Q3 2024 Tencent Holdings Ltd Earnings Call
Business Review. Chief Financial Officer Joan Lo will conclude with financial discussion before we open the floor for questions. I will now pass it to Pony.
Pony: Thank you, Wendy. Good evening. Thank you everyone for joining us.
Pony: During the third quarter of 2024, we delivered robust revenue growth in our games business.
Pony: underpinned by consistent performance of evergreen games globally and contribution from new games with evergreen potential.
Pony: We upgrade our e-commerce strategy around mini-shops to create a unified and trustworthy transaction experience spanning the entire WeChat ecosystem.
Pony: We are increasingly seeing a tangible benefit of deploying AI across our products and operations, including marketing services and cloud.
Pony: And we'll continue investing in AI technology, tools and solutions that assist users and partners.
Pony: Looking at our financial numbers for the quarter, total revenue was 167 billion RMB, up 8% year-on-year and 4% quarter-on-quarter.
Pony: Gross profit was 89 billion RMB, up 16% year-on-year and 3% quarter-on-quarter. Non-IFRS operating profit was 61 billion RMB, up 19% quarter-on-quarter and 5% quarter-on-quarter.
Thank you.
turning to our key services.
Pony: For communication and social networks, combined MAU of recent and rechecked year-on-year and quarter-on-quarter to $1.38 billion. Mobile MAU of QQ, recent and year-on-year to $562 million.
Pony: For digital content, we reinforce our leadership in music and non-film video streaming, where Tencent Music and Tencent Video grow subscriptions year on year.
Pony: For Interactive Entertainment, we successfully launched D&F Mobile and Delta Force. Both have potential to become evergreen titles.
Pony: For cloud, we improve our traction in international markets, leveraging our competitive pricing and domain expertise in areas such as games and live streaming. I will now hand over to Martin and James for business review.
Thank you, Pony, and good morning, good evening to everybody.
Speaker Change: For the third quarter of 2024, our total revenue was up 8% year-on-year.
Speaker Change: VAS represented 49% of our total revenue, within which social networks subsegment was 18%, domestic games subsegment was 22%, and international games was 9%.
Speaker Change: Marketing services was 18% of total revenue and FinTech and business services was 32% of our total revenue.
Thank you very much.
Speaker Change: Moving on to gross profit. Our overall gross profit growth was 16% year on year in the third quarter, primarily driven by growth in high margin revenue streams from domestic games, video accounts, and WeChat search.
Speaker Change: Improved profitability of our cloud services also contributed to overall gross profit growth.
Speaker Change: By segment, Bass gross profit increased 13% year-on-year to $48 billion R&B, representing 53% of our total gross profit.
Speaker Change: Marketing services gross profit increased 18% year-on-year to 16 billion RMB, contributing 18% of total gross profit.
Speaker Change: And FinTech and business services gross profit increased in 19% year-on-year to 25 billion RMB, contributing 29% of total gross profit.
Thank you. Thank you. Thank you.
Speaker Change: For value-added services, the segment revenue was $83 billion RMB, up 9% year-on-year.
Speaker Change: Social network's revenue was up 4% year-on-year to 31 billion RMB, driven by increased revenue from music subscriptions, app-based game item sales, and mini-games platform service fees, which was offset partially by decreased revenue from music and games-related live streaming services.
Speaker Change: Music subscription revenue increased 20% year-on-year, primarily driven by 16% year-on-year growth in subscriptions to $119 million. TME enhanced recommendation algorithms, enriched content offerings, and upgraded audio quality during the period.
Long-form video subscription revenue increased 4% year-on-year.
Speaker Change: Video subscriptions grew 6% year-on-year to 116 million benefiting from popular animated and drama series.
Speaker Change: Our exclusive drama series, She and Her Girls, became the highest rated domestic drama series industry-wide since 2015 per review aggregator site, Douban.
Speaker Change: Our domestic revenue, games revenues, grew 14% year on year to 37 billion RMB, reflecting growth from Honor of Kings and Peacekeeper Elite, as well as a record-setting performance from Valiant and full quarter contribution of PNF Mobile.
Speaker Change: International games revenue increased 9% year-on-year, or 11% in constant currency terms, to 15 billion RMB. The growth was driven by robust performance of PUBG Mobile and Brawl Stars.
Speaker Change: Revenue growth of international games substantially lagged gross receipt growth, as improved retention rates for certain titles led to elongation of their revenue deferral periods.
Now moving on to communications and social network.
Huateng
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Speaker Change: The segment on the key products. Many programs has emerged as an increasingly powerful platform for users to connect with merchants and content providers.
Speaker Change: Many programs facilitated over 2 trillion RMB of transaction GMB in the third quarter, benefiting from better coverage and solutions for use cases including foot ordering, electric vehicle charging, and medical services.
Speaker Change: On the content side, we enriched our content offering beyond mini-games with increasingly popular mini-dramas.
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Speaker Change: MiniShops now serves as our platform for indexed and standardized merchandise, where merchants can operate storefronts similar to those in e-commerce marketplaces, while leveraging WeChat social interactions, content services, and payment capabilities.
Speaker Change: For consumers, we enhanced the user interface for audit tracking, extended return periods, and provide express return services.
Speaker Change: For merchants, we lowered entry barriers with simplified onboarding exercises and enabled shoppable SKU-level links.
Speaker Change: across official accounts, mini programs, WeChat search, and video accounts. Recently, we introduced a standalone merchant-facing app for mini shops merchants to facilitate their store operation and management.
Speaker Change: As Tony mentioned earlier, QQ Mobile device MNU returned to year-on-year growth in the third quarter of 2024.
Speaker Change: Over the past few years, the QQ team has comprehensively upgraded the platform's backend infrastructure and added and popularized new functionalities such as Tencent Channels, resulting in this meaningful achievement.
So with that, I'll pass on to James.
James: Thank you, Martin. Moving to domestic games, our flagship Evergreen Games achieved healthy gross receipts growth as a result of proactive adjustments that we made earlier this year.
James: Honor of Kings grew its gross receipts year-on-year in the third quarter, benefiting from the Chinese Valentine-themed event in collaboration with the Tencent Comics IP Fox Spirit Matchmaker, as well as a top-tier martial arts-themed outfit.
