Tencent Holdings Limited (0700.HK) Earnings Call Transcript & Summary

Good day and a good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2025 Third Quarter Results Announcement webinar. I'm Wendy Huang from Tencent IR team. [Operator Instructions]. And please be advised that today's revenue is being recorded. 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. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for measures of the group's financial performance reported in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website. Let me now introduce the management team on the webinar tonight. Our Chairman and CEO, Pony Ma, will kick off with a short overview. President, Martin Lau and Chief Strategy Officer, James Mitchell, will provide business review; and Chief Financial Officer, John Lo will conclude the financial discussion before we open the floor for questions. I will now pass it to Pony.

Okay. Thank you, Wendy. Good evening. Thank you, everyone, for joining us. During the third quarter of 2025, we achieved solid revenue and earnings growth. reflecting healthy trends across games, marketing services and fintech and business services. Our strategic investment in AI are benefiting us in business areas such as ad targeting and game engagement as well as efficiency enhancement areas such as coating and game and video production. We are upgrading the team and architecture of our June foundation model, whose imaging and 3D generation models are now industry-leading -- capabilities continue to improve, our investment in growing Tien Pao adoption and our efforts in developing get AI capabilities, we think we seen will gain further traction. Looking at our financial numbers for the third quarter. Total revenue was RMB 193 billion, up 15% year-on-year. Gross profit was RMB 109 billion, up 22% year-on-year. Non-IFRS operating profit was RMB 73 billion, up 18% year-on-year. and non-IFRS net profit attributable to equity holders was RMB 71 billion, up 18% year-on-year. Turning to our key services, core communication and social networks combined MAU of resin and WeChat grew year-on-year and quarter-on-quarter, RMB 1.4 billion. For digital content, T&D is paying -- ARPU solidifying its leadership position in music streaming. For games, Delta Force is now the top 3 game in China by gross receipts while Valorant successfully expand from PC to mobile. And in AI, we enhanced -- large-language models, compacts reasoning capabilities, especially in coding -- our full length image generation model is ranked first globally at 2 imaging models by aeroplane arena. And our 3D model is the top generative model of parting base. I will now hand over to Martin for business review.

Thank you, Pony, and good evening and good morning to everybody. For the third quarter of 2025, our total revenue was up 15% year-on-year. VAS represented 50% of our total revenue, within which social networks subsegment was 17%. Domestic game subsegment was 22% and international games was 11%. Marketing Services was 19% of total revenue and FinTech and Business Services was 30% of total revenue. For the quarter, our gross profit was up 22% year-on-year to RMB 109 billion. VAS gross profit increased 23% year-on-year to RMB 59 billion, representing 54% of our total gross profit. Marketing Services. Gross profit increased 29% year-on-year to RMB 21 billion, contributing 19% of total gross profit. And FinTech and Business Services gross profit increased 15% year-on-year to RMB 29 billion contributing 27% of total gross profit. Turning to business segments. Value-added services revenue was RMB 96 billion, up 16% year-on-year. Social networks revenue was up 5% year-on-year to RMB 32 billion, driven by increased revenue from video accounts, live streaming service, music subscriptions and mini games, platform service fees. Music subscription revenue increased 17% year-on-year, boosted by growth in ARPU and subscribers. Music subscribers grew 6% year-on-year to RMB 126 million. Long-form video subscription revenue decreased 3% year-on-year. ARPU was stable our video subscribers declined 2% year-on-year to RMB [ 114 ] million due to the delay of drama series, Lost Ambition. Following its release at the end of the quarter, finally, Lost Ambition ranked among the most viewed drama series in China year-to-date. Domestic games revenue grew by 15% year-on-year, primarily driven by Delta Force, Honor of Kings and Valorant. International games revenue increased by 43% year-on-year or 42% in constant currency, which is an unusually rapid rate due to recognizing revenue upfront on top of -- on copy sales of Dying Light, the beast and also due to the consolidation of recently acquired studios. Moving to communications and social networks. For Mini shops, we're systematically building a more vibrant transaction ecosystem, resulting in continued rapid growth in GDP. With enhanced mini shop merchandise recommendations and thus, sales conversions by leveraging foundation model capabilities to better understand users' interests based on their content consumption with innovation. We rolled out new features to enhance merchandise discovery invasion. For example, we added gifting capabilities in Weixin order and car page, leveraging Weixin social graph. We also upgraded the image search feature innovation, which users can use to scan objects, identify them and then shop for them in new shops. We also enhanced AI features in Weixin to provide new services to users and to promote greater usage Yambao with encouraging results. At Yambao feature in video accounts and official accounts comment boxes, summarizes content and also encourage users to ask follow-up questions and users like that feature a lot. We also enriched the Tencent News Feed in Weixin with Yambao generated content and facilitated user exploration of news-related topics, via the Yambao app. Now with that, I'll pass on to James.

