Q4 2024 Tencent Holdings Ltd Earnings Call
Sure.
[music].
Good day and a good evening.
You for standing by.
Speaker Change: Welcome to Tencent Holdings limited 2020 for fourth quarter and annual results announcement webinar.
And when do you want from Tencent IR team.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: After management's presentation, there will be a question answer session.
Speaker Change: For participants who are dialing in by phone if you wish to ask question. Please press five on your telephone to raise your hand.
Speaker Change: If you are accessing brown that Tencent meeting all GUL meeting application. Please click the grade 10 button at the bottom left and please be advised that today's webinar is being recorded.
Speaker Change: Before we start the presentation, we would like to remind you that it includes forward looking statements, which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons.
Speaker Change: Information about general market conditions is coming from a variety of sources outside of Tencent.
Speaker Change: This presentation also content some unaudited non <unk> financial measures that should be considered in addition to but not as a substitute for measures of the group's financial performance prepared in accordance with Arab Rs.
Speaker Change: For a detailed discussion of risk factors in it neither ours measures. Please refer to our disclosure documents on the IR section of our website.
Speaker Change: Now, let me introduce the management team on the Webinar Tonight.
Speaker Change: Our chairman and CEO Pony MA will kick off with a short overview.
Speaker Change: Didn't Martin law will provide an update our AI initiatives shift.
Speaker Change: <unk> strategy Officer, James Mitchell will provide a business review and Chief Financial Officer, Joe <unk> will conclude with financial discussion before we open up local questions.
Pony Ma: I will now pass it to pony.
Speaker Change: Thank you Wendy.
Speaker Change: <unk>. Thank you everyone for joining us.
Speaker Change: In 2024 wheel reinforces the long term franchise value of our key services.
Speaker Change: Any regime, we strengthened in our transaction capabilities with the launch of the new shop and upgrades fall reaching search.
Speaker Change: Video accounts user time spend grew exactly on in <unk>.
Speaker Change: That emendation equities.
Speaker Change: Our evergreen game portfolio increased from 12 games in 2023 to four key in 2024.
Speaker Change: And we nurtured new games with the evergreen potential.
Speaker Change: Three of cancer and videos drama series ranked among the industry.
Speaker Change: <unk> five in 2024, well Tencent music extend its industry leadership with 121 million subscribers.
Our marketing services revenue growth outperformed the industry as we upgrade our advertising technology platform and increase user traffic.
Speaker Change: In Fintech, we upgrade our risk controlled and optimized payments funding costs.
Speaker Change: Strengthening our overall pre tax franchise profitability.
Speaker Change: On AI, we advised Stockmann, yes, our capabilities deployed AI for internal AI use cases and prepare for breakout growth in consumer AI use cases.
Speaker Change: Financially our revenue growth rates improved during 2020 for it in double digit growth in the fourth quarter.
Speaker Change: Our growth and operating profit grew faster than our revenues as we shifted towards higher quality revenue streams.
Speaker Change: We are focused on delivering shareholder returns.
Speaker Change: Our 32 bit in Hong Kong.
Speaker Change: Cash dividends and repurchasing 112 peer in Hong Kong dollars worth of our shares during the year.
Yes.
Speaker Change: Okay.
Speaker Change: Looking at our financial numbers for the fourth quarter.
Speaker Change: Total revenue was 172 billion RMB.
Speaker Change: 11% year on year.
Speaker Change: Gross profit was 91 billion RMB.
Speaker Change: Up 17% year on year.
Speaker Change: Non <unk> operating profit was 59 billion RMB up 21% year on year.
Speaker Change: Non <unk> net profit attributable to equity holders.
Speaker Change: Was 55 beta RMB up 30% year on year.
Marty: Now I will hand over to Marty.
Marty: Thank you Connie.
Marty: Good evening and good morning to everybody.
Marty: Okay.
Marty: In my section I will talk about our initiatives in terms of investing in AI for growth.
Marty: And I will summarize our AI initiatives and how we are investing in AI as both a growth multiplier for our existing businesses.
Marty: And as a new growth driver.
Marty: And these include the progress we've made with our self developed <unk> and foundation motto.
Marty: Our multi model strategy to provide the best experience to users.
Marty: The integration of AI into our enterprise facing services.
Marty: How we are unlocking the growth potential of existing businesses with AI and finally, our stepped up investment into the future.
Marty: Okay.
Marty: Moving onto the first topic, our AI initiatives are really traced back to 2016 and when we first established our AI lab.
Marty: Since 2023 early part of that we have been investing heavily in a proprietary when you had the foundation model, which forms an important technology foundation for our consumer and enterprise facing businesses.
Marty: And will serve as a growth part of <unk> for us in the long run.
Marty: Investments in the cornea and enable us to develop end to end foundation model capabilities in terms of infrastructure algorithm training alignment and data management.
Marty: And also to tailor solutions for the different needs of internal and external use cases.
Marty: In terms of milestones.
Marty: We are an early adopter of new techniques.
In core L. L M, including the mixture of expert architecture in March 2024.
Marty: Genius Mou based when you're in trouble in September 2024, and hybrid Mamba transformer Mou based turbo S model in February of 2025.
Marty: Unlike convention no transformer models that face limitation in context lengths, our current turbo S.
Marty: <unk> increases the efficiency in handling long sequence to remember him optimization.
Marty: We also released off when you're in tier one deep thinking model in February 2025, which is among the first long chain of thought models in China delivering performance comparable to talk to your models.
In addition to <unk> EMS was released multi modal.
Marty: When you add foundation models with capabilities that span across image video entry degeneration.
Marty: Womens image generation models achieved the highest score for flak about in December of last year.
Marty: And the new generation of motto excels in video output quality and ranked first on hugging phase in December of last year.
Marty: And our three D generation model was the industry's first open source model supporting text and image to three degeneration.
Marty: In addition to that we also contribute to the open source community activity and have open source a series of defense model isn't that when you're in family for three D generation video generation large language and image generation.
Marty: All of these models have gained great popularity among developers were aligned.
Marty: Now going to our consumer facing AI products.
Marty: We adopt a multi model strategy to provide the best experience to our users. So we can leverage all available models to serve different user needs.
We need this because different AI models are optimized for different capability is performance metrics and use cases.
And a combination of various models can handle complex tasks better than a single model.
Speaker Change: Our experience in software businesses.
Speaker Change: Such as online games also demonstrates that there are synergies in being a developer and operator.
Speaker Change: By investing in our own foundation models, we're able to fully leverage our proprietary data.
Speaker Change: Tailored solutions to meet customized internal and customer needs.
Speaker Change: While at the same time, making use of external models.
Speaker Change: Allowed us to benefit from innovation across the industry.
Speaker Change: On the product front, our AI net native.
Speaker Change: Application Rambo provides access to multiple models, including chain of thought reasoning models, such as when you're in tier one and deep CCAR, one and fast thinking model when you're in trouble as.
Speaker Change: With the option of integrating web search results.