James: Peacekeeper Elite continued its recent rebound and grew gross receipts at a double-digit percentage rate year-on-year in the third quarter, driven by items tied into the Neon Genesis Evangelion anime as an upgradable outfit inspired by Chinese ink painting.
James: Among our other evergreen games, eight-year-old game Naruto Mobile achieved a historical high of over $10 million quarterly average DAU. Naruto Mobile group gross receipts robustly year-on-year, reflecting higher paying user penetration for season passes.
James: Valorant captured share in the reviving PC game market and was our largest PC game by gross receipts and revenue in the third quarter.
James: For the first time, a Chinese team, namely Edward Gaming, won the Global Championships in the Valorant Champions Tournament, attracting new players and boosting sales of esports-themed items, driving quarterly average DAU and gross receipts to record high levels.
James: Delta Force, developed internally by Timmy's Studio, represents the first time we've created a first-person action game for simultaneous release on mobile and PC, as well as for domestic and international markets.
James: We launched Delta Force in China in September and the game is achieving good average user daily time spent and player retention rates with several million DAUs. We'll add a content-centric campaign mode and launch Delta Force in international markets in the coming months.
James: Among our international games, PUBG Mobile grew gross receipts by a double-digit percentage year-on-year to a record high left in the third quarter.
James: Egyptian themed outfits became one of the most popular costumes in the game and Lamborghini branded car costumes monetized well too. Brawl Stars continues to rank among the top three mobile games by DAU across the industry and international markets.
James: Gross receipts grew several times year-on-year, driven by the limited-time Megaboxes event and an IP collaboration with SpongeBob SquarePants.
James: For Valorant, gross receipts increased over 30% year-on-year in the third quarter, benefiting from the launch of a console version and esports-themed weapon items. We extended Valorant to PlayStation and Xbox in early August in North America, Europe, Japan, and Brazil, expanding the game's user base.
James: Turning to our next revenue segment, which we've renamed from Online Advertising to Marketing Services, to better represent the breadth of our promotional and marketing solutions.
James: Our marketing services revenue grew 17% year-on-year. Strength in games and e-commerce categories outweighed weakness in real estate and food and beverage. The Paris Olympics somewhat cushioned industry-wide weakness in brand ad revenue during the third quarter, but this positive factor will be absent in the fourth quarter.
James: We leveraged our foundation model, Tencent Hunyuan, to facilitate tagging and categorization of content and ad materials. And we upgraded our machine learning platform to deliver more accurate ad targeting.
James: By property, video accounts' marketing services revenue increased over 60% year-on-year. As we systematically strengthen transaction capabilities in Weixin, advertisers increasingly utilize our marketing tools to boost their exposure and drive sales conversion.
James: Mini programs marketing services revenue grew robustly year-on-year as our mini games and mini dramas provided high value rewarded video ad inventory and generated incremental closed-loop demand.
James: And for Weixin Search, we utilized large language model capabilities to facilitate understanding of complex queries and content, enhancing the relevance of search results. Commercial queries increased and click-through rate improved and our search revenue more than doubled year-on-year.
James: Looking at FinTech and business services, segment revenue was 53 billion renminbi, up 2% year-on-year.
James: Fintech services revenue in aggregate remained largely stable year-on-year with a decrease in payment revenue offset by an increase in both management services revenue.
James: The number of commercial payment transactions continued to increase at a healthy rate, but average value per transaction declined.
James: For wealth management, both the number of users and aggregated customer assets increased year on year.
James: Turning to business services, revenue grew year-on-year in the third quarter, benefiting from higher cloud services revenue and increased technology service fees generated from rising e-commerce transaction volumes.
James: Business services gross profit rose significantly year-on-year due to the increased contribution from higher margin revenue streams as well as improved efficiency.
James: Our cloud revenue from GPUs, primarily used for AI, grew swiftly year-on-year and now represents a team's percentage of our infrastructure-as-a-services revenue.
James: We released Tencent Honyuan Turbo, which utilizes a heterogeneous mixture of experts' architecture, doubling our training and inference efficiency and halving inference cost, versus its predecessor Honyuan Pro.
James: SuperClue ranked Hunyuan Turbo first for general capabilities among domestic peers. Last week we made the Hunyuan Large model and the Hunyuan 3D generation model available on an open source basis.
James: Our international cloud revenue increased significantly year on year. We leveraged domain expertise in areas such as games and live streaming and competitive pricing to win international customers.
Hello, everyone.
James: With that, I'll pass to John for the financial review. Thank you, James.
John: For the third quarter of 2024, total revenue was 167.2 billion renminbi, up 8% year-on-year. Gross profit was 88.8 billion renminbi, up 16% year-on-year. Operating profit was 53.3 billion renminbi, up 20% year-on-year. Interest income was 4 billion renminbi, up 14% year-on-year, driven by growth in cash reserves.
John: Finance costs were 3.5 billion RMB up 27% year-on-year due to exchange loss this quarter compared to gains in the same period last year. Share profit of Associates and JV was 6 billion RMB compared to 2.1 billion RMB in the same period last year.
John: On a non-IFRS basis, share of profit was $8.5 billion renminbi, up from $4.8 billion renminbi last year, due to strong financial performances from several associates as a result of company specific factors, including new content release and improved operating efficiencies.
John: Income tax expense declined by 19% year-on-year to 8.9 billion RMB, primarily due to higher withholding tax provision in the same quarter last year. Domestic corporate income tax in the first quarter of 2024 increased year-on-year.
on Non-IRS Financial Figures.
John: Operating profit was 61.3 billion RMB up 19% year-on-year. Net profit attributable to equity holders was 59.8 billion RMB up 33% year-on-year. The difference in year-on-year growth rates between operating profit and net profit was due to higher non-IRR share of profit from Associates and JV.
John: which increased to 8.5 billion RMB this quarter from 4.8 billion RMB Same for the last year as well as lower income tax due to previously mentioned high base impact
John: The looted EPS was 6.34 RMB, up 36% year-on-year, outpacing non-IR virus net profit growth due to reduced share count from share buybacks.
John: For the first quarter of 2024, our weighted average number of shares for calculating diluted EPS decreased by 2.5% year-on-year.
Thank you very much.
