On August 14th, Tencent Holdings released its financial report for the second quarter of 2024. In Q2, Tencent's revenue reached 161.117 billion yuan, a year-on-year increase of 8%, and a sequential increase of 1%. The operating profit (Non-IFRS) was 58.443 billion yuan, a year-on-year increase of 27%, and a sequential decrease of 0.3%. In the first half of the year, Tencent's revenue was 320.618 billion yuan, a year-on-year increase of 7%, and the operating profit (Non-IFRS) was 117.062 billion yuan, a year-on-year increase of 29%.

In the second quarter, Tencent's two "basic plates," gaming and social, remained relatively stable, with Video Account remaining a highlight in the financial report. At the same time, there were challenges continuing from the first quarter, such as a decline in music and game live broadcasting revenue, and a slowdown in the growth rate of financial technology service revenue. How AI will become a driver of future performance is also a question that Tencent needs to answer. In addition, Tencent's management responded to the "tension" between the gaming industry and app stores.

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WeChat's monthly active accounts grew, while game live broadcasting revenue declined.

Among the main businesses, the growth in Tencent's online advertising revenue was the most significant in the second quarter. The value-added service revenue was 78.822 billion yuan, a year-on-year increase of 6%, online advertising revenue was 29.871 billion yuan, a year-on-year increase of 19%, and financial technology and enterprise service revenue was 50.44 billion yuan, a year-on-year increase of 4%. The revenue share of these three businesses was 49%, 19%, and 31%, respectively. Compared to the first quarter, the revenue share of online advertising in the second quarter increased by 2 percentage points, while the revenue share of financial technology and enterprise services decreased by 2 percentage points.

In the value-added service business, Tencent's domestic gaming market decreased by 2% year-on-year in the first quarter, and recovered growth in the second quarter. The international market gaming revenue continued the growth trend from the first quarter, with a year-on-year increase of 9% in the second quarter. The proportion of gaming in Tencent's revenue remains stable at around 30%.

Apart from gaming, WeChat remains Tencent's traffic engine. As of the end of June, the combined monthly active accounts of WeChat and WeChat were 1.371 billion, a year-on-year increase of 3%. The monthly active accounts of QQ mobile terminals were 571 million, maintaining stability year-on-year. Relying on the WeChat platform, Video Account has promoted the revenue of online advertising business, enterprise service business, and online social revenue in the value-added service business.

The financial report stated that in the second quarter, the user time spent on Video Account grew significantly year-on-year, and the company is systematically strengthening its transaction capabilities. In the second quarter, the revenue from social networking increased by 2% year-on-year to 30.3 billion yuan, benefiting from the growth in revenue from music and long video paid membership, small game platform service fees, and mobile game virtual item sales; the growth in online advertising business revenue was mainly driven by the increase in Video Account and long video revenue; the enterprise service business revenue had a growth rate of more than ten percentage points, benefiting from the growth in cloud service business revenue and Video Account merchant technical service fees.

At the same time, the growth of high gross margin revenue sources such as Video Account advertising revenue, small game platform service fees, and Video Account merchant technical service fees also promoted the gross profit in the second quarter, with a year-on-year increase of 21% to 85.9 billion yuan. Among them, the gross margin of network services was 56%, a year-on-year increase of 7 percentage points, and the gross margin of financial technology and enterprise services was 48%, a year-on-year increase of 10 percentage points. "The growth of e-commerce in this quarter is healthy, and there is still a lot of room for development in GMV compared to other platforms. Recently, we have repositioned the live broadcast business, not only based on Video Account, but also by combining different product segments to establish e-commerce business, hoping to build a systematic ecosystem, separate from pure live broadcast e-commerce. We aim to build an e-commerce ecosystem by pooling the strengths of various business segments of the company to achieve higher financial goals." Tencent's management stated during the financial report conference call.

As for the small games based on WeChat, Tencent's management revealed that in the second quarter, the turnover of small games increased by more than 30% year-on-year, with more than 240 small games having a total turnover exceeding 10 million yuan.

In addition to focusing on high gross margin businesses, some of Tencent's businesses have shown relatively weak performance. For example, in the first quarter, the revenue from music and game live broadcasting faced a decline, and this revenue continued to decline year-on-year in the second quarter. In addition, some internet service companies reduced their advertising budgets in the second quarter, leading to a year-on-year decline in mobile advertising alliance revenue. The growth rate of financial technology service revenue was in the single digits in the first quarter, and slowed down to the low single digits in the second quarter. Behind this, the growth rate of commercial payment revenue further slowed down, reflecting the slow growth in consumer spending. At the same time, due to the increase in risk control measures, the revenue from consumer loan services decreased.In the first half of the year, Tencent's share repurchase was also a highly watched event. According to the latest financial report, Tencent repurchased a total of 154.7 million shares in the first half of the year, with a total cost of about 52.3 billion Hong Kong dollars, and the repurchased shares have been canceled. Among them, 14.8 billion Hong Kong dollars were spent on repurchase in the first quarter, and 37.5 billion Hong Kong dollars were spent in the second quarter. At the end of June, the company's net cash was 71.757 billion yuan, a decrease of nearly 20 billion yuan compared to the end of March, mainly due to share repurchase and dividend payment.

