Tencent (0700.hk):
In 1Q24, the company achieved operating income of 159.5 billion yuan (yoy +6.3%), higher than the Bloomberg consensus estimate of 158.8 billion yuan; Non-GAAP net profit attributable to parent was $50.3 billion (YOY+55%), higher than the Bloomberg consensus estimate of $43.0 billion.
Financial Highlights:
1. Advertising revenue was 26.5 billion yuan (YOY+26%), higher than the Bloomberg consensus estimate of 24.8 billion yuan. Revenue growth was driven by growth in WeChat Channels, Mini Programs, Official Accounts and Soyisou, mainly driven by increased user engagement and the upgrading of AI-driven ad technology platforms, with advertising spending increasing in all major industries except the automotive industry, with significant growth in the gaming, internet services and consumer goods industries.
2. The revenue of value-added service business was 78.6 billion yuan (YOY-0.9%). Among them, the revenue of online games was 48.1 billion yuan, down 0.4% year-on-year, higher than the Bloomberg consensus estimate of 47.3 billion yuan. Social network revenue of RMB30.5 billion (YOY-2%) was in line with Bloomberg's consensus estimate of RMB30.5 billion, reflecting an increase in revenue from paid music and long-form video memberships, live streaming services on Channels and service fees for mini game platforms, while revenue from live streaming music and live game services declined.
3. The overall gross profit margin is 53% (YoY+8pct), and the high growth of gross profit margin is due to the rapid growth of high gross profit margin revenue sources, including WeChat, video number and Soyisou advertising revenue, mini game platform service fees, etc.
4. Marketing efforts were increased, sales expenses increased by 7% year-on-year, and the sales expense rate decreased by 33pct year-on-year; Administrative expenses increased by 0.7% year-on-year, and the administrative expense ratio decreased by 11pct year-on-year.
Financial combing
Operating income and profit
In 1Q24, the company achieved operating income of 159.5 billion yuan (yoy +6.3%), higher than the Bloomberg consensus estimate of 158.8 billion yuan; Non-GAAP net profit attributable to parent was $50.3 billion (YOY+55%), higher than the Bloomberg consensus estimate of $43.0 billion.
Chart: Changes in the company's total operating income (100 million yuan, the same below)
Source: Company announcement, Soochow Securities Research Institute
Chart: Changes in the company's net profit after deducting non-attributable to the parent company
Source: Company announcement, Soochow Securities Research Institute
4Q23 Business Focus:
【Online Game】
Online game revenue was 48.1 billion yuan, down 0.4% year-on-year, higher than the Bloomberg consensus estimate of 47.3 billion yuan.
- Domestic gaming market: Game revenue was RMB34.5 billion (YOY-2%, QOQ+148%), higher than the Bloomberg consensus estimate of RMB33.6 billion. The year-over-year revenue decline was due to revenue deferral, with lower contributions from Honor of Kings and Peace Elite, partially offset by contributions from recently launched games such as Valorant and Ark of Destiny, as well as Battle of the Golden Shovel.
- International game market: game revenue was 13.6 billion yuan (YOY+3%, QOQ-50%), basically in line with the Bloomberg consensus forecast of 13.6 billion yuan. This is due to the resurgence in popularity of supercell games (especially Brawl Stars) and the growth of PUBG MOBILE's users and turnover
Chart: Changes in the company's online game revenue (unit: 100 million yuan)
Source: Company announcement, Soochow Securities Research Institute
【Social Networks】
Social network revenue in 1Q24 was RMB30.5 billion (yoy-2%, qoq+8%), in line with Bloomberg's consensus estimate of RMB30.5 billion, reflecting an increase in revenue from paid music and long-form video memberships, short video live streaming services and mini game platforms, while revenue from music live streaming and game live streaming services declined.
- The number of subscription accounts for fee-based value-added services increased by 12% year-on-year to 260 million;
- the number of video service members was 116 million, a year-on-year increase of 8%;
- The number of paid music memberships was 114 million, an increase of 20% year-on-year.