Speaker Change: and many more. Thank you for watching. We hope you enjoyed this video. If you did, please click the Like button and subscribe to our channel.
Moving on to gross margins. Overall gross
Speaker Change: up 4 percentage points year-on-year. By segment, value-added services gross margin was 57% up 2 percentage points year-on-year due to a higher mix of higher margin gain revenue, margin improvement in music and non-form video businesses, as well as low mix of low margin live streaming revenue.
Speaker Change: Marketing services gross margin increased to 53% up 1 percentage point year-on-year, primarily driven by growth in high-margin video accounts and recent shift revenues.
Speaker Change: Fintech and business services gross margin increased to 48%, up 7 percentage points year-on-year. This was driven by enhanced cost efficiency in our crowd businesses, revenue growth from wealth management services, and e-commerce technology service fees, and improved monetization of Wecom and other business services.
Speaker Change: On per quarter operating expenses, selling and marketing expenses were 9.4 billion RMB, up 19% year-on-year, due to increased promotional efforts to support new games in domestic and international markets.
Speaker Change: Selling and marketing expenses represented 6% of revenues compared to 5% in the same quarter last year.
Speaker Change: R&D expenses for a 17.9 billion renminbi up 9% year-on-year driven by our investment in strategy areas including AI.
Speaker Change: E&A expenses excluding R&D were 11.2 billion RMB, a 14% year-on-year due to higher staff force, including costs associated with performance-based reward at certain overseas subsidiaries.
Speaker Change: At quarter-end, we had approximately 109,000 employees, up about 3% year-on-year, and also up 3% quarter-on-quarter, as the first quarter is the annual college recruitment season.
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and the other.
Speaker Change: So an IFRS operating margin was 37%, up 3 percentage points year-on-year, largely in line with gross margin expansion.
Speaker Change: To conclude, I will highlight some key cash flow and balance sheet metrics. Operating capex was 14.7 billion renminbi, up 122% year-on-year growth by investment in GPU servers.
Speaker Change: Non-operating capex was 2.4 billion RMB up 74% year-on-year driven by CIP. As a result, dual capex was 17.1 billion RMB up 114% year-on-year.
Speaker Change: That cash position was 95.5 billion renminbi, up 33% quarter-on-quarter, primarily driven by free cash flow generation, partially offset by cash use for our share repurchases. Thank you.
Speaker Change: Thank you, John. We shall now open up the floor for questions. Our first question comes from Kenneth Fong from UBS.
Kenneth Fong: Hi, good evening management. Thank you for taking my question. I have two questions. First is on mobile games. This year we have a few major hits in China gaming market. In mobile, we have our hugely successful Dungeon and Fighter. In PC, Blacksmith Warhol, which we have an equity stake, has been a big hit.
Kenneth Fong: in mini-games, White House Survival, which started as our top mini-program, mini-games, and now being a top 10 grossing in China after turning into an app-based game.
Kenneth Fong: So, in light of that, can management share with us some implications and insights for the industry and how would these events or major hit games actually shape our game strategy going forward?
Kenneth Fong: And my second question is on e-commerce. Notice that we upgrade into our WeChat mini stops to enhance our e-commerce offering.
Kenneth Fong: Can management share more with us this initiative, including this positioning versus before, and how should we think about its potential? It is fair to say that we shouldn't think about this term from a live streaming e-commerce, but actually the whole e-commerce space as a much higher term.
Kenneth Fong: and how should we think about its role versus the mini program which GMB has heated $2 trillion last quarter. Thank you.
Speaker Change: Hi Kenneth, I'll take the question on games so it is
and gratifying to say that in recent months,
Speaker Change: That is a structural trend, you know, facilitated by the fact that the Chinese studios
Speaker Change: home market that adopts new trends such as virtual item business models such as mobile platform.
Speaker Change: relatively quickly. Also, they benefit from a very substantial engineering workforce, that means they can allocate substantial headcount to games, both developing and
Speaker Change: operating games. And then the workforces are very willing to embrace new tools. This year in Unreal Engine 5, which powers Black Myth Wukong, has been a particularly notable example of the benefit of utilizing these new technologies.
Speaker Change: So what does that mean for Tencent's strategy? We believe that whether internationally or domestically
Speaker Change: The scarce resource in the industry is really evergreen games, and on the one hand, the ability to release new games that become hits is increasingly challenging. On the other hand, for games that are hits...
Speaker Change: then with the right investment and care, the opportunity to render them evergreen is more attractive than it's ever been before. And, you know, how do we turn that observation into a strategy? You know, the strategy is to really, you know, play to different studios' strengths.
Speaker Change: Within Tencent, we have a number of very capable, proven studios. Many of them are particularly good at player-versus-player gameplay-based games, and they continue to double down on their strengths.
Outside Tencent, there are studios that are particularly good at
content-based, story-driven games such as
Speaker Change: Black Myth Wukong. There are studios that are particularly good at strategy games, such as White Out Survival. And for those studios, we seek to invest in them, which we've done with both.
Speaker Change: to deepen and increase our investments in relationship with them, sometimes to publish their games.
Speaker Change: And so we believe that, you know, that strategy is the right strategy, leveraging both in-house studios and investments and partnerships with external studios for each studio to focus on what it does best.
So kind of on your second question,
In terms of Weishen Media Shops, you know, as we...
Speaker Change: introduced in our prepared remarks that the purpose of the Weixin mini shop is actually to create and develop a unified and trustworthy e-commerce platform within Weixin.
And this platform features standardized and indexed merchandises.
And, you know, these, these.
Speaker Change: products would become atomic data structure within Weixian to represent product information.
Speaker Change: And at the same time, the merchants are going to be verified and subject to quality monitoring.
Speaker Change: So what does it mean, right? With this upgrade, what we believe...
Speaker Change: is that the shopping experience for consumers would improve as there is a better quality assurance on the products.
Speaker Change: and they also enjoy better shopping experience, such as order tracking, express return, because now we know what kind of products have they bought and from which merchants that they have bought.
Speaker Change: And for the merchants, they would actually enjoy better transaction support.
Speaker Change: as we discussed, and more importantly and most importantly access to new traffic and customers.
Speaker Change: Overall, any shop experience will be incorporated into the Weixin ecosystem.
