腾讯0700.HK

Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2025 Q4 results announcement webinar. I'm Wendy Huang from Tencent IR team. At this time, all participants are in a listen-only mode. After the management's presentation, there will be a question and answer session. For participants who dial in by phone, if you wish to ask a question, please press five on your telephone to raise your hand. If you are accessing from the Tencent Meeting or VooV Meeting application, please click the Raise Hand button at the bottom left. Please be advised that today's webinar 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 in the non-IFRS measures, please refer to our disclosure documents on the IR section of our websites. Now, let me introduce the management team on the webinar tonight. Our chairman and CEO, Pony Ma, will kick off with a short overview. President Martin Lau will provide a strategy review. Chief Strategy Officer James Mitchell will provide a business review. Chief Financial Officer John Lo will conclude the financial discussion before we open the floor for questions. I will now pass it to Pony.

Thank you, Wendy. Good evening. Thank you everyone for joining us. In 2025, we achieved high quality growth through our evergreen products and services, increasingly supported by applying AI capabilities. We expanded our evergreen game portfolio with the breakout success of Delta Force and reinforced our existing evergreen games such as Honor of Kings and Peacekeeper Elite. AI contributes meaningfully to game content development, user engagement, and marketing efficiency. Video Accounts total time spent increased over 20% on upgraded recommendation algorithms and enriched content ecosystem. Our marketing services revenue growth outperforms the industry, benefiting from our upgraded ad tech model and newly introduced automatic campaign solution, AiM Plus. For fintech, we sustained healthy revenue growth by deepening cooperation with the licensed financial institutions while maintaining a prudent risk management.

In cloud, we achieved profit at scale due to increased enterprise demand for our industry-leading PaaS and SaaS products and supply chain optimization. Internationally, our international games business surpassed $10 billion in annual revenue for the first time, driven by sustained growth of evergreen games and rapid expansion of content-driven games. Our cloud revenue accelerated in international markets as we expand partnership with key clients and drove a higher adoption of our flagship cloud product. The robust operating leverage and cash flow generated by our core businesses enable us to step up investment in AI. During the year, we upgrade our team with top-tier AI talent and build processes for improving foundation model intelligence in a systematic way. We began deploying new AI capabilities in services, including Yuanbao and Weixin and cloud-type product.

Looking at our financial numbers for the Q4 , total revenue was RMB 94 billion, up 13% year-on-year. Gross profit was RMB 8 billion, up 19% year-on-year. Non-IFRS operating profit was RMB 70 billion, up 17% year-on-year. Non-IFRS net profit attributable to equity holders was RMB 65 billion, up 17% year-on-year. Now I will hand over to Martin Lau.

Thank you, Pony, and good evening and good morning to everybody on the call. I will share with you in this coming section on how we think about AI as a transformational force. Starting with how resilient our existing businesses are in the context of AI, moving on to how we are deploying AI in our existing businesses to strengthen them. Discussing brand-new products and opportunities made possible by AI, and how we are investing in order to capture them. First of all, I would like to talk about our key franchises are very resilient in the age of AI. As we know, AI will affect every part of the technology industry, but some products and services are inherently more resilient than others.

We believe that some of the characteristics of resilience would include network effects arising from consumer to consumer to content creator, and consumer to business interactions in descending order of strength. That's number one. Number two, deep supply chain integration linking the worlds of bits with the world of atoms. Number three, stringent regulatory and licensing requirements. Number four, scarce or unique resources, including physical and intellectual properties. Number five, tick rates that are low compared to value provided or cost of switching. And number six, private data that is closed and interactive in nature. Using these criteria, we look across our major existing businesses. Our conclusion, which is supported by usage trends, is that each one of them has got a high degree of inherent resistance.

In particular, for our communication services, including Weixin, QQ, and Tencent Meeting, people use them to connect and interact with other people, largely their families, friends, and colleagues, and business partners. We believe this need for human interaction, together with the network effects and closed nature of the data arising from these interactions, have resulted in communication services being extremely sticky in the face of competing non-AI services in the past and will continue to be resilient versus AI-based services in the future. Moving on to our games. They are also very resilient as our multiplayer games, especially PVP games, also enjoy network effects. Similar to sports, they are team-based in nature, and players play with and against other players.

Just as people prefer to participate themselves or watch the teams they support compete in sports rather than watching AI sports, game players continue to enjoy the interaction with other humans that our games provide. Our games also cultivate strong IPs. While AI will enable more games to be made faster, the game industry is already in a position of excess supply, with 200,000 new games on mobile and 18,000 new games released on Steam every year. The limiting factor is that new games need to be high quality and more innovative than the best existing games, which in turn requires human creativity on top of cutting-edge technology. Game is a natural beneficiary of AI proliferation, also when people have more time at hand.

Our fintech services are also resilient as they depend on difficult to secure and retain licenses which are limited in nature and also set the boundary on how innovations can be introduced in an industry. We have also invested decades building a payment network of difficult to replicate rails into partner banks, merchants, and connecting them with more than 1 billion consumers, which brings its own network effects. Our mobile payment take rates are already among the lowest in the world, which we believe makes competing with us on price highly uneconomical. We want to demonstrate that we're a leader in strengthening our core businesses with AI.

When generative AI first emerged, we prioritized leveraging AI to reinforce our core businesses on the view that if we can strengthen them, we will be in a better position to invest in new products made possible by AI. We believe that in each of our core businesses, we are now at the forefront of their respective industries in China and often globally in utilizing AI with positive initial results demonstrated by user engagement and revenue trends. In games, we are deploying generative AI to accelerate in-game content production, enabling us to produce more content within our big games. We're using generative AI to facilitate new user acquisition and existing user retention through measures such as targeted ads and personalized daily highlight reels. We're enriching the core gameplay experience with AI features such as virtual teammates in PVP games and realistic non-player characters in PVE games.