- The total user time spent on Channels increased by more than 80% year-on-year.
- The total user usage time of Mini Programs increased by more than 20% year-on-year, of which the average daily usage of non-game Mini Programs achieved a double-digit percentage increase year-on-year, and the turnover of Mini Games increased by 30% year-on-year
【Advertisement】
1Q24 advertising revenue was 26.5 billion yuan (yoy +26%, qoq -11%), higher than the Bloomberg consensus estimate of 24.8 billion yuan. The revenue growth was driven by the growth of WeChat Channels, Mini Programs, Official Accounts and Soyisou, driven by increased user engagement and the upgrading of AI-driven ad technology platforms, with advertising spending increasing in all major industries except the automotive industry, with significant growth in the gaming, internet services and consumer goods industries.
Chart: Changes in the company's advertising revenue (100 million yuan)
Source: Company financial report, Soochow Securities Research Institute
【Fintech & Corporate Services】
Fintech and corporate services revenue in 1Q24 was $52.3 billion (yoy+7%, qoq +4%), below the Bloomberg consensus estimate of $55.1 billion. Fintech service revenue increased by a single-digit percentage year-on-year, mainly due to the slowdown in offline consumer spending growth and a decrease in cash withdrawal revenue, while wealth management service revenue grew strongly, and enterprise service business revenue achieved a year-on-year growth rate of more than 10 points, due to the increase in cloud service revenue and technical service fees for Channels merchants.
Chart: Changes in Fintech and Enterprise Service Revenue (100 million yuan)
1Q24 Operational Data:
- WeChat (including the overseas version of WeChat) consolidated MAU grew further to 1.359 billion (yoy+3%), higher than the Bloomberg consensus estimate of 1.345 billion;
- QQ mobile terminal MAU 553 million (yoy-7%), below the Bloomberg consensus estimate of 573 million.
- The number of registered accounts for fee-based value-added services was 260 million (YOY+12%), higher than the Bloomberg consensus estimate of 251 million.
Chart: User data (in millions)
Source: Company announcement, Soochow Securities Research Institute
Gross margin:
- The overall gross profit margin in 1Q24 was 52.58% (YoY+16pct, qoq+5pct), and the positive growth of gross profit margin was due to the rapid growth of high gross margin revenue sources, including WeChat, video account and Soyisou advertising revenue, mini game platform service fees, etc.
- The gross profit margin of value-added services in 1Q24 was 57% (YoY+5pct, qoq-6pct), which increased year-on-year due to the increase in subscription revenue, the increase in service fees of high-margin mini game platforms, and the decrease in segment content costs and operating costs.
- The gross profit margin of advertising business in 1Q24 was 55% (YoY+66pct, qoq-4pct). The year-on-year increase was mainly due to the growth of advertising revenue on WeChat Channels and Soyisou.
- The gross profit margin of financial technology and enterprise services in 1Q24 was 46% (YoY+42pct, qoq+4pct). The increase in distributed gross profit was due to the increase in the contribution of high-margin financial services and technical service fees from Channels merchants, the increase in the commercialization of WeCom and other enterprise service businesses, and the improved cost-effectiveness of cloud business.
Chart: Gross profit margin of the company as a whole and by business %
Source: Company announcement, Soochow Securities Research Institute
Operating expenses
- In 1Q24, sales expenses were 7.5 billion, an increase of 7% year-on-year, mainly due to the promotion and promotion of supporting the release of new content. The selling expense ratio remains the same.
- In 1Q24, administrative expenses were 24.8 billion, up 1% year-on-year and down 9% month-on-month; The administrative expense ratio decreased by 5pct year-on-year.