Speaker Change: And as a result, it would actually enjoy new traffic streams, such as it will have magnified access to our communication and social traffic, such as chat, group chat, and moments.
Speaker Change: as well as our media properties such as official accounts, media programs, search, video accounts, and overtime recommendation engine.
Speaker Change: So, so, you know, the whole idea is that, you know, when we know what products
Speaker Change: are being sold by what merchants, then we are more comfortable in providing access to traffic to our consumers in the Western ecosystem. And that actually would create the flying view on attraction for merchants.
Speaker Change: In terms of the potential, we are actually very excited about the long-term potential of this e-commerce ecosystem.
Speaker Change: And the reference point, as you said, is like mini programs, right? So within mini programs, there are already a lot of transactions. When we mentioned about 2 trillion transaction, a lot of it is actually on services. So they're not really on physical merchandise.
Speaker Change: But even if you look at the physical merchandise, there's actually a pretty significant GMB already that merchants are selling to their customers. But if you look at how these merchants are generating these.
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Speaker Change: transactions right they are primarily selling these products to customers which they have already known right so you know when merchants have got
Speaker Change: their physical shops, they would actually ask their customers to purchase through WeChat Pay. And with that, they would activate sometimes a mini program. And from their point onward, the customers actually want to revisit.
Speaker Change: the store, they can actually go back to the Mini Program and generate a transaction.
Speaker Change: But within these transactions, we actually don't know what's happening, what kinds of products are being sold. And the merchants actually do not really have new ways of...
Speaker Change: getting access to new customers. But if they feature their product within the WeChat mini shops, right, you know, then they can actually get access to all the traffic that I mentioned, you know, within communication, social, and within our media properties, including video accounts.
Speaker Change: So that's why we felt it's actually a better experience for merchants than the mini program infrastructure.
Speaker Change: And another case in point I would point out is that if you look at video accounts, right, before video accounts was introduced,
as a standardized product format within Weixin.
Speaker Change: What happened is, you know, there was already a lot of non-standardized short video being shared within the ecosystem of Weixin, but
with good traffic support, then the video accounts...
Speaker Change: traffic actually grew very significantly. And that's why we felt if we can actually provide a standardized, well-protected, trustworthy transaction environment within Weixin, then we can actually have a good potential of building our transaction volume.
Speaker Change: Thank you, Martin and James, and congrats on a strong quarter.
Kenneth Fong: Thank you, Kenneth. Next question will be from Citibank's Alicia Yip.
Speaker Change: Thank you, Wendy. Hi. Good evening, management. Thanks for taking my question. Two questions. First, is that related to Wayfing's search?
You mentioned commercial queries and crypto rates year-over-year.
Speaker Change: Can management share some colors on which industry advertisers started to utilize more of the commercial keyword to drive the traffic lead?
Speaker Change: And other than the so-and-so feature within the Weixin app, is there any other entry point the advertiser can leverage on the search query? And also, will your Yuanbao, the Gen AI checkbox, will that eventually embed with the commercial sponsor answer as well? Second question is related to international games.
Speaker Change: When you comment on elongating the deferred periods, is that only refer to certain big flagship titles that you have?
Speaker Change: Can you remind us the range of the deferred pre-req for your international games?
Speaker Change: So and also judging from your comments about the decent growth receipt growth, it seems that international games revenue could see a more stable and more sustainable growth into next year or maybe the years after. Thank you.
Speaker Change: Thank you for the questions Alicia. So on Weixin search then some of the larger advertisers buying search keywords include advertisers in financial services.
internet services, games, automobiles, local services, more recently luxury goods.
Speaker Change: In terms of other than the so-so feature within Weixin, are there other entry points? Then, yes, we have.
Speaker Change: multiple entry points and we'll cultivate more whether that's within video accounts, mini programs, elsewhere. And some of those entry points are more in the nature of search boxes.
Speaker Change: some are more response triggers in response to actions that the users have undertaken. And, you know, for example, Martin was talking about the standardization of SKUs.
that many shops provide. And one of the...
sort of opportunities going forward is that as we have
Speaker Change: in a standardized cards on each product, then a consumer transaction, a consumer interaction.
Speaker Change: can trigger a feed of, you know, commerce-relevant information displaying, you know, those cards one after the other in response to...
in a consumer intent.
Speaker Change: and that feed would then also be powered effectively by a search technology.
In terms of whether Yuanbao will embed commercial
Speaker Change: search results? The answer is no. For the current time, we're focused on making Yuanbao be as appealing and attractive to users as it can be, and we're not focused on premature monetization.
Speaker Change: So that's on Weixin search. Moving to the international games, was the elongation for certain big flagship titles? Yes.
Speaker Change: What is the deferral period for international games? We've disclosed in the past that
Speaker Change: The deferral periods for domestic gains are typically six to nine months.
Speaker Change: and for international games the deferral periods are either similar or longer and in some cases
substantially longer.
Speaker Change: And then in terms of the outlook for international games revenue growth, you know, we are indeed constructive on the outlook.
Speaker Change: given the business trends we're seeing from the existing games, given the deferred revenue backlog that's built up in the last few quarters from those existing games, and then given the potential upside from new game releases. Thank you. Thank you.
Thank you.
Speaker Change: Thank you, Alicia. We will take the next question from Goldman Sachs, Rona Kwan.
and many more. Thank you. Thank you.
Speaker Change: Thank you, thank you Poni, Martin, James, John and Wendy. I have two questions kicking off with a macro kind of related question with the shift in more pro-growth domestic policies in September.
Speaker Change: with the recent singles day and you mentioned a decline in average order value per transaction for payment. So any thoughts on potential inflection points in terms of the ticket size trends that is important for consumption trends. Thank you.
Okay.
and many more. Thank you. Thank you.
In terms of your first question, we...
I'm a little bit nervous.
We do get encouraged by the reasons
policy by the Chinese government to stimulus.
provide stimulus to the economy and we felt this
Speaker Change: policy direction is very constructive. It's very timely and the resolution is actually very strong.
So that's why we
constructive on the longer-term economic outlook. We believe that
Speaker Change: the economic growth would eventually reaccelerate. Although the timing may be uncertain, and especially it would take some time for the measures to be implemented and an additional time for the measures to take effect.