Speaker Change: Beyond our search results can directly access high quality proprietary content from Tencent ecosystem, such as official accounts and media accounts.
Speaker Change: By leveraging when you added some multi modal capabilities.
Speaker Change: We haven't broken process prompts in images Boyce and documents in addition to text.
Speaker Change: Our cloud infrastructure support stable, an uncapped axis to leading models.
Speaker Change: From February to March <unk> increased 24 to become the third highest AI native mobile application in China by <unk>.
In addition to that we have also started testing AI features in waste and enhanced user experience such as for search language input and content generation.
Speaker Change: We'll be adding more AI features in way shape going forward.
Speaker Change: Okay.
Speaker Change: Now moving onto the enterprise facing side, we have been accelerating AI integration into our cloud business.
Speaker Change: Across our infrastructure platform and software as a service solutions.
Speaker Change: Through our infrastructure as a service ice solutions enterprise customers can achieve high performance AI training and inference capabilities at scale and developers can access and deploy mainstream foundation models.
Speaker Change: For platform as a service paas out type platform.
Speaker Change: Supports.
Speaker Change: Model fine tuning and influence demands with flexibility.
Speaker Change: We'll provide powerful solutions supporting enterprise customers and customizing AI assistance using their own proprietary data and developers in generating many programs and mobile applications to natural language pumps.
Speaker Change: Our SaaS products increasingly benefit from AI powered tools real time transcription and meeting summarization functions in Tencent meeting gained significant popularity, resulting in monthly active users for these AI functions doubling year on year to $15 million.
Speaker Change: Tencent Docs also enhanced user productivity and content generation processes.
Speaker Change: In 2024 hour AI cloud revenue approximately doubled year on year.
Speaker Change: Increased allocation of Gpus for internal use cases, initially for Amtech and foundation motto training and more recently on AI inference, when your ammo and Wilson has limited our provision of Gpus to external clients and thus constrained our cloud services revenue growth for.
Speaker Change: External workloads, we have prioritized available gpus to what high value use cases and clients.
Speaker Change: The fourth quarter of 2024, we have stepped up our purchase of Gpus and as we deploy these gpus, we expect to accelerate the revenue growth of our overall cloud services.
Speaker Change: Now moving onto our existing businesses, we believe our investment in AI has already been generating positive returns for us.
And I will give you three examples on how AI is empowering our existing products and businesses and generating return.
Speaker Change: For advertising when the hands to our advertising system with neuro network AI capabilities. Since 2015, we rebuilt AD tech platform using large module capabilities since 2020, enabling long sequence user behavior analysis across multiple properties, which resulted in increased user engagement.
Speaker Change: It's been a higher click through rates since 2023, we have been adding large language model capabilities to facilitate more efficient approvals up add content to better understand merchandize categories and uses commercial intent.
Speaker Change: For a more precise targeting and to provide generated AI tools for advertisers to streamline the AD creative process.
Speaker Change: Leveraging AI powered AD targeting capabilities and generative AI AD creative solutions.
Speaker Change: Our marketing services business.
Speaker Change: This is already a clear beneficiary of AI integration with revenue growth of 20% in 'twenty 'twenty four amid challenging macro environment.
Speaker Change: In games, we adopted machine learning technology, and our Pvp games since 2017, we leveraged AI in games to optimize matching experience improved game balance and facilitate AI coaching for new players empowering our evergreen games strategy.
Speaker Change: Our games business allow integrating large language model capabilities and enhanced <unk> content production efficiency and to empower in game chatbot.
Speaker Change: For our video and music services, we're leveraging AI to improve productivity and animation life action video and music content creation or content.
Speaker Change: Recommendation algorithm.
Speaker Change: Ah powered by AI and a proven effective in boosting content discovery these initiatives enables us.
Speaker Change: To better unlock the potential of our great content platforms.
Speaker Change: Okay.
Speaker Change: And finally as the capabilities and benefits that may I become clearer, we have stepped up our AI investments to meet our internal business needs training Foundation models and support surging demand for inference, we're experiencing from our users.
Speaker Change: To consolidate our resources around this all important AI effort, we have reorganized our it teams to sharpen focus on both faster product innovation and deep motto research Matt.
Speaker Change: Imagining a stepped up execution momentum and decision, making velocity, we increased annual capex more than threefold to $10 $7 billion in 2024 equivalent to approximately 12% of our revenue with no notable uplift in fourth quarter of the year as we bought more gpus.
Speaker Change: For both infants need as well as for our cloud services.
Speaker Change: We intend to further increase our capital expenditures in 2025, and expect our Capex to account for low teens percentage of our revenue.
Speaker Change: In terms of R&D, we will continue to invest in our own models and to accelerate the development AI applications of each of our business groups.
Speaker Change: We're also investing in marketing to build user awareness and promote the adoption of new AI products such as <unk>.
Speaker Change: We believe these investments will generate good economic returns over time, but we also have the capacity to intention to continue returning capital to shareholders.
Speaker Change: And we intend to buyback at least 80 billion Hong Kong dollars worth of stock in 2025.
James Mitchell: So with that I'll pass to James.
Speaker Change: Martin and Hello, everyone at.
Speaker Change: The fourth quarter, our total revenue returned to double digit growth up 11% year on year.
Speaker Change: <unk> represents a 46% of our revenue within which the social network sub segment was 17% domestic games, 20% and international games, 9% marketing services was 20% of our revenue in Fintech and business services, 33%.
Speaker Change: Gross profit grew 17% year on year on increased contributions from high margin revenue streams, such as domestic games video accounts advertising ambition search advertising alongside cost efficiency from cloud services by.
Speaker Change: By segment gross profit increased 19% year on year, representing 49% of our total gross profit.
Speaker Change: Marketing services gross profit increased 19% year on year, two contributing 22% and the Fintech and business services gross profit increased 11% contributing 29%.
Speaker Change: The value added services segment revenue was 79 billion renminbi up 14% year on year, social networks revenue was up 6% driven by increased revenue from App based game item sells music subscriptions and mini games platform service fees.
Speaker Change: Music subscription revenue increased 18% year on year as subscribers grew to $121 million Tencent music deepened cooperation with labels and artists and added Super VIP privileges such as AI powered audio effect matching and collectable artist cards.
Speaker Change: Long form video subscription revenue increased 3% year on year with subscribers growing to a $113 million or self commissioned drama series Love game in Eastern Fantasy was the most watched drama series across all online platforms in China in November.
Speaker Change: Domestic games revenue grew 23% year on year against a low base quarter, driven by evergreen games honour of Kings Peacekeeper elite Ballarat and also contribute shins through recently released games TNF Mobile Delta Force.
Speaker Change: International games revenue increased 15% year on year or 16% in constant currency terms and robust performances from both starts and <unk> mobile and the early access release of partner backs out too.