Chart: The company's selling expense ratio and administrative expense ratio
Source: Company announcement, Soochow Securities Research Institute
Minutes of the Earnings Meeting:
Ma Huateng spoke:
In the first quarter of 2024, some of our major games, both domestically and internationally, began to benefit from the team organization we had established, resulting in increased game growth and laying the foundation for our game revenue to return to growth in the coming quarters. We continue to nurture high-quality revenue streams, including Channels and Soyisou, Mini Games, Platform Service Fees, and E-commerce Technology Service Fees, contributing to our growth and operating profit growth that outpaced our revenue growth. We have executed on our commitment to return shareholder capital, ramped up our buyback program, and plan to repurchase more than HK$100 billion of shares in 2024, while increasing dividends, while investing in artificial intelligence, platform enhancements and high-production value content.
Looking at our financial data for the quarter, total revenue was RMB160 billion, up 6% year-over-year and 3% sequentially. Gross profit was RMB84 billion, up 23% year-on-year and 8% sequentially. Non-IFRS operating profit was RMB59 billion, up 30% year-on-year and 19% quarter-on-quarter. Non-IFRS net profit attributable to applicant holders was RMB50 billion, up 54% year-on-year and 18% quarter-on-quarter.
Turning to our key services, the total number of annual and quarterly active users for communication and social networking reached RMB136 million. In terms of digital content, we strengthened our leadership in long-form video and music streaming, with Tencent Video and TME subscribers increasing year-on-year. On the gaming side, we have actively pivoted to drive the initial recovery of our flagship games in China and international markets, while several games in our portfolio achieved record revenue during the quarter. In terms of cloud computing, international and domestic customers from the media, entertainment, and live streaming industries are increasingly using Tencent Cloud Media Services.
Our enterprise SaaS products, Tencent Docs and Tencent Meeting, have added functionality in terms of hybrid drive capabilities and increased adoption by enterprise customers.
Martin Lau发言：
In the first quarter of 2024, our total revenue increased by 6% year-over-year. Our overall gross profit growth, seen as a key indicator of our organic growth, increased 23% year-over-year, surpassing the first half of 2021, when our revenue growth rate was much higher.
This is driven by the rapid growth of high-margin revenue streams, including video account advertising, wealth management services, mini game platform service fees, and e-commerce technology service fees. Gross profit was also driven by increased gross profit due to cost efficiencies in our long-form video and cloud businesses.
Long-form video subscription revenue increased by 12% year-on-year, and the average number of daily paying users increased by 8% year-on-year to 116 million, benefiting from popular self-made dramas and animated series such as "Flowers". Music subscription revenue increased year-over-year, reflecting ARPU subscription growth, and Tencent Music Entertainment strengthened its partnership with Tencent Video and Video.
VALORANT, Battle of the Golden Shovel, and Lost Ark's revenue increases were offset by lower revenues for Honor of Kings and Peace Elite as Honor of Kings faces a tough comparison of the 2023 Chinese New Year, with Peace Elite's revenue for the quarter reflecting weak monetizable content releases in recent quarters. However, the total gross revenue of domestic games in the first quarter increased by 3% year-on-year, showing a general recovery trend. International gaming revenue grew 3% year-on-year to RMB14 billion, or remained stable under constant currency conditions. On the other hand, gross revenue increased 34% year-over-year, driven by contributions from PUBG: Battlegrounds and Supercell games. Revenue growth lags behind total turnover growth due to the long-term deferred revenue of Supercell's games.
Turning to communication and social networks, WeChat users are increasingly steadily consuming content provided by social graphs in chats and moments, as well as content from official and video accounts recommended by algorithms, and participating in various services provided by Mini Programs. This trend has benefited from our significant investment in artificial intelligence, and recommendations have gotten better over time. For official accounts, it enables creators to share text and images on a topic of their choice with interested followers, and it achieves healthy annual page view growth as AI-powered recommendation algorithms allow us to deliver targeted, high-quality content more efficiently.
Mini Programs have become an increasingly powerful platform for merchants and content providers to interact with users online and offline. The total time spent by users on Mini Programs increased by 20% year-over-year in the first quarter. In non-gaming use cases, daily activations grew by double digits year-over-year, especially in the production tools, foodservice, and transportation sectors. For mini games, revenue increased by 30%, especially for newly released games and games that have been released for more than three years.