Speaker Change: So how do we position ourselves? I would say we would continue to
Speaker Change: do the right things, right? You know, if you look at what we have been doing
In the past few years, we have...
gone through a cycle of regulatory...
Speaker Change: scrutiny and that was domestic primarily, but then I think that principle can also be applied globally, which is we continue to do things that make us very compliant.
Speaker Change: to all rules and regulations, not just to the word but also to the spirit.
Speaker Change: In a lot of cases, when we understand what are the intentions of the regulators, we are able to...
Speaker Change: be proactive in making changes to our products and in conductive communication so that we will be not only just sort of passively compliant but also actively compliant to rules and regulations around the world.
Speaker Change: We continue to improve our products and create user value. I think that's actually sort of very important.
for us.
And in order to do that, we focus on...
Speaker Change: the products and services that are meaningful. And instead of like, you know, spreading ourselves very thinly across.
Speaker Change: many different products. You know, we want to make sure that we focus ourselves on the right products and continue to create value for the users as well as for our customers and for our partners.
Speaker Change: And at the same time, I think, you know, in just in turn, in conducting ourselves.
internally, right, you know, we continue to...
and FORS and BUILD.
you know, a culture of excellence.
and also a culture of focusing on cost efficiency.
Speaker Change: so that we are strong on our own self-discipline and prevent ourselves.
from, you know, spending too much and...
Speaker Change: you know, getting into a lack of focus. So I think, you know, when we do these right things, right, no matter
Speaker Change: whether, you know, there's good times and bad times in macroeconomic conditions and
Speaker Change: whether there will be some fluctuations in terms of regulatory attention, we can actually
Speaker Change: to continue to grow our business and develop business in a consistent way.
Speaker Change: Now in terms of just looking at the macroeconomic environment right now, what we have seen is that
Um...
Speaker Change: There is an uptake in October after the policy got announced in terms of transaction
value.
Speaker Change: And that's actually against a backdrop of, you know, a gradual decrease of year-on-year growth rate.
through each month in the third quarter.
Speaker Change: So, so, you know, if you look at the trend, it was like, you know, month on month that year-on-year growth rate has been declining through the third quarter until we hit October and there's an uptick. So, so I think, you know, that's the latest.
Speaker Change: trend that we see. We believe going forward, the economic recovery would take
Speaker Change: be re-accelerating because we felt there's a very strong resolution by the government to revive the economy and at the same time there's actually positive structural factors in the economy.
Speaker Change: including a very strong work ethics among the workers in China, including a very deep engineering talent pool, including entrepreneurism among companies of all sizes, small, medium, and large companies.
Speaker Change: And also there's a vast and comprehensive supply chain in China, you know, just to name a few. And that's why we felt, you know, over the longer run, you know, we are optimistic about the economic revival in the macroeconomic environment.
Thank you.
James Mitchell, Robin Zhuang,
Speaker Change: Thank you. We will take the next question from Bank of America Miranda. Miranda, the line is open.
Thanks.
Miranda: Good evening, management. Thanks for taking my question. So first a question I want to follow up on the recent e-commerce business.
Miranda: So management has explained the rationale and the benefits of the mini shops and is optimistic about the e-commerce business over the long term. If we zoom in into the near term, wondering what will be the next steps and timeline for the recent e-commerce business in the upcoming quarters.
Speaker Change: Can management share about your focus areas or priorities and the strategy to ramp the business in the near term? Especially against the backdrop environment where it seems that the overall short video and live streaming e-commerce market is slowing down.
Speaker Change: And traditional e-commerce market still, you know, has intense competition. So against all these, like, you know, near-term involvement, and how will the within e-commerce grow the scale and gain share in the market?
Speaker Change: My second question, can I check with the management if there will be any color about the recent open up and cooperation with Taobao?
Speaker Change: What kind of benefits are we seeing, and how should we think about any potential future collaborations? Thank you.
Speaker Change: The short answer on the mini shop is that we will continue to improve.
Speaker Change: The basic infrastructure, which is, you know, building this standardized and indexed and quality assured transaction environment within
Speaker Change: and there's actually a lot of functionalities that we need to.
There's the infrastructure bit, there's actually the customer service.
and a consumer experience needs to be improved.
Speaker Change: And there's also a lot of merchant tools that we need to provide to merchants. And once all this is done, then we will provide
Speaker Change: linkage of this infrastructure to the various traffic source, right? You know, if you look at the communication and social side and all the media properties, you know, we need to
built a lot of these features and functionalities and product.
utilities.
So I think that's essentially the focus.
Speaker Change: And what's the short-term target? I think the answer is that we don't manage that from a short-term perspective. We felt if we can actually build all these products and features and utilities, then the growth would actually follow.
Speaker Change: On the second question, it's very early days, but we have seen a good adoption of
Speaker Change: Weixin Pei within Taobao in October and you know that's beneficial for us.
Speaker Change: customers who are using Weisheng Pei within Taobao are disproportionately customers who are new to Taobao and who are therefore particularly desirable customers.
Speaker Change: So, you know, we think that this is something that will take, you know, a long period of time to fully...
play out, but we're very happy with
the initial steps and success. And we also believe that...
Speaker Change: As it becomes easier for Weixin Pay users to transact within Taobao, then over time it would also become more desirable for Taobao to advertise within Weixin. Thank you.
Thank you.
Thanks for monitoring.
Speaker Change: Thank you. We will take the next question from J.P. Morgan, Alex Young.
Hello, everyone.
Speaker Change: Hey, thank you guys for taking my question. My first question is about the newly launched game Delta Force. Based on the iOS ranking, the game's monetization seems to be a little bit behind the curve, despite of high user time span and retention rates.
Speaker Change: Is the current situation more of a monetization timing strategy thing or is it a monetization design thing?
Speaker Change: and then the second question is regarding the payment revenue decline in this quarter. China's retail spend actually grew by a low single digit in third quarter but your payment revenue declined on a year-to-year basis.
Speaker Change: So the question is, is Tencent payment overly exposed to certain weak consumption categories? Thank you.
and the other.
Speaker Change: So on that Delta Force, you know, Delta Force is a PvP multiplayer game.