These initiatives are one reason why Tencent's games are more and more evergreen, and our revenue growth of 22% in 2025 outperformed the 7% growth of the global games industry. For marketing services, we scaled up our advertising foundation model to provide more relevant ads to more targeted users, boosting ad conversions for advertisers and providing better user experiences at the same time. We provide generative AI-powered ad creative solutions, enabling advertisers to create more ads which are more relevant to smaller set of users and more efficiently. We introduced our automated ad campaign solution, AiM Plus, under which advertisers can automate targeting, bidding, and placement, improving their return on marketing investments and increasing their budget allocation to us. These initiatives contributed substantially to Tencent's marketing services revenue growth of 19% in 2025, outstripping the overall China ad industry growth of 14%.

For Video Accounts, deploying a longer sequence AI model which captures more of a user's signals to enhance content recommendation is boosting user growth, engagement, and content distribution. Total time spent on Video Accounts increased more than 20% in 2025, and Video Accounts is now the second-largest short video service by DAU in China. For digital contents, we utilize AI in content production, improving production workflow efficiency, and providing visually compelling special effects. AI also helps in content distribution through more intelligent content recommendations across music, videos, and literature. We're using AI in enterprise software to provide features such as AI agents that can take notes on and summarize concurrent meetings for users, and AI agents that generate intelligent summaries of customer service history for merchants. Our enterprise software products, WeCom and Tencent Meeting, are leaders in their categories in China in terms of usage and revenue.

For Fintech, we utilize lightweight AI models to enhance credit scoring processes and facilitate fraud detection, contributing to us sustaining better than industry non-performing loan rates. Now that our core businesses are benefiting operationally and financially from integrating AI, we believe we are in a position of strength to add development of new AI products to our priorities. At the foundation model layer, we see substantial opportunities from combining a strong foundation model with configuration for core user cases such as chatbot, coding, multimodal, and agentic applications. Although we're not the first mover in large language models, having already revamped our team, improved our data quality, and rebuilt our AI infrastructure for pre-training and reinforcement learning, we're now iterating more intelligent models at a faster pace. HunYuan 3.0 is in internal testing and currently represents a bigger step in capabilities versus HunYuan 2.0 than HunYuan 2.0 was versus HunYuan 1.0.

For multimodal capabilities, our 3D text-to-image and world models are early category leaders and will increasingly benefit from leveraging our proprietary data and abundant use cases. Some observers in Chinese tech are single-mindedly focused on AI chatbots as the only means for bringing AI to users. We believe this mindset is overly simplistic because AI can help people in a multitude of ways beyond powering an information advice app. We believe that AI chatbot applications are largely competing with search applications rather than with every other application. For Yuanbao, our own AI chatbot app, we're focused on finding product market fit and use cases which belong in chatbot AI app. We're rapidly iterating Yuanbao to enhance its user experience by providing better search integration, improved speech recognition, easier access to multimodal capabilities, and exploration around group chat, which we believe will increase usage and user retention of the app.

In the coming months, as we deploy HunYuan 3.0 in Yuanbao, we believe the core user experience will step up further. In addition, we have also integrated AI to enhance a range of existing user experiences within Weixin, including content consumption, information retrieval, and merchandise recommendation and customer service. We're building AI agents which autonomously interact on behalf of users within Weixin functionalities, especially Mini Programs. The excitement around OpenClaw illustrates that people recognize AI can unlock computer use capabilities to improve their daily lives but also illustrate the risks around unleashing unsupervised AI. We want AI agents in Weixin to deliver AI productivity that's beneficial to the general public as well as early adopters, and which will boost ecosystem activity and naturally generate revenue.

AI agents are currently powered by a multiplicity of foundation models, and we expect that users at the application level will continue to have access to a range of models. However, improving the performance of HunYuan will enable us to offer new, unique to Weixin agentic capabilities. The Weixin and HunYuan teams will work increasingly closely together going forward. Speaking of OpenClaw, we have introduced a number of AI tools for enhancing productivity, including WorkBuddy, QClaw, and Tencent Cloud Lighthouse. We provide downloadable skills to easily put these tools to use from our SkillHub. OpenClaw is upgrading AI from thinking to doing via autonomous workflows and continuous task execution.

Users control this new generation of AI tools through command line interfaces in their existing communication apps, which generally means Weixin and QQ in China, as it's the most efficient for users to interact with digital agents in a place and format where they are already interacting with human contacts. The new AI products that I described above require substantial and increasing investment, which we believe will generate significant return for us over the long run. Our spending on our two biggest new AI products, HunYuan and Yuanbao, was CNY 7 billion in the Q4 of 2025 and CNY 18 billion for the full year. These figures are only for HunYuan and Yuanbao and exclude AI initiatives supporting our existing products and services, as well as exclude costs arising from providing GPUs to external customers via Tencent Cloud.

We expect to more than double these investments in HunYuan, Yuanbao, and other new AI products in 2026, which we intend to fund from increasing earnings from our core businesses. In this transformational period, we are breaking out our investment in new AI products because we view these strategic investment conceptually similar to investment in an affiliate or to CapEx. These are upfront investments required to build the necessary foundation to unlock new value as opposed to ongoing operating expenses. As such, we believe the impact of these investments should be viewed separately from the profits generated by our existing businesses. Over time, we're confident that monetization will follow usage for these new AI products. Lastly, I would like to present a case study on Tencent Cloud as the latest example on how we develop our services into market leaders with economic returns over time.