Time spent by Channels users grew 80% year-over-year in Q1. Time spent on video accounts is now 2 times as much time spent on Moments. We've also strengthened the live streaming e-commerce ecosystem by diversifying product categories and enabling more content creators to monetize their e-commerce activities.
James Mitchell发言：
Next up is domestic games, and for our two flagship games, last quarter we highlighted the positive adjustments we've made, including timing and enhanced content design to spread out high-value item sales throughout the year. While their revenue declined in the first quarter, we could see these adjustments starting to pay off, with Honor of Kings and Peace Elite growing their total monthly revenue year-over-year in March. Several of our other games achieved notable milestones in Q1
The revenue from the sale of virtual items is increasing year on year. In the first quarter, our two flagship games, Honor of Kings and Peace Elite, saw year-over-year growth in total monthly revenue. Several of our other games achieved notable milestones in Q1.
Golden Shovel Shovel delivered a record DAU during the quarter and ranked third in total revenue across all mobile games in China, fueled by popular content updates such as customizable arenas. CrossFire: Shootout Kings Mobile achieved record paying subscribers and total revenue during the quarter, thanks to new PVE content and an enhanced rewards system. And Arena Breakout has reached new milestones in terms of DAU, paying subscribers, and total revenue as we release an expanded map, equipped with vehicles, and introduce armor and weapons inspired by ancient Chinese culture. We plan to release several high-value games this year, including Dungeons & Warriors Mobile next week, World of Taris, Need for Speed: Endless Racing, One Piece: Burning Will, and Delta.
Among our international games, PUBG Mobile saw double-digit percentage year-over-year growth in both DAU and total revenue in Q1, benefiting from popular new modes and featured events such as the Shadow Power Mode and the Golden Moon event. It is worth noting that PUBG Mobile is transforming from a gaming product to a gaming platform, and the amount of time users spend on new modes outside of the original Battle Royale is increasing, especially the extraction shooter mode Metro Royale. Smash Bros. Stars saw average DAU growth in the first quarter more than double the year-over-year period, and total revenue growth more than quadrupled year-over-year. The game ranked third in DAU worldwide (excluding China) in March.
Supercell has expanded the Brawl Stars development team to create a new 5-on-5 model, a simplified reward system, and successful community events. Warframe achieved record gross revenue in the first quarter, introducing a new, faster-moving Warframe – Gauss Prime. In terms of online advertising, our revenue for the quarter was RMB26.5 billion, up 26% year-over-year, benefiting from increased engagement and AI-powered ad targeting. With the exception of the automotive industry, ad spend increased year-over-year across all major categories, especially gaming, internet services, and consumer goods.
During the quarter, we upgraded our ad tech platform to help advertisers manage campaigns more effectively, and made generative AI ad creation tools available to all advertisers. These initiatives enable advertisers to create ads more efficiently and achieve more precise targeting. For WeChat, Channels' ad revenue grew 100% year-over-year, thanks to higher video views and click-through rates. Mini Programs' ad revenue grew 40% year-over-year, benefiting from the closed-loop effect of Mini Games, which allows Mini Game developers to both stimulate demand and act as substantial advertisers, as well as create supply, as Mini Games offer rewarded video ad inventory with high CPMs.
On content platforms, our long-form video ad revenue grew by double digits year-over-year as popular self-produced dramas attracted marketing budgets. In fintech and business services, revenue in this sector was RMB52 billion, up 7% year-on-year. Fintech services revenue growth slowed to single-digit year-over-year growth. On the payment side, the growth trend of commercial payments has slowed due to the slowdown in offline consumer spending. Compared to last year, withdrawal fee income is down as consumers are increasingly using WeChat balances and depositing those balances into money market funds instead of withdrawing the balance to a bank account, triggering withdrawal fee income. In terms of wealth management, revenue grew strongly year-on-year, with a significant increase in the number of users and the average amount of funds invested by users, mainly in low-risk money market funds. Shifting to Business Services, business services revenue grew by double digits year-over-year in the first quarter, benefiting from higher cloud services revenue and increased technical service fee contributions due to higher e-commerce transactions for video accounts. Business Services gross profit more than doubled year-over-year due to increased contributions from higher-margin revenue streams and efficiency gains.