Historically and currently, when we release PvP multiplayer games,
Speaker Change: We do tend to front load the user engagement, the user additions, and then progressively monetize over time. That said, the monetization on DeltaForce is actually good.
Speaker Change: our first big game simultaneously launched on mobile and pc and four games that are simultaneously launched on mobile and pc we can see from our investee companies and we can see now with Delta Force that while the
Speaker Change: Majority of the users are on mobile. The large majority of the revenue is generated on PC, which doesn't show up.
Speaker Change: in the data sources you're looking at. But rest assured, Delta Force is actually monetizing quite well. And, you know, we're very happy with it, both from a usage perspective, but also from a monetization perspective.
Speaker Change: In terms of our payment revenue and you know the comparison to the China retail spend, I would say
Speaker Change: I think the implied question is like, you know, is there any issue without payment transacts? You know, and I think the.
Speaker Change: The way we look at it is actually we are quite comfortable with our payment franchise and the discrepancy is actually due to
Speaker Change: two points in our view. One is, you know, we, throughout this year, we have been eliminating lower quality and, in particular, sometimes the loss-making transaction volume.
Speaker Change: And that actually sort of has an impact on our overall payment volume.
Speaker Change: And the second thing is actually when we look at our payment coverage, it doesn't represent all the retail purchases in China. It's actually gravitated towards smaller ticket everyday items.
Speaker Change: And as a result, we're much more focused on the number of transactions.
Speaker Change: rather than the transaction volume or the revenue when we assess our payment franchise.
Speaker Change: And when we look at that number, the number of transactions, it actually grew around 10% year-on-year, which gives us comfort that our payment franchise is actually still very strong.
and many more. Thank you for joining us. Thank you.
Speaker Change: Thank you. We will move to the next question from HSBC Shellingville.
Speaker Change: Thanks, Wendy, and thank you, Management Team, for the opportunity. The first question I wanted to ask is about...
sort of outlook on earnings growth.
because we have seen close to two years of.
Speaker Change: a really strong margin expansion come through. Does Tencent have a more normalized earnings growth rate that the company targets in the medium term? Alternatively, is there a certain ratio that Tencent seeks to achieve?
Speaker Change: between top line and earnings growth, say for example, no GP growth at 1.5 times of top line, et cetera.
Speaker Change: Secondly, do we have an updated budget for 2025 share buyback?
Speaker Change: It's a fair to assume that Tencent would do at least the absolute amount
Speaker Change: that Tencent did in 2024, and how's the management thinking about shareholder return more generally? Is buyback still the preferred form versus disposal of investments, investees and dividend? Thank you.
I think the quick answer is
We don't have a target for...
Speaker Change: We can't share the target for earnings growth, right? But overall the direction is that we are going to see
some revenue growth even under a pretty challenging macroeconomic environment.
Speaker Change: And so that's something we have achieved, and we hope we can actually continue.
Speaker Change: and among the revenue drivers, right, there are some drivers which are high quality and as a result, hopefully, we can actually see some additional...
Speaker Change: you know, leverage on, from revenue growth to gross profit growth, and then we, we hope we can actually achieve some operating leverage when we get from gross profit to operating profit.
Speaker Change: So that's sort of the model that we strive to achieve. But of course, given how dynamic the situation is, how complicated the business is, there will be sort of quarter to quarter fluctuations.
Speaker Change: in all these sectors, but the general direction is as such.
Speaker Change: Now, in terms of the 2025 share buyback, we would share our view.
Speaker Change: basically for 2025 at our year-end earnings announcement. So we're not in a position to share at this point in time. When we look at 2024, we
said the target was actually a hundred billion.
Speaker Change: So far, we have already done slightly more than $90 billion, and we believe we'd actually
exceed the $100 billion target this year.
Speaker Change: And when we look at next year, right, you know, the underlying factor is that, you know, we do want to
Speaker Change: share shareholder value with our shareholders and we are in a good position to return cash to our shareholders because
Our business is actually generating significant cash flow.
Speaker Change: and at the same time we have a very large investment portfolio which is essentially at least self-funded.
Speaker Change: It would not be drawing any capital from our operating cash flow, and at times it may actually sort of provide additional return if we want to distribute stock or if we do big divestment.
And at the same time, if you look at CapEx,
Speaker Change: and progressive CAPEX plan, especially given that the development of a cloud business and the event AI, but at the same time, it's measured compared to.
Speaker Change: a lot of the U.S. companies. So with these three factors in play, then we believe we'll be generating significant free cash flow next year that we can engage in dividend and share buyback.
Thank you very much.
and many more. Thank you. Thank you.
Speaker Change: Thank you. We will take the next question from Daiwa John Choi.
Speaker Change: Okay, thank you very much for taking my question and congratulations and a strong set of results.
John Choi: I have a question on AI. I think Madsman mentioned that.
John Choi: VPU Power Services accounts for change for your IAS business. But can you kind of elaborate a bit more how do we...
John Choi: Well, in terms of the tangible benefits of AI that we...
Speaker Change: that we've mentioned. I think that the most significant one right now is actually around content recommendation and ad targeting.
Speaker Change: because the AI engine in those two use cases are generating a significant amount of additional user time.
and at the same time, you know...
it's generating a higher incremental
Speaker Change: targeting rate, response rate for our ads. And both of them actually, you know.
Speaker Change: are direct benefits to the business and direct benefits to ad revenue.
Speaker Change: and both of the video accounts and you know and and our performance at revenue actually at scale so if you add a certain percentage to that
Speaker Change: that kind of number, it's significant. The ICE revenue is now in the teams generated by AI.
but
Speaker Change: Having said that, we think the amount of AI revenue is actually less than U.S. cloud companies. And the main reason is because, number one, China doesn't really have a very big enterprise.
Speaker Change: market, and if you look at the U.S., a lot of enterprises are actually sort of fiddling with AI, and they...
Speaker Change: in testing out how AI can do for their business that they're actually buying a lot of compute, which is not happening in China yet. There's a very big SaaS.
Speaker Change: ecosystem in the US, which, you know, everybody is actually trying to add AI to their functionality and thus charge the customers more and and that sauce.
Speaker Change: ecosystem is not really that vibrant in China. And thirdly, there are also fewer AI startups in China which are actually buying a lot of compute.