That would follow games, payments, and long-form video. We expect it will be the same for our new AI products. Tencent Cloud was a relative late entrant in cloud services. However, we committed to a patient and long-term investment strategy, believing that it had scale from the start due to Tencent itself being the biggest single end user for a range of technology infrastructure in China, and that it could provide differentiated services arising from Tencent's unique insights, ecosystem, and capabilities. For example, we believe that we were the first cloud service provider in China to fully recognize the stepped-up capabilities of AMD's recent generations of CPUs, becoming AMD's largest partner in the country, and that our cloud video streaming service is the industry leader in terms of streaming quality.

After a period where Tencent Cloud prioritized the revenue growth somewhat misguided by other industry participants, in 2022, we aggressively restructured Tencent Cloud to focus on high-quality services rather than chasing high revenue but low-value-added activities such as reselling and customizing projects. This pivot cost us several quarters of revenue growth, but it enabled Tencent Cloud to achieve operating profit breakeven in 2024, up from significant losses in prior years. During 2025, although Tencent Cloud continued to face revenue headwinds due to limited availability of GPU for external customers as we prioritize our internal needs, it grew revenue and sharply improved earnings, achieving CNY 5 billion adjusted operating profit. In recent months, we're seeing a better pricing environment, especially for memory and CPU, which, along with robust AI demand and overseas expansion, allowing Tencent Cloud to grow revenue at a faster rate.

Moving through the year, we have ordered a substantially higher volume of compute, which should also facilitate revenue growth. Overall, we think Tencent Cloud is becoming another example of how Tencent competes on our own terms and pace and how our incubation investment cycle works. We view the initial losses in Tencent Cloud as a fixed sum of cash investment necessary to incubate a successful new business, but ultimately generating good economic returns. We view the initial investment in new AI products, code-named MAP, in the same way. With that, let me pass to James.

Thank you, Martin. For the Q4 of 2025, our total revenue was up 13% year-on-year. VAS represented 47% of our revenue, within which the social network sub-segment was 16%, domestic games 20%, and international games 11%. Marketing services was 21%, and fintech and business services 31%. Our gross profit was up 19% year-on-year to CNY 108 billion . VAS gross profit increased 21%, marketing services increased 22%, and fintech and business services increased 17%. Turning to business segments, value-added service revenue was CNY 90 billion , up 14% year-on-year. Our social network revenue grew 3% year-on-year to CNY 31 billion , driven by increased revenue from Video Accounts, live streaming, and from music subscriptions.

Music subscription revenue increased 13% year-on-year on ARPU and subscriber growth. Long-form video subscription revenue increased 1% year-on-year as video subscribers grew slightly year-on-year, benefiting from the drama series Love's Ambition, the variety show Natural High: Season 3, and the animated series Renegade Immortal. Each of these ranked first by video views in their respective genres across all video platforms in China for the quarter. Domestic games revenue grew 15% year-on-year, primarily driven by Delta Force, the Valorant franchise, and Wuthering Waves. International games revenue increased 32% year-on-year, primarily driven by Supercell's titles, PUBG Mobile, and Wuthering Waves.

Moving to communications and social networks, we strengthened Weixin's commerce experience by upgrading features for users and tools for merchants in the Mini Shops. The upgraded e-commerce gateway page allows users to check their shopping carts, see what friends are recommending, and receive notifications from their favorite shops, and generated substantial GMV during the quarter. Through the new Likes for Discounts feature, users can discover products liked by friends and receive and share discounts via the e-commerce gateway page, chats, and moments. For Mini Programs, total user time spent increased over 20% year-on-year, driven by workplace productivity tools, mini-games, and novels. We added Tencent CodeBuddy to our developer toolkit, enabling developers to create mini-programs using natural language input, and we provided developers of AI native mini-programs with free compute resources. For domestic games, Delta Force sustained among the top three games in the industry in the quarter.

In February 2026, the game surpassed 50 million peak daily active users and achieved lifetime high monthly gross receipts. Delta Force leverages AI coding for development efficiency and deploys AI-powered companions to enhance user engagement. Valorant PC increased its gross receipts more than 30% year on year and achieved record high average DAU in the quarter, benefiting from the Flowers Meets Magic Mystbloom skins, limited time modes and eSports events. Valorant Mobile was the most successful new mobile game industry-wide by gross receipts in 2025, bringing a PC-quality shooting experience and a distinctive art style that appeals to younger players. The game achieved lifetime high gross receipts in February as we released outfits to integrate traditional Chinese aesthetics with contemporary design. In January, we launched Assault Fire: Future, a multi-platform FPS game built on Unreal Engine, which has attracted several million DAUs.

Among our international games, Clash Royale ranks the third largest mobile game industry-wide by DAU in the Q4 . Its average DAU and gross receipts more than tripled year-on-year, reaching lifetime highs. The game launched tenth anniversary events in March, including a limited time PVP mode with random modifiers powering up players' cards, providing a more dynamic competitive experience. Wuthering Waves won the Players' Voice Award at The Game Awards ceremony in 2025. In the Q4 , the game posted rapid year-on-year growth in gross receipts and DAU, driven by a new storyline, urban ruins maps, and new characters. Warframe launched a major update, The Old Peace, featuring a new storyline, two new game modes, a new Warframe Uriel, and its average DAU and gross receipts reached lifetime highs in December 2025. For marketing services, revenue increased 17% year-on-year to CNY 41 billion .