Domestic and international customers, especially those from the media, entertainment, and live streaming industries, are increasingly adopting our integrated audio and video cloud solution, called Tencent Cloud Media Services, to achieve 50% year-over-year revenue growth. IDC recognized Tencent Cloud Media Service as a market leader in this area for the sixth consecutive year. In our enterprise SaaS offerings, merchants are increasingly willing to pay to use customer communication features for WeCom. As a result, WeCom's revenue tripled year-over-year.
For Tencent Meeting, we are driving adoption and upgrades for enterprise customers, and Tencent Meeting's revenue has doubled year-over-year. For Hunyuan, the main model has made significant progress as we scale with an expert hybrid approach and we are deploying the hybrid to more services. Today, we're announcing that we're launching a version of MixElement, which provides text-to-image generation AI, and is available as open source.
Q&A:
Q: The first question is related to online games. In the last quarter, I heard from the company that one of the key strategies was to revive the more popular games before, with Supercell games having a very strong performance and PUBG MOBILE having a good recovery. Can you tell us more about the future growth potential and growth plans for this business? In addition, there is another question about repurchase, in the last quarter, the company said that there will be a repurchase of 100 billion Hong Kong dollars for the whole year, so how to view the specific pace of repurchase?
A: First of all, answer the question of games. We've been revitalizing our key games, and it's a process that continues. We now hope to move forward gradually and learn more from this journey. Evergreen games have also been defined before, and evergreen games are indeed able to grow new shoots and maintain their vitality. In fact, we also have very good examples, for example, there were some games where the total turnover was multiplied by two, and the number of active users also increased by one or more. I think we need to take it a step further and think about how evergreen games are evolving, rather than stagnating. We want to see more about how these games perform now and how they will develop in the future, and Dream Star is a great example of this. We take into account the nature of the game itself and how the team is going to push the game further. Sometimes it's the game itself, sometimes it's the way of thinking, sometimes it's the person. We see positive results when we make these changes, and we want to be able to analyze the factors to keep up with the pace of change. For the games themselves, we need to consider what long-term games in this category are large-scale competitive multiplayer games, football, basketball games, and other games that have the potential to become evergreen. Other game categories will also consider what kind of development potential there is, so as to give new life to those evergreen games.
In terms of buybacks, yes, we have committed to buying back at least HK$100 billion of shares this year, and we also announced such a plan at the last earnings meeting. Buybacks have been moving smoothly, and at this point in time, I don't think buybacks are dependent on the share price. You can see that the stock price has indeed risen a lot, but it is a significant change compared with the 100 billion Hong Kong dollar repurchase plan we announced at that time. Even so, we are still methodically moving forward with our buyback program, our portfolio value has been improving, profits have increased significantly, and we are very optimistic about the long-term business outlook. Therefore, we can and confidently move forward with the buyback as planned.
Q: This question is related to advertising: we can see that the business momentum in this area is very good in the first quarter of 2024, how should we look at the market share growth of this business. And 618 is coming soon, at such an important event and important time node, what kind of vision does the company have for advertising, how to consider the whole situation in e-commerce live broadcast and other aspects, and increase advertising revenue.