Speaker Change: As a result, the AI revenue in China on the cloud side is...
Speaker Change: somewhat at scale for us, but I think it would not be exploding like in the U.S.
And in terms of how AI would...
Speaker Change: continue to propagate through our different products and services right now. I think, you know, I talk, I talk about the immediate
Speaker Change: Scalable benefit is actually on the content recommendation and ad side. At the same time, it's actually a productivity tool that everybody is using on a frequent basis. For example, our co-pilot.
Speaker Change: is being used by our engineers across the board on a very frequent basis and it's actually generating
efficiency gain for our business.
Speaker Change: and, you know, different businesses, all our products are actually testing our Hunyuan and trying to incorporate AI into either the production process, right? So that they would gain efficiency or in the user experience.
use case so that they can actually make their
Bye.
Speaker Change: you know, user experience better. So, you know, I would say right now we are seeing more and more adoption among all our different products and services. It would take probably a few more quarters for us to see some real
Speaker Change: use cases at scale. And at that time, we'll actually provide an update to all of you.
Thank you.
Speaker Change: Thank you. We will take the next question from Thomas Chung from Jeffries.
Hi, good evening. Thanks, management, for taking my questions.
Speaker Change: My first question is back to the gaming business. I think recently, if we look into Southeast Asia, as well as the domestic market, or even globally, we're actually seeing shooting games experience a strong growth and we also see peace capabilities also experiencing a very...
Speaker Change: good growth momentum. So I'm just wondering on a gamer preference perspective, are we actually seeing our gamers are increasingly shifting?
Speaker Change: to shooting games. And for domestic market, given the market is very big already, should we expect there might be categorization among different games in our portfolio? And my second question.
Speaker Change: is relating to our FinTech business. We have talked about wealth management is experiencing positive growth. I just want to get some color with regard to our strategies.
Speaker Change: in wealth management versus lending. Given that, I think other theme park companies are also talking about metal headwinds on the private business, should we expect our strategy is focused on wealth management going forward? And lastly,
Speaker Change: It's more about our investees. Any thoughts about unlocking the values of our investees or our free cashflow is already strong enough in returning value to shareholders? Thank you.
I'm a little bit nervous.
Speaker Change: Hi Thomas, so on your first question around first-person shooter, first-person action games
Speaker Change: We absolutely see that younger users in China disproportionately favor first-person action games versus older users. And there are certain first-person action games.
Speaker Change: such as Valorant and now Delta Force that are proving particularly appealing.
Speaker Change: to that sort of 18 to 25-year-old age cohort. And we think that's a structural trend. And if you look at.
Speaker Change: you know, first person action is, you know, the sort of the super dominant genre, it's equivalent to
Speaker Change: You know, drama series being the super dominant form of TV programming that, you know, within drama series.
Speaker Change: You have costume drama series. You have, you know, romance. You have police procedural. Each of them is as big or bigger than many, you know, standalone genres of TV programming such as, you know, documentaries. And so in the same way with video games, you know, first-person action is the dominant genre in the West.
Speaker Change: successful in first-person action games. Now, as to whether new first-person action games like Delta Force are cannibalizing existing games, then the answer is no. And I think that that is
Speaker Change: in a modern day suspense drama series or a police procedural drama series because there's so much difference between them in terms of user tastes.
So with the first-person action games...
Barbara.
Speaker Change: differences within the genre that are too big for any single game to transcend. So, you know, one important...
And so, you know, while we have a multitude of.
Speaker Change: successful first-person action games within Tencent in China including Peacekeeper Elite.
Speaker Change: in Nevada and Delta Force crossed by a Call of Duty mobile.
arena breakout, you know, they actually each occupy a unique
in a niche along those axes that I just outlined.
Speaker Change: And that is why, you know, when we launch new first person action games, you know, we don't see the cannibalization that one might expect to see, just as if we launch a new costume drama series on Tencent Video, it doesn't cannibalize a police procedural or a modern day contemporary drama series.
are the way that one might expect it to.
Speaker Change: In terms of the payments and the wealth management service and lending, I would say the wealth management strength.
Speaker Change: in the recent quarters are actually mostly driven by money market funds. And to some extent, this is counter-cyclical, right? When people spend, then they actually save less. And when people don't spend, they actually save more. So that's...
But overall, there is a cyclical part, but there's also...
Yo, um.
Speaker Change: structural part, which is over time, we actually want to gradually convert more and more people into buying not just money market funds, but also longer term equity based funds and ETFs. So we are in the process of building those.
Speaker Change: products and providing the conversion mechanism for people who have equity, who have money market funds with us, right, you know, to, you know, adopt.
additional investment products within our wealth management service.
Speaker Change: Now, with respect to lending, it's true that we are getting more cautious recently in terms of lending in order to control the credit exposure.
I think overall, our credit...
exposure is still very well manageable and very conservative.
because you know we have always...
taken a conservative approach.
And we selectively pick the better credit to lend to.
Speaker Change: been all along the way controlling the scale of our lending pretty proactively.
Speaker Change: But given the macroeconomic cycle right now, we are more cautious. When the macroeconomic conditions improve, then we can actually be a little bit more aggressive in expanding our lending again. So it's kind of dynamic according to where the economic conditions are.
Please see the complete disclaimer at https://sites.google.com
Speaker Change: And in terms of divestments, we do actively divest from our portfolio where we have been
Speaker Change: in a particularly actively divesting in the last couple of months as you know various markets have rallied aggressively. On rare situations you can sort of track that through you know filings that we have to make but most of the divestments that we conduct don't require filings and the purpose of the divestments
Speaker Change: is to recycle capital, whether that be for new investments or for funding share buybacks.
Speaker Change: or simply for, you know, increasing our, you know, ammunition for activity in the future, which you can see in the shape of the net cash position having progressively improved through this year despite the buybacks and dividends that we've done.
Speaker Change: Thank you. We will take the next question from CICC Baiyang.
Thank you, management.
Speaker Change: for taking my question. My question is about the game business. IEG has made some internal adjustment. Could the management share more details on the reason about this adjustment? And how do these adjustments relate to the overall trends in the gaming market and Tencent's current business situation?
and her family.