We experienced rapid growth from the internet services and local services categories, partially offset by slower growth from the e-commerce category due to platforms temporarily shifting budget from marketing to subsidies, and also from the financial services category due to the impact of policy changes affecting online lending during the quarter. Growth drivers included improved ad targeting, expanding our closed loop marketing services, and tailoring ad formats for specific advertiser use cases, such as ads that are playable previews of the mini games being advertised. Entering 2026, we have deepened collaboration with e-commerce platforms, facilitating their merchants advertising within Tencent, and we've increased the inventory for rewarded video ads and Video Accounts, which have contributed to faster year-on-year marketing services revenue growth in the Q1 to date versus in the Q4 of last year.

At a product level, Video Accounts total time spent increased due to upgrades to the content recommendation algorithm, enabling faster growth in ad impressions while our ad load remained lower than peers. Better conversion rates contributed to more marketing spending for Mini Shops merchants. For Mini Programs, consumers engaging more with mini-games and mini-dramas attracted more marketing spend from the mini-game and mini-drama studios. Weixin Search overall query volume grew at a rapid rate due to AI enhancements to search results, driving growth in commercial query volume, while search pricing also increased. On fintech and business services, segment revenue was CNY 61 billion, up 8%. We grew fintech services revenue by a single-digit percentage YoY, and fintech gross profit at a higher rate driven by wealth management and commercial payment services.

Commercial payment volume sustained positive year-on-year growth, supported by a higher number of transactions and a narrowed decline in value per transaction. For wealth management, which is the second biggest contributor to fintech revenue, average assets per user and number of users each increased year-on-year. Turning to business services, revenue in the Q4 grew 22% year-on-year, driven by higher cloud services revenue and increased technology service fees generated from higher Mini Shops e-commerce transaction volumes. Our cloud services revenue accelerated its year-on-year growth rate due to increased demand and a better pricing environment amid tight supply of memory and CPU industry-wide.

Revenue from our cloud media services grew notably as short video platforms and AI video generation services are increasingly using our media processing solutions for streaming video and audio from processing in the cloud to playback on device, reflecting our industry leading streaming quality and our competitive pricing. Now I'll pass to John.

Thank you, James. Hello, everyone. For quarter four 2025, total revenue was CNY 194.4 billion, up 13% year-on-year. Gross profit was CNY 108.3 billion, up 19% year-on-year. Other gains were CNY 1.3 billion compared with other gains of CNY 2.5 billion in the same period last year due to lower subsidies and tax rebates. Operating profit was CNY 60.3 billion, up 17% year-on-year. Interest income was CNY 4.8 billion, up 22% year-on-year, driven in part by growth in cash reserves. Finance costs were CNY 3.6 billion compared with CNY 2.5 billion in the same quarter last year, primarily due to ForEx loss this quarter versus ForEx gains in the same quarter last year.

Share of profit of associates and joint venture was CNY 6.8 billion compared with CNY 9.3 billion in the same quarter last year. On a non-IFRS basis, share of profit was CNY 9.1 billion, up from CNY 7.7 billion in the same quarter last year, with the increase from improved performance of certain domestic associates due to operational efficiencies and business growth. Income tax expense increased by 7% year-on-year to CNY 12.5 billion. On a non-IFRS basis, diluted EPS was CNY 6.96, up 18% year-on-year, outpacing non-IFRS net profit growth due to reduced share count after our share buybacks. On Q4 non-IFRS financial figures, operating profit was CNY 69.5 billion, up 17% year-on-year. Net profit attributable to equity holders was CNY 64.7 billion, up 17% year-on-year. Moving on to gross margin for the Q4 .

Overall gross margin was 56%, up 3 percentage points year-on-year by segment. VAS gross margin was 60%, up 4 percentage points year-on-year, primarily driven by greater contributions from internally developed high-margin games. Marketing services gross margin was 60%, up 2 percentage points year-on-year as AI-powered marketing services drove strong growth in high-margin revenue streams, particularly Video Accounts and Weixin Search. Fintech and business services gross margin was 51%, up 4 percentage points year-on-year, benefiting from growing scale of cloud services and improved revenue mix in Fintech services alongside enhanced cost efficiency. On Q4 operating expenses, selling and marketing expenses were CNY 13 billion, up 26% year-on-year, reflecting increased promotional efforts to support the growth of our AI-native application and games.

R&D expenses grows by 20% year-over-year to CNY 23.8 billion, primarily due to higher staff costs and increased depreciation expenses driven by our AI investments. G&A, excluding R&D expenses, increased by 8% year-over-year to CNY 12.5 billion due to higher staff costs. At quarter end, we had approximately 116,000 employees, up 5% year-over-year, or 1% quarter-over-quarter, primarily reflected headcount additions to gains in our technology platform, including AI-related headcount. Our Q4 non-IFRS operating margin was 36%, up 1 percentage point year-over-year. Q4 operating CapEx was CNY 16.9 billion, increasing 41% quarter-over-quarter as we accelerated investment in server infrastructure.

Year-on-year operating CapEx decreased by 51%, reflecting concentrated CapEx spending in Q4 2024, leading to a high base effect. Non-operating CapEx was CNY 2.7 billion, up 60% year-on-year due to higher facility-related investments. Free cash flow was CNY 34 billion, increasing over 6x year-on-year, reflecting stronger operating cash flow generation this quarter, as well as lower CapEx spending versus Q4 2024, as I mentioned earlier. On a quarter-on-quarter basis, free cash flow decreased by 42% due to seasonally lower game gross receipts and seasonal settlement of student accounts payable.

