Tencent Q2 Conference Call: Rapid Growth in Chinese AI Demand, Currently Negotiating iOS Mobile Game Revenue with Apple, Planning to Release "Fearless Contract" Mobile Version

After the Hong Kong stock market closed on Wednesday, Tencent Holdings released its latest financial report: in the second quarter, revenue reached RMB 161.12 billion, an 8% year-on-year increase; net profit increased by 82% to RMB 47.63 billion, and non-IFRS operating profit increased by 27%.

In the second quarter, Tencent's gaming business rebounded strongly, with domestic gaming business reversing its previous sluggish trend and international gaming business accelerating growth. Games like "Honor of Kings" and "Peacekeeper Elite" saw a recovery in revenue, while "Wild Rift" achieved a record high in average daily active users.

During a later conference call, Tencent mentioned that financial technology and gaming businesses will continue to drive profit growth.

Tencent expressed optimism about the high user retention rates of new games like "Dungeon & Fighter Mobile," seeing it as a key driver for sustained growth. "Code: S" has become China's largest PC game, and Tencent plans to expand it to mobile platforms. At the same time, Tencent is negotiating revenue sharing for iOS mini-games with Apple, seeking a fair and sustainable solution to enhance user experience and developer revenue. Currently, revenue from iOS mini-games is not generated through in-app purchases, and the negotiation outcome will impact future earnings.

Regarding cloud services, Tencent noted a rapid growth in customer demand for renting GPUs to meet their AI needs. Although the Chinese market is still relatively small compared to the U.S., demand is steadily increasing. Tencent believes that with more encouraging government policies and the innovative environment in the Chinese market, there will be greater development opportunities for AI-related businesses. The company will continue to increase AI investments, actively exploring the integration of AI technology into its games and digital content products to drive business growth.

While the financial technology business has been affected by weak consumer demand, Tencent stated that it will continue to adjust credit policies and optimize wealth management services to cope with market changes. The company holds an optimistic view on the stimulus consumption policies introduced by the government, expecting these policies to boost consumer confidence and further drive economic and business growth.

Below is the translation of the Q&A session during the conference call:

Q1. "Dungeon & Fighter Mobile" is not a typical tactical esports game like "Peacekeeper Elite." Considering the type and nature of this game, what are its strategic and sustainability prospects?

Tencent: Since the launch of "Dungeon & Fighter Mobile" (DNF Mobile), it has shown very good user retention capabilities. Of course, retention rates fluctuate over time, but in fact, the first 30 days of a game's lifecycle have always been a very good indicator of predicting which games will enjoy the longest lifespan. So, whether it's "League of Legends," "Teamfight Tactics," "Peacekeeper Elite," or "Honor of Kings," their outstanding performance in the first 30 days is not about the number of users downloading the game or the revenue they generate, but the high retention rates shown among those users who have installed and started playing the game. We have also seen very good retention rates, especially on the DNF mobile platformOf course, due to the unusually long development cycle of DNF mobile game, there is a very rich content pipeline ready for the next two to three years, which will be gradually released. In the next two to three years, we will also be working on the content pipeline for subsequent years. However, the game is in an unusual situation because of its exceptionally long development pipeline, there is now an exceptionally long post-release content pipeline ready to be released at any time. This is about the DNF mobile end.

Q2. Regarding the financial technology business: The growth rate of the financial technology business has been negatively affected by the sluggish consumer environment and consumers' high sensitivity to prices. Has Tencent observed any changes in consumer behavior in financial product transactions on the Tencent platform? If so, are these changes structural or cyclical?

Tencent: As for financial technology, if we analyze different businesses, the payment business is definitely closely related to consumer growth. As you can see in the official data, consumer growth in China is actually quite weak. We also clearly see this in our payment business, where we see transaction volume continuing to grow, while the transaction value on the commercial side continues to grow at a double-digit rate. However, on the other hand, the average transaction value has decreased, which is contrary to the consistently increasing average transaction value we have seen in the long term.

So we believe this is a clear sign that consumers are becoming more budget-conscious, especially in payments. In terms of credit, we do see that consumers actually want to borrow more money at this time, but incomes have actually decreased because we have actively controlled the amount we lend. We lend because we want to tighten credit at this time, in a macro environment and consumer weakness. On the other hand, wealth management has actually increased, as many consumers, in uncertain times, are not consuming but actually saving more.

These are the dynamics happening in different product areas of financial technology. We believe this is more cyclical, related to the consumption patterns of the overall market. Therefore, we see that the government has actually introduced very positive policies to encourage consumption. We believe that with the introduction of these policies, consumer sentiment and the economy will start to shift at some point. As demonstrated in wealth management services, it's not that people don't have money. People actually have money, but they choose to save rather than spend. If the government's policies can actually instill more confidence among consumers and begin to revitalize different parts of the economy, we believe that at some point, consumer sentiment will return, which will be good for our financial technology business.

Q3. Where does Tencent stand in the development cycle of AAA games? Some powerful IP generated by Chinese literature has played a significant role in driving the growth of PC games, long videos, and mobile games. "Honor of Kings" is clearly highly anticipated in terms of IP adoption, how is its progress? Is Tencent still gamifying other IP? How much revenue potential can be generated in digital content?

Tencent: We have discussed some other IP-based games, and we are excited about this as mentioned earlier in this conference call and in the fourth quarter results conference call. Many of our games have achieved great success on PC, such as "Fearless Alliance," which is currently the largest PC game in ChinaOf course, we want to expand it to the mobile end. You can see, if you are inclined, you know, some interesting IPs generated by Chinese literature, whether it makes sense for Tencent Comics and creators to generate IPs, you know, it is also the foundation of games. This is a response to the second question.

As for the first question, I am not sure if there is a cycle in the development of AAA games itself.