A: The current economic situation is mixed, so the sentiment of advertisers on the advertising side is quite mixed. Overall, the advertising landscape is very challenging, sometimes seeing an acceleration and sometimes a slowdown. We expect advertising to continue to grow, but perhaps not as fast as in the first quarter of the year. This is more in line with our expectations for the overall advertising landscape. So far, the advertising segment is still in a good position to move forward, and we can consider what the current market share is. I will continue to see how advertising on the video account will further develop. We have always mentioned that the ad loading rate of Channels is still very low, and the ad loading rate of Channels is only 25% of that of competitors' short video platforms. We also take into account the AI in terms of ad tech and the associated stack. We believe that applying AI to advertising technology will definitely lead to better results. Historically, we, as a social media platform, have had a relatively low total click-through rate for ads. We started with a relatively low technology, and now we've made such metrics very high, so to speak, multiply by 2 or even multiply by 4, for example, doubling or tripling, which is a very good development trend for advertisers. We continue to grow at a respectable rate, and the market share of ad revenue going down this path will be very good. Regardless of the overall advertising environment, the advantages of the company are very obvious.
Q: Tencent's high-quality growth strategy has been very successful and the current growth momentum is good, where will earnings growth and profit trends go in the next few years, and when will the company need to look back and see where it needs to strengthen investment? In terms of content and games, what are the plans for the next few quarters?
A: The company will consider the strategy and philosophy in terms of user experience and product portfolio, and make investment decisions based on relevant analysis. We're now able to unlock more growth momentum, not because we're extracting more value from the platform, but because we've been making continuous investments.
I think it's important to have a strategy and a philosophy for user experience and product portfolio in the long run. High-quality growth is a keyword that we have repeatedly mentioned, and the reason why this keyword is becoming clearer and clearer is the result of our efforts to continue in this direction. We're actually looking at the low-quality products and services and adjusting the ones that distract us from our core focus.
In business, we really want to focus on the core platform, the core business, to achieve healthier and higher quality growth. If you think about Sousearch ads, as well as video number ads, the growth in these aspects is organic and healthy. We provide more value-added services in the payment business. With the passage of time, there can be better technical service fee income in e-commerce, which means that the company has come a long way. The company is also always thinking about new areas of investment that could serve as future growth drivers, which may involve new games, e-commerce and SaaS products.
Going forward, our gross profit should continue to benefit from the continued growth of these high-quality earners. In terms of sales and marketing, we have actually seen a 17% year-on-year increase in expenses. In 2024, the year-on-year growth of this part is relatively low, so we can actually make real-time adjustments to this part of the cost according to dynamic demand, and we also need to consider which products and services need to be invested in this area, and we will make the best decision in terms of the overall cost structure.
Q: We've seen some very popular games that have achieved good revenue, or good turnover. Some games, such as Peace Elite, have set all-time highs. I would like to ask, can this trend be sustained in the coming quarters? What are the benefits for revenue growth? As I mentioned that there are changes to the team, are they still ongoing? More broadly, there are no other adjustments to the gaming business? Are there any risks or uncertainties about the game that we need to be concerned about or worry about? WILL SEEING AN ARRANGEMENT OF APP STORE REVENUE SHARING IN TERMS OF DIGITAL CONTENT AND RELATED APPS SUPPORT VS CAPABILITIES TO REACH NEW LEVELS FURTHER?
A: We want to consider game revenue deferral, deferred revenue improvement, which is a positive leading indicator of revenue growth for our games. In the games business, we do not see any particular risks that have been specifically pointed out, and we believe that the structural changes we have made are very correct for the overall strategy of the games business, and we will continue to execute on such strategies.
In the game pipeline, we also have several new major game launches. ON THE ISSUE OF APP STORE REVENUE SHARE, I THINK IT'S DEFINITELY AT THE EXPENSE OF APP PROVIDERS, INCLUDING OUR COMPANY, WHETHER IT'S IN CHINA OR THE U.S.
Q: What kind of lessons can you learn from the past when releasing a new game, and what kind of game management strategies can you develop? In a nutshell, how should we think about the strategy for releasing new games in the future?
A: The entire gaming industry, no matter who wants to make a new game, will face a lot of challenges, because the previous evergreen games will get better and better over time. The new game has to compete not only with other games released during the same period, but also with previous games that have been very popular. This is true on PC, but it is also true on mobile. This is true in the domestic market, but also in the international market, where big evergreen games like Fortnite and Call of Duty can take a lot of time.