Thank you, Martin. For domestic games, Honor of Kings gross receipts grew year-on-year, benefiting from collaborations with the China Literature IPs, Node of the Mysteries and Fox Spirit Matchmaker. The game achieved 139 million daily active users during its tenth anniversary event in October, which featured Hero and Minion outfits inspired by Bronze Age -- artifacts. Delta Force ranked among the top 3 games industry-wide by gross receipts in the quarter, achieving over 30 million daily active users in September including over 10 million daily active users on PC, driven by new season content, extensive first anniversary events and a globally sports tournament. We released Valorant Mobile on August 19 and it's become China's most successful mobile game launch year-to-date based on its first March DAU and gross receipts. Valorant PC continued to grow and achieved record high DAU and gross receipts in September, benefiting from esports themes weapon items. The mobile launch resulted in Valorant's combined monthly active users more than doubling from July's level to over 50 million in October. Among our international games for Clash Royale Supercell released new auto chest mode merged tactics and extended its Trophy Road achievement system to 10,000 trophies in higher player engagement monthly daily active users and gross receipts achieved all-time highs in September. Gross receipts increased more than 400% year-on-year during the third quarter. Gross receipts of Poppy Mobile also grew year-on-year in the third quarter, benefiting from ancient Egyptian themed outfits and innovative acute with emo sound effects in a 2-player glider and collaborations with transformers and Lotus cars. Our Polish subsidiary, TAC land released a new game in its Dying Light series called Dying Light: The Beast, which has achieved a very positive average user review score on steam and which contributed to our international game revenue growing unusually quickly during the quarter due to the upfront revenue recognition of copy sales. The Marketing Services revenue increased 21% year-on-year to RMB 36 billion, underpinned by ad spend growth from all major advertiser categories. Impressions grew year-on-year as we enhanced engagement and increased at load across video accounts, mini programs and -- Search. Average CPM increase year-on-year as we upgraded our at -- foundation model with more parameters and captured additional closed loop marketing demand. We introduced our automated ad campaign solution, AI marketing us through which advertisers can automate targeting, bidding and placement as well as optimize our creation improving their return on marketing investment. By inventory, video accounts and rich content and transaction system and its upgraded recommendation algorithms through stronger user engagement. Increases in DAU and time spent per user contributed to ad impression growth. advertisers increasingly adopted our marketing tools to drive traffic to their short videos, live streams in many shops. For many programs, increases in activations and time spent, attracted ad spend for many drama and mini games to promote their contact. And fruition search increases in commercial query volume and kick-through rates contributed to notable revenue growth. We improved the relevance of search ads by upgrading our large language model capabilities and optimize some sponsor results to better match user queries. Looking at FinTech and Business Services. Segment revenue was RMB 58 billion, up 10% year-on-year. FinTech services revenue grew by a high single-digit percentage, primarily driven by commercial payment services and consumer loan services. For commercial payment volume, the year-on-year growth rate was faster in the third quarter than the second quarter. online payment volume continued to grow robustly, while off-line payment volume improved, particularly in the retail and transportation categories. For consumer loan services, our nonperforming loan rates remained among the lowest in the industry and improved year-on-year, reflecting our prudent risk management practices. Turning to Business Services. Despite supply chain constraints on sourcing GPUs, revenue grew at a teens rate year-on-year in the third quarter, benefiting from higher cloud services revenues and increased technology service fees generated from rising mini shop e-commerce transaction volumes. Revenue from our cloud storage and data management products, namely Cloud Object Storage, TC House, and factor GB grew notably year-on-year due to increased demand, including from -- automotive and Internet companies. And for WeCom, we launched an AI summarization feature generate project recaps and provide advice at some users e-mails and conversations to hand some project collaboration efficiency. And I'll now pass to John for the financial review.