On August 14, Tencent Holdings closed at 373.8 Hong Kong dollars per share, down 1.27%. In May of this year, Tencent's stock price returned to the 400 Hong Kong dollar mark during the trading day, setting a new high within a year, and then the stock price adjusted. As of August 14, Tencent's stock price has increased by 28.42% year-to-date.

How can AI be transformed into revenue?

The financial report states that in the future, Tencent will continue to invest in platforms and technologies including AI. In relation to AI, the financial report mainly mentions the basic model Tencent Hunyuan and AI assistant Yuanbao. Yuanbao was launched in May of this year, later than other manufacturers' AI assistants such as Wenxin Yiyan, Tongyi, Doubao, etc.

Whether such large model AI assistants facing the C-end can run a sustainable business model is still a question. According to a report released by QuestMobile in July, the compound growth rate of Tencent Yuanbao's monthly active user scale ranked first in June, with a monthly uninstallation rate of 53.3%. The current mainstream AIGC App's monthly per capita usage days are basically below 5 days, the activity rate is generally below 15%, and the uninstallation rate is high, with some uninstallation rates above 60%. The report stated that the situation of heat and usage mismatch reflects the mismatch between user scenario-based needs and the capabilities provided by the App.

Related to the cloud, in the financial report conference call, Tencent executives stated that the company is using high-performance computing infrastructure to compete for more AI-related budget investment from customers. In terms of computing chips and models, the company has launched more solutions. Regarding the situation of cloud business driven by AI, Tencent executives stated that there are many domestic customers who do not have their own resources to build AI infrastructure and have the demand for renting computing power, and the rental demand is increasing. In addition, the management stated that the company has recently applied AI to content push, achieving commercial value. Games are also applying AI, and AI can be used to build new game modes, allowing players to compete directly with the machine.

Since this year, many global technology giants have increased capital expenditure to invest in AI infrastructure, and the market is very concerned about whether capital expenditure can be converted into revenue in a timely manner. The financial report shows that Tencent's capital expenditure in the first half of this year, including the purchase of property, equipment and equipment, and construction projects, was 23.088 billion yuan, higher than the 8.364 billion yuan in the same period last year, and close to the 23.893 billion yuan for the whole year of last year. However, the financial report did not mention whether the capital expenditure was mainly used for AI. From 2019 to 2023, over the five years, Tencent's annual capital expenditure increased from 32.369 billion yuan in 2019 to 33.96 billion yuan in 2020, then decreased to 18.014 billion yuan in 2022, and showed a gradual recovery trend in 2023, and may continue to grow this year.

Tencent's management also responded to questions related to game channel revenue sharing in the financial report conference call. Recently, the news that has attracted much attention includes Tencent's "Dungeon and Fighter: Origin" being removed from some Android mobile phone app stores. In addition, there have been recent reports that Apple has increased its pressure on Tencent and ByteDance, and Apple hopes to "block" the payment loopholes of small games to prevent developers from leading users to external payment systems and avoiding Apple's commission. Regarding this news, both Apple and Tencent have not confirmed or provided more information to reporters.

Tencent's management stated that there is an inherent tension between the game industry or the digital content industry and app stores, and the root cause is that app stores charge about 30% commission, which the game industry believes is a heavy burden. App stores may think they provide a good ecosystem to support the development of the game industry, while the game industry believes that if the app store ecosystem is beneficial to digital content, it will also benefit other products. Over time, whether for regulatory or commercial reasons, the trend is that the commission ratio of app stores will change or decrease. For mobile games like "Dungeon and Fighter: Origin," considering the attractiveness of the IP, players will find their own download methods. The company decided to release this game on other channels instead of some Android channels, which is beneficial for the company's returns and provides a better user experience.

"I think there is some misunderstanding about the nature of the current situation, that is, we are not currently commercializing small games on iOS through in-app purchases (bypassing payments)." Tencent's management stated that if commercialization can be achieved, it will not only be in the interests of Tencent and Apple, but also in the interests of game developers and users. However, Tencent hopes to achieve this goal under economically sustainable and fair conditions. This discussion is ongoing, and the company hopes to achieve positive results, as this will be a win-win situation. However, if the discussion does not make progress, the current situation will continue. If the discussion makes progress, it will bring incremental revenue to Tencent, game developers, and possibly Apple, and will definitely bring a better experience to Apple users.