Speaker Change: Our communications and social networks, many shops, a platform for indexed and standardized merchandise is progressively adding features to stimulate new and repeat transactions. For example, we introduced a gifting feature which leverages <unk> social interactions and People's desire to keep each other final 20 items. This gifting feature has.
Speaker Change: The benefit that gift recipients in Australia, and that delivery addresses which builds out our delivery location graph, making future shopping transactions more convenient for consumers and future delivery more efficient for margins.
Speaker Change: <unk> continued to grow queries and bathroom at rapid rates, we integrated <unk> and deep seek large language modal capabilities to enhance the relevance and quality of <unk> search results and <unk> own model powered results now cover over 90% of question base sections.
Speaker Change: The domestic games several of our evergreen games benefited in terms of <unk> and monetization from IP collaborations and high profile events during the fourth quarter honour of Kings gross receipts grew by a double digit percentage year on year on higher <unk> and popular outfits based on the animated series Detective Conan.
Speaker Change: <unk> gross receipts more than doubled on tie ins with the World Championship, winning team Edward gaming and with riots animated series Arcane season too.
Speaker Change: Fight if the Golden Spatulas crush receipts grew by a double digit percentage on arcane themed champions.
Speaker Change: We're seeking to not traditional evergreen titles. For example, our recently released games Delta Force generated over 1 billion renminbi gross receipts from PC and mobile in China during the fourth quarter and our pipeline includes highly anticipated games such as the hidden months light of Marcia Ram got us the victory, new hype and via mobile.
Speaker Change: <unk>.
Speaker Change: During the 2025 Spring Festival period, a few weeks ago, our five highest grossing games each increased <unk> <unk> versus the 2020 for spring Festival period, demonstrating the health of the game industry and the vitality of our evergreen titles Cie growth flowed from gameplay and social activity initiatives such as peacekeepers.
Speaker Change: <unk> Tang dynasty themed map and honour of kings, social space, featuring fireworks and southeast spots.
Speaker Change: Among our international games Brawl stars from Supercell in Finland was the third highest mobile game <unk> industry wide outside China for 2024 gross receipts grew several times year on year in the fourth quarter benefiting from the angels versus demons season, and redesign battle pumps.
Speaker Change: Part of X out too from our subsidiaries grinding care games in New Zealand is a new action RPG PC and console featuring an in depth character development system. The game ranked first among premium games by wrapping on scheme for six weeks following its early access release in December.
Speaker Change: Wharf frame from our subsidiaries digital extremes in Canada released a major update warfarin 1999 in the fourth quarter, which boosted <unk> and results in the game achieving the highest level of fourth quarter gross receipts and its 11 year history for the full year 2024 wall frames gross receipts increased over 30% year on year also.
Speaker Change: Achieving a life to date record level.
Speaker Change: For marketing services revenue grew 17% to 35 billion renminbi in the fourth quarter benefiting from higher user engagement and the ongoing upgrade of our advertising platform spin.
Speaker Change: Specifically, we enhanced our AI models to facilitate more holistic understanding of users' interests and of how users are responding to ads, enabling our system to make more relevant ad recommendations.
Speaker Change: Marketing services revenue increased across most industries.
Speaker Change: By inventory video accounts marketing services revenue grew over 60% year on year on higher user engagement.
Speaker Change: Constitutes mentioned earlier and increased consumer transactions within video accounts, resulting in more cloud sweeps format setbacks Iceman.
Speaker Change: Mini programs marketing service revenue increased rapidly year on year, <unk> search revenue more than doubled year on year on more more commercial queries as well as AI optimized AD placements in AD formats, boosting click through rates.
Speaker Change: Looking at Fintech and business services segment revenue was 56 billion renminbi in the fourth quarter up 3% year on year Fintech services revenue resumed low single digit year on year growth in the quarter benefiting from improved commercial payment volumes and increases in wealth management and consumer loan services revenues for <unk>.
Speaker Change: Actual payments revenue improve to largely stable year on year and the number of transactions grew faster year on year in the fourth quarter versus the third quarter.
Speaker Change: Business services revenue grew modestly year on year in the fourth quarter benefiting from higher cloud services revenue and increased technology service fees generated from rising ecommerce transaction volumes, but as Marty mentioned allocating more gpus to 10 cents one needs temporarily constrained growth cloud services revenue in the quarter business serve.
Speaker Change: Gross margin rose year on year due to improved efficiency for <unk> com revenue more than doubled year on year as enterprises are increasingly willing to pay for advanced communication functionalities and Tencent meeting grew revenue over 40% year on year benefiting from increased enterprise adoption.
Speaker Change: With that I'll pass to John.
John: Thank you Yang.
Speaker Change: Hello, everyone.
Speaker Change: For the fourth quarter of 2024 total revenue was 172.
Speaker Change: 4 billion.
Speaker Change: <unk> be up 11% year on year gross profit was 97.
Speaker Change: And renminbi up 17% year on year operating profit was 51 point that they are in renminbi up 24% year on year interest income was $3 9 billion renminbi broadly stable year on year finance costs were $2 5 billion renminbi down 29% year on year due to the exchange foreign exchange gains this quarter compared to losses.
Speaker Change: In the same period last year.
Speaker Change: Share of profit of Associates and January was $9 3 billion renminbi compared to $2 4 billion renminbi in the same quarter last year.
Speaker Change: And then on either basis share of profit was $7 7 billion renminbi up $4 5 billion renminbi in the same quarter last year due.
Speaker Change: Due to associate company specific factors, including business growth, new content releases and enhance operating efficiencies.
Speaker Change: Income tax expense increased by 22% year on year to $11 8 billion renminbi, primarily driven by operating profit growth.
Speaker Change: On non <unk> basis diluted EPS was $5 nine months renminbi up 33% year on year outpacing on eye of ours that profit growth due to reduced share count from our share buybacks.
Speaker Change: On non <unk> financial figures for quarter four operating profit was $59 5 billion renminbi up 21% year on year net profit attributable to equity holders was $45 3 billion renminbi up 30% year on year. The difference in one LIBOR rates between operating profit and net profit was.
Speaker Change: Primarily due to higher no Niobrara shale profit from associates in JV, which went up by 72% to seven seven per amendment would be this quarter.
Speaker Change: Moving onto gross margin for the fourth quarter overall gross margin was 53% up three percentage points year on year and by segment value added services gross margin was 56% up two percentage points year on year gives you a higher mix of higher margin domestic gains revenue margin improvement in music subscription revenue.
Speaker Change: Revenue and a lower mix of low margin live streaming revenue.
Speaker Change: Marketing services gross margin was 38% up one percentage point year on year due to growth in high margin video accounts and wage in search revenue.
Speaker Change: Fintech and business services gross margin was 47% up three percentage points y on Y due to a higher mix of high margin revenues alongside improved cost efficiency in our cloud services.
Speaker Change: Our fourth quarter operating expenses, selling and marketing expenses were $10 3 billion renminbi down 6% from the high base in the same quarter last year, selling and marketing expenses represented 6% of revenues down from 7% in the same quarter last year.
