Q3 2023 Tencent Holdings Ltd Earnings Call

Unknown Executive: Let me now introduce the management team on webinar tonight.

Wendy Huang: Our chairman and CEO, Pony Ma, will kick off with a short overview.

Pony Ma: President Martin Lau will discuss strategy review.

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

John Low: Chief Financial Officer, John Low will conclude with financial discussion before we open the floor for questions.

Pony Ma: I will now pass it to Pony. Thank you, Wendy. Good evening. Thank you, everyone, for joining us.

Pony Ma: During the third quarter of 2023, we achieved the solid and high quality revenue growth, notable margin expansion, and structural operating leverage. Relatively, new services such as video accounts and mini games contribute high margin revenue streams, while we will be focused away from less scalable activities. We are increasing investment in our AI models, providing new features to our products and enhancing our targeting abilities for both content and advertising. We aspire to position our leading AI capabilities, not only as a growth multiplier for ourselves, but also as a value provided for our enterprise customers and the society a lot.

Pony Ma: Now, let me go through the headline financial for the third quarter. Total revenue was 155 billion R&B up 10% year and year and 4% quarter and quarter. Growth profit was 77 billion R&B up 23% year and 8% quarter and quarter. Non-IFI's operating profit was 56 billion R&B up 36% year and year and 11% quarter. Non-IFI's net profit attributable to equity holders was 45 billion R&B up 39% year and 20% quarter and quarter.

Pony Ma: Turning to our key services for communication and social networks, combined MAU of Wishing and WeChat grew both year and year and quarter and quarter to 1.3 billion. For games, we will be enforcing our leadership competitive multiplayer games, while investing to develop future hits in content driven and casual games. For cloud, we upgrade the size and capabilities of our proprietary foundation model, 10% weekend. We are making HWNU available on a limited basis to the public and to customers and deploying HWNU in 10% meeting and 10% box.

Martin Lau: I will now hand over to Martin for strategic review. Thank you for me and good evening everybody.

Martin Lau: In the past few years, the Internet Industry in China has gone through structural challenges leading to strategic changes. A major strategic change is a shift away from seeking to maximize revenue at all costs toward delivering high quality and sustainable growth. Today, I would like to share with you the progress we have made toward high quality revenue streams, and how this shift is translating into improved operating leverage and strategic position. To start with, let me walk you through the evolution of our WeChat platform, and how it continues to improve its position by enhancing its value to users.

Martin Lau: The original Wation experience was messaging, and the franchise is stronger than ever, as messaging remains the highest daily user frequency service in China. Wation chats, DAU, and daily messages sent per user are consistent and increasing, driven by the evergreen need for communications among friends, family members, and colleagues. Meanwhile, Wation chat meets social networking needs through group functionalities and moments, and also enables new forms of connections, such as customer support services.

Martin Lau: Subsequently, we supplemented messaging with open platforms, which connect users with a range of external services. These include official accounts, which enable brands and content creators to reach their followers with text and image content, and mini-programs which allow users to transact with merchants and service providers offline and online. Each day several million, 100 million unique user visits and interact with over a million unique mini-programs. Mini-programs facilitated over 1.5 trillion RMB of GMB in the third quarter.

Martin Lau: Merchants and service providers developing and managing their own mini-programs provides growth and innovation for our ecosystem. Mini-games, which is a successful vertical use case for mini-programs, has become the largest casual game community in China. We monetize in these open platforms primarily through payment tick rate and a very light advertising load. Resouting in a wide gap between the value would deliver to participants versus the revenue would generate ourselves. More recently, Wation launched video accounts, which is a major new addition to the Wation ecosystem. Video accounts are growing usage fast, and that usage is incremental to our messaging and open platform time spent. Uplifting Wation's overall time spent.

Martin Lau: Video accounts also differ from chat and open platforms in that they enable us to participate in high margin monetization activities, such as infeed advertising and e-commerce technology service fees. Going into Wation's new services monetization a bit more, our newer services in Wation are generating revenues at higher incremental margins than our company average, specifically for video accounts. Monetization generates high incremental margins, because first, we're already incurring video accounts platform cost during the build phase, prior to monetization.

Martin Lau: Second, once video accounts attain critical mass, our developers can start streamlining operating costs such as bandwidth, service, and content costs. Consequently, video accounts the advertising revenue is high margin and offers a long runway for growth ahead. Given increasing video views, low-at load compared to peers, and continued to deployment of AI technology to enhance at click-through rates. Video accounts e-commerce technology service fees, which we book on a net basis, are also high margins in nature for similar reasons.

Martin Lau: Additionally, we're cultivating more high-quality revenue stream opportunities within Wayshin, for example, mini-games, which we discussed in the last quarter at quite a bit of length, contribute platform fees and advertising revenues to Tencent. From a reporting perspective, we'll also book platform fees on an app basis, such that mini-games revenue carries higher margins than app-based games.

Martin Lau: And for Wayshin's search, the increasing volume of transactions within Wayshin is driving rapid growth in our commercial, core, curate volume, and marketing search keywords on our own existing traffic generates high margin inherently. As a result, we believe we have moved into a high-quality revenue growth model. Under this model, we can now deliver greater operating leverage than in past. Prior to 2021, our growth and operating profit typically grew at similar or slower rates versus our revenue.

Martin Lau: While in 2021 and 22, slowing revenue growth translated into even slower profit growth or in some certain quarters profit declines. However, entering 2023, solid revenue growth rates have translated into substantially faster growth and operating profit growth rates. There are three drivers in this significant change. Two sustainable ones colored in blue on the right and one time a driver colored in gray.

Martin Lau: The biggest driver of this change, which we view as structural in nature, is a positive revenue shift. I.e, the growth of new high-quality revenue streams and the scale back of certain low-quality activities. This positive mix shift is the primary reason for growth's profit growth exceeding revenue growth. A second driver, which we view as less recurring, is that we optimize costs by exiting certain non-core business and cut back excessive spending on operations, subsidies, and marketing activities during the tough time.

Martin Lau: This driver helps explain why operating profit growth has succeeded, grows profit growth, partly, and we view it as a lever for pulling at certain times, but not at all times. The third driver, which we view as ongoing, is our heightened focus on cost discipline. We're seeking to continuously improve operational efficiency, thoughtfully allocate headcount, and effectively manage marketing expenses so as to maintain a focused organization and lean cost structure for the future.

Martin Lau: Lastly, I also share with you how we think about our position in the games market. We maintain a strong and defensible franchise in competitive multiplayer games, due to the ongoing popularity and performance of our flagship evergreen games, such as honor of kings, native legends, and peacekeeper elite. But we also supplement our success by cultivating new competitive multiplayer games, such as fights of golden spatula, arena brickout, and valorant, which have the potential of becoming evergreen titles in the future, of the game.

Martin Lau: Looking across the market, what's seen increased interest in casual games and renewed excitement around content-driven games, these trends have not negatively impacted our competitive multiplayer games in terms of audience and monetization. But on the other hand, we see these as new opportunities for us to capture, and we are investing to benefit from these trends.

Martin Lau: For content-driven games, we have attained some success, including Naruto mobile, Lost Arc, and the K, but we aspire to create even bigger hits in the future. For casual games, we already operate the largest casual game platform in the model of mini games, we are also seeking to operate blockbuster app-based casual games with user-generated content capabilities. Looking forward, we have a substantial pipeline of new games in development, including games that expand our own game IPs, such as Honor, King World, Valorate, Mobile, and Delta Force.

Martin Lau: Mobile games that utilize well- loved and licensed IPs, such as Monster Hunter, Mobile, Assassin Creed Mobile, and One Piece Mobile. A new game with new IPs in high potential genres, such as Dreamstars and casual games, Nightingale in Survival Open World crafting, and Ash Echoes in LPG. We're taking more time than before in developing these games because we want to ensure the quality of these games and because our improved financial structure described in the previous slides offer us the ability to do so.

James Mitchell: Now with that, I will pass to James to talk about business review. Thank you, Martin.

James Mitchell: For the third quarter of 2020, the total revenue increased 10% year-on-year. The AAS represented 49% of our revenue within which the social network sub-segment was 19%, domestic games 21%, and international games 9%. Online advertising was 16% of our revenue, and FinTech and Business Services was 34%. The value added services, segment revenue was 76 billion revenue in B, up 4% year-on-year. Social networks revenue was 30 billion revenue in B, flat year-on-year, as revenue from music related and game-related live streaming services sharply decreased, while revenue from music subscriptions and minigames substantially increased.

James Mitchell: Profitability improved as we book entertainment live streaming revenue on a gross basis, creating revenue sharing as content cost, whereas we book mini-game revenue on a net basis, netting the game developer's revenue share out of our revenue. Long-form video subscription revenue increased 2% year-on-year, benefiting from higher output. Video subscriptions declined slightly year-on-year, though group quarter-on-quartered to 117 million accounts.

James Mitchell: Our exclusive drama series lost you forever ranked first industry-wide by video views across all online platforms in China during the quarter. Music subscription revenue increased 42% year-on-year, content music optimised user operations in rich membership privileges, and deepened collaborations with labels and artists, resulting in music subscriptions and 21% year-on-year, total 103 million accounts, and all increasing 17% year-on-year. Timastic Games revenue grew 5% year-on-year, so 33 billion revenue in B. The increase was driven by new launches, valorants and lost stock, as well as evergreen titles such as Honor of Kings and Dungeon and Fighter. International Games revenue increased 14% year-on-year, or 7% in constant currency terms, the 13 billion revenue in B.

James Mitchell: The recovery of PUBG Mobile and sustained contributions from Nick A. Valorant and triple-match 3D, growth of the growth and offset of tough comparison from power of fancies launched quarter in the third quarter of 2022. So communications and social networks, Wishing Video Accounts, Video Views increased over 50% year-on-year, thanks to a thriving creator community and growing views and mind share. Original content that is uploaded directly to Video Accounts now contributes to the large majority of our video views, demonstrating the service's content creation and consumption flywheel.

James Mitchell: We're enhancing our recommendation algorithms and traffic support programs to more activity surface original content with individual accounts. Inside QQ we're adding capabilities to QQ channels, which enable users with shared hobby activities or memberships to operate interest-based communities using software tools such as Voice Trout and Event Management. QQ now hosts over 700,000 active channels covering categories including colleges, games, knowledge-based content and music.

James Mitchell: Moving to domestic games, the 19th Asian Games held in Hangzhou included eSports as official metal events for the first time, reflecting interesting competitive games from the general public and endorsement from governments. We published four out of the seven games selected for the Asian Games, Arena of Baller, Peacekeeper Elite, League of Legends and FC Online. During the quarter we extended our leadership in competitive multi-player games. Honor of Kings remained a first-faced mobile game across all genres in terms of DAU, time-spanting gross receipts while we've also grown Wild Rift's audience in monetization, such that Wild Rift now ranks among the top 10 mobile games by gross receipts too. Between our three big bath arena games, Honor of Kings, Wild Rift and League of Legends, we serve different player needs and innovating multiple directions within the battle arena genre.

James Mitchell: Similarly, for FPS games, we're launching new titles with appeal to different player interests who capture new gameplay concepts such as the PC Tactical First Person Game Valorant and the Mobile Hero First Person Game Hyper Legends. While it typically takes several years to grow individual FPS games in their potential audience in monetization, Valorant has already become one of the leading PC games in China in terms of users and of revenue. Martin spoke about our aspirations to size up in content with and in casual games.

James Mitchell: For content-driven games, in August, we launched Maple Story, the Legends of Maple, which ranked fourth across all mobile games by gross receipts in its first 30 days. For casual games, we opened our mobile party game Dreamstars up for pre-registration in September and the game has accumulated over 27 million pre-registrations so far, we're making a substantial investment around Dreamstars upcoming launch. Turning to international games, among our competitive multiplayer games after a post-COVID consolidation period, PUBG mobile returned to year on year and quarter on quarter increases in DAU and gross receipts, benefiting from appealing content and themed events such as a Dragon Ball Collaboration. Court of Duty Mobile, which we released back in 2019, achieved record high monthly gross receipts in July, driven by new season content, including a top tier operator and a new arena mode.

James Mitchell: Among our content-driven games, Nikkei maintained robust BAU and gross receipts via content updates, such as a collaboration with Square Enix's near-autometer. For online advertising, our revenue increased 20% year-on-year to 26 billion RMB, with notable growth contributions from video accounts, mobile ad network, and waste in search. Advertising categories such as fast-moving consumer goods and local services increase standing while automobiles will weaker. Our advertising revenue year-on-year growth rate slowed versus the previous quarter, because Azure Commerce has become a much bigger contributor to our ad revenue recent periods.

James Mitchell: Our advertising revenue seasonality has changed, with the second and fourth quarters of each year seeing more positive seasonality by the first and third quarters of each seasonality, reflecting the wasting of e-commerce promotional activities toward the second and fourth quarter of each year. In addition, we began minuscising video accounts via input ads through the third quarter of last year.

James Mitchell: We have expanded our AI models with more parameters to increase their ad targeting and attribution accuracy, contributing to our ad revenue growth. We're also starting to provide generative AI tools to advertise our partners, which enables them to dynamically generate ad visuals based on text from, and to optimise ad sizes for different inventories, which should help advertisers create more appealing advertisements with higher click-through rates, producing their transactions in our revenue. Close loop advertisements, which link directly to a transactional user action within the app where the advertisement appears, provide users and advertisers with a shorter impression to transactional funnel, and enhance the effectiveness and measurability of advertisers spend.

James Mitchell: Advertisers are increasingly linking their ads within waste and transactions or actions inside the advertisers mini program, video account, official accounts, or week on landing page, and such close loop ad revenue increased over 30 per cent year on year-to-end quarter, now accounting for more than half of Wacens ad revenue. Video accounts ad revenue grew notably quarter on quarter, driven by increases in video abuse and time spent on a stable ad load per cent increase.

James Mitchell: On the content side, our long-form video ad revenue increased moderately year-on-year, and our music ad revenue maintained robust year-on-year growth. Looking at FinTech and Business Services, Segment Revenue was 52 billion RMB up 16 per cent year-on-year. FinTech Services revenue sustained a teen-zero-on-year growth rate benefiting from increased commercial payment activity and wealth management aggregated customer assets. The commercial payments, daily active users and transaction per user both increase year-on-year. Enhanced merchant solutions boosted mini program transactions in categories such as retail, travel and transportation, and dining services, and mini program transactions have notably increased as a proportion of our overall commercial payment volume.

James Mitchell: For Business Services, revenue grew to double digit rate year-on-year and the third quarter, exaggerating buses for the second quarter, and the Business Services grow smart and improved significantly year-on-year. Our cloud services revenue grew to benefit from the restructuring undertaken in prior periods, as well as from higher spending by industries such as finance and automotive.

James Mitchell: Chief. Video accounts, e-commerce, transaction, GNB, entry, squatter-on-quarter, and the technology service fees we collect on these transactions contributed to the business services revenue and margin uplift. We have upgraded our proprietary foundation model, Tencent Honyuan. We have made Tencent Honyuan bought, initially available to a smaller, expanding number of users via a mini-program. Honyuan is also now powering meeting summarisation in Tencent meeting and content generation in Tencent Docs. And externally we're enabling enterprise customers to utilise our large language model via APIs or model as a service solutions in our cloud. The functions such as coding, data analysis and customer service automation.

John Low: And now I'll pass to John for the financial review. Thank you, James. Hello everyone.

John Low: For the 10% year. Cross profit was 76.5 billion RMB up 23% year. Upgrading profit was 48.5 billion RMB down 6% year. Finance costs were 2.8 billion RMB up 43% year. Due to reduced forward 4x gains and to a lesser extent higher interest expenses. Sheer of profit of associates and JVs was 2.1 billion RMB compared to Sheer of loss of 3.7 billion RMB for the third quarter of 2022. On a non-I have our spaces.

John Low: Sheer of profit was 4.8 billion RMB improving form Sheer of profit of 2.4 billion RMB last year. This was proven by a better profitability of certain domestic associates thanks to their revenue growth and improved cost efficiency along with a successful game released by an overseas investor. Income tax expense increased by 55% year-on-year to 11 billion RMB, driven by pre-tax profit growth and increased withholding tax provision. I have our SNAP product attribute about the equity holders was 36.2 billion RMB down 9% year-on-year, diluted EPS was 3.752 RMB down 9% year-on-year. Now I will share our non-I have our financial figures.

John Low: Operating profit was 55.5 billion RMB up 36% year-on-year. Net profit attribute about the equity holders was 44.9 billion RMB up 39% year-on-year, diluted EPS was 4.657 RMB up 41% year-on-year. Moving on to gross margins. Over a gross margin was 49.5% of 5.3% each point year-on-year. By sentiment, gross margin for vast was 55.5% of 3.8% each point year-on-year. This was due to higher mix of high margin games revenue including mini-games and lower mix of low margin music and games related life-streaming revenue along with our cost control measures.

John Low: Gross margins for online advertising increased to 52.3% up 6% each point year-on-year. This was mainly driven by high incremental profits generated from video accounts at revenue as well as our efficiency improvement. Ross margin for thin tag and business services was 40.9% up 7.6% each point year and year. This was driven by a margin improvement following crowd business restructuring, emerging high margin revenue from video accounts e-commerce, technology service fees, structural shift to what's certain high margin products within thin tag services in our operational efficiency initiatives.