Net cash position was CNY 107.1 billion, up 5% quarter-on-quarter or CNY 4.7 billion, mainly driven by free cash flow generation, partially offset by share repurchase of CNY 19.6 billion and net cash flows of CNY 6.9 billion, primarily relating to investment in other corporations. For the full year of 2025, we repurchased 153 million shares with a total consideration of HKD 80 billion. Our weighted average number of shares for calculating 2025 diluted EPS decreased by 2% year-on-year. Given we see high return opportunities from investing in AI, we will likely buy back lower value of our shares versus 2025 to fund investment in AI while increasing our dividends.

Subject to the shareholders' approval at the upcoming AGM, we are proposing an annual dividend of HKD 5.3 per share, reflecting 18% year-on-year increase. This dividend will be payable to shareholders on the first of June 2026. Thank you.

Thank you, John. We shall now open the floor for questions. If you are dialing in by phone, please press five to raise a question, then press six to unmute yourself. If you are accessing from the Tencent Meeting or Zoom meeting application, please click the Raise Hand button at the bottom. We will take one question from each analyst in the interest of time. The first question comes from Kenneth Fong from UBS.

Kenneth, why don't I start and then, you know, Martin may complement. Yeah, I think it's implicit in our opening remarks that, you know, it is possible that our revenue would grow faster than our profit in 2026 due to the stepped up investment in new AI products. You know, if that's what eventuates, we're very comfortable with that outcome because we can see that these new AI products, you know, represent an opportunity for us to expand our footprint, you know, deliver new value to users. We can also see, you know, from the user enthusiasm around some of these products, that you know that there's a very good opportunity for product market fit.

In terms of your second question around resource constraints on you know, talent and GPUs, as far as talent is concerned, you know, we've already been staffing up quite aggressively some very excellent quality talent from you know, the world and from China for the HunYuan team. We'll continue to make selective hires, but we actually feel we have you know, really a state-of-the-art team AI talent team already in place.

You know, we've been able to put it in place, not only through compensation as an incentive, but also through creating the right culture for the team, through allocating you know, the roles of the team versus each other and the role of the team within the rest of Tencent appropriately, through you know, the best leaders of the team in turn attracting the best joiners to the team, in terms of provisioning the team with ample compute, and in terms of being able to offer the team you know, use cases for the AI products they create that are somewhat differentiated and unique to Tencent.

That's on, you know, talent where, you know, I think that, we were facing a situation of scarcity and, you know, we're now, you know, much more comfortable with, the setup, although we'll continue to recruit selectively. In terms of GPU constraints then, we've been quite actively provisioning, more compute, and that will be coming on stream, progressively, and increasingly quickly through this year, especially the H2 of the year. You know, that additional compute comes from leasing capacity. It comes from us purchasing, higher-end imported GPUs which are now becoming available again, and it comes from us purchasing, the increasing quantity of, domestically China-designed, GPUs.

In terms of utilizing those, the compute for different use cases, you know, the priority right now is, you know, HunYuan and our new AI products more generally. You know, the core products are inherently distributed in nature and, you know, they can themselves source compute, you know, from local devices, from, you know, multiple clouds, you know, from Tencent Cloud. They're sort of somewhat agnostic in terms of the sourcing of compute. We are, you know, focusing our compute on HunYuan as the core foundation model and then on the new AI products.

Thank you, James. Reminder that each analyst please only ask one question. We can take your follow-up later if we have more time. Next question comes from Robin Zhu from Bernstein.

Okay. Well, you know, I think from a ROI perspective, we have already seen very good ROIs when we apply AI into our existing businesses, right? You know, so if you look at the breakdown of our financials, you know, if you look at the financials on a combined basis and then sort of we break it out and saying, oh, you know, these are the financials with existing businesses plus the investment into AI for supporting these businesses, right? You know, the growth is actually quite strong and if you exclude the investment in new AI products, then you know, the operating leverage is clearly there. I think that's sort of level number one, right? You know, and then level number two is an investment into new AI products.

On that front, I think, you know, we would be seeing new investments first, right? You know, there's not that much of a revenue, especially in the context of China.

Unlike in the U.S. where you can actually get consumers to pay subscriptions and you can get companies to pay for, you know, coding agents at a very high cost. In China, those are not sort of that available. I think these will present themselves as investments upfront.

Over time, we believe, you know, we'll be able to generate revenue from these new AI products and they would generate, you know, very attractive return for us over time. You know, we quote Tencent Cloud as an example in which we initially actually have to invest in the business in terms of incurring losses, but over time, right, you know, it actually turns into a profitable business. We believe AI will be like that. There will be a timing difference in terms of the investment and then the return for these new AI products.

In terms of building versus renting, I think, you know, if we can buy, right, you know, I think, you know, given how strong our balance sheet is, we would actually prefer to buy because then we don't necessarily need to pay the additional margin for leasing. I think, you know, given, you know, the constraints in the supply chain and all the different regulations, right, sometimes we just have to rent. I think, you know, we would do that if we need to secure compute. What was the last question? Last bit of the question. Did I answer all your questions?

I think at this point in time, it's actually very dynamic, right? You know, you're in a fast-moving market. I think, you know, it's very difficult for someone to say sort of, you know, oh, you know, there will be one layer more important than the others, right? You know, I think, you know, we have the resources, we have the people, we have the team to actually invest in all these layers.

Especially the teams are actually very different. You know, actually we have to build the team from scratch.

Once again. Now it's actually sort of, as James said, you know, we have a very strong core team, and we have a very strong capability to keep attracting top talent. Then if you start getting into the application layer, right? You know, it's actually, you know, playing into our strength, right? Because then suddenly you don't even need to have that model capability, but, you know, it actually plays into our strength in terms of product capability and orchestration capability connection, which is our strength. Ecosystem is actually our strength. All the infrastructure services like security is also something that we have invested for a very long time. The ability to go across devices such as mobile and PC, right? You know, it's actually our core strength, too, right?