Speaker Change: Total G&A expenses were $31 4 billion renminbi up 16% Y on Y substantially driven by an increase R&D expenses, which grew 21% year on year to <unk> 19, 8 billion renminbi.
Speaker Change: Mainly due to higher staff costs, and GPU servers depreciation related to our AI initiatives.
Speaker Change: G&A, excluding R&D was up 8% Y on Y to 11 6 billion renminbi.
Speaker Change: Quarter end, we had approximately 111000 employees or 5% year on year or 2% quarter on quarter.
Speaker Change: Yes.
Speaker Change: For the fourth quarter 2020 for non <unk> operating margin was 34% up three percentage points year on year largely in line with gross margin expansion.
Speaker Change: Nick I will highlight some key cash flow and balance sheet metrics.
Speaker Change: For the fourth quarter operating Capex was $34 9 billion renminbi up 421% year on year, driven by increased investment in Gpus is service to ramp up our AI capabilities.
Speaker Change: Nonoperating Capex was $1 7 billion renminbi up 103% year on year, primarily driven by data center construction in progress.
Speaker Change: Capex was $36 6 billion renminbi up 386% year on year.
Speaker Change: Free cash flow was $4 5 billion renminbi that 87% year on year, primarily due to increased capex spending on Gpus servers and data centers.
Speaker Change: On a Q on Q basis free cash flow was down 92% due to timing differences and settlement of certain accrued expenses higher capex spending on Gpus servers, alongside with the seasonally lower games gross receipts.
Speaker Change: Net cash position was $76 8 billion renminbi down, 20% Q on Q, reflecting cash outflows related to capex and share repurchases.
Speaker Change: On capital returns for the full year of 2024, we have repurchased 307 million shares with a total consideration of 112 billion Hong Kong dollars more than doubling both number of shares repurchased and total consideration from last year our.
Speaker Change: Our weighted average number of shares for calculating 2024 diluted EPS decreased by 2% year on year.
Speaker Change: Subject to shareholders' approval at our upcoming 2025, AGM, we are proposing an annual dividend of $4 five Hong Kong dollars per share, reflecting a 32% increase from previous year.
Speaker Change: The dividend will be payable to shareholders on periods of May 2025. Thank you.
John: Thank you John.
Speaker Change: We'll now open the floor for questions. If you are dialing in by phone. Please press <unk> to raise a question <unk> on mute yourself if.
John: If you are accessing from the Tencent meeting our board meeting application. Please click the raise hand button at the bottom.
John: We will take one main question and up tier one follow up question each time.
Speaker Change: Our first question comes from Kenneth Wong from UBS.
John: Okay.
John: Yeah.
John: Alright.
John: Your line is open.
Speaker Change: Hi, Good evening management, congrats on a strong quarter and I think Michael about taking my questions.
Speaker Change: Two question. The first one is on the AI capex impact on financials.
Speaker Change: So as we step up the Capex on AI, our margin will be inevitably dropped by additional depreciation and R&D expenses. So over the past few years, we have seen meaningful increase in margin as we focus on high quality growth. So going forward, how should we balance between growth and profitability and kirkman.
Speaker Change: And my second question's on many shops.
Speaker Change: In Q3, we launched our reaching many jobs and blue packets gifting function. There has been very well received by the user program.
Speaker Change: Management share with us the strategy and key initiatives this year for e-commerce. Thank you.
Speaker Change: I cannot thank you for your question. So people say the only things that are inevitable in life or death and taxes.
Speaker Change: And as a company executive I think it would be remiss, if we were to say that lower margins inevitable and we certainly don't believe that's the case as.
Speaker Change: As far as increased research and development spending on AI is concerned and essentially every year of <unk> history, we have been increasing our research and development spending on various different projects. So we don't see R&D spending being a pressure per se on our margins our capex as a more nuanced chop back because we did step up.
Speaker Change: Capex to a new sort of higher steady state in the fourth quarter of last year and over time that incremental capex will flow through into incremental depreciation over the next several years, but it's worth digging into exactly where that capex is going to understand whether the depreciation becomes a margin.
Speaker Change: Pressure or not so the most immediate use of the Capex is gpus to support our AD tech and to a lesser extent our games businesses and you can see from from our results you can hear from what Martin talked about that that Capex actually generates good margins high returns.
Speaker Change: Our second use of Capex with Gpus for large language model of training and there was a period of time last year. When there was a belief that every new generation of large language model required in order of magnitude more.
Speaker Change: <unk>.
Speaker Change: That period of time entered with the breakthroughs that deep seek demonstrated and now the industry and we within the industry are getting much higher productivity on.
Speaker Change: A large language model training from existing Gpus without needing to add addition, gpus the pace previously expected.
Speaker Change: There's capex related to our cloud business, which we buy this GPU servers, we rent them out to customers. We generated return it may not be.
Speaker Change: The highest return business in our portfolio, but nonetheless, it's a positive return.
Speaker Change: The cost of the.
Speaker Change: Gpus and therefore, the attendant depreciation.
Speaker Change: And then finally I think there is potentially the short term pressure as the Capex for two C inference.
Speaker Change: And.
Speaker Change: That.
Speaker Change: And it is an additional cost pressure barge.
Speaker Change: Believe it's a manageable cost pressure because that capex is a subset of the total capex and we're also optimistic that over time.
Speaker Change: Those are the.
Speaker Change: QC influence activity that debt.
Speaker Change: We're generating you know just like previous activity within different Tencent platforms, we'll be monetizing through a combination of advertising revenue and value added services. So our overall.
Speaker Change: While we understand that you have questions around the step up in Capex and how that translates into profitability over time, and we're actually quite optimistic that we can.
Speaker Change: Continue to to grow the business, while protecting margins. Thank you.
Speaker Change: And yeah, just just one sort of point to add to.
Speaker Change: James <unk> percent and a sense of Enzo.
Speaker Change: <unk>, which is in the inference for consumer facing.
Speaker Change: Product.
Speaker Change: A lot of that.
Speaker Change: It was through which we can actually reduce unit cost by technical means by software.
Speaker Change: And by better.
Speaker Change: Algorithms. So I think that's also so the effected to keep in mind.
Speaker Change: So with respect to the many sharp right new I would say.
Speaker Change: Number one it's a very long term initiative for us.
Speaker Change: So so.
Speaker Change: Any particular initiatives is just sort of a new one.
Speaker Change: Of many.
Speaker Change: Things that we can do to build up this ecosystem over the long run and secondly, I would say that I would like to remind.
Speaker Change: The audience about the positioning of the media show up right now.
Speaker Change: Really a unified platform that connects all the components of our <unk> ecosystem.
Speaker Change: And there is a standard in indexed merchandise information data structure.
Speaker Change: So thats.
Speaker Change: The merchandize information can actually flow.
Speaker Change: Freely across the different components of the equation ecosystem and that's.
Speaker Change: The purpose is actually for our consumers to be able to find quality products and merchants and if you look at the different components of durations ecosystem. There is.