Speaker Change: you're looking at what what you're referring to right now there's some recent media coverage on the adjustments and then frankly the adjustments
Speaker Change: were basically adjustments that we have already made by some time ago.
So, so these are adjustments that we've made to.
Speaker Change: The Honored Kings team, which happened last year, late last year, and the adjustments that we have made to the Peacekeeper Elite team, which happened earlier this year. And we have actually talked about these adjustments quite a few times on our earnings call.
Speaker Change: productive in the sense that, you know, both Ernest King and, in particular, the Peacekeeper Elite had actually registered good growth in this year. And, you know, the logic is really around
Speaker Change: you know, our overall strategy on evergreen titles, right? You know, so there is, you know, yeah, I think, you know,
I believe that all games are...
Speaker Change: life cycles, and sometimes if the games are not performing well, then there's nothing you can do about it. We do not believe that's the case. We believe that when a game has reached a certain scale and has become eligible for becoming an evergreen title, and especially when a game has a very large user base,
Speaker Change: then it's not about the game itself, it's about the team and the ideas behind the development and the ideas behind the operations.
Speaker Change: and community management. So, you know, that's why we make changes when the games are not.
Speaker Change: performing well and and when we see it you know a team that has run out of ideas then we have to make some adjustments in order to restore the creativity, restore the activity, restore
Speaker Change: the innovation to the games, and when those adjustments are done, right, you know, then the games get back to, you know, its aggregate status and get back into a growth mode.
So I think that's essentially what it is.
Speaker Change: focused on sustaining and growing our evergreen titles, as well as creating new games that has potential to become evergreen titles. And that means we will have to be much more focused.
on
Speaker Change: the games that we create, instead of creating many games, we create fewer games. And at the same time, you know, we have to put behind each game a very strong positioning, very strong genre, very strong.
and become category leading in the
Speaker Change: gaming market in order for us to really give the games a potential to become evergreen title.
Speaker Change: And I think Delta Voice is actually a good demonstration of that focus.
Speaker Change: and we'll have more of such high potential evergreen titles coming to the market in the future.
Thank you.
Speaker Change: Thank you. We will take the last question from Nomura Shigyalong.
The
Speaker Change: Good evening. Thanks management for taking my question and congratulations on a very solid quarter.
Speaker Change: So, I have two questions. The first question is about the advertising business. Tencent advertising, Tencent ad business has performed much better than industry peers this year. Media account has been a driver for your overall ad business among other drivers. So, just wondering how should we think of the outlook for your ad business?
Speaker Change: If we take a look at the two bigger short video peers of your video account, both of them generate a very big chunk of ad revenue from e-commerce brands and merchants.
Speaker Change: So just wondering if it is fair to say e-commerce sector will also be instrumental to fully unleash the potential of your video account ads.
Speaker Change: My second question regards the collaboration between WeChat and Taobao. What were the factors that have led to the collaboration? Are we going to see more collaborations of this kind?
Speaker Change: between Tencent and other internet platforms, such as granting access to your WeChat accountants for external search engine. Thank you.
Speaker Change: Thank you for the question. I'll take the advertising one. So in terms of the drivers for 2025, the overall macro environment would obviously be important, you know, accelerator or decelerator or neutral force.
for the aggregate advertising market.
Speaker Change: and that in turn will be a function, a primarity of consumer confidence.
Speaker Change: consumer spending behavior. Now, within that, you know, overall environment, you know, our relative performance will be a function of, you know, first of all, our advertising technology.
and you know our ability to utilize GPUs, utilize...
Speaker Change: neural networks to continue boosting click-through rates from the current very low levels to higher levels that mechanically translates into more revenue. And then secondly, our deployment of specific inventories, in particular video accounts, in particular WeChat search.
With video accounts, we did moderately increase the ad load.
Speaker Change: during the course of the third quarter which contributed to the 60% plus year-on-year growth that we
We have disclosed.
Speaker Change: But the advertising load is still dramatically lower than those of peers in the low single-digit range.
You know going forward
Speaker Change: We believe that we can continue to outgrow the industry as we take the ad load higher.
without needing the e-commerce initiative to contribute.
Speaker Change: Once the ad load reaches, let's say, two-thirds of where our peers are currently at, which
Speaker Change: with our peers in the mid-teens would be around 10% ad load versus
The three or four percent were out today.
Speaker Change: then, you know, I think it is, you know, fair to to infer.
that being able to really tap into closely e-commerce advertising.
will be increasingly important.
Speaker Change: But as we look at our growth runway, you know, that situation is still, you know, years away. And so, you know, we believe we'll continue to outgrow the overall ad market for a number of years based on ad tech enhancements, based on improving ad load in video account, based on growth of WeChat search.
Speaker Change: And then in order to sustain that, you know, market share gain beyond that point, it will be increasingly beneficial if we have cracked the code on closed-loop e-commerce activity with the mini-stores that Martin talked about earlier.
Thanks for watching!
In terms of the cooperation with Taobao,
Yeah, I think...
Speaker Change: The obvious thing is that it's actually beneficial to the users because it's more convenient for them to click. And there's actually benefit to us because we can actually have a...
Speaker Change: Less obvious is actually how much work that actually have gone into making that happen because
Speaker Change: The key thing is actually, there's a lot of designs and agreement that we need to do in order to make sure that the user experience is actually well protected.
Speaker Change: So that, for example, there's not going to be a lot of spamming of our users, right, when you have
Speaker Change: So we actually need to design for that and also get our counterparty to agree to producing that. And for example, on compliance, we actually need to make sure that all the merchants are actually
Speaker Change: gone through a proper onboarding process in order to be compliant. And that's something which requires work from our side and our counterparty in order to make it to work.
Speaker Change: And I think, you know, in the past, all these very complicated designs are very difficult to execute.
Speaker Change: But, you know, with the new environment, you know, with the more collaborative and open environment of the different platforms, you know, these, you know, hard work has been done and as such, we can actually have these collaborations.
Speaker Change: So, you know, when we look at other collaborations, I think, you know, we'll be very open-minded but the bottom line is that it has to make sense and be very good and safe for our users and and for our content partners in order for these
Collaborations to be done.
and many more. Thank you. Thank you.
Speaker Change: The replay of this webinar will also be available soon. Thank you and see you next quarter.