John Low: On operating expenses, selling market expenses were 7.9 billion RMB up 11% year and year due to more spending on promotion advertising and the total represented 5.1% of revenues. R&D expenses were 16.5 billion RMB up 9% year and year mainly because of higher staff course on research and development projects. GNA excluding R&D were 9.8 billion RMB down 14% year and year mainly due to lower staff course including reduced surveillance statements. At quarter end, we had approximately 105,000 employees down 3% year and year or up 1% quarter and quarter.

John Low: Let's look at our operating and net margin ratios. For the first quarter of 2023, non-Iavirus operating margin was 35.9% up 6.7% each point year and year. Non-Iavirus net margin was 29.6% up 5.8% each point year and year. To conclude, I'll highlight some cash, key cash flow and balance sheet metrics. Total capax operating capax was 6.6 billion RMB up more than 5 times year and year driven by increasing dust and in GPUs and servers.

John Low: Non-Iavirus operating capax rose by 6% year and year to 1.4 billion RMB. Three cash flow was 51.1 billion RMB up 85% year and year mainly due to run by higher receipts from various businesses and timing difference in the settlement of certain accounts variables. Net cash position was 36.4 billion RMB up 106% quarter and quarter, reflecting strong free cash flow generation, partially offset by cash outflow for share purchases and strategic indexes.

John Low: Thank you.

Unknown Executive: Thank you, John. We shall now open up local questions. If you are dialing by phone case press 5 to raise that question, then press 6 to unmute yourself. If you are accessing from the 10th and meeting or meeting application, please click the rate and button at the bottom left. We will take one main question and ask one full-up question each time.

Unknown Executive: The first question comes from the 10th phone from the UDS. Thank you.

Kenneth Fong: Good evening management. Thank you for taking my questions and congrats for another solid quarter of quality growth. I have two questions.

Kenneth Fong: The first is on mini games. Could management share with us more about the future strategy of mini games, given 10th and strong franchise? We will be just staying at a platform for distribution or we can actually use mini games to rejuvenate some of our existing titles which are linked in their product cycles. Also going forward, any shift in our strategy on the game launch between app-based versus mini games in our games going forward, and I have a follow-up question on AI strategy.

Kenneth Fong: We have successfully launched the Hunyuan AI model, and we stand up with our peers with our use cases. Can management share with us how would the US chipsen impact our AI strategy, including product launch monetization and also area focus? Thank you. Hi, Kenneth.

Martin Lau: Thank you for your question. So I'll take the minigame question, Martin, what we'll hand with the AI question. For the minigames, then we view the minigame opportunity for Tencent primarily as a platform opportunity, and there are many thousands of game development studios that are now focused on creating minigames. We're very happy to nurture that ecosystem and we don't want to squeeze or undue the pressure that ecosystem.

Martin Lau: You asked about whether we would seek to rejuvenate existing titles which are laid in their product cycle by releasing minigames. The reality is that our game strategy is not built on titles that have a product cycle that age and that then require heavy rejuvenation. Our game strategy is built around what we hope will become evergreen games, and it's built around making those evergreen games as popular and successful as they can be, and then adding further evergreen games that would also be popular and successful. We don't hugely focus on taking smaller games that have a product cycle and then seeking to rejuvenate them through minigames or anything else.

Martin Lau: In terms of Huan Yuan and the overall AI strategy, I would say we have been pretty far along in terms of building up Huan Yuan, and we feel that we are one of the leaders within China, and we are also continuously increasing the size of the model and preparing for the next generation of our Huan Yuan model which is going to be a mixture of experts' architecture which would believe will further improve the performance of our Huan Yuan model. By building up Huan Yuan, we actually have really built up our capability in general AI across the board, because Huan Yuan and the transformer based model include it involves the handling of a large amount of data, large amount of training data, large size of computing cluster, and a very delicate fine tuning process in terms of improving the AI performance.

Martin Lau: By going through the process we have also built up a lot of our AI capability which is not transformer based but can be applied in many of our other businesses. If you look at Huan Yuan itself, right now we see it very good at generating text and messages.

Martin Lau: And that actually is quite useful for a lot of... A lot of SaaS applications improve the capability of the SaaS service. For example, in Tencent meeting, we can actually leverage Honyuan to provide summary of meetings and help people to catch up on meetings, if they have missed the first half of the meeting and so on and so forth. And in Tencent dogs, we can actually provide a whole set of tools for people to create documents in a much more efficient way. And these services are already offered to outside customers.

Martin Lau: And we also have a whole set of productivity enhancement tools, such as the customer service APIs, which are now being tested by a lot of customers and enterprise customers who have the need to interact with the customers. In terms of code generation, it's actually providing very good results and tools for our programmers as well as our outside customer programmers to improve on their coding efficiency. And it's also helping in terms of content creation for both of our advertising business, helping advertisers to create more ads, more targeted ads, which can be used to improve the click through rates of the advertising as well as in the game production process, especially related to the artwork. We are actually leveraging AI to actually help us to create these artwork in a more efficient and cost effective way. So that's for Honyuan.

Martin Lau: And the general AI capabilities is actually helping us quite a bit in terms of the targeting technology related to advertising and our content provisioning service. So in short video, by improving our AI capability, we can actually ramp up our video accounts at the fast clip. And in terms of the advertising business by increasing the targeting capability, we are actually increasing our ad revenue and by delivering better results to our customers. So they are generating, so our AI capabilities is generally tentable result at this point in time.

Martin Lau: And we actually look into the future. Honyuan can actually provide a lot of tools for enterprise customers. It can further improve our advertising business efficiency by in the future, really merging the advertising stage and the selling stage. If we can actually provide very good customer service capability, then a lot of merchants can actually combine the advertising and sales process into one. And we also feel that further in the future, when there's actually a consumer-facing product, it's more like a smart agent for people right now that is further down the road. But it actually carries quite a bit of room for imagination.

Martin Lau: Now in terms of the chip situation, right now we actually have one of the largest inventory of of AI chips in China among all the players. And one of the key things that we had done was actually we were the first to put in order for H800, and that allows us to have a pretty good inventory of H800 chips. So we have enough chips to continue our development of when you at least a couple more generations.

Martin Lau: And the band does not really affect the development of Huan Yuan and our AI capability in the near future. Going forward, we feel that the chip band does actually affect our ability to resell these AI chips throughout cloud services. So that's one area that may be impacted. And going forward, we will have to figure out ways to make our usage of our AI chips more efficient. We'll try to see whether we can offload a lot of the inference capability to lower performance chips so that we can retain the majority of our high performance AI chips for training purpose. And we'll also try to look for a domestic source for these training chips. Thank you Martin and James. Thank you.

Gary Yu: We will take the next question from Gary Lee from Morgan Stanley. Hi, thank you management for the opportunity and congratulations for another follow quarter.

Gary Yu: My first question is also related to the games business. I think two years ago, we also identified games as the key investment area for future growth. I think at that time, we were expecting a kind of two to three years production cycle. We commented that because of the improvement financial performance, we now had the luxury to take a longer time for production cycle.

Gary Yu: So where are we right now at the kind of production cycle and how should we look at these investment translating into games pipelying in different genres and also financial performance in the next couple of years. And then I have a follow up questions related to our capital management. I think last year, we increased dividends. We have also stepped up share by back. How should we look at the opportunities and how investment portfolio similar to what we did on JD and made one distribution in the past two years. Thank you. Hi Gary.

Gary Yu: So of the game question, then in general, we have chosen to elongate our game production cycle. Sometimes by six months, sometimes by 18 months. And there's a couple of reasons for that.

Gary Yu: One is that we can see empirically that there's bigger opportunities now for the best games, especially if the development studio is patient about investing that the time, the resources to make the best games feel that they can be. And of course, we once are in a capitalized on that and release the best games. And then secondly, as you alluded to, with the high quality revenue growth model in place, we feel we now have the luxury where Our business, because of video accounts, because of minigames, because of search, because of e-commerce, is actually capable of sustaining quite healthy earnings growth rates, even without releasing a big game in a given three month period, and therefore, in a boat of those in place, we think that for us, it has made sense for us to play the long game, and really focus on making the games in our pipeline be all that they can be, and Martin highlighted nine games in our pipeline. One of those games will be released in the coming weeks, the others will be released in the coming few months, and those will be the test cases of how effectively we're executing in that direction.

Gary Yu: But overall, we feel that we now have this luxury of playing the long game, because the high quality revenue growth model provides us with earnings growth irrespective of whether we're launching a game in a quarter or not. In terms of shareholder return and capital management, I would say a few points, right? Number one, we are very focused on shareholder return, and we'll try a different way to improve it, and secondly, we do have a very strong cash flow alongside with a very large investment portfolio, half of which is actually in liquid stocks. So we do have the flexibility of using different tools to increase a shareholder return. And if you look at the tools that we have, right?

Gary Yu: Obviously, you mentioned their share buyback. There's a dividend. There is also a distribution of invested shares that we have executed before. And there's also a divesting investment so that we generate cash so that we can actually do more of share buyback and dividend. So we will use these tools dynamically and also at different times in different combination to improve and return, improve the shareholder return and return capital to our shareholders. But I would say at this point in time, if you look at the market, the valuation in the market, for China, internet, net stock is almost at historical lows, right? So I would say at this point, buyback will be a more favorable means for our shareholders than other means. Thank you, Gary.

William Packer: All the takes the next question from William Packard from the MP. William, you're lying to me. Hi, this is Will Packard. Can you hear me?

William Packer: Yeah, we can. Thanks very much and congrats on the strong calls. My question is around the sustainability of growth margin improvement across the key VAS adjunct index segments of your portfolio. Are the gains we've seen year-to-date sustainable into 2024 and beyond? And is there further upside and my follow-up question was around domestic gaming, gross green volatile and recent years as you've digested the impact of lockdowns, reclication, etc. We now seem to have settled into a more normalised period.

William Packer: How should we think about the medium to long-term growth algorithm for the segment? And to what extent are you reliant on new hit content within that segment? Thank you. I will.

William Packer: So on the margin question, we talked about how there's three drivers of the uplift in margins in recent quarters and two of them we view as sustainable and recurring in nature. One of them, which is the headcount adjustments, restructuring and so forth, is more episodic in nature. And looking forward, in general, the revenue streams that are growing fastest in our business, the revenue streams with the highest margins. So we believe that the current level of margin of gross margin is sustainable and we believe that there is room for margins to improve further.

William Packer: If you look at the advertising segment, for example, the gross margin has improved from 30 per cent to around 50 per cent in our closest global comparable is running an advertising gross margin of 80 per cent. So that's on the margin side. You know, with regard to the games, then, you know, we believe that the existing evergreen games provide a certain quantum of growth. And then on top of that, you know, we have new games in the pipeline and depending on when we release those and the success of those new games, you know, those can provide additional growth on top. Thank you. Thank you, William.

John Troy: Next question comes from John Troy from Taiwan. John, your line is open now. So good evening.

John Troy: Thank you for taking my question. I have just a quick one question on the games, as you mentioned. I think I think you guys mentioned that the most of your work of comfortable it was the more launches, but as we go into the international side, can you kind of elaborate like what kind of investments that we have to do further as we continue to invest. I do understand that we have. I first, I think, called duty mobile.

John Troy: You mentioned that after describing launch four years ago, we had a record July. So I want to know like what are like kind of how do you elongate or revive some of the old titles while you balance the new launches. And just a quick follow up on your Catholics and headcount plan. Do you can you kind of share us, you know, what I think this quarter, we did see elevated Catholics on this time and also headcount did see a sequential improvement. So actually going to 2024 could imagine you know share some color on this area. Thank you. Hi, John.

John Troy: So on the international games, you know, we've already been running a race substantial investment in international game development through our PNL. If you take, you know, our studios, such as, you know, riot, super style mini clip. But that fact shock shock more and you know on and on and on, then, you know, we're actually one of the biggest game developers in the world, excluding our China business. And of course, our big kind of studio, such as Timium quantum, you know, as many thousands more of developers who are creating games that are targeting an international as well as a domestic market.

John Troy: So we feel that we have, you know, that the teams in place now to create, you know, big budget, high production value and, you know, ultimately successful games for the international market. And you know, we'll be bringing those games to release in the quarters to come. So that's on the game side.

John Low: CapEx, John, please. Operating CapEx. Rep. 3.5% of total revenue, free to 3.5% in 2023. And for 2024, I think it would be at a similar level.

John Low: And if we are able to get more GPUs to add on, and then 1% on top of that, free to 3.5%. For non-operating catpats every year on the construction site, we spend roughly $1 billion US dollars in the market. In the past few years, that's extruding any land acquisition. If we add on land acquisition, it shouldn't be more than additional, you know, 1 billion on top of that construction cost.

John Low: In terms of the headcounts, we believe most of the efficiency optimization has been done. And we have the right size of workforce for our existing business. We are hiring selectively to grow our new businesses. But also, it's actually very important for us to recognize that big teams, actually not very good for focus and efficiency execution of businesses. So in the past, I think, you know, we and maybe many other companies that actually sort of build teams up too quickly and build too large a team.

John Low: And so going forward and consistent with what we talked about in our new high quality revenue growth model, you know, one of the key things is actually discipline and the cost discipline is really part of it is trying to keep our teams smaller, but with better people so that we can actually help our team to focus on the real value added things to work on. And that turns out to usually be a value creation exercise for our business and make ourselves our business is particularly stronger. Thank you.

Alicia Yap: We will take the next question for Alicia. Hi, good evening, management. Thanks for taking my question. Louder.

Alicia Yap: Hello, can you hear me? Okay, we can hear you better now. Okay, all right. Thank you. So yeah, thanks for taking my questions. Also, congrats on the solid profit speech. Two questions.

Alicia Yap: First is on the video account advertising revenue as we started to laptop the low base. And although we going to still have the close group e-commerce transactions to benefit and support that solid at growth for the video account, just wondering what could be the steady stage of the growth rate for the overall online ad revenue going forward. And then a follow up is on the phone and model, I think management did mention potentially sometimes down the road, there will be a commercial product for a consumer.

Alicia Yap: And so just wondering, you know, when we can see, for example, the AI and I system to be integrated into Richard and pew pew. And when that is ready, would that be potential also a commercial service charge, for example, like this. Thank you. Hi, Alicia.

Alicia Yap: So on your first question about video account advertising revenue, you know, we're not super focused on, you know, whether there's a low base or a higher base because actually we have, you know, four discrete growth drivers, we see supporting our advertising revenue growth, you know, not just this year, but for many years to come into the first of them is traffic. So, you know, the number of video views today, is substantially greater than 50% higher than it was when we began monetizing video accounts just over a year ago.

Alicia Yap: And so that's a, you know, an immediate uplift in an ongoing uplift because we believe video accounts traffic will continue to grow. Second, there's the ad load, you know, today, the ad load we operate at on video accounts is less than 3%. The ad load that our domestic peers operate at is over 10%.

Alicia Yap: And so we have room to very substantially multiply our ad load over the years to come versus where it is today. Thirdly, there's the ability to uplift our click through rates using artificial intelligence, you know, today a typical click through rate might be around 1%. And as you deploy large language models, then you can make more use of the thousands of discrete data points that we have potentially for targeting and bring them to bear and turn them into reality.

Alicia Yap: And you can get pretty substantial uplift in click through rate and therefore in revenue, which is what the big in a US social networks are now starting to see. And fourth, there's the close loop opportunity. If you look at our domestic peers in the short video space, they've been very focused and very effective at maximizing closed loop transactions because those generate the most information. And those those enable that that the greatest future targeting forward targeting abilities.

Alicia Yap: And you know, given our mini programs, given our week on landing pages, given video accounts, and given the temperament infrastructure, we feel we're in an ideal position to further ramp up our own closed loop capabilities. So, you know, with those four drivers in place, obviously the macro environment is out of our control that we have four important drivers is growth within our control.

Alicia Yap: Thank you. Now, in terms of the when you're in and in the future, you know, potential of a AI assistant, I think you know, it's fair to say it's still in a very, very early stage of concept design. So definitely not at the stage of product design yet and and definitely not at the stage of thinking about monetization yet. But of course, right, you know, if you look at any of these generative AI technology at this point of time, inference cost is a real variable cost, which needs to be considered in the entire equation.

Alicia Yap: And that to some extent, add to the challenge of the product design to you. So, you know, I would say at this point of time, it's actually very early stage, there is a promise and imaginary room for opportunity for the future, but, but it's too early to talk very concretely about it for now. Okay, thank you. Thank you.

Thomas Chong: We will take the next question from Thomas Chong from Jeffrey, Thomas, your lines open. Okay, we will maybe come back to Thomas later. Can you hear me? We can hear you now. Yes, we can hear you now.

Thomas Chong: Go ahead. Thanks, management for taking my questions. My question is about live streaming e-commerce. Given that the competitive environment is very intense, and we are seeing video accounts is gaining a very good traction and drawing very fast growth. So I just want to get some color from management perspective about our strategies and our goal in coming years. And in particular, how we should think about the internal advertising as well as the commission's growth trend or any market position that we want to achieve in coming years. Thank you.

Thomas Chong: Well, in terms of live streaming e-commerce, I think the playbook is actually quite clear. Once you have the short video franchise, you actually start taking that into the live streaming and build a franchise there. And then from live streaming, if you can actually establish the tools and the connection and supply chain of merchants, then you can start building up the live streaming e-commerce. So the playbook is actually well developed.