Thank you, James. For the third quarter of 2025, total revenue was RMB 192.9 billion, up 15% year-on-year. Gross profit was RMB 108.8 billion, up 22% year-on-year. other gains were RMB 0.5 billion compared with gains of RMB 3 billion in the same period last year, mainly due to lower subsidies and tax rebates as well as provisions paid for some receivables during the quarter. Operating profit was RMB 63.6 billion, up 19% year-on-year. Interest income was RMB 4.3 billion, up 7% year-on-year, driven by growth in cash reserves. Finance costs were RMB 3.8 billion, up 6% year-on-year due to forward movements and high interest expenses. Share of profit of associates and JV was RMB 7.8 billion with RMB 6 billion in the same quarter last year. On a non-IFRS basis, share profit was RMB 10.3 billion, up from RMB 8.5 billion in the same quarter last year, driven by associated company specific factors, including this growth and improved operational efficiency. Interest expense increased by 10% year-on-year to RMB 9.8 billion, mainly driven by operating profit growth. on IFRS basis. Diluted EPS was RMB 7.575 per up 19% year-on-year, outpacing non-IFRS debt group for growth due to reduced share count after our share buyback. Our weighted average number of shares, which we use for calculating quarterly diluted EPS decreased by 1% year-on-year. On non-IFRS financial figures, operating profit was RMB 72.6 billion, up 18% year-on-year. Net profit attributable to equity holders was RMB 7.6 billion, up 18% year-on-year. Moving on to gross margins. Overall gross margin was 56%, up 3 percentage points year-on-year by segment as gross margin of 61%, up 4 percentage points year-on-year, mainly driven by greater contributions from certain internally developed high-margin games. Marketing Services gross margin was 57%, up 4 percentage points year-on-year due to higher contributions from high-margin revenue streams, including video accounts and Weixin search. FinTech and Business Services gross volume was 50%, up 2 percentage points year-on-year due to improved revenue mix within fintech services. On third quarter operating expenses. Selling and marketing expenses were RMB 1.5 billion, up 22% year-on-year, reflecting increased promotional efforts to support the growth of AI native applications and games. R&D expenses rose by 28% year-on-year to RMB 22.8 billion, primarily due to higher staff costs and increased infrastructure investment to support our AI initiatives. G&A, excluding R&D expenses increased by 2% year-on-year to RMB 11.4 billion. At quarter end, we had approximately 11,000 employees, up 6% year-on-year or 3% Q-on-Q, primarily reflecting headcount conditions for both games and our technology platform, including AI-related accounts. Our third quarter non-IFRS operating margin was 38%, up 1 percentage point year-on-year. Operating CapEx was RMB 12 billion, down 18% year-on-year, primarily due to supply changes. Nonoperating CapEx was RMB 1 billion, down 59% year-on-year, reflecting higher base last year relate construction. Free cash flow was RMB [ 38.5 ] billion, largely stable year-on-year as operating cash flow growth was offset by higher CapEx payments. On a quarter-on-quarter basis, free cash flow was up 36% due to higher gains gross ratio. Net cash position was RMB [ 100.2 ] billion, up 37% Q-on-Q or 27.8% at RMB 27.8 billion, mainly driven by pre capital generation, partially offset by share repurchase as well RMB 19.2 billion.

[Operator Instructions]. The first question comes from Yao from Citi.

Good evening, management congrats on the strong results. My first question is about your gaming business. Your international gaming business growth rate has been accelerating for multiple quarters. So I just want to know what have you done right to achieve such good results? And how should we think about the growth trend going forward besides could you share more sorts on your international gaming credits? For example, will you continue investing high-quality overseas skim studios or bringing more developed games to global markets. And my second quick question is about your CapEx. And this quarter, CapEx was around RMB 13 billion, but the cash payment for CapEx was RMB 20 billion. So how should we interpret the difference between these 2 figures? And is there any new update to your full year CapEx guidance?

Ray, why don't I start with the questions around games and the growth rate of the international game business, the strategy for the international game business. So the growth rate that we reported for the quarter for the international game business is substantially faster than the underlying trend line, and that's because during the quarter, we had the benefit of consolidation of newly acquired or recently acquired game studios, as well as the benefit of the upfront revenue recognition on comp sales for the game Dying Light the beast. So going forward and looking into fourth quarter, you should expect the growth rate for the international games segment, subsegment to decelerate closer to the underlying trend line. In terms of the strategy for our international game business, yes, the drivers that you mentioned, we'll continue seeking to acquire game studios. We'll continue seeking to partner with overseas game studios and we'll continue seeking to bring more games that are made in China to a global audience as well.