Speaker Change: Social infrastructure there is content that is search there is.
Speaker Change: Mini programs there is transaction platform and there is also.
Speaker Change: We come so there is a lot of components within.
Speaker Change: The unified <unk> ecosystem that many shops really once you.
Speaker Change: Fluctuated.
Speaker Change: And if you look at.
Speaker Change: The gifting, it's really one.
Speaker Change: Feature within the social component of the ecosystem and so it's just sort of near one of the many many different features that we can add in order to really.
Speaker Change: Leverage.
Speaker Change: <unk> <unk> ecosystem.
And from the initial feedback to as you said revenue is actually quite quite well received we see a lot of people sort of newer using dysfunction to get to their friends during.
Speaker Change: During the Chinese new year period.
Speaker Change: And this gifting actually also magnify the word of mouth effect of quality products. Because you were only gift the products that you felt is actually sort of good.
Speaker Change: For the people, who received the products, which sort of new magnify.
Speaker Change: The initial purchase.
Speaker Change: They would enter there.
Speaker Change: Address into the delivery address and that would actually help us to get a bill.
Speaker Change: Or would it infrastructure of delivery graph and that would actually sort of can you help us to complete transactions in the easier way for a lot of people who have entered their address and usually it actually will also induce that people who received the gifts to sometimes like give that further to their friends.
Speaker Change: So overall I think the word of mouth effect is very good and the feedback from the merchants have been good but it is only one component would then.
Speaker Change: The overall duration of ecosystem. So we felt.
Speaker Change: Over time, we continue to build up this ecosystem this platform.
Speaker Change: No what patients and that would treat it as a marathon rather than a sprint and we felt we can go actually very far along.
Speaker Change: Along this path and if you look at the GMB of media.
Speaker Change: Many shop it continues to grow at a very fast pace in the fourth quarter of last year.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Great. Thank you everyone. Congrats again thanks.
Speaker Change: Thank you Kenny.
Speaker Change: Next we will take the question from.
Speaker Change: Alicia Yapp from Citigroup.
Speaker Change: Thank you good evening management, Thanks for taking my questions and also congrats on the strong set of results.
Speaker Change: Question first is for the enterprise facing service that you mentioned I'm just wondering if management can elucidate a little bit of demand and adoption rate that you have seen for your service.
Speaker Change: Service over the past two months and how you foresee the demand growth in the coming quarters and for the SaaS products.
Speaker Change: Besides tencent meetings and Tencent docks that you mentioned so can management also share with us some of the software solution that we plan to roll out that could potentially help to cross sell and upsell to our customer.
Speaker Change: And second question is on the consumer facing application setting in addition to <unk>, which OCC has achieved very strong breakout.
Speaker Change: Breakout the last couple of months.
Speaker Change: Also these are EMA co pilot and also.
Speaker Change: The way <unk> is also with the enhanced search features so just wondering how will all these products eventually evolve over time and we'll land position.
Speaker Change: Our position as the AI gateway that consolidating all the search and discovery entries that will be complementary to the wechat Super App. Thank you.
Speaker Change: Okay.
Speaker Change: Okay in terms of.
Speaker Change: I service demand, it's actually very strong.
Speaker Change: As.
Speaker Change: As I said earlier, and then sort of James also talk about it right now we actually supply constrained.
Speaker Change: Part of the reason why you see such a big step up in terms of the Capex in the fourth quarter is because we have a bunch of rush orders for Gpus.
Speaker Change: For both <unk> as well as for our cloud services, and we would only be able to capture the large increase in terms of Ais service demand when we actually install these gpus into the data center, which would take some time.
Speaker Change: So I would say we.
Speaker Change: Probably have not really captured a lot of that during the first quarter, but overtime. It will capture quite a bit of that with the arrival and installation of the gpus and in terms of the.
Speaker Change: Different software solutions right. So you mentioned in terms of meeting turns in dogs and we come is another.
Speaker Change: Very strong product as a matter of fact this is actually our biggest SaaS products in terms of revenue and it actually has grown.
Speaker Change: Our Lord nearly doubled its revenue year on year in the previous quarter and in addition to that we also see a security pass software and audio video past software, including.
Speaker Change: <unk>.
Speaker Change: Real time communications as well as life broadcasting.
Speaker Change: Yes software that we actually selling to our cloud customers and quite a bit of these also can be enabled AI to provide extra value to our customers.
Speaker Change: And then on the consumer facing.
Speaker Change: Application.
Speaker Change: Yes, we actually have a whole host of.
Speaker Change: Different.
Speaker Change: Consumer facing applications and you should expect more to come I think AI is actually in a very early stage. So it's really hard to talk about what the eventual state would look like but I would say one each product will continue to evolve it too.
Speaker Change: Useful and even more powerful products for users.
Speaker Change: So we unbundle it can be sort of you are very.
Speaker Change: Strong AI native assistant and the email copilot Fabricio personal library and also.
Speaker Change: Collaborate with library for.
Speaker Change: Team collaborations and <unk> can have many many different features to come right. In addition to these products I think are other products would have AI experiences, including QQ, including.
Speaker Change: The browser.
Speaker Change: Other products. So I think we would see more and more AI.
Speaker Change: Our consumer AI facing products and at the same time, each one of the products will continue to evolve.
Speaker Change: I think if you look at <unk>. It is indeed, consolidating a lot of different functionalities, but it will not be the only gateway each one of our products would actually.
Speaker Change: Look for unique use cases in which they can leverage AI to provide a great user experience to their users, but at the same time.
Speaker Change: Our different products can also work together in order to provide.
Speaker Change: The right pathway for our AI products.
Speaker Change: To grow their own user base. So I think that that will be continue to evolve.
Speaker Change: So that would be helpful for us.
Speaker Change: As we build a whole host of AI.
Solutions and applications with consumers.
Marty: Thank you Marty.
Speaker Change: Thank you.
Speaker Change: Take the next question, Josh Siegel from Nomura.
Speaker Change: Yes.
Josh Siegel: When do you think management and good evening and congratulations again on a very solid quarter. My question is actually fall out on the last question. So we saw tens of your EM margins very strong growth momentum.
Speaker Change: So can management elaborate in strategies to further grow the user base.
Speaker Change: In this very competitive market and gamma is a hybrid is a hybrid AI chatbot and search provider. So just wondering which part of the two is tens and most excited about.
Speaker Change: And also related to that how big a market share will AI synergy eventually represent in the entire search marketing in the future in terms of search queries and how do you guys plan to monetize search in the future. Thank you.
Speaker Change: Yeah.
Speaker Change: Well in terms of gumbo.
Well right now it is.
Speaker Change: Chatbot and surgery, but overtime I think it was actually proliferate in SKU.
Speaker Change: All capable AI assistance with many different functionalities for surfing different types of people. So.
Speaker Change: If if.
It would range from students who want to.
Speaker Change: Learn and it would include.