Thomas Chong: What we're doing is actually we want to build it in a systematic way step by step. And it does involve a process of many steps, including including building a strong ops team so that we can ensure the quality of the products offered on our platform, building category teams to manage different categories. Building tools and infrastructure to facilitate merchants to do more businesses, we need to have integration of the entire ecosystem into our app system.

Thomas Chong: And also we need to build up a KOL ecosystem so that the merchants can leverage the KOL to facilitate the live streaming e-commerce business. So I think this would actually if played out step by step, right, you know, would basically, you mirror the market share that we have on short video, right, you have short video, you have the live streaming and the live streaming actually sort of, you know, have the live streaming e-commerce GMV. And I think, you know, if we execute all those steps well within the playbook, then it would give us a fair share.

Thomas Chong: But over and beyond, we believe we have some pretty unique capabilities or characteristics that we can bring to bear that may offer further upside that include we have a very strong mini program ecosystem. And there are a lot of merchants and brands who are already doing a lot of businesses on mini programs. And if we can actually connect our live streaming e-commerce with the mini programs and that additional layer of integration and ability to do more business. We have social sharing within our ecosystem right now and that would actually help merchants and products to be shared to many other friends and connections and as a result can generate more sales.

Unknown Executive: And we also have a pretty significant group of high income and affluent customer base who are probably not that used to shopping on short video platform at this point of time. And if we can bring them to the entire live streaming and e-commerce ecosystem, then that could offer further upside. So that's the way we think about the live streaming e-commerce at this point. Thank you. Okay, good evening, management team. Thank you for taking my question and the comments on a good quarter. I have two questions.

Unknown Executive: Number one, regarding the growth driver of advertising business, James, you mentioned Wishing Search as one of the drivers. I'm sure there's a little bit more metrics in terms of where the business is. For example, percentage of a Wishing DAU who use Wishing Search, etc., etc. And more importantly, I would like to understand how you think about the long-term monetization opportunity given search ads is a legacy as model with many years of operational history in China Internet. So that's the first one on Wishing Search.

Unknown Executive: Second question is on the mini-game, we notice the super majority of the core and the hardcore game activities are still mostly take place in apps. What does it take for those of me core and the harder core game activity to migrate into mini-game ecosystem? Is it currently constrained by technology or bandwidth or is one of a user behavior issue?

Unknown Executive: Thank you.

Unknown Executive: Why didn't I take mini-game question? On the mini-game question, there's a number of constraints. We believe the most important is the technical capabilities and the game development tools for making mini-games that are comparable to app-based games. I say that first of all because if you look at similar concepts such as Roblox and over time, there's been a steady broadening in the range of games available on Roblox in its two more graphically immersive, more and more multi-player, more and more fast-paced, Twitch-based games. We're seeing now something similar in mini-games where the initial mini-games for typically single-player, then there were basic multi-player card games.

Martin Lau: Now we're moving into multi-player role-playing games and then going into the future, we expect to see multi-player first person action games. As the handsets become more sophisticated, as the mini-game architecture becomes more powerful, as the developers become more expert in creating mini-games, then there should be a long-term convergence in terms of the capabilities and the experiences of mini-games versus app-based games. As that happens, then there's no intrinsic reason why people who are currently playing app-based games wouldn't also start playing mini-games.

Martin Lau: Now in terms of recent search, right now, the penetration is actually quite high, right? So starting from people basically searching for You know, in app, contact and content, you know, basically everybody does it on a very frequent basis every day, right? You know, but then in, in addition to that, everybody have actually searched something on, on the open web as well as in the ecosystem. So for content search, everybody has done some of that. But, you know, what we need to do is actually need to.

James Mitchell: To have people use it more frequently and the way through which we can actually make it more frequently used is, of course, one, the search technology right now within, we have been constantly building up the technology and I think, you know, the search technology has improved consistently. And after we have acquired, so go, you know, the technology of search have also taken a step up, the second is that actually the search user experience because the way she is a tool which people communicate. So we actually need to have a user experience that allow people to find the content more quickly than normally, if people open up browser and try to do that.

James Mitchell: So we can do searches and I think, you know, that we've made progress, but there's still more work to be done. And the third one is actually the ecosystem right, you know, so we have a lot of content within Waysian, and that's due. To official accounts and that there's also an increasingly large mini program ecosystem that that's sitting on Waysian, and now there's also video accounts, the ability for us to leverage the Waysian search and connect it to all the content within our ecosystem is actually something that that we are building over time.

James Mitchell: And once we have done that right now, we can allow people to search on the open web or also have unique content that's uniquely available on Waysian, and the Waysian search value proposition and content will be even better.

James Mitchell: So I think, you know, those are things that we have been doing in order to increase the frequency of usage by our users on on search. And we have seen encouraging signs on that because the VV and in general, we be on content have been increasing consistently over the past few years. And over time, we felt, you know, once we have built up that content search traffic within Waysian on a consistent basis, then we can actually overlay the monetization right now. And right now, the at load on our search is still very, very low.

James Mitchell: So that there's actually a lot of potential for us to increase it. But more important, I think, you know, the ability for us to build a transaction ecosystem within Waysian is actually very important for the future growth of Waysian search. The more mini program transactions that we can generate, the more life streaming e-commerce that we can generate over time that would actually help us to increase the potential for Waysian search monetization. And we feel there's actually a very long runway in terms of going this part of the business. Thank you. Thank you, Wendy.

Unknown Executive: I have some questions. First is on advertising, which obviously has been a really strong year for Tencent as the platform has been gaining market share. Considering e-commerce is becoming a bigger contributor and obviously there are, you know, seasonality factors that comes with that contribution from wasting surge. And, you know, next year obviously what we could see, however, is your year comes for video accounts after it has delivered very robust growth this year. Should we expect, I guess, growth to accelerate into the next quarter or 24, just generally how you're thinking about, you know, the outlook. Thank you. And then follow up with Ashley.

Unknown Executive: We've missed some of the question. I think I'll sit and may have overlapped a little bit with Alicia's question earlier. So I'll just refer back to that in the, you know, we see four district growth drivers for our advertising business, including traffic growth, increased ad load to converge with industry peers, deployment of AI, to boost CTR, and closed loop advertising. And so those are all on the positive side. And then, you know, macro could be a potential negative.

Unknown Executive: But, you know, candidly, this year hasn't been a spectacular year from a macro perspective anyway. In terms of, you know, what that translates into, you know, for growth in the next quarter or next year we don't give guidance. And, you know, the theme we've been talking about this evening is not, you know, high revenue growth model, it's high quality revenue growth model. So, you know, we're less focused on, you know, maximizing the speed of our revenue growth.

Unknown Executive: And in your given quarter, we're more focused on, you know, having a healthy, sustainable revenue growth rate. And we believe with sustainable revenue growth rate, we can drive a faster earnings growth rate. So that's on the advertising question. Thank you.

Unknown Executive: I guess separately on international games, you know, I guess what factors should be focusing on, as we think about again, the outlook. Obviously, we're reading a little bit more about layoffs in the industry. How should we think about contributing factors like, you know, user spending as well as development pace and new launches and consolidation within the industry? How would these things kind of play out, you know, whether it will help a bit or help a, you know, benefit 10 cents? Thank you.

Unknown Executive: But I don't think there's a, you know, very simple single-ounce, you know, it's a complex industry. And it went through a period of rapid head count increase over the last two to three years. Now it's going through a period of, you know, head count consolidation. You know, that's happened, you know, many times in the past, and unfortunately, it may happen again in the future.

Unknown Executive: And it's just incumbent on us to, you know, navigate that effectively. But again, we have the benefit in that because You know, we have a number of other businesses that are growing quickly. Therefore, we don't feel pressure to, you know, maximize our international or optimistic game revenue growth in any single quarter. You know, if you're looking at Microsoft, then, you know, Microsoft doesn't feel it has to release a new Halo game, you know, on December 31st rather than January 1st, because, you know, people keep using Windows and Office and a zero and all of the other Microsoft products that also generate profit growth.

Unknown Executive: And, you know, I think we're now in that position where with the improving margins of our advertising business, with the improving margins of our Fintech business with the turnaround in our business service, there's new contributions from e-commerce and so forth, then, you know, we have a multi-pronged growth model. And so, you know, as and when international games has a big new product and accelerates, you know, that's great. But in the meantime, international games is not, you know, the primary determinants of whether we grow our earnings on our daily given quarter. Thank you, Shirley, where do it takes the last question from, you know, come from Goldman Sachs? Thank you.

Unknown Executive: Thank you, Tony Martin, James John and Wendy. So, my first question, I think on FDS, we haven't talked too much on the Fintech meetings growth and our business so far, just how should we think about the landscape on these two and the growth outlook. Should we expect a further recovery, particularly on the business services, excluding the e-commerce size of the cloud business in the competitive landscape and outlook, maybe I'll ask the second question as well, just that in one go.

Unknown Executive: So, on our show to return policies, how should we think about our current investment portfolio in terms of the investment and reinvestment piece this year and any lessons or experience from the past two years of distribution. That we have in and from my experience and how should we think about the show to return on the investment portfolio front. Thank you.

Unknown Executive: In terms of the FBS, I think, you know, there are two parts of it, right? You know, there is the Fintech and there is the business services. Now, in terms of the Fintech, I think what we have is a very significant platform. Fintech's payment and on top of the payment, we actually offer financial services. And if you look at the business itself, it's actually growing quite nicely this year. And there are a couple of drivers.

Unknown Executive: Party is actually growing alongside with consumption, right? And as you can see, although there's some macro challenges on the economy side, but consumption in China is still growing quite nicely and and our overall at the Fintech business actually grow alongside with that. And then on top of it, we actually have been offering financial services such as lending, such as wealth management. And these are actually falling into the model of the high quality revenue growth model in which these are businesses which generates high margins and they ride on a payment network which has the cost already paid.

Unknown Executive: So they are growth actually generates additional incremental margins. And at the same time, we actually manage these businesses in a very measured way because we want to make sure that we are very good in terms of risk management and we also try to grow them in a measured way so that we don't take on too much risk and we can also pick the best customers that we want to serve. So I think that's on Fintech side over time.

Unknown Executive: We actually sort of would like to find additional value at the services that we can actually bring value to the merchants that we serve and forward the value that we create, we charge a little bit on additional fees if they are really generating value. So I think that's the overall model that we're thinking with respect to Fintech. In terms of the business service at the cloud, I think right now there's a lot of in the past two years, there's a lot of capacity.

Unknown Executive: Readjustment within the industry, access capacity is being used up and a lot of businesses have been trying to manage their cost down. And I think we have also proactively got rid of some low quality businesses too. When we look into 2024, we believe that the dynamics in the market is that the squeezing of unused capacity is probably over. So if macro stays the same, there will probably some modest growth in terms of the cloud usage, but there probably need to be a higher economic growth in order for higher growth to return to the market.

Unknown Executive: There will be some growth with respect to a path in SaaS and that's frankly the area that we are focused on with belief going forward. Again, we're more focused on the high quality revenue model in which would be more focused on the past and SaaS, which inherently will be generating more growth margins for us. So that's how we look at those two businesses. We regard the investment portfolio, so we are quite active and agile on both additional investments, but also on divestments. Some of that activity is visible, a lot of it is not visible.

Unknown Executive: But given what we view as our share price dislocation, primary use of cash has been buying back our own shares. And that remains the priority at this point in time. Thank you Martin and James. Thank you all for joining the call today. We are now ending the webinar. If you wish to check out our first release and other financial information, please visit the IR section of a company website at www.tensin.com. The replay of this webinar will also be available soon. Thank you and see you next quarter.

Unknown Executive: Let me now introduce the management team for the webinar tonight. Our Chairman and CEO, Pony Ma, will kick off with a short overview.

Let me now introduce our management team on weapon out Tonight.

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

Unknown Executive: President Martin Lau will discuss the strategy review. Chief Strategy Officer James Mitchell will provide a business review. Chief Financial Officer John Low will

President Martin Lau will discuss strategy review Chief strategy Officer, James Mitchell will provide a business review Chief Financial Officer, John Lowe will conclude with financial discussion before we open the floor for questions.

Unknown Executive: Financial Officer John Lo will conclude with a financial discussion before we open the floor for questions. I will now pass the floor to Pony.

I will now pass it to pony.

Thank you Randy.

Huateng Ma: Good evening. Thank you, everyone, for joining us. During the third quarter of 2023, we achieved solid and high-quality revenue growth, notable margin expansion, and structural operating leverage. Relatively new services such as video accounts and mini games contributed high-margin revenue streams while we left focus away from less scalable activities. We are increasing investment in our AI model, providing new features to our products, and enhancing our targeting capabilities for both content and advertising.

Good evening, Thank you everyone for joining us.

During the third quarter of 2023, we achieved a solid and high quality revenue growth notable margin expansion and structure operating leverage.

Relatively new services, such as the PD account and mini games contribute higher margin revenue streams, while we leave focuses to away from less scalable activities.

We are increasing investment in our AI models.

Providing new features to our products enhancing our targeting capabilities.

While both content and advertising.

Huateng Ma: We aspire to position our leading AI capability not only as a growth multiplier for ourselves but also as a value provider to our enterprise customers and society at large. Now let me go through the headline financial for the third quarter. Total revenue was 155 billion RMB, up 10% year on year and 4% quarter on quarter. Gross profit was 77 billion RMB, up 23% year-on-year and 8% quarter-on-quarter. Non-IFRS operating profit was 56 billion RMB, up 36% year-on-year and 11%. Non-IFRS net profit attributable to equity holders was 45 billion RMB, up 39% year-on-year and 20% quarter-on-quarter.

We aspire to position, our leading AI capability.

Not only us.

Gross margin Playa for ourselves by.

Also as a value provider to our enterprise customers.

And the society at large.

Now I'll, let Nick go through the headline financials for the third quarter.

Total revenue was $1 5 billion RMB up 10% year on year, and 4% quarter on quarter.

Gross profit was 77 billion RMB up 23% year on year, and 8% quarter on quarter.

Non <unk> operating profit was 56 billion up 36% year on year and 11% quarter on quarter.

Non <unk> net profit.

Attributable to equity holders was 45 billion RMB up 49% year on year and 20% quarter on quarter.

Huateng Ma: Turning to our key services, for communication and social networks, combined MAU of WeChat and WeChat Messenger will grow year on year and quarter on quarter to 1.3 billion. For games, we'll reinforce our leadership in competitive multiplayer games while investing to develop a future hit in content-driven and casual games. For clouds, we will upgrade the size and capabilities of our proprietary foundation model, Tencent Quintian. We are making Huenu available on a limited basis to the public and to customers and deploying Huenuang in 10th and 10th and talks. I will now hand over to Martin for a strategic view. Thank you, Pony, and good evening, everybody.

Turning to our key services.

For communication and social networks.

<unk> of wishing and Wechat group, both year on year and quarter on quarter.

One 3 billion.

Wilkins will reinforces our leadership competitive multiplayer games, while investing to develop a future hits in content driven and casual games.

For cloud, we upgrade the size and capabilities of our proprietary foundation model Tencent when again, we are making.

Available on a limited basis to the public and to customers and deploying linger in Tencent meeting and Tencent box.

I will now hand over to Martin for strategic review.

Thank you Pony and good evening, everybody and.

Martin Lau: In the past few years, the internet industry in China has gone through structural challenges leading to strategic changes. A major strategic change is a shift away from seeking to maximize revenue at all costs toward delivering high quality and sustainable growth. Today, I would like to share with you the progress we have made towards high-quality revenue streams and how this shift is translating into improved operating leverage and strategic position. To start with, let me walk you through the evolution of our WeChat platform and how it continues to improve its position by enhancing its value to users.

In the past few years, the internet industry in China has gone through a structural challenges leading to strategic changes or major strategic change is a shift away from seeking to maximize revenue at all costs towards delivering high quality and sustainable growth.

I would like to share with you the progress we've made towards high quality revenue streams and how this shift is translating into improved operating leverage and strategic position.

To start with let me walk you through the evolution of our <unk> platform and how it continues to improve its position by enhancing its value to users.

Martin Lau: The original Wei Shin experience was messaging, and the franchise is stronger than ever, as messaging remains the highest daily user frequency service in China. Weishin chat, DAU, and daily messages sent per user are consistent and increasing, driven by the evergreen need for communications among friends, family members, and colleagues. Meanwhile, Weish and chat meet social networking needs through group functionalities and moments, and also enable new forms of connections, such as customer support services.

Our regionalization experience with messaging and the franchise is stronger than ever as messaging remains the highest daily user frequency service in China.

Wishing chats.

And daily messages sent per user are consistently increasing driven by the evergreen need for communications among friends family members and colleagues. Meanwhile, <unk> chat social networking needs food group functionalities and moments and also enables new forms of connections such as.

Customer support services.

Martin Lau: Subsequently, we supplemented messaging with open platforms that connect users with a range of external services. These include official accounts that enable brands and content creators to reach their followers with text and image content, and many programs that allow users to transact with merchants and service providers offline and online. Each day, several hundred million unique users visit and interact with over a million unique mini programs; many programs facilitated over 1.5 trillion RMB of GMB in the third quarter.

Subsequently, we supplemented the messaging with open platforms, which connect users with a range of external services.

These include official accounts, which enable brands and content creators to reach their followers with text and image content.

Mini programs, which.