I think you know that actually is really moving into our territory of strength. We would actually have to and also invest in all these capabilities. You know, the dynamics of the market will play out itself, and hopefully we'll become best of breed in all layers.

Thank you. We will take the next one question from Ronald Keung from Goldman Sachs.

I think OpenClaw is actually a very exciting concept, right? You know, it actually sort of presents a decentralized model or a decentralized regime for, you know, how AI works in this world. You know, so there's some parallel to sort of how the internet evolves, right? You know, in the very beginning when internet first appears, right, you know, there seems to be sort of, you know, there is one entry point, which is the browser. You know, there is sort of one distribution point, which is the search engine. Over time, you know, it, you know, there are different services which evolve, right? You know, and then when mobile internet comes, suddenly you see sort of a multitude of applications coming up, right?

You know, and within the applications, there are applications which are completely mobile native, mobile centric, mobile first. There are also mobile applications that were the PC internet champions who actually migrate onto the mobile internet world, right? You know, and I think, you know, this is, you know, how we felt the OpenClaw is, right? You know, for some time, right, AI seems to be sort of, you know, everybody is trying to fight to become the AI, AGI hegemon or monopoly. You know, there seems to be a point in it which like people said, "Oh, if there's one model which is AGI, then, you know, it would rule over everybody," right? You know, the reality is it's not, right?

You know, you have multiple models becoming, you know, very strong and, you know, they specialize in different kinds of activities, right? One in chatbot, the other one in coding, and the other one in multimodal. You also have open source, which are, you know, pretty good. You have a lot of other models which sort of, you know, fast followers too. Then there was a time in which, you know, in the two C world, there seems to be.

The chatbot being sort of, you know, the single entry point. Now with Claw, you can see, you know, it opens up a completely decentralized regime where, you know, many companies can have their own Claw, and the Claw can be using all kinds of different models, right? You know, and it's supported by, you know, the infrastructure of cloud, and each one of the Claw has to figure out its unique value proposition, right, you know, to win the heart of the users. The Claws also sort of, you know, make use of not just the cloud, not just its unique model, it also sort of make use of the tools available to them on the devices and utilizes the file system, right? You know, it becomes a much more exciting decentralized world.

We felt, you know, there's a lot of opportunities for us, right, you know, in terms of building products to cater to people's needs. So that's why there's QClaw, there's also WorkBuddy, and in the future, I think a lot of existing apps will try to come up with their own claws, right, you know, and their own agentic capabilities. Different models will also sort of, you know, try to compete to win the hearts of these claws. So it becomes a much more exciting world and decentralized world for everybody to have some participation. You know, we just need to, as I said, right, build expertise in the different layers.

You know, in the model layer, in the product layer, in the infrastructure layer, and, you know, each layer would have to sort of, you know, have their own specific value proposition to win, you know, its own usage.

Thank you, Martin. We will take the next question from Ellie Jiang from Macquarie.

I think that in terms of you know Tencent's unique value proposition or what we can bring to users in the Claw era you know that there's a few sort of inherent you know attributes that we possess which we think are very suitable for you know the agents the deployment of Claws. You know Martin's touched on them. You know one of those attributes is that we're a company whose you know capabilities span across you know PC mobile cloud. We're a company whose capabilities span across applications and the worldwide web you know just as the agentic claws you know span the devices and span the sort of domains.

We're a company that, you know, operates a number of centralized apps, but also hosts some extremely, you know, decentralized yet vibrant ecosystems, most notably the Mini Programs ecosystem. One framework you could think about is that, you know, in prior years, the arrival of the mobile internet really sort of turbocharged the you know application experience vis-à-vis the you know the more centralized app experience vis-à-vis the more decentralized worldwide web experience. Now with these agentic capabilities and OpenClaw, then there's an opportunity for, you know, decentralized experiences such as Mini Programs to be turbocharged and, you know, themselves develop far more powerful capabilities than they enjoyed in the past.

You know, that's why we think there's inherently a sort of natural fit between our capabilities and our interests and the deployment of you know these agents or OpenClaws. You know, that's why you know we're seeing one reason why we're seeing you know consumers and prosumers enthusiastically adopting our own agents and OpenClaw services. In terms of the part of your question about preventing other large language models diluting our model's value, I may not sort of understand the premise correctly, but you know, I don't see that happening. You know, if you use these OpenClaws, then you know you go into them, and you have a choice.

Do you want to use, you know, model A, which is, you know, very high performance and high price per token, or, you know, model Z that's medium performance and very low price per token, or models, you know, B through Y in the middle? You know, that's part of the appeal of OpenClaw. You know, HunYuan is, you know, one of those models that is available. You know, we believe with the capabilities of the HunYuan team now in place, that going forward, HunYuan will get better faster, and therefore consumers will naturally increasingly opt to use HunYuan. I don't think it will be a monopoly situation.

You know, the clouds that are successful will be clouds that continue to allow consumers and prosumers to, you know, make their own choice along the price-performance curve. You know, different models will sit at different places on the price-performance curve. You know, we want to, you know, be one of those, but we don't intend to be the only one of those.

Thank you. We will take the next question from Alicia Yap from Citi.

Yeah, Alicia Yap, I think your point is a reasonable one that you know that there is already computer-aided design capabilities and you know one would naturally expect you know AI to supplement and eventually supercharge those abilities. You know that's important in industrial design, it's important in architecture. It's actually very important and increasingly important in video games. You know we believe we can see that we're in a somewhat uniquely good position to you know provide the data to train the models to in turn supply you know those 3D tools because of the breadth and depth of 3D graphical assets within our video games.