In terms of CapEx, the difference timing gap between the accrual of server-related expenditure and cash payment, which can cause temporary mismatches between the two. In particular, the credit period for us to pay server suppliers is usually 60 days. In terms of the CapEx for 2025 to share with you in 2024, our total CapEx grew by 221% year-on-year was about 12% of the revenue. Previously, 2025, we guided total CapEx was as a percent of revenue to be at low teens for -- and the 2025 CapEx will be lower to our previous guided range, but the amount will be higher than that of 2024.

We will take the next question from Rishay Yap from Citigroup.

And also congrats on the solid results. First question, can management elaborate about your comment on the upgrading Hunyan team and also the Hunyan infrastructure. What should we be expecting to see from the upgraded version. And then does management have any updated view on how you Yambao might complement the AI capabilities that you have embedded into the wasting ecosystem the past few months? And then second question is on your advertising marketing service revenue. So that's that automated ad campaign solution, the AIM pass better serve the smaller advertiser should we expect the solution to drive broader adoption rate for advertisers and drive higher ROI spending that support potentially accelerations of the ad revenue growth in the coming quarters.

Yes. In terms of the Hanyan team and the Hanyan architecture, we are actually hiring more tonnage talent, especially in the research area in order to complement our existing strong engineering team and they are complementary to each other. And we have also been in proving the Hanyan overall architecture across different dimensions such as improving the hardware and software infrastructure in order to support better data preparation to support better pretraining of the model as well as to support reinforce learning across different knowledge domains at scale. So these are the improvements that we are making more specifically on the Hanyan team as well as the Hanyan architecture. Now in terms of how Yambao and Weixin complement each other. I would point to the fact that Weixin has actually introduced a number of AI features based on Yambao's capability. For example, in the prepared comments, we actually talked about the Yambao feature in video accounts and official accounts comment box which allows user to ask Yambao to summarize the content so that they can actually have very quick reference. And it actually encouraged a lot of interesting additional follow-up questions and follow-up comments. Based on the summary of what -- provided. And we also enriched the Tencent News Feed in Weixin with Yambao generated content and allowed a lot of users to use that as a way to explore more news content-related news content as well as ask questions on the news content. And we're actually adding more and we are planning to add more functionalities of Yambao intuition. So those functionalities actually, one, serve the Weixin users better; and two, actually help Yambao about to gain a larger audience and more and more of these audiences find Yambao capability. duration and eventually become a Yambao app user. So that's sort of complementary to each other.

And this year, in terms of the automated campaign solution really if the automated ad campaign solution benefits or the advertisers to deploy it by enabling them to automatically reach inventories as well as user profiles that are more performant than the inventories and user profiles they were manually targeting. You're right to say that small- and medium-sized businesses are the first -- or the most eager to adopt this kind of product because they have the least legacy process to replace, and that's what we're experiencing right now. But we're also seeing bigger advertisers adopting as to how it has the experience of meters advantage plus automated ad solution overseas.

We will take the next question from Gary Yu from Morgan Stanley.

My first question is a follow-up on Yambao and Weixin. It appears that both the Yambao adoption and also Agenetic AI function Weixin on foundation model capabilities. But yet CapEx spending remains slowed according to our latest comment. So is there a risk that the company is not aggressive enough such that the potential application market could be lost to other companies who have either better model capabilities or more aggressive CapEx spending. And my follow-up question is regarding some of the expense items, selling and marketing and. So when should we expect some of the internal AI adoption to benefit on cost efficiency in order to offset some of the investment that we have talked about on Yambao and game advertising.