We will continue to raise the bar for new games that we bring to market, and we will focus on making new games that are more mainstream and popular. But the number of games doesn't have to be that much, we want to make sure that every new game that comes to market performs really well and can be popular for a long time. For content-driven games, we need to consider the preferences of the players and the experience of the players in the game.
The previous evergreen games have been further iterated and optimized in terms of content. We also look at player engagement metrics, or player retention metrics, which can tell us how well a game is performing, when to release a game, which games will be out of popularity after a year or two, and which games will become evergreens.
We saw that "Golden Shovel Battle" had a pretty solid start in the development of the game, and to this day, it is still the third largest mobile game in China, and the two mobile games ahead of it are also our company.
Q: With so many business segments seeing an increase in gross margin, how should we see the continued level of gross profit in the future?
A: There are many factors at play in gross profit, including the competitive environment, macroeconomics, seasonality, and more. It's important to take a long-term view and turn the tide in different market segments.
We're actually seeing some positive changes in advertising, finance, technology, and corporate services, a positive mix shift that allows us to move from low-margin revenue to high-margin revenue streams. In this segment, we should be able to achieve consistently high gross margins.
Q: What does management think about the fact that we see Meta improving their advance plus advertising tool based on their large language model? How will you respond? Friends like ByteDance and Alibaba are also deploying AI for the advertising business. How do you think AI will drive change in advertising market share in the long term?
A: For the advertising business, we are very confident in AI-powered tools. Friends have done a lot of work on AI, and hope that their advertising business can be blessed by AI. AI is really useful in streamlining and automating a lot of the advertising process.
Media companies can use AI to deliver richer experiences and better results to advertisers. E-commerce platform companies and search engine companies actually have some advantages of their own, but social media companies provide advertisers with better advertising experience and results. In this regard, compared with search engine companies and e-commerce platform companies, it actually has advantages. Social media platforms actually have more user engagement time and have higher user engagement. There are a lot of competitors who are clearly promoting AI aggressively, and I believe that this will benefit more stakeholders as well.
We spend a lot of time researching AI and seeing how the technologies and solutions it provides can help our business. For example, after the deployment of AI on the advertising side, there may be a structural change in the click-through rate, moving in a higher direction, and such a shift may be in the previous product inventory with a relatively low click-through rate, and AI empowerment can achieve very good results.
AI tools also allow advertisers to create better ads, such as creating ads specifically for search, which are essentially text-based, but there may be some issues that need to be addressed to create ads directly from social media. Social media creates ads that are essentially more inclined towards images and videos. This requires generative AI to play a bigger role.
Overall, we're reallocating ad spend to more of the business segments where users have been engaged for a long time and have a high level of engagement.
Q: How do you react to meta's recent rollout of meta AI to all of its products, resulting in a new product portfolio?
A: AI can help companies achieve better results, such as better distribution on advertising. We have a platform like WeChat, which has a huge number of users and high user engagement, and the introduction of AI can bring more possibilities. At the same time, there are many unknowns, various companies are still in the trial stage, there is no killer app yet, and we are actively testing and creating new products.
Q: The cloud business is growing very well, is there a trend of acceleration in revenue from enterprise services? The cloud is very sensitive to the macro environment, are today's customers more willing to go to the cloud?
A: Previously, many SaaS products were available for free. There are some customers in China who are starting to pay for it, but there are a lot of businesses that are reluctant to pay for software, which is very different from the U.S. market. We want to provide value-added services to more businesses, but we are still in the early validation stage.
Cloud business revenue is not particularly large at the moment, and development cannot be achieved overnight, and there is no significant acceleration in revenue yet. We need to do more case verification, continue to invest, and provide better services. Once customers start to feel ready to pay, we start to build monetization. We have established relationships with many enterprises to further sell cloud services and other enterprise services, hoping to become a leading service provider when the inflection point of the industry development arrives in the future.
Q: Wealth management and financial technology are closely related, how to further develop the profit margin of this part of the business?