Allow users to transact with merchants and service providers offline and online.

Each day several many at 100 million unique user visits and interact with over a million unique mini programs.

Mini programs facilitated over one five trillion RMB of <unk> in the third quarter.

Martin Lau: Merchants and service providers developing and managing their own mini-programs provide growth and innovation for our ecosystem. Mini Games, which is a successful vertical use case for mini programs, has become the largest casual game community in China. We monetize these open platforms primarily through payment tick rates and a very light advertising load, resulting in a wide gap between the value we deliver to participants versus the revenue we generate ourselves. More recently, Weixin launched the Video Account, which is a major new addition to the Weixin ecosystem.

<unk> and service providers, developing and managing their own mini programs provides growth and innovation for our ecosystem.

Mini games, which is a successful vertical use case for mini programs has become the largest casual game community in China.

We monetize these open platforms, primarily through payment take rate and a very light advertising load.

Resulting in a wide gap between the value we deliver to participants.

Versus the revenue we generate ourselves.

More recently <unk> launched video account, which is a major new addition to the <unk> ecosystem.

Martin Lau: Video accounts are growing in usage fast, and that usage is incremental to our messaging and open platform time spent, uplifting Weixin's overall time spent. Video accounts also differ from chat and open platforms in that they enable us to participate in high-margin monetization activities, such as infid advertising and e-commerce technology, Service Fees. Going into Weixin's new services monetization a bit more, our newest services in Weixin are generating revenues at higher incremental margins than our company average, specifically for video accounts.

Accounts are growing usage fast and that usage is incremental to our messaging and open platform time spent up.

<unk> overall time spent.

Video accounts also differ from chat and open platforms in that they enable us to participate in high margin monetization activities, such as infant advertising and E Commerce technology served.

Service fees.

Okay.

Total installations, new services monetization that bit more our newest services relation or generating revenues at higher incremental margins than our company average.

Specifically for video accounts.

Martin Lau: Monetization generates high incremental margins because, first, we're already incurring video account platform costs during the build phase prior to monetization. Second, once video accounts attain critical mass, our developers can start streamlining operating costs such as bandwidth, servers, and content costs. Consequently, video accounts advertising revenue is high margin and offers a long runway for growth ahead, given increasing video views, low ad load compared to peers, and continued deployment of AI technology to enhance ad click-through rates. Additionally, e-commerce technology service fees, which we book on a net basis, are also high margins in nature for similar reasons.

<unk> generates high incremental margins because first we're already incurring video accounts platform cost during the buildup phase prior to monetization second once video accounts attained critical mass our developers can start streamlining operating costs, such as bandwidth service and content costs.

<unk>.

Consequently video accounts the advertising revenue is high margin and offers a long runway for growth ahead, given increasing video views low AD load compared to peers and continue the deployment of AI technology to enhance at click through rates.

Video accounts E Commerce technology service fees, which we book on a net basis.

Also high margins in nature for similar reasons.

Martin Lau: Additionally, we're cultivating more high-quality revenue stream opportunities within Weixin. For example, Minigames, which we discussed last quarter at quite a bit of length, contribute platform fees and advertising revenues to Tencent. From a reporting perspective, we'll also book platform fees on an app basis such that mini-games revenue carries higher margins than app-based games.

Additionally, we're cultivating more high quality revenue stream opportunities with inflation for example.

Any games, which we discussed last quarter.

Quite a bit of length contribute to platform fees and advertising revenue was 210.

From a reporting perspective, we're also book platform fees on a net basis, such that the Muni games revenue carries higher margins than App based games.

Martin Lau: And for Waysian search, the increasing volume of transactions within Waysian is driving rapid growth in our commercial core curate volume, and marketing search keywords on our own existing traffic generates high margins inherently. As a result, we believe we have moved into a high quality revenue growth model. Under this model, we can now deliver greater operating leverage than in the past. Prior to 2021, our gross and operating profit typically grew at similar or slower rates versus our revenue.

And formation search the increasing volume of transactions with innovation is driving rapid growth in our commercial <unk> volume.

And marketing search keywords on our own existing traffic generates high margin inherently.

As a result.

We believe we have moved into a high quality revenue growth model.

Under this model, we can now deliver greater operating leverage than in past.

Prior to 2021 gross and operating profit typically grew at similar or slower rates versus our revenue.

Martin Lau: While in 2021 and 2022, slowing revenue growth translated into even slower profit growth, or in certain quarters, profit decline. However, entering 2023, solid revenue growth rates have translated into substantially faster growth and operating profit growth rates. There are three drivers in this significant change, two sustainable ones colored in blue on the right, and one one-time driver colored in gray.

While in 'twenty, 'twenty, one and 'twenty two slowing revenue growth translated into even slower profit growth or in some certain quarters profit declines.

However, entering 2023 solid revenue growth rates have translated into substantially faster growth and operating profit growth rates.

There are three drivers in this significant change to sustainable ones colored in blue on the right one.

One time driver.

Driver colored inquiry.

Martin Lau: The biggest driver of this change, which we view as structural in nature, is a positive revenue mixture, i.e., the growth of new high-quality revenue streams and the scale-back of certain low-quality activities. This positive mix shift is the primary reason for gross profit growth exceeding revenue growth. A second driver, which we view as less recurring, is that we optimized costs by exiting certain non-core businesses and cutting back excessive spending on operations, subsidies, and marketing activities during the tough times.

The biggest driver of this change, which we view as structural in nature as a positive revenue mix shift.

I E. The growth of new high quality revenue streams, and the scale back of certain low quality and activities.

This positive mix shift as the primary reason for gross profit growth exceeding revenue growth.

A second driver, which we view as less recurring is that we optimize costs by exiting certain noncore business and cutback excessive spending on operations subsidies and marketing activities during the tough time.

Martin Lau: This driver helps explain why operating profit growth has succeeded gross profit growth, partly, and we view it as a lever for pulling at certain times, but not at all times. The third driver, which we view as ongoing, is our heightened focus on cost discipline. We're seeking to continuously improve operational efficiency, thoughtfully allocate headcount, and effectively manage marketing expenses so as to maintain a focused organization and a lean cost structure for the future.

This driver helps explain why operating profit growth has exceeded gross profit growth, partly and we view it as a lever for pulling at certain times, but not at all times.

The foot driver, which we view as ongoing.

As our heightened focus on cost discipline, we are seeking to continuously improve operational efficiency thoughtfully allocate head count and effectively manage marketing expenses. So as to maintain a focused organization and a lean cost structure for the future.

Martin Lau: Lastly, I will also share with you how we think about our position in the games market. We maintain a strong and defensible franchise in competitive multiplayer games due to the ongoing popularity and performance of our flagship evergreen games, such as Honor of Kings, League of Legends, and Peacekeeper Elite. But we also supplement our success by cultivating new competitive multiplayer games, such as Fights of Golden Spatula, Arena Breakout, and Valorant, which have the potential to become evergreen titles in the future.

Lastly, I'll also share with you how we think about our position that the games market.

We maintain a strong and defensible franchise in competitive multiplayer games due to the ongoing popularity and performance of our flagship evergreen games, such as honour of Kings Little <unk> and peak Peacekeeper elite.

But we also supplement our success by cultivating new competitive multiplayer games, such as Pfizer of Gordon Spatula arena out and salaries.

Which have the potential of becoming evergreen titles in the future.

Martin Lau: Looking across the market, we've seen increased interest in casual games and renewed excitement around content-driven games. However, these trends have not negatively impacted our competitive multiplayer games in terms of audience and monetization. But on the other hand, we see these as new opportunities for us to capture, and we are investing to benefit from these trends. For content-driven games, we have attained some success, including Naruto Mobile, Lost Ark, and K. But we aspire to create even bigger hits in the future. For casual games, we already operate the largest casual game platform in the model of mini-games.

Looking across the market <unk> seen increased interest in casual games and renewed excitement around content driven games. These trends have not negatively impacted competitive multiplayer games in terms of audience monetization.

But on the other hand, we see these as new opportunities for us to capture and we are investing to benefit from these trends for.

For content driven games, we have attained some success.

Including <unk> mobile lost arc in the K.

But we aspire to create even bigger hits in the future.

For casual games, we already operate the largest casual game platform in a motto of mini games.

James Gordon Mitchell: We are also seeking to operate... Blockbuster app-based casual games with user-generated content capability. Looking forward, we have a substantial pipeline of new games in development, including games that expand our own game IPs such as Honor of Kings World, Valorant Mobile, and Delta Force. Mobile games that utilize well-loved licensed IPs, such as Monster Hunter Mobile, Assassin Creed Mobile, and One Piece Mobile, and new games with new IPs in high-potential genres, such as Dreamstars and Casual Games, Nightingale and Survival Open World Crafting, and Ash Echoes in LPG.

We are also seeking to operate block.

Blockbuster App based casual games with user generated content capabilities.

Looking forward, we have a substantial pipeline of new games in development, including.

Games that expand our own game Ips such as on a King World Valerie mobile and Delta for Us.

Mobile games that utilized well after licensed Ips such as Monster Hunter.

Mobile SaaS and mobile and one piece mobile.

And new games with new IP is in high potential designers such as stream stars and casual games Nightingale in survival open word crafty.

And echoes in LPG.

James Gordon Mitchell: We're taking more time than before in developing these games because we want to ensure the quality of these games and because our improved financial structure, described in the previous slides, offers us the ability to do so. Now, with that, I will pass to James to talk about the business review. Thank you, Martin.

We're taking more time than before in developing these games because we want to ensure the quality of these games and because our improved financial structure described in the previous slides offer us the ability to do so.

Now with that our pastor James to talk about business review.

James Gordon Mitchell: For the third quarter of 2020, our federal revenue increased 10% year-on-year. BAS represented 49% of our revenue, within which the social network sub-segment was 19%, domestic games 21%, and international games 9%. Online advertising was 16% of our revenue, and FinTech and business services were 34%. The value added services segment revenue was 76 billion renminbi, up 4% year on year. Social networks revenue was 30 billion renminbi, flat year on year, as revenue from music-related and game-related live streaming services sharply decreased.

Thank you Martin for the third quarter of 2020 annual revenue increased 10% year on year.

Aaas represented 49% of our revenue within which the social network sub segment was 19% domestic games, 21% and international games, 9% online advertising was 16% of our revenue and Fintech and business services was 34%.

The value added services segment revenue was 76 billion renminbi up 4% year on year, Social networks revenue was 30 billion renminbi flat year on year as revenue from music related and game related live streaming services sharply decreased while revenue from music subscriptions and many gains substantially increased profitability.

James Gordon Mitchell: While revenue from music subscriptions and minigames substantially increased, profitability improved as we book entertainment live streaming revenue on a gross basis, treating revenue sharing as content cost, whereas we book minigame revenue on a net basis, netting the game developer's revenue share out of our revenue. Longform video subscription revenue increased 2% year-on-year, benefiting from higher ARPU. Video subscriptions declined slightly year-on-year, though they grew quarter-on-quarter to 117 million accounts. Our exclusive drama series, Lost You Forever, ranked first in the industry by video views across all online platforms in China during the quarter.

Improved as we book Entertainment live streaming revenue on a gross basis, creating revenue sharing is constant cost, whereas we broke many game revenue on a net basis net into game developments revenue share out of our revenue.

Long form video subscription revenue increased 2% benefiting from higher Pds.

Video subscriptions declined slightly year on year and grew quarter on quarter to 117 million accounts.

Our exclusive drama series Laski Forever ranked fast industry wide by video views across all online platforms in China during the quarter.

James Gordon Mitchell: Music subscription revenue increased 42% year on year. Tencent Music optimized user operations, enriched membership privileges, and deepened collaborations with labels and artists, resulting in music subscriptions from 21% year-on-year to 103 million accounts and ARPA increasing 17% year-on-year. Domestic games revenue grew 5% year-on-year to $33 billion in B. The increase was driven by new launches, Valorant and Lost Ark, as well as evergreen titles such as Honor of Kings and Dungeon and Fighter.

Music subscription revenue increased 42% year on year, Tencent music optimized use of operations enriched membership privileges and deepened collaborations with labels and artists, resulting in music subscriptions and 21% year on year to 103 million accounts and offer increasing 17% year on year.

Domestic games revenue grew 5% year on year to 33 billion renminbi. The increase was driven by new launches veterans and lost stock as well as evergreen titles, such as honour of Kings in Dungeon <unk> fighter.

James Gordon Mitchell: International games revenue increased 14% year on year, or 7% in constant currency terms for 13 billion renminbi. The recovery of PUBG Mobile and sustained contributions from Nikkei, Valorant, and Triple Match 3D drove the growth and offset a tough comparison from Tower of Fantasy's launch quarter in the third quarter of 2022. At Communications & Social Networks, Weixin Video Accounts' video views increased over 50% year-on-year, thanks to a thriving creator community and growing user mindshare.

International games revenue increased 14% year on year was 7% in constant currency terms to 13 billion renminbi the recovery of <unk> T mobile and sustained contributions from Nikkei about rins and triple matched <unk> growth the growth and offset a tough comparison from tower fantasies launch quarter from the third quarter of 2002.

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Our communications and social networks ration video accounts video views increased by over 50% year on year, thanks to a thriving creative community and growing user mindshare original content is uploaded directly to video accounts now contributes the large majority of our video views demonstrating the services <unk>.

James Gordon Mitchell: Original content that is uploaded directly to video accounts now contributes to a large majority of our video views, demonstrating the service's content creation and consumption flywheel. We're enhancing our recommendation algorithms and traffic support programs to more actively surface original content within video accounts. Inside QQ, we're adding capabilities to QQ channels, which enable users with shared hobbies, activities, or memberships to operate interest-based communities using software tools such as VoiceChat and Event Manager.

<unk> and consumption flywheel, we're enhancing our recommendation algorithms and traffic support programs and more accurately surface switching our content within the <unk> accounts.

Inside QQ, we're adding capabilities to Kyushu channels, which enable users with Chad <unk> activities on memberships to operate interest based communities using software tools, such as voice chat and event management QQ now has over 700000 active channels covering categories, including colleges gains knowledge.

James Gordon Mitchell: QQ now hosts over 700,000 active channels covering categories including colleges, games, knowledge-based content, and music. Moving to domestic games, the 19th Asian games held in Hongzhou included esports as official medal events for the first time, reflecting interest in competitive games from the general public and endorsement from governments.

On Santa <unk> music.

James Gordon Mitchell: We publish four out of the seven games selected for the Asian games, Arena of Baller, Peacekeeper Elite, League of Legends, and FC Online. During the quarter, we extended our leadership in competitive multiplayer games. Honor of Kings remained the top mobile game across all genres in terms of DAU, time spent in gross receipts, while we've also grown Wild Rift's audience and monetization, such that Wild Rift now ranks among the top 10 mobile games by gross receipts too. Between our three big battle arena games, Honor of Kings, Wild Rift, and League of Legends, we serve different player needs and innovate in multiple directions within the battle arena genre.

Moving to domestic games, the 19th Asian games held in Hangzhou included esports as official metal events for the first time, reflecting interesting competitive games from the general public and endorsement from governments, we publish for up to seven games selected for the Asian Games Arena of Valor Peacekeeper Elite League of legends and accuracy online.

During the quarter, we extended our leadership and competitive multiplayer games honour of Kings remains the first phase mobile game across all genres. It sounds <unk> time spent in crush receipts, while we've also groundwater its audience and monetization such that what risk now ranks among the top 10 mobile games by crush receipts too.

Between our three big fast Arena games honour of Kings, what rift and league of legends, we set different player needs and innovate in multiple directions within the battle arena genre.

James Gordon Mitchell: Similarly, for FPS games, we're launching new titles that appeal to different player interests and capture new gameplay conventions, such as the PC tactical first-person game Valorant and the mobile hero first-person game Hyper Legends. While it typically takes several years to grow individual FPS games into their potential audience and monetization, Valorant has already become one of the leading PC games in China in terms of users and revenue. Martin spoke about our aspirations to size up in content-driven and casual games.

Similarly for Fps games, we're launching new titles with appeal to different payer interest and capture new game play concepts such as the PC Tactical fast fashion game Valley Ranch, and the mobile hero FASTPASS again high collections, while it typically takes several years to grow individual fps game since that potential audience and monetization value.

<unk> has already become one of the leading PC games in China in terms of users and revenue.

Martin spoke about our aspiration sized op and content driven and casual games are content driven games in August we launched Maple story, then that can some April which ranked fourth across all mobile games like rice receipts in its first 30 days.

James Gordon Mitchell: For content-driven games, in August, we launched MapleStory: The Legends of Maple, which ranked fourth across all mobile games by gross receipts in its first 30 days. For Casual Games, we opened our mobile party game DreamStars up for pre-registration in September, and the game has accumulated over 27 million pre-registrations so far.

Our casual games, we opened on mobile Posse game Dream starts up for pre registration in September and the game has accumulated over 27 million pre registrations. So far we're making a substantial investment around <unk> upcoming launch.

James Gordon Mitchell: We're making a substantial investment around DreamStars' upcoming launch. Turning to international games, among our competitive multiplayer games, after a post-COVID consolidation period, PUBG Mobile returned to year-on-year and quarter-on-quarter increases in DAU and gross receipts, benefiting from appealing content and themed events such as a Dragon Ball collaboration. Call of Duty Mobile, which we released back in 2019, achieved record high monthly gross receipts in July, driven by new season content, including a top-tier operator and a new arena mode.