Speaker Change: All kinds of different.
Speaker Change: But people, who actually knowledge workers, who want to.
Speaker Change: Complete their work.
Speaker Change: And you would sort of cover deep research, which allows people to.
Speaker Change: Two very deep research into different topics.
Speaker Change: And so I think.
Speaker Change: It's going to be.
Speaker Change: Having many many different applications and I think the.
Speaker Change: Kind of unique.
Speaker Change: Vantage of November.
Speaker Change: <unk>, obviously, it's about innovation.
Speaker Change: It's about certain continuously adding.
Speaker Change: Features and.
Speaker Change: Functionality is to fulfill that user needs, but I think <unk> has got the unique advantage of having access to.
Speaker Change: Our content ecosystem of Tencent.
Speaker Change: Especially around.
Speaker Change: Official accounts and video accounts that gives us very high quality information sources.
Speaker Change: And at the same time, we felt our multis model strategy actually helps the.
Speaker Change: The users to get access to the best model and also have the advantage of using a combination of models to fulfill their complex needs and in the future as I actually alluded to many of our different.
Speaker Change: A large VA products would actually start to add different AI features and functionalities and some of them would have pathway and access to gamble and our array of products would actually sort of can you help each other out so I think those are.
Speaker Change: The things that we can do continuously which typically would be competitive but at the same time. There are some unique advantages that we have here.
Speaker Change: And.
Speaker Change: In a more general question about AI.
Speaker Change: AI prompts vis vis the traditional such I think different people will have different opinions and it will take time to play out but at a high level. If we look at the history of.
Speaker Change: Web search Subsuming web directory, if we look at our own behavior.
Speaker Change: With AI pumps speeds.
Speaker Change: Traditional such I think it is possible that AI, such will subsume traditional such because ultimately web directory traditional search AI prompt overrepresent mechanisms for accessing the internet knowledge graph.
Speaker Change: Within them.
Speaker Change: Comps in it brings new technology, new efficiency also new transactional capabilities through Egencia II that were not possible in traditional.
Such as.
Speaker Change: So in terms of how.
Speaker Change: The comps.
Speaker Change: Comps will be monetize time will tell but I think that we can already see in the western world. The first monetization is through subscription models and then over time.
Speaker Change: <unk> advertising will follow I think in China. It will start with performance advertising and then.
Speaker Change: Value added services will follow.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: We will take the next question.
Speaker Change: Roma Bronco.
Speaker Change: Thank you plenty of Montana name, John and Wendy the two question first one.
Speaker Change: Advertising.
Speaker Change: A healthy 17% growth that we saw should we view this fourth quarter exit rate as a proxy, let's say to 2025 this year.
Speaker Change: And given to talk about the AI powered enhancements and we've seen from meta.
Speaker Change: In learning and advantage plus shopping all of these AI could drive growth acceleration for some of the global peer. So is there a possibility for even acceleration of this marketing services growth line as we head into this year with more AI applications of that.
Speaker Change: Separately on games, how should we view the growth outlook this year for domestic and international, especially the higher base effect for domestic by the second half of this year and with AI what are the implications to this business.
Speaker Change: About longevity.
Speaker Change: Competition and cost structures and this games in.
Speaker Change: Industry. Thank you.
Speaker Change: So why don't I lead off with advertising and game.
Speaker Change: Trends briefly and then I'm not sure if matson will address <unk> determined adding to cost I.
Speaker Change: I think on the advertising and we're very pleased with the growth rate in the fourth quarter, which clearly outpaced the industry.
Speaker Change: There were no particular special <unk> called out it was purely organic growth and it was very broad based against.
Speaker Change: Pretty much every industry that we monitor our LNG, we think thats because across pretty much every industry. We monitor the AI enhancements, where we're deploying it delivering superior return on investment for advertisers versus what they previously enjoyed and versus what's available elsewhere.
Speaker Change: Compared us with some of our global peers, which I think is the right thing to do with the caveat that some of our global peers tend to move to.
Speaker Change: Sort of fully loaded AD load much earlier in the evolution of that product for example.
Speaker Change: Short video versus we tend to be.
Speaker Change: We're actually.
Speaker Change: Incrementally increase the AD load for our newer products like short video and that remains the case and so I think there is a difference in how quickly we choose to just sort of race down the runway versus some of our global peers, but overall.
Speaker Change: As long as the macro environment doesn't change dramatically then I think we feel quite comfortable with our advertising business as.
Speaker Change: As far as the game business is concerned you are asking about higher base effect in the second half.
Speaker Change: The year I mean, I guess, it's because of.
This kind of industry that if you do well and people worry about the base effect here later, but I think that.
Speaker Change: Peter there are some observable facts about our game business. Today. One is that we ended last year with a deferred revenue much of which comes from the game business.
Speaker Change: High teens percentage year on year, and so that deferred revenue will flow through into reported revenue.
Speaker Change: Through the first half, but also through the second half of.
Speaker Change: 2025, and some in 2026 and then a second observe the fact that we called out in the prepared remarks is that the.
Speaker Change: The user behavior on our games during Chinese new year was quite a nice sort of insight into either our games are generally increasing or not increasing popularity and so for all five of our highest grossing games to see daily active users up year on year and the Chinese new year this year versus the Chinese new year.
Speaker Change: The period last year is a positive leading indicator. So those are both sort of observable facts. There's also subjective opinions.
Speaker Change: Subjectively.
Speaker Change: We believe we have a couple of games.
Speaker Change: Well on their way to graduating to evergreen status as well and.
Speaker Change: And we mentioned one of them Delta forces us iridium important opportunity tailwind secondly, as we talked about in the prepared remarks were.
Speaker Change: We have a number of new games in the pipeline.
Speaker Change: Excited about.
Speaker Change: And then thirdly, we.
Speaker Change: We do believe that games benefit in a direct and potentially a less direct way from AI technology enhancements.
Speaker Change: Direct way is the game developers using AI to assist them in creating more.
Speaker Change: More content more quickly and serving more uses more effectively and then the indirect way, which it may be more of a multi decade, rather than the second half of Bcf story is that as.
Speaker Change: Humanity uses AI more broadly than we think there'll be.
More time and also more desire for high agency activities.
Speaker Change: People, who are now empowered by.
<unk> AI and so one of the best ways for them to express themselves.
Speaker Change: Hi agency by Rob and the passive way is through interactive entertainment, which is games.
Speaker Change: Okay.
And I think just one more point to add which is.
Speaker Change: So when we think about.
Speaker Change: The competitive dynamics right, we actually felt.
Speaker Change: AI would allow.
Speaker Change: Evergreen games to be more evergreen and.
Speaker Change: We are already seeing sort of neuro, how AI can help us to execute and magnify our evergreen strategy and.
Speaker Change: Part of it is.
Speaker Change: Within production right now you can actually produce.
Speaker Change: <unk> content now within a shorter period of time, so that you.
Speaker Change: You can keep updating the games.