Yes. In terms of Yambao adoption and also the CapEx spending at this point in time. We actually believe that there's no in sufficiency of GPUs for us at this moment. All our GPUs actually sufficient for our internal use. And there is some limiting factor for external cloud revenue. Now in terms of the Yambao capability and -- model capability. As I talked about to Alicia's question, we are actually making a lot of improvement in terms of our team, in terms of our talent recruitment and in terms of our -- Huanyan have infrastructure and your overall process of the research. And I would say we are actually happy with the progress we have made already. And if you wait a little bit for our mix model, you can see, meaning for improvement in terms of the Huanyan capability. And I believe with the new improvements that we have been making, we'll continue to pick up pace on the Huanyan capability. And at this point in time, we actually do not believe that there is a decisive better model in China as everybody is actually locked in the pretty close range and different models may be different maybe better in different use cases as well. So we don't believe we are really behind. And as we continue to improve our year capability. And we actually have been also seeing quite a good ramp in terms of Yambao engagement. So I think you see both the model capability as well as our AI products keep on improving. Now in terms of the expenses, I think that this point of time, the G&A expense, especially the R&D is actually some of that is related to our AI investment. So there's a natural ramp up because new invest more in AI. And if you look at the benefit AI, at this stage, a lot of the efficiency gains are more on the revenue side. and the gross profit side. So you see pretty good growth in those items. But in terms of the cost item, I would say we have already done a pretty big organizational optimization a few years back. And the organization that we have is actually an efficient and AI adoption actually allows our team to do more as well as instead of to reduce cost, which I think some other companies you are probably comparing with.

We will take the next question from Alex Yao from JPMorgan.

Congrats on a very, very strong quarter and also thank you for playing a very smooth and relaxing music before the call, I will insure I watch this TV drama after the earnings season. So 2 questions from my side. First one, you mentioned that Tencent is developing Agentic AI capabilities within region in the prepared remarks. Can you share your thoughts about how Agentic AI creates value to consumers in Weixin. I'm particularly interesting in your thoughts around Agentic-commerce. Second one is on CapEx. Did I hear John, right? The CapEx for 2025 will be lower than the previous guidance, but higher than the '24 actual CapEx spending, if I get that right, does it reflect a change of AI chip availability or a change of investment strategy or a change of your expectation of a future token consumption.

Yes. On your second question, the answer is you heard it right. It's not a reflection of our change in AI strategy. It's not a change in terms of expectation of future token consumption. It is indeed a change in terms of AI chip availability. Now in terms of the Agentic AO capabilities, right. I think the blue sky scenario is that eventually, Weixin will come up with an AI agent actually can help the user to essentially do a lot of tasks within AI within Weixin and leveraging AI, right? Because if you look at the ecosystem of Weixin, it has a very strong communications and social ecosystem and it has a lot of data that allows the agent to understand about the users, feeds as well as the intentions and interest. It has a very strong content ecosystem in the form of official accounts and video accounts. It has mini-program ecosystem, which essentially includes most of the use cases on Internet. It has a commerce ecosystem, which allows people to buy stuff and the payment ecosystem, which actually allows people to pay for it almost immediately. So that is almost ideal assistant for users and understands about the users' needs and can actually perform all the tasks within the ecosystem. So that's the blue sky scenario. Now I think, how do we get there, right? At this point in time, it's actually very early stage in terms of development. Weixin is doing a number of things. In parallel, for example, it's introducing Yambao capabilities into Weixin so that we can test out a lot of the AI features on a stand-alone basis with innovation. It's also enhancing search with AI so that we can serve the users search and information collecting as well as analysis needs more efficiently. We are also starting to work on vertical AGM capabilities. And that's something that we are working on. We have not launched it yet. But then very likely, we'll be sort of working on a functionality one by one. But eventually, we can actually sort of integrate all these giant capabilities as well as the AI features so that we can actually create this blue sky scenario of Weixin agent. I think in terms of Agentic commerce, I think there's the agent side and there's the commerce side. The commerce, we're actually making very good progress in terms of building up our e-commerce ecosystem and the mini shop is actually growing very nicely in terms of over time, as it continue to grow, right, and as we work on the vertical agents, at some point in time, we will have Agentic ecommerce as well. But that's a bit later in the process.

We will take the next question from the William Packer from Axon.

Congrats on the strong quarter. Firstly, Bloomberg have reported today that you've come to terms regarding a 15% commission with Apple within the WeChat ecosystem. Below their 30%, while you're probably prefer not to talk about the specifics in the press article. Could you help us think through the implications of your improving relationship with Apple and the impact on your business, particularly in mini games and domestic video games? And then secondly, as a follow-up, do you feel it was another very good quarter for marketing services with revenue growth accelerating. Could you help frame the growth outlook in the shorter term into 2026 and any new structural or cyclical factors to consider?

Well, in terms of Apple, right, what I could say is that, number one, we have a very good relationship with Apple, and we have sort of collaborated on a lot of different areas. And we have been in discussion with Apple to make the mini game ecosystem more vibrant. And we constructive with the progress that we've made so far. And I think at some point in time, there may be an official announcement. And I think everybody should wait for that.