Turning to international games, among our competitive multiplayer games after post COVID-19 consolidation period.

T mobile a return to year on year on quarter on quarter increases in gross receipts benefiting from appealing contents in themed events such as a dragon ball collaboration.

<unk> mobile, which we released back in 2019 achieved record high monthly gross receipts in July driven by new season content, including a top tier operator, and a new arena mode. Among.

James Gordon Mitchell: Among our content-driven games, Nikkei maintained robust DAU and gross receipts via content updates, such as a collaboration with Square Enix's Nier Automata. For online advertising, our revenue increased 20% year-on-year to R26 billion, with notable growth contributions from video accounts, mobile ad network, and Weixin Search. Advertiser categories such as fast-moving consumer goods and local services increased spending while automobiles were weaker. Our advertising revenue year-on-year growth rate slowed versus the previous quarter because as e-commerce has become a much bigger contributor to our ad revenue in recent periods, our advertising revenue seasonality has changed, with the second and fourth quarters of each year seeing more positive seasonality, while the first and third quarters see weaker seasonality, reflecting the weighting of e-commerce promotional activities toward the second and fourth quarters of each year.

Among our content driven games Nikkei maintain robust Cie and gross receipts via content updates such as a collaboration with square Enix since near automata.

So online advertising our revenue increased 20% year on year to <unk> 6 billion renminbi with notable growth contributions from video accounts mobile App network inflation, such advertiser categories, such as fast moving consumer goods and local services increased spending while ultimately else will recap.

Our advertising revenue year on year growth rate slowed versus the previous quarter, because as E. Commerce has become a much bigger contributor to our AD revenue in recent periods. Our advertising revenue seasonality has changed with the second through fourth quarters of each yes, seeing more positive seasonality, while the first and third quarters see weaker seasonality.

Reflecting the wasting of ecommerce promotional activities towards the second and fourth quarter of each year.

James Gordon Mitchell: In addition, we began monetizing video accounts via in-feed ads through the third quarter of last year. Additionally, we have expanded our AI models with more parameters to increase their ad targeting and attribution accuracy, contributing to our ad revenue growth. We're also starting to provide generative AI tools to advertiser partners, which enable them to dynamically generate ad visuals based on text prompts and to optimize ad sizes for different inventories, which should help advertisers create more appealing advertisements with higher click-through rates, boosting their transactions and our revenue.

In addition, we began monetizing video accounts by <unk> through the third quarter of last year.

We have expanded our AI models with more parameters to increase their AD targeting and attribution accuracy contributing to <unk> revenue growth.

We're also starting to provide generative AI tools to advertise the partners, which enables them to dynamically generate at visuals based on text prompts and to optimize AD sizes for different inputs inventories, which should help advertisers create more appealing it budd instruments with higher click through rates stay that transactions not revenue.

<unk>.

James Gordon Mitchell: Close-loop advertisements, which link directly to a transaction or user action within the app where the advertisement appears, provide users and advertisers with a shorter impression to transaction funnel and enhance the effectiveness and measurability of advertising spend.

Close loop advancements, which linked directly to a transactional user action within the App, where they had purchased from Japan provide users and advertisers with a shorter impressions transaction funnel and enhance the effectiveness and measure ability of advertising spend.

James Gordon Mitchell: Advertisers are increasingly linking their ads with in-patient transactions or actions inside the advertiser's mini program, video account, official account, or Wecom landing page. And such closed-loop ad revenue increased over 30% year-on-year during the quarter, now accounting for more than half of Weixin's ad revenue. Video accounts ad revenue grew notably quarter on quarter, driven by increases in video views and time spent on a stable ad load percentage. On the content side, our long-form video ad revenue increased moderately year-on-year, and our music ad revenue maintained robust earlier growth.

Advertisers are increasingly linking their apps with emulation transactions our actions inside the appetizers mini program video accounts efficient accounts or we come landing page and such close new pad revenue increased over 30% year on that trend quarter now accounting for more than half Inflations ad revenue.

<unk> accounts AD revenue grew notably quarter on quarter, driven by increases in video views and time spent on a stable at a percentage.

On the content side, our long form video AD revenue increased moderately year on year and our music revenue maintained robust yet right.

James Gordon Mitchell: Looking at FinTAC and Business Services, segment revenue was 52 billion REMM and B, up 16% year-on-year. FinTech services revenue sustained a team zero on year growth rate benefiting from increased commercial payment activity and wealth management aggregated customer assets. The commercial payments, daily active users, and transaction per user both increased year-on-year. Enhanced merchant solutions boosted mini-program transactions in categories such as retail, travel and transportation, and dining services, and mini-program transactions have notably increased as a proportion of our overall commercial payment volume.

Looking at Fintech and business services segment revenue was 52 billion renminbi up 16% year on year.

Fintech services revenues sustained a teens year on year growth rate benefiting from increased commercial payment activity and wealth management aggregated customer assets.

Commercial payments daily active users and transaction per use of both increase year on year enhanced merchant solutions boosted mini program transactions in categories, such as retail travel and transportation and dining services in each program transactions have notably increased as a proportion of our overall commercial payment volume.

James Gordon Mitchell: For business services, revenue grew at a double-digit rate year-on-year in the third quarter, accelerating versus the second quarter, and the business services gross margin improved significantly year-on-year. Our cloud services revenue growth benefited from the restructuring undertaken in prior periods, as well as from higher spending by industries such as finance and automotive. Video accounts, e-commerce, transaction GMV increased quarter-on-quarter, and the technology service fees we collect on these transactions contributed to the business services revenue and margin increase. We've upgraded our proprietary foundation model, Tencent Honyuan. We've made Tencent Honyuan Bot initially available to a smaller, though expanding, number of users via a mini program.

The business services revenue grew at a double digit rate year on year in the third quarter accelerating versus the second quarter and the business services gross margin improved significantly year on year.

Our cloud services revenue growth benefited from the restructuring taken in prior periods as well as from higher spending by industries, such as finance and automotive.

Video accounts E Commerce transaction GMP increased quarter on quarter and the technology service fees. We collect on these transactions contributed to the business services revenue and margin uplift.

We've upgraded our proprietary foundation model <unk>, one we've made Tencent Honeywell bought initially available which was smaller theyre expanding number of users via mini program. <unk> is also now powering missing summarization, and Tencent meeting and content generation and Tencent docs and externally, we're enabling enterprise customers to Utah.

Shek Hon Lo: Honyuan is also now powering meeting summarization in Tencent Meeting and content generation in Tencent Docs. And externally, we're enabling enterprise customers to utilize our large language model via APIs or model as a service solutions in our cloud for functions such as coding, data analysis, and customer service automation. Now I'll pass to John for the financial review. Thank you, James. Hello, everyone.

Our large language model via Apis, all model as a service solutions in our cloud the functions such as coding data analysis and customer service automation and now I'll pass to John for the financial review.

Shek Hon Lo: For the first quarter of 2020, total revenue was 154.6 billion remand B, up 10% year on year. Gross profit was 76.5 billion remand B, up 23% year on year. Operating profit was 48.5 billion remand B, down 6% year on year. Finance costs were 2.8 billion revenue of 43% year-on-year due to reduced Forex gains and, to a lesser extent, higher interest expenses. Share profit of Associates and JVs was 2.1 billion renminbi compared to a share of loss of 3.7 billion renminbi for the third quarter of 2022.

Thank you James.

Hello, everyone for the first quarter of 2023 total revenue was $154 6 billion renminbi.

10% year on year gross profit was $76 5 billion renminbi up 23% year on year operating profit was $48 5 billion renminbi down 6% year on year.

Finance costs were $2 8 billion renminbi up 43% year on year due to reduced for forex gains and to a lesser extent higher interest expenses.

Share of profit of associates, and JV was $2 1 billion renminbi compared to share of loss of $3 7 billion renminbi for the third quarter of 2022.

Shek Hon Lo: On a non-IFRS basis, share profit was $4.8 billion RMB, improving from $2.4 billion RMB last year. This was driven by better profitability of certain domestic associates thanks to their revenue growth and improved cost efficiency, along with a successful game released by an overseas investor. Income tax expense increased by 55% year-on-year to RMB11 billion, driven by pre-tax profit growth and increased withholding tax provision.

On a non <unk> basis share of profit was $4 8 billion amendment improving from share of profit of $2 4 billion renminbi last year.

This was driven by better profitability of certain domestic associates. Thanks to their revenue growth and improved cost efficiency along with the success of a game released by and overseas investigate.

Income tax expense increased by 55% year on year to 11 billion renminbi, driven by pre tax profit growth and increased withholding tax provision.

Shek Hon Lo: IFRS Net Profit Attributable to Equity Holders was 36.2 billion RMB, down 9% year-on-year. Diluted EPS was 3.752 RMB, down 9% year-on-year. Now I'll share our non-nayavirus financial figures.

<unk> net profit attributable to equity holders was $36 2 billion renminbi down 9% year on year.

Diluted EPS was $3 75 to renminbi down 9% year on year.

Now I'll share our non <unk> financial figures.

Shek Hon Lo: Operating profit was R55.5 billion, up 36% year-on-year. Net profit attributable to equity holders was R44.9 billion, up 39% year-on-year. Diluted EPS was R4.657, up 41% year-on-year.

Operating profit was $55 5 billion renminbi up 36% year on year net profit attributable to equity holders was $44 9 billion renminbi up 39% year on year diluted EPS was $4 $65 seven renminbi up 41% year on year.

Shek Hon Lo: Moving on to Gross Margins, overall gross margin was 49.5%, up 5.3 percentage points year-on-year. By segment, gross margin for VAS was 55.5%, a 3.8 percentage point increase year-on-year. This was due to a higher mix of high-margin games revenue, including mini-games, and a lower mix of low-margin music and games-related live-streaming revenue, along with our cost-controlled meshes. Gross margin for online advertising increased to 52.3%, up 6% year on year. This was mainly driven by high incremental profits generated from video ad revenue, as well as our efficiency improvement.

Moving onto gross margin.

Overall gross margin was 49, 5% of five three percentage points year on year.

By segment gross margin for Vas was 55, 5% of three eight percentage points year on year.

This was due to higher mix of high margin games revenue, including many gains and lower mix of low margin music and gains related live streaming revenue along with our cost control measures.

Gross margin for online advertising increased to 52, 3% up six percentage points year on year.

This was mainly driven by high incremental profit generated from video accounts at revenue as well as our efficiency improvement.

Shek Hon Lo: Gross margin for FinTech and business services was 40.9%, up 7.6 percentage points year-on-year. This was driven by margin improvement for in-crowd business restructuring, emerging high-margin revenue from video accounts, e-commerce, and technology service fees. Structural shift to what's certain high-margin products within FinTech services in our operational efficiency initiative. On operating expenses, selling and marketing expenses were 7.9 billion RMB, up 11% year-on-year due to more spending on promotion and advertising, and the total represented 5.1% each.

Gross margin for Fintech and business services was 44, 9% up seven six percentage points year on year.

This was driven by margin improvement for a crowd business restructuring emerging high margin revenue from video accounts E Commerce technology service fees structure.

Structural shift to certain high margin products within Fintech services, and our operational efficiency initiatives.

On operating expenses, selling and marketing expenses were $7 9 billion renminbi up 11% year on year due to more spending on promotion advertising and the total represented five one percentage.

Shek Hon Lo: 5.1% of revenues. R&D expenses were 16.5 billion RMB, up 9% year-on-year, mainly because of higher staff hours on research and development projects. GNA excluding R&D was 9.8 billion renminbi, down 14% year-on-year, mainly due to a lower staff force, including reduced severance payments. At quarter end, we had approximately 105,000 employees, down 3% year-on-year or up 1% quarter-on-quarter.

One 1% of revenues.

R&D expenses were $16 5 billion renminbi up 9% year on year, mainly because of higher staff costs on research and development projects.

G&A, excluding R&D were $9 8 billion renminbi down 14% year on year, mainly due to lowest of course, including reduce other than statements.

At quarter end, we had approximately 105000 employees down 3% year on year or up 1% quarter on quarter.

Shek Hon Lo: Let's look at our operating and net margin ratios. For the first quarter of 2023, our non-IR virus operating margin was 35.9%, up 6.7 percentage points year on year. To conclude, I will highlight some key cash flow and balance sheet metrics. Total cutbacks were RM8 billion, more than triple year-on-year. Within total CAPEX, operating CAPEX was 6.6% of REMB, up more than five times year-on-year, driven by increasing investment in GPUs and servers.

Let's look at our operating and net margin ratios for the first quarter of 2023, non <unk> operating margin was 35, 9% up six seven percentage points year on year.

Non <unk> net margin was 29, 6% up five eight percentage points year on year.

To conclude I'll highlight some cash key cash flow and balance sheet metrics.

Capex was 8 billion renminbi more than tripled year on year.

Within total Capex operating Capex was $6 6 billion renminbi up more than five times year on year, driven by increasing that's been in GPU and servers.

Shek Hon Lo: Non-operating capex rose by 6% year-on-year to 1.4 billion RMB. Free cash flow was 51.1 billion remit, up 85% year on year, mainly driven by higher receipts from various businesses and timing differences in the settlement of certain accounts payable. The net cash position was $36.4 billion RMB, up 106% quarter-on-quarter, reflecting strong free cash flow generation, partially offset by cash outflow for share repurchases and strategic indexes.

Nonoperating Capex rose by 6% year on year to $1 4 billion renminbi.

Free cash flow was $51 1 billion renminbi up 85% year on year, mainly driven by higher receipt from various businesses and timing difference in the settlement of certain accounts payables.

Net cash position was $36 4 billion renminbi up 106% quarter on quarter, reflecting strong free cash flow generation, partially offset by cash outflow for share repurchases and strategic investments.

Unknown Executive: Thank you, John. We shall now open the floor to questions. If you are dialing in by phone, please press five to raise a question, then press six to unmute yourself. If you are accessing from the Tencent meeting or group meeting application, please click the raise hand button at the bottom left. We will take one question after one follow-up question each. The first question comes from Kenneth Fong from UBS, and a few others. Thank you.

Thank you John we shall now open us local questions. If you are dialing in by phone. Please press <unk> raised a question then presses to annuity ourselves if you will.

Accessing from Mckinsey and meeting meeting application these clinics.

Alex the Raytheon button at the bottom left.

We'll take one question one follow up question each time.

The first question comes from the strong profit UBS.

And it's.

Kenneth Fong: Thank you. Good evening, management. Thank you for taking my questions, and congratulations on another solid quarter of quality growth. I have two questions.

Thank you good evening management. Thank you for taking my questions and congrats on another solid quarter of quality growth.

Kenneth Fong: The first is on minigames. Could management share with us more about the future strategy of minigames, given Tencent is a strong franchise? Will we be just staying as a platform for distribution, or can we actually use minigames to rejuvenate some of our existing titles which are late in their product cycles? Also, going forward, any shift in our strategy on the game launch between app-based versus mini-games in our games going forward?

Two questions. The first is on many gains could management share with us more about the future strategy of mini games, given Tencent a strong franchise, we will be just seeing as a platform for tissue pollution or we can actually use media games to rejuvenate some of our existing titles, which will lag the product cycles are.

Also going forward any shift in our strategy on the game launch between base.

Versus a mini games.

Teams going forward.

Kenneth Fong: And I have a follow-up question on the AI strategy. We have successfully launched the Hunyuan AI model, and we stand up versus our peers with our use cases. Can management share with us how the US chip spend will impact our AI strategy, including product launch, monetization, and also areas of focus? Thank you.

And I have a follow up question on the AI strategy, we have successfully launched.

<unk> module, and we say now versus our peers with our use cases.

Can management share with us how would the U S chip spend impact our AI strategy, including product launch monetization and also area of focus thank you.

Martin Lau: Hi Kenneth, thank you for your question. So I'll take the minigame question, and Martin will handle the AI question. For the minigames, then we view the minigame opportunity for Tencent primarily as a platform opportunity. And, you know, there are many thousands of game development studios that now focus on creating minigames. We're very happy to nurture that ecosystem, and we don't want to, you know, squeeze or unduly pressure that ecosystem.

Hi, Kenneth Thank you for your question, so I'll take the mini game Crafts, and Matson will hand with AI question.

So there are many games than we.

We view the mini game opportunity for <unk>, primarily as a platform opportunity.

And.

There are many.

Thousands of game development Studios.

Now focus on creating mini games, we're very happy to nurture that ecosystem, and we don't want to squeeze or on Judy pressure that ecosystem.

You asked about whether we would seek to rejuvenate existing titles, which relate in their product cycle.

By releasing many games.

Martin Lau: You asked about whether we would seek to rejuvenate existing titles, which are late in their product cycle, by releasing minigames. And, you know, the reality is that our game strategy is not built on titles that, you know, have a product cycle that is aging and that then require, you know, heavy rejuvenation.

The reality is that <unk>.

Game strategy is not built on titles.

Have a product cycle today and that then require heavy rejuvenation.

<unk> strategy is built around what we hope will become an evergreen games.

Martin Lau: Our game strategy is built around, you know, what we hope will become, you know, evergreen games. And it's built around, you know, making those evergreen games as popular and successful as they can be, and then adding further, you know, evergreen games that will also be popular and successful. So we don't, you know, hugely focus on taking smaller games that have a product cycle and then seeking to rejuvenate them through minigames or anything else.