Speaker Change: With higher frequency of high quality content.
Speaker Change: And with the PV experience when you have smaller box new actions that we can make the K more exciting and more like Pvp and within Pvp, a lot of the matching and balancing and coaching of new users can actually be done in a much better way when you apply AI. So all these.
Speaker Change: Would actually help already popular and large scale games to be even more popular and more.
More attractive for the users.
Speaker Change: Got it thank you.
Speaker Change: Well now take the next question from Alex Yao from JP Morgan.
Alex Yao: Thank you management for taking my question and congrats on the strong quarter. My first question is regarding the commercial payments.
Speaker Change: It's encouraging to see that your commercial timing around when you or has turned from negative growth in Q3 to year on year flat in Q4.
Speaker Change: Can you share with us your observation of how the commercial payment activity trends so far in first quarter of 2025.
Speaker Change: My second.
Speaker Change: Question is a follow up follow up sure.
Speaker Change: On the Capex.
Speaker Change: No.
Speaker Change: Capex to revenue ratio of low teens for 2025.
Speaker Change: Which is a similar ratio.
<unk> hundred 24, so basically this guidance implies significant slowdown of Capex growth.
Speaker Change: Can you talk us through the rationale behind this.
Speaker Change: Capex to revenue ratio is it because you foresee a slowdown in demand growth Fortunately.
Speaker Change: Or is it because the big step up in 2024 will be sufficient to address.
Speaker Change: Jimmy or demand in 2025, thank you.
Speaker Change: Well in terms of commercial payments, what our observation is that the volume.
Speaker Change: Our transactions actually sort of deal.
Speaker Change: Increase.
Speaker Change: But then.
Speaker Change: The pricing pressure on the Asps actually continued so net net.
It's still.
Speaker Change: So from a from a value perspective, it's still kind of flattish.
Speaker Change: So that the.
Speaker Change: The way we interpret it.
Speaker Change: Is that I think consumers' propensity to spend is actually.
Speaker Change: Coming back, but then on the supply side, there's still a lot of pricing pressure. So.
Speaker Change: Hopefully this is sort of a good sign that to where to what.
Speaker Change: <unk> of <unk>.
Speaker Change: Tough market when consumers demand continue to improve overtime.
Speaker Change: The suppliers will be less cutthroat and overtime.
Speaker Change: That would translate into value growth, but I think that's something that we'll have to see.
Speaker Change: Going forward.
Speaker Change: And on your question about Capex of revenue then.
Yes. It is because the step up in late 2024 should be sufficient to address gen AI and other needs in 2025 at this sort of new normal run rate.
Speaker Change: In car a time lag.
Speaker Change: Lack between ordering the GPU servers and fully deploying them in data centers.
Speaker Change: So during the fourth quarter during part of the first quarter. If we were in that situation, but as Mike spoke to exiting the first quarter, we are deploying the gpus.
Speaker Change: Get the benefit of them.
Speaker Change: In tunnel.
Speaker Change: In front seats for you about as well as our external Tencent cloud needs branching out to clients and generating direct revenue and now I think that if you step back and look at the bigger picture than that.
Speaker Change: Period last year when people asked us if our capex was big enough relative to our China periods relative to our global peers.
Speaker Change: Now out of the listed companies I think we had the largest capex of any China Tech company in the fourth quarter.
Speaker Change: We are at the forefront among.
Speaker Change: China appears in general the China Tech companies.
Speaker Change: Spending less on Capex as a percentage of revenue than some of that western peers.
Speaker Change: But we believe for some time that's because.
Speaker Change: Chinese companies are generally prioritizing efficiency.
Speaker Change: And we have utilization efficient utilization of the GPU suffers.
Speaker Change: And that doesn't necessarily.
Speaker Change: <unk> the Alps, much effectiveness of the technology, that's being developed and I think deep seeks a success ready sort of symbolized.
Speaker Change: Solidified demonstrated at that reality.
Speaker Change: But the only point I want to add.
Speaker Change: This is a very dynamic situation right. So what we're giving is actually sort of our expectation, but frankly, the expectation can change when you're if suddenly there is a surge of demand than we can definitely sort of your increase our our order for Gpus.
Speaker Change: So I think we will be sort of very flexible and dynamic in responding to the market dynamics.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Take the next question outbound John Choi from Daiwa.
John Choi: Thank you for taking my question. My first question is a follow up on advertising. So can management share some more color I think on the prepared remarks, you guys mentioned, obviously, an increase for most industry like which verticals have benefited most and also in terms of the advertisers.
John Choi: Advertisers, we noticed that video cast mini program solutions search all went up quite a bit so in terms of the advertisers' behavior.
John Choi: This change in how has this.
John Choi: <unk> benefited our advertising revenue growth.
John Choi: Second question is on capital allocation I think management shared that the share buyback and this year will be less than last year, but on the other hand dividends will increase.
John Choi: So when it comes what is our priority when it comes to capital allocation.
John Choi: Meanwhile, how should we think about investments in M&A as we are seeing a very strong demand.
John Choi: The AI industry at the current.
John Choi: Stage. Thank you.
Speaker Change: Sure. So on your advertising question and some of the categories, where we saw year on year growth in <unk>.
Speaker Change: E Commerce financial fast moving consumer goods games local service education health care, So a long list of categories across the board and.
Speaker Change: As we.
Speaker Change: Deploy these AI enhancements generally what we do so.
Speaker Change: Justin in video accounts, and then it sort of calculates across other way Shin properties across the Tencent properties and across our AD network and so that the benefits become increasingly broad be felt over time. So that's on the advertising question.
Speaker Change: In terms of capital allocation I think the key thing.
Speaker Change: Overriding principle is actually we want to invest.
Speaker Change: In order to.
Speaker Change: Generate return for the company and for the shareholders right.
Speaker Change: And.
Speaker Change: It means different.
Speaker Change: Okay.
Speaker Change: Areas and different times that there were times in which we invest a lot in the ecosystem and our ecosystem partners and build a very large investment portfolio and then we.
Speaker Change: We started returning cash.
Speaker Change: To our shareholders through dividends and share buyback.
Speaker Change: And now there is AI and we felt there is a lot of potential in AI to generate return for the future. So I think we basically know what too.
Speaker Change: Create investment strategy that debt.
Speaker Change: Invest in our future, but at the same time, we also provide current period return through dividend and buybacks right. So I think that's the overriding principle and if you look at.
Speaker Change: Our our ability to do that.
Speaker Change: I'd say, we have a very strong financial capability to do that because it would be a very strong cash flow on an operating basis. We also have a very large.
Speaker Change: And valuable investment portfolio and a big part of it is actually we are liquid so we have enough financial resources to.
Speaker Change: Invest in the future both in AI as well as if needed radio invested in some investment.
Speaker Change: Activities, our investment portfolio is essentially self funded and at the same time provide current period.
Speaker Change: Return to shareholders. So as we look.
Speaker Change: Therefore, this year, we have already announced that we're going to paid cash dividend of <unk> 41 billion Hong Kong dollars.