You know, it's ultimately a sort of a big niche, and you know, it's one that you know, we are well positioned to address. I wouldn't say it's you know, the biggest opportunity ahead of us. You know, there's many larger, more immediate opportunities.

Thank you. We will take the next question from John Choi from Daiwa.

Yeah. Thank you for the question, John. I don't know if any of you attended the Game Developers Conference last week, but it is the sort of premier event each year for game developers. You know, as you would expect, there was a number of well-attended presentations about the use of AI within creating games. You know, I think a couple of broad observations. One is that you know, those presentations were pretty exclusively focused on how to use AI to you know, upgrade content within existing games to accelerate the content creation, improve the content creation within games.

You know that there is not yet the capability to create games, you know, completely from scratch using AI for a number of reasons that we can get into. You know, the second observation is that many of the, you know, best-attended presentations were by our colleagues within Tencent's Interactive Entertainment Group. You know, they talked about how, you know, AI can be deployed in games, you know, for graphics. AI can be deployed in games for gameplay. AI can be deployed in games for, you know, user companionship and so forth. You know, we believe that, you know, we're at the forefront of the industry in this regard.

You know, the feedback from many of the people, the developers who attended the Game Developers Conference was consistent with that belief. In terms of the H2 of your question about whether AI will result in you know, a flood of new games and therefore, you know, elevate the importance of publishing versus development, then you know, the sad reality of the game industry is that it's perpetually in an oversupply situation. You know, every year, as Martin mentioned, there's 200,000 new games on mobile. There's 18,000 new games on Steam. So you know, whether that number goes from 200,000 to 2 million to 2 billion to 2 trillion, you know, has sort of diminishing incremental impact.

You know, the key is really, you know, making and then, you know, extending and rendering evergreen the best games. You know, to, in order to do that, you need, you know, the best human beings, you know, supplemented by the best technology. You know, we think that, therefore, the value balance between development and publishing, you know, will remain where it is today and the critical success factors, it will continue to favor the best developers in the industry. Thank you.

Just to add a couple more points, right? Number one, you know, when you talk about sort of AI disruption for games, right? You know, that basically sort of, you know, imply it's actually bad for the gaming industry. But I think sort of gaming is actually one of the industries that would benefit from AI, right? You know, because when AI proliferates, I think people would have more free time at their hands, and the demand side would actually increase significantly for t he gaming industry, which I think, you know, is a rare certainty in the sort of face of AI proliferation. Number two is, you know, the availability of great tools, you know, would be available to new developers, but it also sort of will be available to very organized teams and highly talented developers, you know, that are already running big evergreen games, right?

You know, I would say sort of, you know, when a tool is actually available, it's gonna overly benefit the people who have the resources and who have already got all the gamers around the platform and, you know, they can actually better use these tools to, you know, increase the amount of production and make, you know, games even more evergreen, right? I think that's an advantage for players who have evergreen games and are also extremely fast and agile in embracing technology. Finally, right, you know, when there's a multitude of innovations, right?

A lot of times I think, you know, what we saw in the game industry is like, you know, an idea comes around and then it's not perfect and it gets sort of iterated and polished over time. I think the process would actually, again, be speeding up if a lot of these games who have a lot of users look at these innovations and can iterate faster and incorporate these new experiences into their existing games and make games essentially into platforms. I think, you know, that's a unique opportunity that we would see over time as well.

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

Thank you for the question, Alex. You know, first of all, I'd start by saying that, you know, clearly there is a surge in demand for sort of AI compute, but it's not only for AI compute. You know, when people utilize the agentic tools that we've been discussing, they're using them and they create software. You know, that software, you know, then primarily, it needs to be executed. When it executes, most of it is not executing on a GPU. It's executing on CPU, and then as it executes, it creates, you know, memory demands. It's not just, you know, GPU, DRAM, HBM where we're seeing demand picking up. It's also, you know, CPU. It's, you know, regular RAM. It's SSD. It's hard disk drive.

It's across the board, there's a pickup in demand. You know, in terms of how the industry, you know, addresses at an industry level responds with pricing, then, you know, for years the industry has suffered because the cloud services providers in China were operating at very low margins. One of the reasons they operated at very low margins was because, you know, if there was a new entrant or if the customers wanted to source infrastructure directly, they were able to telephone the supplier and, you know, order the infrastructure that they wanted from the supplier of, you know, CPU or GPU or DRAM. You know, that's no longer the case. You know, now, the supply is booked out months, quarters, in some cases, years in advance.

You know, the supplier is prioritizing the biggest, most regular customers, which are the hyperscalers such as ourselves. Therefore, you know, the smaller cloud providers no longer have certainty that they can source supply, and they need to come to the hyperscalers. You know, the hyperscalers have been operating at low margins and so, you know, when the demand picks up, then, you know, we almost sort of as an industry have no choice but to pass through higher prices. You have seen a number of price increases in China cloud in the last 24 hours as a result.

In terms of, you know, how we sort of value capture, you know, in this dynamic environment, then, you know, one broad principle is, you know, we seek to deliver, you know, more value through, you know, enrichment. Enrichment means that, you know, at a minimum, if you have, you know, compute, you can rent it out bare metal and you get a certain low price and low margin. You know, preferably you rent it out.