And it's built around making those evergreen games as popular and successful as they can be and then adding fair.

The evergreen games that would also be popular and successful.

<unk>.

Hugely focused on <unk>.

Taking smaller games that have a product cycle had been seeking to rejuvenate them through mini games, so or anything else.

Martin Lau: In terms of Huenu'an and the overall AI strategy, I would say we have been pretty far along in terms of building up Huen Yuan, and we feel that we are one of the leaders within China, and we are also continuously increasing the size of the model and preparing for the next generation of our Huanian model, which is going to be a mixture of expert architecture, which we believe will further improve the performance of our Huanian model. Building up Huenu, we actually have a really built up our capability in general for AI, you know, across the board, because when you're in the transformer-based model, it involves the handling of a large amount of data, a large amount of training data, a large size of a computing cluster, and a very delicate fine-tuning process in terms of improving AI performance.

In terms of.

When you're in the overall AI strategy.

I would say.

Have been pretty far along in terms of building up when you are in and we feel that.

We are one of the leaders within China and we are also.

Continuously increasing the size of the motto and preparing for the next generation of our when you model, which is going to be a mixture of experts architecture, which we believe will.

The improve.

The performance of when your model and by building up when you're in we actually have.

Really build up our capability in general AI across the board because when you're in the transformer base to model include a box.

The handling of large.

Amount of data larger amount of training data large size of computing cluster and.

Barry dedicate fine tuning process in terms of.

Improving the AI performance and by.

Going through the process right now we have also built a lot of.

Martin Lau: And by going through the process, right now, we have also built up a lot of our AI capability, which is not transformer-based but, you know, can be applied to many other businesses. So if you look at Huan Yuan itself, right now, we see it is very good at generating text messages.

Our AI capability, which is not transformer base, but it can be applied in many of our other businesses. So if you look at when you're in itself right.

Right now.

Martin Lau: And that actually is quite useful for a lot of applications. A lot of SaaS applications improve the capability of the SaaS service. For example, in Tencent Meeting, we can actually leverage Hunyuan to provide a summary of meetings and help people to catch up on meetings if they have missed the first half of the meeting and so on and so forth. And in Tencent Docs, we can actually provide a whole set of tools for people to create documents in a much more efficient way. And these services are already offered to outside customers.

See it.

A very good at generating.

Text <unk>.

<unk> and <unk>.

And that actually is.

Quite useful for a lot of.

A lot of.

SaaS applications improve the capability of the SaaS service for example, intense and meeting we can actually leverage when you and to provide summary of meetings and help people to catch up on meetings.

I missed the first half of the meeting and so on and so forth and intense in dogs, we can actually provide a whole set of tools for people to create documents in a much more.

Efficient way.

Sure.

These services are already offered to outside customers.

Martin Lau: And we also have a whole set of productivity enhancement tools, such as the customer service APIs, which are now being tested by a lot of customers and enterprise customers who have the need to interact with their customers. In terms of code generation, it's actually providing very good results and tools for our programmers as well as our outside customer programmers to improve their coding efficiency. And it's also helping in terms of content creation for both of our advertising business, helping advertisers to create more ads, more targeted ads, which can be used to improve the click-through rates of the advertising, as well as in the game production process, especially related to the artwork. We are actually leveraging AI to help us to create this artwork in a more efficient and cost-effective way. So that's for Hunyuan.

We also have a whole set of productivity enhancement tools such as.

The.

<unk>.

Service.

Apis, which.

Now being tested by a lot of.

Customers.

Enterprise customers, who have the need to queue.

To interact with their customers.

In terms of cogeneration, it's actually sort of providing very good.

Results and and tools for our programmers as well as our <unk>.

Outside of customer program or is it too.

Improve on their coding efficiency.

And it's also helping in terms of content creation for both of our advertising business, helping advertisers.

To create more ads more targeted ads, which can be used to improve the click through rates of the advertising as well as in became production process, especially related to the artwork.

We are actually leveraging AI to actually help us to create these artwork and a more efficient and cost effective way.

Look.

So that's for when you add in.

And the general AI capabilities is actually helping us quite a bit in terms of the targeting.

Martin Lau: And the general AI capability is actually helping us quite a bit in terms of the targeting technology related to advertising and our content provisioning service. So in short, video, by improving our AI capability, we can actually ramp up our video accounts at a faster clip. And in terms of the advertising business, by increasing the targeting capability, we are actually increasing our ad revenue and by delivering better results to our customers.

Technology related to advertising and our content.

<unk> service so in short video by improving our AI capability, we can actually ramp up our video accounts.

Faster clip.

In terms of the advertising businesses by increasing.

The targeting capability.

Actually increasing our AD revenue and.

And by delivering better results to the.

Martin Lau: So, they are generating, so our AI capabilities generate tangible results at this point in time, and we look into the future. Hunyuan can actually provide a lot of tools for enterprise customers. It can further improve our advertising business efficiency by, in the future, really merging the advertising stage and the selling stage. If we can actually provide very good customer service capability, then a lot of merchants can actually combine the advertising and sales processes into one.

Yeah.

So our customers. So they are generating so our AI capabilities is generally tend to be resolved at this point in time, and we actually look into the future. When you can actually provide a lot of tools for enterprise customers. It can further improve our advertising business efficiency by.

In the future really emerging advertising stage and selling stage right. If we can actually provide very good customer service.

Capability than than a lot of merchants can actually combine the advertising sales process into one.

And we also feel that debt.

Martin Lau: And we also feel that further down the road, and when there's actually a consumer-facing product that, you know, it's more like a smart agent for people right now, that is further down the road, but it actually carries quite a bit of room for imagination.

Further in the future when there is actually a consumer facing product.

It's more like a smart agent for people right now that is further down the road.

Got it.

Actually carries quite a bit of.

And the room for imagination now in terms of the chip situation right now we actually have one of the largest inventory of.

Martin Lau: Now, in terms of the chip situation, right now, we actually have one of the largest inventories of AI chips in China among all the players. And one of the key things that we did was actually we were the first to put in an order for H800, and that allowed us to have a pretty good inventory of H800 chips. So we have enough chips to continue our development of Hunyuan for at least a couple more generations.

Of.

AI chips in China, among all of the players and.

One of the key things that we have done was actually we were the first.

To put an order for 800 and that allow us to have a pretty good.

Inventory of eight.

800 chips so.

So we have enough chips to continue our development of when you had at least a couple more generations.

Martin Lau: And the ban does not really affect the development of Huanyuan and our AI capability in the near future. Going forward, we feel that the chip ban does actually affect our ability to resell these AI chips throughout cloud services. So that's one area that may be impacted. And going forward, we will have to figure out ways to make the usage of our AI chips more efficient. We'll try to see whether we can offload a lot of the inference capability to lower-performance chips so that we can retain the majority of our high-performance AI chips for training purposes. And we'll also try to look for a domestic source for these training chips.

And.

So the ban does not really affect the development when you add in our AI capability.

Near future.

Going forward, we feel that the chip then does actually affect our ability to resell.

<unk>.

It ships to through our cloud services. So thats one area that may be impacted and going forward, we will have to figure out ways to.

<unk>.

Make our usage of our AI.

AI chips more efficient we will try to see whether we can.

Offload a lot of the inference capability to lower performance chips. So that we can retain the majority of our high performance AI chips for training purpose and we also try to look for.

Domestic source for these.

Gaining chips.

Okay.

Thank you Martin and James.

Unknown Executive: Thank you. We will take the next question from Gary from Morgenstern. Hi.

Thank you.

Our next question from Gary <unk> from Morgan Stanley.

Gary Yu: Hi, thank you management for the opportunity and congratulations on another solid quarter. My first question is also related to the games business. I think two years ago we also identified games as the key investment area for FutureGlobe, and I think at that time, we were expecting a kind of two to three years production cycle. We commented that because of the improvement in financial performance, we now have the luxury of taking a longer time for the production cycle.

Hi, Thank you management for the opportunity and congratulations for another solid quarter.

My first question is also related to the games business.

Two years ago, we also identified <unk> as the key investment area for future growth I think at that time, we were expecting a kind of two to three years production cycle.

We comment that that.

Because of the improving financial performance as we know.

Gary Yu: So where are we right now in the production cycle and how should we look at these investments translating into a pipeline of games in different genres and also financial performance in the next couple of years? And then I have a follow-up question related to our capital management. I think last year we increased dividends. We have also stepped up our share buyback. How should we look at the opportunities in our investment portfolio, similar to what we did with JD and Meituan distribution in the past two years? Thank you. Hi Gary.

The luxury to taking to take a longer time for our production cycle. So where are we right now at the kind of production cycle and how should we look at these investment translating into games pipeline different genders and also financial performance in the next couple of years, and then I have a follow up questions related to <unk>.

Our capital management.

I think last year, we increased dividends, we have also step up our share buyback.

How should we look at the opportunities in our investment portfolio symbol.

Similar to what we did on JD and May 12 distribution in the past two years. Thank you.

Gary Yu: So of the game question, then in general, we have chosen to elongate our game production cycles, you know, sometimes by six months, sometimes by 18 months. And there are a couple of reasons for that. One is that we can see empirically that there are bigger opportunities now for the best games, especially if the development studio is patient about investing the time and resources to make the best games be all that they can be.

Hi, Gary So all the game question then in general we have chosen to elongate our game production site cycles, sometimes by six months, sometimes by 18 months and Theres a couple of reasons for that one is that we can see empirically that bigger opportunities now for the best game.

It's especially if the development studio is patient about the investing the time the resources to.

To make the best games feel that they can be and of course, we will answer in a capitalized on that and released the best games.

Gary Yu: And of course, we want to, you know, capitalize on that and release the best games. And then secondly, as you alluded to, with the high-quality revenue growth model in place, we feel we now have the luxury where our business, you know, because of video accounts, because of minigames, because of search, because of e-commerce, is actually capable of sustaining quite healthy earnings growth rates even without releasing a big game in a given three-month period.

And then secondly, as you alluded to with the high quality revenue growth model in place we feel we now have the luxury where.

Our business because of video accounts because of mini games because of it.

E Commerce is actually capable of sustaining a quite healthy earnings growth rates, even without releasing a big game in it given the three month period.

Gary Yu: And therefore, with both of those in place, we think that for us, it makes, has made sense for us to play the long game and, you know, really focus on making the games in our pipeline be all that they can be. And, you know, Martin highlighted nine games in our pipeline. You know, one of those games will be released in the coming weeks. The others will be released in the coming few months.

And therefore with the both.

Both of those in place, we think that for US It makes us made sense for us to play the long game.

And really focus on making the games in our pipeline build with it they can be and Martin highlighted nine games in our pipeline.

One of those games will be released in the coming weeks the others will be released in the coming few months.

Those will be the.

Test cases of how effectively we are executing in that direction, but overall, we feel that we now have.

Gary Yu: And, you know, those will be the test cases of how effectively we're executing in that direction. But overall, we feel that we now have the luxury of playing the long game because the high-quality revenue growth model provides us with earnings growth, irrespective of whether we're launching a game in a quarter or not. See you next week. Bye. Bye.

This luxury of playing the long game because of the high quality revenue growth model provides us with earnings growth.

Irrespective of.

Now, whether we are launching it came in a quarter or not.

Yes.

Yes.

Martin Lau: In terms of shareholder return and capital management, I would say a few points, right? Number one, we are very focused on shareholder return, and we try different ways to improve it.

In terms of shareholder return on a capital management I would say a few points really number one.

We are very focused on shareholder return.

We will try it different ways to improve it and secondly, we do have very strong cash flow.

Martin Lau: And secondly, we do have very strong cash flow, alongside a very large investment portfolio, half of which is actually in liquid stock. So we do have the flexibility of using different tools to increase shareholder return. And if you look at the tools that we have, right, obviously, you mentioned, there's share buyback, there's dividend, there's also a distribution of investee shares that we have executed before. And there's also divesting investments, so that we generate cash so that we can actually do more share buyback and dividend.

Long side with a very large investment portfolio.

Which is actually.

And liquid stocks.

So we do have the flexibility of using different tools to increase shareholder return.

If you look at the tools that we have right.

You mentioned the share buyback.

There is a dividend there.

There is also a distribution of MST shares that we have.

Executed before and there is also.

Divesting investment so that we generate cash so that we can actually do more of share buyback and dividend. So.

Martin Lau: So, we will use these tools dynamically and also at different times in different combinations to improve and return, improve the shareholder return, and return capital to our shareholders. But I would say at this point in time, if you look at the market, the valuation in the market for Chinese Internet stocks is almost at historical lows. So I would say at this point that the buyback will be a more favorable means for our shareholders than other means.

We will use these tools.

Demand locally and also.

At different times and different combination.

Two <unk>.

Improve.

Return.

Improved shareholder returns and returning capital to.

Our shareholders.

But.

I would say at this point in time, if you look at the market the.

The valuation in the market for China and that stock is almost at historical lows rates, So I would say.

At this point.

Buyback will be more favorable means for our shareholders than other means.

Thank you Gary.

Martin Lau: Thank you, Gary. Thank you. We're going to take the next question from William Packer from BMP.

Thank you.

Well take the next question from William Packer from BMC.

Yeah.

Hey, your lines.

Unknown Executive: [inaudible]

Our highest as well pack can you hear me.

Unknown Executive: Really, you're lying to me.

Yes, we can.

William Henry Packer: Hi, this is Will Packer. Can you hear me? Yeah, we can. Thanks very much.

Thanks, very much and congrats on the strong quarter.

My question is around the sustainability of gross margin improvement across the key ad.

And Fintech segments of your portfolio all the gains we've seen year to date is sustainable into 2024 and beyond.

Further upside from mix shift.

And my follow up question was around domestic gaming.

Grocery and volatile in recent years as you've digested the impact of Lockdowns rectification et cetera, we now seem to have settled into a more normalized period, how should we think about the medium to long term growth algorithm for the segment.

And to what extent are you relying on new hit content within that segment. Thank you.

William Henry Packer: And congrats on the strong calls. My question is around the sustainability of gross margin improvement across the key VAS ads and fintech segments of your portfolio. Are the gains we've seen year to date sustainable into 2024 and beyond? And is there further upside from makeshift?

I will say on the margin question.

We talked about how there's three drivers.

The uplift in margins in recent quarters and two of them, we view as sustainable and recurring in nature now one of them which is that.

Count adjustments restructuring and so forth is more episodic in nature.

And looking forward in general the revenue streams that are growing fastest in our business and our revenue streams with the highest margins.

So we believe that the carrier.

What level of margin of gross margin is sustainable and we believe that there is room for margins to improve.

And if you look at the advertising segment for example.

The gross margin has improved from 30% to around 50%.

Our closest global comparable is running an advertising gross margin of 18%.

So that's on the margin side with regards to the games then we believe that the existing evergreen games provide a certain quantum of growth.

And then on top of that.

We have new games in the pipeline and depending on when we really started in the success of those new games that can provide additional growth on top.

Thank you.

Okay.

Many thanks.

Thank you. Thank you next question comes from John.

John Choi from Daiwa.

Okay.

John Your line is open now.

William Henry Packer: And my follow-up question was around domestic gaming. Growth's been volatile in recent years, as you've digested, and the impact of lockdowns, replication, etc.

Good evening and thank you for taking my question I have just a quick.

One question on the gains as you mentioned I think.

I think you guys mentioned, the domestic or more comfortable you will see more launches, but as we go into the international side can you kind of elaborate like what kind of investments that we have to do further as we continue to invest.

The stand that we have our first I would call of duty mobile you mentioned that apps are despite being launched four years ago, we had a record.

July so wanted to know what are like kind of how do you elongate or revive some of the old titles, while you balance the new launches and just a quick follow up.

On your Capex and head count plan.

Can you kind of share us.

I think this quarter you did see elevated capex.

At this time and also head count did see sequential improvement. So as we go into 2024 can management share some color on this area. Thank you.

William Henry Packer: We now seem to have settled into a more normalized period. How should we think about the medium to long-term growth algorithm for the sector? And to what extent are you reliant on new hit content within that segment? Thank you. I will.

Hi, John So on the international games, we have already been running a very substantial investment in.

William Henry Packer: So on the margin question, we talked about how there were three drivers of the uplift in margins in recent quarters, and two of them we view as sustainable and recurring in nature. One of them, which is the headcount adjustments, restructuring, and so forth, is more episodic in nature.

William Henry Packer: And looking forward, in general, the revenue streams that are growing fastest in our business are the revenue streams with the highest margins. So we believe that the current level of gross margin is sustainable. And we believe that there is room for margins to improve further. If you look at the advertising segment, for example, the gross margin has improved from 30% to around 50%. Our closest global comparable is running an advertising gross margin of 80%, so that's on the margin side.

William Henry Packer: With regard to the games, we believe that the existing evergreen games provide a certain quantum of growth. And then, on top of that, we have new games in the pipeline. And depending on when we release those and the success of those new games, those can provide additional growth on top.

In International game development through our P&L, if you take.

Our studios such as riot Super style mini clip fat sharp shock mob.

And on and on and then we're actually one of the biggest game developers in the world executing our China business and of course.

Big China Studios, such as <unk> and quantum add many thousands more of developers who are creating games that are targeting and international as well as the domestic market. So we feel that we have.

The teams in place now to create.

Big budget high production value.

Some of these successful games for the international market, and we'll be bringing those games to release in.

