Accelerated AI Transformation: TENCENT Q1 Revenue Rises 9% YoY, Net Profit Surges 21%, Capital Expenditure Reaches RMB 37 Billion | Financial Report Insights

On May 13, TENCENT released its first-quarter results for the period ended March 31, 2026. During the period, the company achieved revenue of RMB 196.5 billion, a 9% year-on-year increase, slightly below the market expectation of RMB 199.4 billion. Net profit attributable to shareholders increased 21% year-on-year to RMB 58.1 billion, higher than the previously expected RMB 57.8 billion. Operating profit rose 17% year-on-year to RMB 67.4 billion, and the gross margin increased from 56% in the same period last year to 57%.

In the first quarter, TENCENT's free cash flow was RMB 56.7 billion, with net cash generated from operating activities reaching RMB 101.4 billion. Capital expenditure payments for the quarter amounted to RMB 37 billion, which the company stated were primarily used to support AI-related investments.

In the AI sector, the restructured AI R&D team released the Hy3 preview large language model at the end of the quarter. Since April 28, it has become one of the most widely used models on the OpenRouter platform in terms of token consumption. The daily active users of the efficiency AI agent product, WorkBuddy, rank among the top in domestic similar services. Management stated that if the relevant investments in new AI products (Hy, Yuanbao, CodeBuddy, WorkBuddy, and QClaw) were excluded, the year-on-year growth rate of non-IFRS operating profit would expand from 9% to 17%.

Regarding the gaming business, quarterly turnover for games such as "Honor of Kings," "Game for Peace," and "Delta Force" all hit record highs, while international game revenue maintained double-digit growth. Marketing services revenue increased 20% year-on-year against the backdrop of the traditional off-season during the Spring Festival, representing an acceleration from the previous quarter. The company continued its share repurchases, with net cash increasing by approximately RMB 40 billion quarter-on-quarter to RMB 146.9 billion at the end of the period.

Acceleration in Marketing Services, Steady Gaming Business

Total revenue for the quarter was RMB 196.5 billion, up 9% year-on-year and 1% quarter-on-quarter. The three major segments showed varied performance:

Value-added Services (accounting for 49% of total revenue) increased 4% year-on-year to RMB 96.1 billion. The growth was relatively moderate, mainly because the 2026 Spring Festival occurred later, deferring some game revenue recognition to the second quarter. Domestic game revenue increased 6% year-on-year to RMB 45.4 billion, but the actual year-on-year growth rate in turnover reached "teens percentage points," with significant contributions from "Honor of Kings," "Game for Peace," and the newly established evergreen game "Delta Force."

International game revenue increased 13% year-on-year to RMB 18.8 billion, with strong performances from "Clash Royale," "Wuthering Waves," and the PC version of "Valorant." Social network revenue decreased slightly by 2% to RMB 31.9 billion, also affected by the misalignment of the Spring Festival schedule.

Marketing Services (accounting for 19% of total revenue) performed most prominently, increasing 20% year-on-year to RMB 38.2 billion, accelerating from the 17% growth in the previous quarter. TENCENT's marketing AIM+ intelligent delivery matrix has empowered advertisers with approximately 30% of their ad spend, with particularly outstanding growth among advertisers in internet services, e-commerce, and gaming industries. Total user time spent on Video Accounts increased by over 20% year-on-year, and transaction volume on WeChat Shops also maintained rapid growth, continuously providing traffic support for the advertising ecosystem.

FinTech and Business Services (accounting for 31% of total revenue) increased 9% year-on-year to RMB 59.9 billion. Among these, business service revenue increased 20% year-on-year. Cloud services saw rising demand both domestically and internationally, driven by AI-related needs and a more favorable pricing environment. The growth rate of commercial payment volume accelerated compared to the previous quarter, with an increase in the average transaction amount in categories such as catering and retail making significant contributions.

Comprehensive Improvement Across All Profit Levels

In terms of profitability, the company's gross profit increased 11% year-on-year to RMB 111.3 billion, outpacing revenue growth, mainly benefiting from the increased contribution of self-developed game revenue and the scale effects of cloud services. By segment, the gross margin for value-added services increased from 60% to 63%, and the gross margin for FinTech and Business Services rose from 50% to 52%. The gross margin for marketing services slightly declined from 56% to 55% due to increased depreciation of AI equipment and operating costs.

Operating profit increased 17% year-on-year to RMB 67.4 billion; non-IFRS operating profit increased 9% year-on-year to RMB 75.6 billion. The difference between the two mainly stems from investments in AI products—management disclosed that if the impact of new AI products were excluded, the year-on-year growth rate of non-IFRS operating profit could reach 17%.

Regarding expenses, selling and marketing expenses increased significantly by 44% year-on-year to RMB 11.3 billion, primarily used for the promotion of AI-native applications and new games. General and administrative expenses remained basically flat year-on-year at RMB 33.9 billion. The increase in R&D investment (R&D expenditure for this quarter was approximately RMB 22.5 billion, up 19% year-on-year) was offset by a decrease in share-based compensation—last year's same period included one-time equity incentive expenses of approximately RMB 4 billion related to the restructuring of overseas subsidiaries.

Ultimately, net profit attributable to shareholders increased 21% year-on-year to RMB 58.1 billion. On a non-IFRS basis, net profit attributable to shareholders increased 11% year-on-year to RMB 67.9 billion. Basic earnings per share were RMB 6.431, an increase of 22% year-on-year.

Accelerated AI Investment, Significant Jump in Net Cash

Net cash inflow from operating activities in this quarter was RMB 101.4 billion, a substantial year-on-year increase (RMB 76.9 billion in the same period last year); free cash flow was RMB 56.7 billion. Capital expenditure recorded RMB 31.9 billion, a significant increase from RMB 27.5 billion in the same period last year, primarily used for AI infrastructure construction (including servers, data centers, etc.).

Cash and cash equivalents at the end of the period reached RMB 217.8 billion, a substantial increase from RMB 141.0 billion at the beginning of the period. After deducting borrowings and notes payable, net cash was RMB 146.9 billion, an increase of nearly RMB 40 billion quarter-on-quarter. During the quarter, the company spent approximately HKD 7.6 billion (approximately RMB 7.9 billion) to repurchase and cancel 12.65 million shares, demonstrating management's commitment to long-term shareholder returns.

AI Strategy: Moving from Investment Phase to Implementation Phase

TENCENT demonstrated a multi-front simultaneous advancement in the AI sector this quarter.

At the foundational model level, Hy3 preview became the model with the highest token consumption on the OpenRouter platform on April 28. Management believes it holds a leading position among models of similar parameter scale in reasoning, agent, and coding capabilities.

At the application level, WorkBuddy has joined the ranks of the most popular efficiency AI agents in China by daily active users. TENCENT Cloud's efficiency AI agent solutions have also achieved rapid growth and healthy retention rates. In the advertising business, AI-driven ad recommendation models have covered approximately 30% of the ad spend in marketing AIM+, gaining widespread application in emerging scenarios such as mini-games, short dramas, and WeChat Shops.

Current AI-related investments are mainly reflected in increased equipment depreciation, operating costs, and R&D expenses. However, the company emphasizes that the ample cash flow generated by core businesses is sufficient to support continuous investment and provide a rich scenario foundation for the implementation of AI applications.