Speaker Change: And.
Speaker Change: We would slightly reduce our.
Speaker Change: Share buyback from last year, we said that we're going to buyback 100 billion and this year, we said, we're going to buyback 80.
Speaker Change: 80 billion radio so basically.
Speaker Change: You can call it at $20 billion flexibility buffer for us to sort of sit through the year and see whether we need to invest in further in AI.
Speaker Change: But if you look across the two years right last year, we set the dividend was 32 billion and a share buyback was $100 billion, that's $132 billion target return and this year. Our target return is 80, plus 41 21, but if you add the over spending off.
Speaker Change: Our share repurchase last year of 15 right than this year's number is actually sort of similar to last year's target. So I think we are trying to provide a very good balance between current period of investment.
Speaker Change: <unk> as well as future investment, but we have a very strong set of financial resources to do that.
Speaker Change: Thank you.
Speaker Change: Take the next question from Robin Zhu from Bernstein.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Robert you need you on mute yourself.
Speaker Change: Yes.
Speaker Change: Maybe we take the <unk>.
Speaker Change: Next question from Thomas Chong from Jefferies.
Thomas Chong: Hi, Good evening, Thanks management for taking my question and congratulation on a very strong set of result.
Speaker Change: My question is going back to the previous question.
Speaker Change: On on spending and also on higher margin business and monetization. So given the fact that we have.
Speaker Change: <unk> been pursuing high quality growth strategy for the past couple of years and we are also looking into margin expansion story.
Speaker Change: Operating profit.
Speaker Change: Well to be faster than revenue.
Speaker Change: But those will point out that as time goes on.
Speaker Change: Between the two that were down so I think of putting connecting all the dots together and putting all the puzzles how should we think about.
Speaker Change: The margin expansion story in China kind of five and the next few years. Thank you.
Speaker Change: Why don't I take a stab at that.
Speaker Change: So.
Speaker Change: Okay.
Speaker Change: At some level the reason or a key reason why we have enjoyed operating margin leverage in.
Speaker Change: In the past two years in particular is because we have enjoyed gross margin that rich and the reason why we have enjoyed gross profit leverage to revenue is because.
Speaker Change: While our sort of base business has a blended gross margin of around 50% as the number of new revenue streams that contribute the majority of our revenue growth, which are coming in at gross margins of 70% 80%.
Speaker Change: So as that mix shift.
Speaker Change: <unk> has been underway that has been pulling up.
Speaker Change: Gross margin and resulting in gross profit growing faster than revenue now of course, there is over time, a base effect or more accurately as sort of a synthetic effects.
Speaker Change: Blended gross margin gets closer to the incremental gross margin then inevitably the rate of improvements in the Atlantic gross margin.
Speaker Change: Set of rates, so I think thats true.
Speaker Change: Over the longer term, but that said when we look at high quality.
Speaker Change: Revenue streams, such as the video accounts adds such as search ads such as some of the value added financial services, such as e-commerce transaction fees, such as our own games.
Speaker Change: And generally those continue to grow faster than our overall revenue and continue to enjoy contribute substantially higher margins than our blended margin and so we believe that it will continue to enjoy.
Speaker Change: Gross profit leverage and therefore operating profit leverage visa fee revenue.
Speaker Change: On a sort of progressive asymptotic basis.
Speaker Change: Of course, yeah investment with actions go against that price.
Speaker Change: The balance of the tissue.
Speaker Change: I think just to make the full picture clearer.
Speaker Change: Thank you.
Speaker Change: In the interest of time, we will take the last question from now yes.
Speaker Change: <unk> Securities.
Speaker Change: Since really essentially management for taking my questions Congrats for the strong corner.
Speaker Change: My question is regarding <unk>.
Speaker Change: Yeah.
Speaker Change: We have seen many companies release their own loss from three models.
Speaker Change: Just wanted to know.
Speaker Change: Our management for you the key competitive factors in the future of Latam, which model and our competitive advantages are.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: So what.
Speaker Change: What's the I didn't catch the last part of whats the yes, what is the.
Speaker Change: Competitive advantage, because we see a lot of aging in the market. So how should we to increase the user engagement in the future by adding more features and functions.
Speaker Change: Yeah I think.
Speaker Change: There is sort of Neil.
Speaker Change: But there are many types of AIA is right now.
Speaker Change: The AI agent is essentially a model leveraging the model capable ATM.
Speaker Change: Having connections two different software tools in order for a complex task to be completed.
Speaker Change: It's a.
Speaker Change: It's a pretty general concept and you can have AI agents on a standalone basis, you can have AI agents.
Speaker Change: Living in different apps and the way we look at it as there will be sort of a multitude of AI agents, but I think for us.
Speaker Change: We would be able to fill it to standalone AI agents, thereby leveraging models that are of great quality and at the same time by leveraging the fact that we have a lot of.
Speaker Change: Consumers on our different software platforms like our browser like Rambo overtime.
Speaker Change: But at the same time, even within <unk> and within QQ, we can have AI agent and the <unk>.
Speaker Change: <unk> can actually.
Speaker Change: Leverage the.
Speaker Change: Ecosystem within.
Speaker Change: The apps and provide really.
Speaker Change: Great service to our users by completing complex task right now if you look at <unk> for example, <unk>.
Speaker Change: <unk> has got a lot of users are very long user time per day as well as high frequency of.
Speaker Change: Users opening up the App. That's one advantage. The second advantage is that if you look at the activities within <unk> is actually very very diversified right. It's not just sort of entertainment is not just transactions, it's actually sort of social communication and.
Speaker Change: Content and a lot of people conduct their work with innovation.
Speaker Change: Conductor learning with inflation and.
Speaker Change: There are a lot of transactions that go through Asia, and Theres, a multitude of medium programs, which actually allowed.
Speaker Change: Sorts of different activities to be carried out right. So you look at the meaney.
Speaker Change: Program ecosystem, we can easily build and agent based on a model that actually can connect to a lot of the different mini programs and <unk> activities and complex topics completely.
Speaker Change: Completed for our users.
So I think those are all very distinct advantage that we have now of course these are.
Speaker Change: Experiences that we want to build very carefully we want to build very patiently. So that they would deliver the right experience to the users with a lot of attention to that data security to their sense of security.
Speaker Change: Our sense of comfort and security right.
Speaker Change: These are the kinds of things that we need to pay attention to when we built these products, but over time I think those are great opportunities for us.
Speaker Change: Thank you Mark and we are now ending the webinar. Thank you all for joining us.
Speaker Change: Second at state.
Speaker Change: To check out our press release and other financial information. Please visit the IR section of our company website at Www Dot Tien Tsin Dot com.
Speaker Change: This webinar will also be.
Speaker Change: Available.
Speaker Change: See you next quarter.
Speaker Change: [noise] schema.
Speaker Change: Sure.
Speaker Change: Yeah.
Speaker Change: Yeah.