In the quarters to come.

So that's on the game side Capex John please.

Operating capex.

Represents about 3253, 5% of the total revenue pre 235 in 2023.

For 2024, I think you will be at similar level.

We are able to get more GPU through <unk> and 1% on top of that pre two or one 5%.

Nonoperating Capex every year on the construction side, we spent roughly 1 billion U S dollars in the past few years.

That's excluding any land.

<unk>.

<unk>.

Add on application you shouldn't beam.

More than an additional 1 billion on top of that construction costs.

In terms of the head counts, we believe most of the efficiency optimization has been done and we have the right size of our workforce.

Our existing business.

We are hiring selectively to grow our new businesses.

But also it is actually very important.

For us.

Two to recognize that.

Big teams actually not very good for four focus and efficiency execution of businesses. So in the past I think.

And maybe many other companies have actually built.

Teams up too quickly and build geologic team and and so going forward.

Consistent with what we've talked about in our new high.

High quality revenue growth model one of the key thing is actually.

The cost discipline as part of it is.

Trying to keep our teams smaller but with better people so that.

We can actually.

How 'bout team to focus on the real value added things to work done and that turns out to usually be a value creation exercise for our business and make ourselves a business strategically stronger.

William Henry Packer: Thank you. Thank you, William. The next question comes from John Choi from

Thank you we'll take.

Take the next question is the initial step sausage.

Hyungwook Choi: and John Choi from Daiwa.

Hi.

Thanks management for taking my question.

Hyungwook Choi: Joint Alliance organized

The louder.

Hello.

Hear me Okay, yes.

We can hear you better now okay alright. Thank you.

Hyungwook Choi: Good evening. Thank you for taking my question. I have just one question on the games, as you mentioned. I think you guys mentioned that domestically, you're more comfortable with more launches. But as we go into the international side, can you kind of elaborate on what kind of investments we have to make further as we continue to invest? I do understand that we have, at first, I think Call of Duty Mobile. You mentioned that, despite being launched four years ago, we had a record July. So I wanted to know, like, what are the kind of ways you elongate or revive some of the old titles while you balance the new launches?

Yes, Thanks for taking my questions also congrats on the solid profit.

Two questions first on the BD apparel.

Our housing revenue as we started to lap.

Hello, Paul.

And auto.

Harper costs.

e-commerce transactions to pharmacy.

Alright.

For the video call just wondering what could be the SADC off the growth rate for the overall online.

Revenues going forward.

Along a follow up.

Yeah.

I think management.

Potentially sometimes out of all of that will be.

Our commercial product for our consumer.

Just wondering.

So you're quite right about that.

We integrate that into wechat, and QQ and <unk> would that be potentially also a calm Russia.

These charges by somebody like US recently, thank you.

Hyungwook Choi: And just a quick follow-up on your CapEx and headcount plan. Can you kind of share with us what I think this quarter we did see elevated CapEx this time, and also headcount did see a sequential improvement? So as you go into 2024, can you share some color on this area? Hi John.

Hi, Alicia so on your first question about media account advertising revenue.

Hyungwook Choi: So on the international games, you know, we've already been running a very substantial investment in international game development through RP&L. If you take, you know, our studios, such as, you know, Riot, Supercell, Miniclip, Fat Shark, Shark Mob, and on and on and on, then you know, we're actually one of the biggest game developers in the world, excluding our Chinese business. And of course, our big Chinese studios, such as Timmy and Quantum, have many thousands more developers who are creating games that are targeting an international as well as a domestic market.

Hyungwook Choi: So we feel that we have, you know, the teams in place now to create, you know, big budget, high production values, and, you know, ultimately successful games for the international market. And, you know, we'll be bringing those games for release in the quarters to come. So that's on the game side.

No.

Hyungwook Choi: [inaudible] represents about 3.5% of the total revenue, 3 to 3.5 in 2023. And for 2024, I think it will be at a similar level. And if we are able to get more GPUs to add on, and the 1% on top of that, 3 to 3.5%. For non-operating capex every year, on the construction side, we have spent roughly $1 billion in the past few years. That's excluding any land acquisition. If we add on land acquisition, it shouldn't be more than an additional $1 billion on top of that construction cost.

Super focused on whether that's a low base or a higher base because actually we have.

For discrete growth drivers, we see supporting our advertising revenue growth not just this year, but for many years to come.

The first of them is traffic.

The number of video views today is substantially greater than 50% higher than it was when we began monetizing video accounts.

From a year ago and so that's.

An immediate uplift in an ongoing uplift because we believe video accounts profit will continue to grow.

Thats the AD load today the AD load we operate out on video accounts is less than 3% the AD load that our domestic peers operate app is over 10% and so we have room to vary substantially multiply our AD load over the years to come versus where it is today.

Thirdly, there's the ability to uplift our click through rates using artificial intelligence.

Today, a typical click through rate might be around 1%.

As you deploy large language models, then you can make more use of the thousands of discrete data points.

We have potentially photog, hitting and bring them to bear and turn them into reality and you can get pretty substantial uplifts in click through rate and therefore revenue, which is what the big U S social networks and now starting to see.

And fourth that's the closed loop Opex you actually if you look at our domestic peers in the short video space and that being very focused and very effective at maximizing closed loop transactions, but this does generate amongst inflammation.

Does enable that the greatest future targeting for targeting abilities.

And given our many programs given a weeklong landing pages, giving video accounts given the Tencent payment infrastructure. We feel we are in an ideal position to further ramp up our own closed loop capabilities. So with those four drivers in place and obviously the macro environment is out of our control that we.

Have four important drivers of growth within our control. Thank you.

Hyungwook Choi: In terms of headcount, we believe most of the efficiency optimization has been done, and we have the right size of a workforce for our existing business. We are hiring selectively to grow our new businesses. But also, it's actually very important for us to recognize that big teams are actually not very good for focus and efficiency in business execution. So in the past, I think, you know, we and maybe many other companies have actually sort of built teams up too quickly and built too large a team.

So in terms of the when you're in and.

Hyungwook Choi: And so going forward, and consistent with what we talked about in our new high-quality revenue growth model, one of the key things is actually cost discipline, and cost discipline is really part of it, trying to keep our teams smaller but with better people so that we can actually help our teams to focus on the real value-added things to work on. And that turns out to usually be a value creation exercise for our business and makes our business strategically strong.

And the future potential of AI assistant I think it's fair to say, it's still in the very very early stage of concept design.

Hyungwook Choi: Thank you. We will take the next question from Alicia Yap from C3.

So definitely not at the stage of product design, yet and and definitely not at the stage of thinking about monetization yet.

But of course, if you look at.

Of these generative AI technology at this point in time influence cost is the real variable cost which needs to be considered in the entire equation.

And that to some extent add to the challenge.

Product design too so.

I would say at this point in time, it's actually a very early stage.

There is a promise and imaginary.

Going forward the opportunity for the future but.

It's too early to talk very concretely about it for now.

Okay. Thank you.

Thank you we will take the next question from Thomas Chong from Jefferies.

Your line is open.

Okay.

Okay, we will maybe come back to Thomas data so.

I'm sorry can you hear me sorry, we can't hear you now yes, we can hear you now sorry.

Thanks management for taking my questions. My question is about our live streaming e-commerce.

Alicia Yap: Hi, good evening, management. Thanks for taking my question. Louder. Hello. Oh, can you hear me okay? Yeah, we can hear you better now. Okay, all right. Thank you. Also, congrats on the solid profit bid.

That put.

And one of them is more intense and we are seeing.

Alicia Yap: Two questions. First, is on the video account advertising revenue as we start to lapse out of the low base, and are we going to still have the closed group?

Our policies are gaining very good traction and joined <unk> fast growth. So I just wanted to get some color from a management perspective about our strategies and our goal in coming years and in particular, how we should think about the in panel at the pricing as well as the.

Commissions wolf trend or any.

Our market position that we want to achieve in coming years. Thank you.

Alicia Yap: e-commerce transactions to benefit and support that solid reputation.

Alicia Yap: for the video account. Just wondering what could be the steady state of growth?

Well in terms of live streaming E Commerce I think the playbook is actually quite clear Ray once you have.

Alicia Yap: for the overall online ad revenues going forward. And then a follow-up on the Huanyuan model. I think management did mention that, potentially, sometime down the road, there will be a commercial product.

Alicia Yap: up for a consumer. And so, just wondering, you know,

The short video franchise, you actually is up and you start taking that into the live streaming and build a franchise. There and then from live streaming if you can actually establish the tools and the.

Alicia Yap: when we can see, for example, the AI system could be integrated into.

Alicia Yap: chat in QQ, and when that is ready, would that also be a potential commercial?

The connection and our supply chain of merchants then you can start building up the life streaming e-commerce.

Alicia Yap: Thank you.

So the playbook is actually relative to hold to what were doing is actually we want to build it in.

Martin Lau: Hi Alicia, so on your first question about video account advertising revenue, you know, we're not super focused on whether there's a low base or a higher base because actually, we have four discrete growth drivers we see supporting our advertising revenue growth, not just this year but for many years to come. You know, the first of them is traffic.

Martin Lau: So, you know, the number of video views today is substantially greater than 50% higher than it was when we began monetizing video accounts just over a year ago. And so that's an immediate uplift and an ongoing uplift because we believe video account traffic will continue to grow. Second, there's the ad load. You know, today the ad load we operate at on video accounts is less than 3%. The ad load that our domestic peers operate at is over 10%.

Martin Lau: And so we have room to very substantially multiply our ad load over the years to come versus where it is today. Thirdly, there is the ability to uplift our click-through rates using artificial intelligence. You know, today, a typical click-through rate might be around 1%. As you deploy large language models, then you can make more use of the thousands of discrete data points that we potentially have for targeting and bring them to bear and turn them into reality.

Systematic way step by step and.

It does involve.

Process of many steps, including.

Including.

Building a strong ops team so that we can ensure the quality of the products offered on our platform building category teams to manage different categories building tools and infrastructure to facilitate merchants to do more businesses, we need to have integration.

Of the entire ecosystem into our AD system.

And also we need to build up.

Our ecosystem, so that merchants can leverage to Q.

To.

Facilitated the live streaming e-commerce business right. So I think this would actually if played out step by step right deal with basically.

Mirror the market share that we have on short video right now where you have short video or you have the.

Live streaming on the life streaming you're actually sort of half.

The live streaming E Commerce GMB.

I think.

If we execute all those steps well.

Within the playbook, then it would give us a fair share, but over and beyond we believe we have some pretty.

Martin Lau: And you can get pretty substantial uplifts in click-through rates and, therefore, in revenue, which is what the big U.S. social networks are now starting to see. And fourth, there's the closed-loop opportunity. If you look at our domestic peers in the short video space, they've been very focused and very effective at maximizing closed-loop transactions because those generate the most information, those enable the greatest future targeting and forward-targeting abilities. And, you know, given our mini-programs, given our WeCom landing pages, given video accounts, and given the Tencent payment infrastructure, we feel we're in an ideal position to further ramp up our own closed-l So, you know, with those four drivers in place, obviously, the macro environment is out of our control, but we have four important drivers of growth within our control. Thank you.

Martin Lau: In terms of Huanyuan and, in the future, the potential of an AI assistant, I think it's fair to say it's still in a very, very early stage of concept design. So definitely not at the stage of product design yet, and definitely not at the stage of thinking about monetization yet. But of course, right now, if you look at any of these generative AI technologies at this point in time, inference cost is a real variable cost which needs to be considered in the entire equation.

Martin Lau: And that, to some extent, adds to the challenge of the product design for you. So, you know, I would say at this point in time, it's actually in a very early stage. There is promise and imaginary room for opportunity for the future, but it's too early to talk very concretely about it for now. Thank you.

Unique capability yourself characteristics that we can bring to bear that may offer further upside that include we have a very strong <unk> program.

Ecosystem and they are a lot of merchants and brands, we're already doing a lot of businesses on many programs and if we can actually connect our life streaming e-commerce with the Amelia program said that.

Additional layer of.

Integration and ability to do more business, we have social sharing with our within our ecosystem right and that would actually help.

Merchants and products to be shared.

Many other friends and connections and as our results can generate more sales and we also have a pretty significant group of high income and affluent customer base, who are probably not that used to shopping on short video platform. At this point in time, and if we can bring them to the <unk>.

<unk>.

Life streaming e-commerce ecosystem.

Who could offer further upside so that's the way we think about that lifestyle.

<unk> e-commerce at this point of time.

Thank you.

Martin Lau: Thank you. We will take the next question from Thomas Chong from Jeffrey. I'll let your lines open. Okay, we will maybe come back to Thomas later.

Okay next question.

Well I'm looking at.

Thomas Chong: So we were just- Sorry, is it, can you hear me? Sorry. Yeah, we can hear you now. Yeah, we can hear you now. Go ahead.

Hi, Good evening management team. Thank you for taking my question.

Thomas Chong: Thanks management for taking my questions. My question is about live streaming e-commerce. Given that the competitive environment is very intense and we are seeing video accounts are gaining very good traction and enjoying very fast growth, so I just want to get some color from a management perspective about our strategies and our goals for the coming years. And in particular, how we should think about internal advertising as well as the commission's growth trend or any market position that we want to achieve in the coming years. Thank you. Well, in terms of live streaming,

That's a good quarter.

Thomas Chong: Well, in terms of live streaming e-commerce, I think the playbook is actually quite clear, right? Once you have the short video franchise, you actually start taking that into the live streaming and build a franchise there. And then from live streaming, if you can actually establish the tools and the connection and a supply chain of merchants, then you can start building up the live streaming e-commerce. So the playbook is actually quite well developed.

I have two questions number one.

Thomas Chong: What we're doing is actually building it in a systematic way, step by step. And it does involve a process of many steps, including building a strong operations team so that we can ensure the quality of the products offered on our platform, building category teams to manage different categories, and building tools and infrastructure to facilitate merchants to do more business. We need to have integration of the entire ecosystem into our ad system.

Unknown Executive: A quick greeting, management team.

Thomas Chong: And also, we need to build up a KOL ecosystem so that merchants can leverage the KOL to facilitate the live streaming e-commerce business. So I think this would actually, if played out step by step, would basically mirror the market share that we have on short video. When you have short video, you have live streaming, and then live streaming, you actually have light streaming e-commerce GMV. And I think, you know, if we execute all of those steps well within the playbook, then it would give us a fair share.

Thomas Chong: But, over and beyond, we believe we have some pretty unique capabilities or characteristics that we can bring to bear that may offer further upside. That includes: We have a very strong mini-program ecosystem, and there are a lot of merchants and brands who are already doing a lot of business on mini-programs. And if we can actually connect our live streaming e-commerce with the mini-programs, and that additional layer of integration and ability to do more business.

Regarding the gross driver.

Thomas Chong: We have social sharing within our ecosystem right now, and that would actually help merchants and products to be shared with many other friends and connections, and as a result, can generate more sales. And we also have a pretty significant group of high-income and affluent customers who are probably not that used to shopping on short video platforms at this point in time, and if we can bring them into the entire live streaming and e-commerce ecosystem, then that could offer further upside. So that's the way we think about live streaming e-commerce at this point in time. Thank you. The next question is, I'll Siao San Jose in December.

Tyson business Janice you mentioned wishing search.

Unknown Executive: Thank you for taking my question and congratulations on a good quarter. I have two questions. Number one, regarding the gross driver of advertising business, Jens, you mentioned WeChat Search as one of the drivers. Can you share with us a little bit more metrics in terms of

The driver.

With us a little bit more metrics.

Unknown Executive: in terms of where the business is located.

So far what are the business is.

Unknown Executive: For example, the percentage of a WeChat DAU who use WeChat search, etc., etc. And more importantly, I would like to understand how you think about the long-term monetization opportunity given search ads... Alexei's model with many years of operational history on the China Internet. So that's the first one on WeChat search.

For example percentage of <unk> do you, who use wishing search on such et cetera, and more importantly, I would like to understand how you think about long term monetization opportunity give us search.

Our legacy US model with many years of operational history in China Internet.

So that's the first one on Wechat search.

Unknown Executive: Second question is on the minigame; we notice the super majority of the mid-core and hardcore game activities still mostly take place in apps. Um, what does it take for those mid-core and harder core game activities to migrate into the mini-game ecosystem? Is it currently constrained by technology or bandwidth, or is it more of a user behavior issue? Thank you. Why don't I take the minigame question? So, sorry, Martin.

Question is.

On the mini game, we know tense.

Some of them majority of the core and hardcore game.

TSS due mostly take planting apps.

What does it take for those mid Corps and the Harbor Court game activity to migrate into mini game ecosystem as it currently constrained biotechnology or bandwidth or it's more of a user behavior issue.

Thank you well why don't I take the mini game question. So.

Unknown Executive: So on the minigame question, then, you know, there are a number of constraints, but we believe the most important is the capability, the technical capabilities, and the game development tools for making minigames that are comparable to app-based games. And, you know, I say that first of all because, over time, there's been a steady broadening of the range of games available on Roblox, to more graphically immersive, more and more multiplayer, and more and more fast-paced, twitch-based games.

Sorry.

So on the mini game question.

There's a number of constraints we believe the most important is that.

Kate the technical capabilities and the game development tools for making many games that are comparable to App based games.

I would say that first of all because if you look at.