A: Clients' funds are mainly used by us to invest in money market funds, and our clients' money does not need to be rushed to the bank account, and can be used directly for consumption, so we can get a larger share in the money market fund.
People are very familiar with the services we offer and are more likely to save than to spend. We will continue to build a payment platform, hoping that customers can use our platform to manage their finances with more confidence and have more confidence to manage their finances. We will cooperate with more fund companies to provide more diversified wealth management products.
At the same time, we will invest more in risk management and pay close attention to the safety of funds. We hope that this business can achieve healthy growth.
Q: Do you have more information about the innovation of advertising technology related to e-commerce and Channels?
A: The delivery of advertisements through AI has improved the pertinence of advertisements. It provides advertisers with better services to manage their targeting to improve efficiency. We provide more value in the delivery of ads, the creation of ads, and the innovation of ads, which contributes to the further growth of the advertising business.
Q: The value of the portfolio is very considerable, what is the distribution strategy and what is the future assessment?
A: We have been working closely with the target companies. There is a lot of investment-related data in the report that is growing rapidly. We see some challenges that need to be addressed, such as Pinduoduo is doing very well, and their earnings are directly reflected in their financial numbers.
The market has grown very fast over the past few years, and many companies are gradually building their business scale, and we have benefited a lot from investing in such companies. We want to build a better ecosystem on the core platform, and we have enough funds to support the development of the studio, to help us better internationalize and support evergreen games. Invested in Spotify and some companies in the payment side.
Our portfolio brings a lot of benefit to our shareholders and contributes a lot of shareholder value and free cash flow, which we may use for dividends and share buybacks. However, there will be no distribution of shares.
Q: What are the potential applications of the hybrid model in the game business?
A: The current best use case for large models is customer service, and such a model can be deployed to answer customer questions. With the development of more models over time, AI may be helpful in providing high-resolution video to enhance the gameplay experience and NPCs to enhance the interactive experience. Assistance in game content creation needs to wait for further technical iterations.
Q: Can you dissect the ratio of payments and non-payments and the medium- to long-term growth prospects for Fintech?
A: Offline consumption has slowed down a bit. There are very obvious headwinds at the macro level, and many industries are affected. The government has a lot of stimulus measures, and we believe that the headwinds will improve under these factors. Payments account for a large portion of fintech revenue, and the long-term growth of this segment may change further in the future. Withdrawal fee income is a one-time income, we are not very entangled in the change of this income, we hope that the money will stay in our system for a long time, to generate financial management fees, which is very important, is the long-term income model we pursue. Wealth management will continue to grow, and despite headwinds in the macro environment, we are very confident. Risk management is also very important.
Q: The growth of Soyisou is gratifying, what is the strategy for monetizing from user search activities?
A: The frequency of use and the number of searches are growing. There was no monetization activity in the previous search, and we did a good job from 0. From the ecological aspect, official accounts, mini programs, video accounts, etc. should be considered. All of these can promote the further growth of Soyisou's revenue.
Q: What kind of synergy is there between Channels and Moments? What is the monetization potential of Channels?
A: Short video has great potential in terms of monetization, and along the current development track, it is very different from traditional social networking in terms of advertising, and we need to analyze some characteristics specifically.
Q: What are the views of different management groups on the internal game development process and product pipeline?
A: There are challenges when it comes to gaming, but iteration and debugging are non-stop, and we want better engagement and better monetization. There is a well-established but not uniform internal development process, and a different management approach has been adopted from studios such as Disney and Fox to further improve efficiency. We're a global business, and with studios working together, we have different experiences and practices to share to keep the game business alive.
There is no perfect team, no perfect game, we continue to iterate, and we continue to keep moving forward in a transparent and honest process. We have blockbuster games and evergreen games, and we are constantly thinking about what the game itself means to players. We need to find out what factors motivate players to engage with the game. Our evergreen games are industry-leading in proportion. Diversity in the game development process is very important. We also often reflect on what is missing out on less successful games.