You subdivide it and virtualize it into tokens, and then you get a higher price and higher margin per unit of compute. Ideally, you bundle it into a platform as a service or software as a service. Then you can get, you know, the best pricing and the best margins. That's part of the journey that we've been on, and that's part of, you know, how Tencent Cloud has moved from a very substantial losses four years ago to pretty substantial profits last year. We'll continue on that journey of, you know, moving from bare metal to token to platformization and to software. Thank you.

Thank you.

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

Yeah, I think that's a very good question. I think if you are playing just one game, then basically it's hard to sort of, you know, catch up on one game, right? You know, if you view AI as sort of, you know, a multiple of different games, then, you know, there are new opportunities, new frontier that's opened all the time, right? You know, I think, you know, It's already happening, right? You know, if you look at the model, right? You know, in the very beginning, everybody felt, you know, it's the chatbot, and then coding comes around, and then multimodal come around.

You know, in the and then sort of, you know, when everybody felt, oh, that's pretty much it, and then suddenly sort of, you know, OpenClaw came around, which basically further decentralized the whole AI landscape. You know, in the future, we actually felt, oh, you know, there will be just like apps, right? You know, there will be a lot of different permutations of how AI will be packaged, from model to the product to agent, and existing services will be having sort of, you know, different agentic capabilities. There will be new agentic capability coming around, you know, on mobile, on PC. You know, it's very early, you know, early days in the whole AI development world.

That's why, you know, just within a short period of time, you can see sort of, you know, there are already a lot of proliferations and there'll be more and more coming. That's why it's actually important to have some fundamental capability, right? You know, we do have a lot of them at the application layer, you know, be it Weixin and be it our ecosystem of having communication and presence on PC and mobile and a lot of infrastructural capability, including security and cloud and payment. You know, all these elements can be packaged together, you know, in the new race of AI. It's not sort of, you know, one race. It's actually sort of, you know, a world of many, many races.

I think, you know, that will, you know, increasingly manifest itself and as a result, there will be a lot of opportunities for different players to come up and innovate from behind. I'm not sort of, you know, very worried about, you know, being late, but I'd be worried about, you know, if we're not innovating fast enough, right? You know, which I think, you know, we as we restructure our HunYuan team and as we started to invigorate all our product teams to yeah start innovating with products and I think, you know, that's actually happening in a very exciting way for us.

Thank you. We will take the next question from William Packer from BNP. William, your line is open.

Hi, William. You know, happily in this case, the press reports were based on, you know, the sort of objective reality of an Apple, you know, formal announcement. This is not a, you know, a speculative hypothetical. It's a, you know, actual development that takes effect in the last few days.

In terms of the flow through then, you know, there should be a good flow through. You know, when we have you know, game development partners and we're the publisher of those games, which is now quite a small minority of our game revenue, then in the overwhelming majority of cases, the revenue share is calculated based on the

Gross revenue, not on the revenue net of the Apple take. That, you know, flows through to us. You know, if by taxes you're referring to us paying a teens percentage corporate income tax on, you know, this incremental profit stream, then I suppose that's correct, dependent on the extent to which we, you know, reinvest this incremental profit stream into new AI products. I think that you talked about one part of the Apple announcement, which is the sort of quantitative part that, you know, moves from 30%-25% and 15%-12%.

You know, for us, actually the more important aspect of the Apple announcement looking forward was that you know, Apple stated that it would effectively offer developers in China equivalence with whatever the lower rate is that you know, developers elsewhere in the world are paying to App Store. Our view is that with the evolving industry trends, it's a sort of matter of time for the tolls the App Store collects to normalize downward in different parts of the world. With this declaration, Apple has stated that as the take rates move down in different parts of the world, so the take rates will move down in China in synchronicity.

We believe that this is, you know, a very positive first step, but you know, it is, you know, a first step on a multi-step positive journey. Thank you.

Thank you. We will take the last question from Alex Liu from Bank of America.

Yeah, thanks for your question. I think at this point of time, it's not the most critical thing that we'll be focused on. So if you look at the chip, you know, there is, you know, a difference between training chip and inference chip, right? You know, and for training chip, it's actually very, very difficult to design and you manufacture, and you actually want to have access to the most state-of-the-art, you know, training chips to the extent possible and in the most flexible way so that, you know, you can actually sort of keep training for the best model. And then, you know, if you're talking about inference, right, you know, I think inference, it's mostly for cost.

I think for cost at this point in time, there's actually a lot of different suppliers in China, which is actually very different from, let's say, in the training space, right, where there's essentially one player or two players who can actually command a very, very high margin, right? You know, in the inference world, people basically sort of, you know, are earning much lower margin, and there are many more solutions and, you know, options. So, I think, you know, the key for us is actually sort of leverage the best training chips to train the best model at this point in time, and there's a lot of value in being focused.

When it comes to the inference part, right, you know, over time, I think, you know, the market would actually sort of, you know, play out in such a way that, I think, you know, the margin in the inference chips will be actually quite manageable. At this point in time, we're very focused on leveraging the best chip to train our model. Our HunYuan 3.0 is gonna be much better than HunYuan 3.0, and that's actually just the starting point. I think, you know, over time, we'll be able to iterate the training of our model faster and, you know, I'm very confident that, you know, if we focus on that, you know, we'll reach SOTA at some point in time. I think that's actually the most important thing for us.

The next important for us is actually really unleashing the power of our product development capability and integration and connection capability in order to design the most exciting AI products for users. I think, you know, when those are done, right, then we'll think about, you know, how do we try to, you know, reduce the cost of inference.

Thank you, Martin. We are now ending the webinar. Thank you all for joining our results today. If you wish to check out our press release and other financial information, please visit the IR section of our company website at www.tencent.com. The replay of this webinar will also be available soon. Thank you, and see you next quarter.