Similar concepts such as roadblocks over time, that's been a steady broadening in the range of games available on broke locks and niche tumor graphically immersive more and more multiplier more and more fast paced switch based games and we are seeing now something similar in many games, where the initial mini games for <unk>.

Unknown Executive: And, you know, we're seeing something similar in minigames, where the initial minigames were typically single player, then there were basic multiplayer card games, you know, now we're moving into multiplayer role-playing games, and then going into the future, we expect to see multiplayer first-person action games. So, you know, as the handsets become more sophisticated, as the minigame architecture becomes more powerful, as the developers become more expert at creating minigames, then there should be a long-term convergence in terms of the capabilities and the experiences of minigames versus app-based games. And, you know, as that happens, then, you know, there's no intrinsic reason why people who are currently playing app-based games wouldn't also start playing minigames.

<unk> single player than that with basic multiplayer card games.

Now, we're moving into multi play a role playing games and then going into the future. We expect to see multiplayer first person action games.

So as the.

Handsets become more sophisticated.

The mini game architecture becomes more powerful as the developers become more expert in creating mini games, then there should be a long term convergence.

Payments of the capabilities and the experiences of mini games versus App based games.

As that happens then.

There is no intrinsic reason why people who are currently playing App based games.

<unk> stopped playing mini games.

Unknown Executive: Now in terms of recent search, right now, the penetration is actually quite high, right? So starting from people basically searching for, [inaudible] contact and content, basically everybody does it on a very frequent basis every day, right, you know, but then, in addition to that, everybody has actually searched for something on the open web as well as in the ecosystem. So content search, everybody has done some of that, but what we need to do is actually have people use it more frequently.

In terms of recent search.

No.

The penetration is actually quite high right. So starting from people basically searching for.

Yeah.

In App.

Contact and content basically everybody does it on a very frequent basis everyday but then in addition to that.

Everybody you have to actually search something.

On on that.

<unk>.

Open web as well as in the ecosystem. So it's the content search everybody has done some of that.

But what we need to do is actually need to have people use it more frequently and the ways in which we can actually make it more.

Unknown Executive: And the way through which we can actually make it more frequently used is, of course, one, the search technology, right? You know, within Weisheng, we have been constantly building up the technology. And I think, you know, the search technology has improved consistently. And after we acquired Sogo, you know, the search technology has also taken a step up. The second is actually the search user experience because Weisheng is a tool for people to communicate, so we actually need to have a user experience that allows people to find content more quickly than normally if people open up a browser and try to do searches. And I think, you know, that we've made progress, but there's still more work to be done. And the third one is actually the ecosystem, right?

More frequently used is of course one.

It's technology right now within <unk>.

<unk>, we have been constantly building up the technology and I think the search technology.

Has improved consistently and after we have acquired.

So go to technology.

Search also.

Taking a step up.

The second is actually the search user experience because <unk> is a.

A tool, which people communicate so we actually need to have.

User experiences that allow people to find the content more quickly than normally if people open up brown.

Browser and tried to do searches and I think that what made progress, but theres still more work to be done and the third one is actually the ecosystem. So we have a lot of content within <unk>.

Unknown Executive: You know, so we have a lot of content within Weixian, and that's through official accounts. And there's also an increasingly large mini-program ecosystem that's sitting on Weixian. And now there are also video accounts.

That's true.

Official accounts and there is also an increasingly large mini program ecosystem, that's sitting on way Shen and now Theres also video accounts.

Unknown Executive: The ability for us to leverage Weixian search and connect it to all the content within our ecosystem is actually something that we are building over time. And once we have done that, you know, we can allow people to search on the open web. We'll also have unique content that's uniquely available on Weixian, and the Weixian search value proposition and content will be even better. So I think, you know, those are things that we have been doing in order to increase the frequency of usage by our users in search.

<unk> for us to leverage.

<unk> search and connect to all the content within our ecosystem is actually something that we are.

Building over time and once we have done that right. There we can allow people to search on the open web will also have unique content, that's uniquely available on <unk> and the <unk> search.

Value proposition and content will be even better.

So I think those are things that we have been doing in order to increase the frequency of usage by our users on search and we have seen encouraging signs on that because the VEB and in general we'd be on content.

Unknown Executive: And we have seen encouraging signs of that because the VV and, in general, on content have been increasing consistently over the past few years. Over time, we felt, you know, once we had built up that content search traffic within Weishen on a consistent basis, then we could actually overlay demonetization, right? You know, and right now, the ad load on our search is still very, very low. So there's actually a lot of potential for us to increase it.

<unk> been increasing consistently over the past few years.

And.

Overtime, we felt once we have buildup that content search.

Traffic within <unk> on a consistent basis, then we can actually overlay de monetization right and right now.

At load on our search is still very very low so that theres actually a lot of potential for us to increase it.

Unknown Executive: But more important, I think, you know, the ability for us to build a transaction ecosystem within Weishen is actually very important for the future growth of Weishen Search. The more mini-transactions that we can generate, the more live streaming e-commerce that we can generate over time, that would actually help us to increase the potential for Weishen Search monetization. And we feel there's actually a very long runway in terms of growing this part of the business.

But more important I think the ability for us to build.

Transaction ecosystem with <unk> is actually very important.

For the future growth of <unk> search.

More.

Mini program transactions that we can generate the more.

Life streaming e-commerce that we can generate over time that would actually help us to incur.

Increase the potential formation search monetization and we feel there is actually a very long.

Runway in terms of growing this part of the business.

Unknown Executive: Thank you. We will take the next question from Charlene Liu from HSBC. Thank you. Thank you, Wendy.

Thank you we'll take the next question comes shutting Neil from HSBC.

Charlene Liu: I have two questions. First, on advertising, which obviously has been a really strong year for Tencent as the platform has been gaining market share. Should we expect, I guess, growth to accelerate into the next quarter or 2024, just generally how you're thinking about it? Thank you. And then I'm going to follow up with Joshua Gates.

Thank you. Thank you Andy I have two quick questions.

First is on advertising, which obviously has been a really strong year for Camden as the platform has been gaining market share.

Considering e-commerce is becoming a bigger contributor than obviously the arch season.

Seasonality factors that comes with that contribution from waste and search.

And next year, obviously, we could see tougher comps.

Florida Chums Astor has delivery today my basketball as this year.

Should we expect I guess growth decelerate.

This quarter, our 2020 or just generally how are you.

Thank you and then on the pharma like jackpot games.

Charlene Liu: Hi Charlene, we've missed some of the questions. I think it may have overlapped a little bit with Alicia's question earlier.

Hi, Charlie we missed some of the question I think I'll say may have overlaps in little bit with Alicia's question earlier, So I'll just.

Charlene Liu: So I just refer back to that. We see four district growth drivers for our advertising business, including traffic growth, increased ad load to converge with industry peers, and deployment of AI to boost CTR in closed loop advertising. And so those are all on the positive side. And then, you know, macro could be a potential negative, but, you know, candidly, this year hasn't been a spectacular year from a macro perspective anyway.

Refer back to that in the <unk>.

C four discrete growth drivers for our advertising business, including traffic growth.

Increased ad load to converge with industry peers deployment of AI to boost ctr.

Charlene Liu: In terms of, you know, what that translates into, you know, for, you know, growth in, you know, next quarter or next year, we don't give guidance. And, you know, the theme we've been talking about this evening is not. We're less focused on maximizing the speed of our revenue growth in any given quarter. We're more focused on having a healthy, sustainable revenue growth rate, and we believe with a sustainable revenue growth rate, we can drive a faster earnings growth rate. So that's the advertising question.

And closely with advertising.

And so those are all on the positive side, and then macro could be a potential negative but candidly this year hasn't been a spectacular year from a macro perspective anyway.

In terms of what that translates into.

So growth in the next quarter and next year, we don't give guidance.

Theme, we've been talking about this evening is not.

High revenue growth model, which high quality revenue growth model.

So we're less focused on maximizing the speed of our revenue growth in any given quarter. We're more focused on now having a healthy sustainable revenue growth rate and we believe with sustainable revenue growth rate, we can drive a faster earnings growth right. So thats on the advertising question.

Charlene Liu: Thank you. I guess separately on the international games, you know, I guess what factors should we be focusing on?

Thank you.

Separately on international games.

I guess, what factors should we be focusing on as we think about again the outlook, obviously, we're reading a little bit more about layoffs in the industry.

Charlene Liu: As we think about, again, the outlook, obviously, we're reading a little bit more about layoffs in the industry. How should we think about contributing factors like, you know, user spending as well as the development pace of new launches and consolidation within the industry? How would these things kind of play out, you know, whether they will help a bit or hurt or not?

How should we think about.

Contributing factors like user spending.

As well as development pace of new launches and consolidation within the industry. How would these things kind of play out.

Whether it will help with that are helpful.

Charlene Liu: you know, Benefit Tencent.

Benefits that Ken Thank you.

Charlene Liu: Tencent. Thank you.

Charlene Liu: I don't think there's a very simple single answer. It's a complex industry, and it went through a period of rapid headcount increase over the last two to three years. Now it's going through a period of headcount consolidation. That's happened many times in the past, and unfortunately, it may happen again in the future, and it's just incumbent on us to navigate that effectively.

But I don't think that.

Simple single answer.

It's a complex industry.

It went through a period of rapid head count increase.

Over the last two to three years now it's going through a period of head count consolidation that's happened in many times in the past and unfortunately, it may happen again in the future and it's just incumbent upon us to navigate that effectively but again.

Charlene Liu: But again, we have the benefit of that because, you know, we have a number of other businesses that are growing quickly. Therefore, we don't feel pressure to, you know, maximize our international or our domestic game revenue growth in any single quarter. You know, if you're looking at Microsoft, then, you know, Microsoft doesn't feel it has to release a new Halo game on December 31st, rather than January 1st, because, you know, people keep using Windows and Office and Azure and all of the other Microsoft products that also generate profit growth.

We have the benefit in the because.

We have a number of other businesses that are growing quickly. Therefore, we don't feel pressure to maximize our international or our domestic game revenue growth.

In any single quarter, if youre looking at Microsoft than Microsoft has to release, a new Halo game on December 31st drop in January the first because.

People keep using windows and office centers zero and all of the other Microsoft products that also generate profit growth and I think we're now in that position, where with the improving margins of our advertising business with improving margins.

Charlene Liu: And, you know, I think we're now in that position where, with the improving margins of our advertising business, with the improving margins of our fintech business, with the turnaround in our business services, new contributions from e-commerce, and so forth, then, you know, we have a multi-pronged growth model. And so, when International Games has a big new product and accelerates, you know, that's great. But in the meantime, you know, International Games is not the primary determinant of whether we grow our earnings or not in a given quarter.

Fintech business with the turnaround in our business services and new contributions from E Commerce and so forth then we have a multi pronged growth model and so as my name's National games has a big new product and accelerates that's great but in the meantime international games is not.

Primary determinant of whether we grow our earnings on at any given quarter.

Charlene Liu: Thank you, Charlene. We will take the last question from Ronald Kong from Goldman Sachs. Thank you, thank you, Pony Martin, James, John, and Wendy.

Thank you Jody.

Take the last question will now come from Goldman Sachs.

Thank you. Thank you Bonnie Martin James.

Jonathan Wendy.

Ronald Keung: So my first question, I think, on FDS, we haven't talked too much about fintech, McKean's growth, and the cloud business so far. Just how should we think about the landscape for these two and the growth outlook? Should we expect a further recovery, particularly in the business services, excluding e-commerce?

First question I think on FBS, we haven't talked.

So much on the Fintech.

Mid teens growth in our business. So far just how should we think about.

The landscape on these two and the growth outlook should we expect a further.

Recovery, particularly on the business services, excluding the e-commerce side, so the cloud business.

Ronald Keung: to the cloud business in the computer.

Ronald Keung: and Outlook. Maybe I'll ask the second question as well, just in one go. So on our shareholder return policies, how should we think about our current...

Got it landscape and outlook.

The second question as well is just that.

One goes on our shareholder return policies, how should we think about our current investment portfolio in terms of the investment and reinvestment piece this year.

Ronald Keung: Investment Portfolio, in terms of the investment and

Ronald Keung: Thank you very much.

And any lessons or experience from the past two years of distribution that we have from my experience and how should we think about that.

This showed a return on the investment portfolio front. Thank you.

Okay.

Martin Lau: In terms of the FBS, I think, you know, there are two parts to it, right? You know, there is FinTech and there is business services. And now, in terms of FinTech, I think what we have is a very significant platform in terms of payment. And on top of payment, we actually offer financial services. And if you look at the business itself, it's actually growing quite nicely this year. And there are a couple of drivers.

In terms of the FBS I think there are two.

Two parts of it right. There is the Fintech and there is the business services in terms of the Fintech I think.

What.

We have is a very significant platform <unk> payment and on top of the payment we actually offer.

Financial services and if you look at the.

Business itself, it's actually growing quite nicely this year.

Sure.

Martin Lau: Part of it is actually growing alongside consumption, right? And as you can see, although there are some macro challenges on the economic side, consumption in China is still growing quite nicely. And our overall fintech business actually grows alongside with that. And then, on top of it, we have actually been offering financial services such as lending, such as wealth management. And these are actually falling into the model of the high quality revenue growth model, in which these are businesses that generate high margins, and they ride on a payment network that has the cost already paid for.

There are a couple of drivers party is actually growing alongside with consumption.

C. Although.

There is some macro challenges.

The economy side.

Consumption in China is still growing quite nicely.

Our overall.

<unk>.

Fintech business actually grow alongside with that and then on top of it we actually have been offering financial services, such as lending such as wealth management and these are actually falling into the model of the high quality revenue growth model in which these.

Our businesses, which generates high margins and they ride on.

Payment network, which has the cost already paid for so.

Their growth actually generates additional.

Incremental margins.

Martin Lau: So their growth actually generates additional incremental margins. And at the same time, we actually manage these businesses in a very measured way because we want to make sure that we are very good in terms of risk management. And we also try to grow them in a measured way so that we don't take on too much risk.

And at the same time, we actually manage these businesses in a very measured way because we want to make sure that we're very good in terms of risk management and we also we're trying to grow them.

In a measured way so that we don't take on too much risk and we can also pick the best customers that we want to serve.

Martin Lau: And we can also pick the best customers that we want to serve. So I think that's on the FinTech side. Over time, we actually would like to find additional value-added services that we can actually bring value to the merchants that we serve. And for the value that we create, we charge a little bit for additional fees if they are really generating value.

So I think that's that's on Fintech side over time, we actually sort of you would like to find additional value added services that we can actually bring value to the merchants that we serve.

For the value that we create we charge a little bit on.

Additional.

Additional fees.

If they are really generating value. So I think that's the overall model there were thinking with respect to fintech.

Fintech.

Martin Lau: So I think that's the overall model that we're thinking with respect to FinTech. In terms of the business service of the cloud, I think right now there's a lot of... In the past two years, there's been a lot of capacity readjustment within the industry. The access capacities are being used up, and a lot of businesses have been trying to manage their costs down. And I think, you know, we have also proactively got rid of some low-quality businesses, too.

In terms of the business services the cloud right.

Right now there is a lot of in the past two years, there is a lot of capacity.

The readjustment within the industry right.

Excess capacity it is being used.

And a lot of businesses have been.

Trying to match.

<unk> manage their costs down.

And I think we have also proactively got rid of some low quality businesses too.

Martin Lau: When we look into 2024, we believe that, you know, the dynamics in the market are that the squeezing of unused capacity is probably over. So, you know, if macro stays the same, there will probably be some models.

When we look into 2024, we believe that.

The dynamics in the market is that the squeezing of of.

Unused capacity is probably over so if macro stays the same there will probably some modest growth in terms of the.

Martin Lau: growth in terms of cloud usage. But there probably need to be higher economic growth in order for higher growth to return to the market. There will be some growth with respect to pass and SARS, and that's frankly the area that we are focused on. We believe going forward, again, we'll be more focused on the high-quality revenue model, which, you know, I would be more focused on. focused on the past and such, which inherently will be generating more gross margins for us. So that's how we look at those two businesses. So James.

The cloud usage.

There probably needs to be a high economic growth in order for higher growth to return to the market.

There will be some growth with respect to our Paas and SaaS and that's frankly the area that we're focused on we believe going forward.

Our gateway.

We're focused on the high quality revenue.

Model in which would be more focused on the paas and SaaS, which inherently will be generating more more gross margins for us. So that's how we look at those two businesses.

So James Yes, with regards to the investment portfolio.

James Gordon Mitchell: Yeah, with regard to the investment portfolio, we are quite active and agile on both additional investments but also on divestments. You know, some of that activity is visible. A lot of it is not visible. But, you know, given what we view as our share price dislocation, our primary use of cash has been buying back our own shares. And, you know, that remains the priority at this point in time.

<unk>.

Quite active and agile on bi.

Additional investments, but also on divestments and of some of that activity is visible a lot of it is not visible.

But given what we view as our share price dislocation.

Primary use of cash has been buying back our own shares and that remains the priority at this point in time.

Thank you Martin and James.

James Gordon Mitchell: Thank you, Martin, and James. Thank you all for joining the call today. We are now ending the webinar. 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.

Thank you all for joining the call today, we are now ending the webinar, if you wish to check out our press release.

These and other financial information please visit IR section of our company website.

W. W. W Dot <unk> dot com.

All of this webinar will also be available soon thank you and see you next quarter.