Hi and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2023 Fourth Quarter and Annual Results Announcement Webinar. This is 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 5 on your telephone to raise your hand. If you are accessing from the Tencent Meeting or Zoom 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 this includes forward-looking statements, which are subject to 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 prepared in accordance with IFRS. For a detailed discussion of risk factors in non-IFRS measures, please refer to our disclosure documents on the IR section of our website. 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 discuss strategy review. Chief Strategy Officer, James Mitchell, will provide a business review. Chief Financial Officer, John Lo, will conclude with 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 2023, we sharpened our strategic focus and achieved substantial progress in our major products, powering our high-quality revenue growth model. Notably, Video Accounts' total user time spent more than doubled as we enrich our short video content ecosystem. Our Mini Games platform increased gross receipts by over 50% year-over-year. Our number of major hit games in China achieved both high DAU and substantial monetization increase from 6 in 2022 to 8 in 2023. International games achieved double-digit revenue growth and rose to 30% of games revenue. Tencent Video and Tencent Music extend their industry leadership with CNY 117 million and CNY 107 million paid subscribers, respectively. WeCom and Tencent Meeting strengthened their enterprise software leadership and increased monetization. We also achieved significant technology breakthroughs.
Our Tencent Hunyuan Foundation model is now among the top-tier of large language models in China, with notable strengths in advanced logical reasoning. Our upgraded advertising AI model enabled us to deliver better ad targeting and higher revenue. We invest further in sustainable social value initiatives. Our digital philanthropy platform helped raise CNY 3.8 billion in public donations during the 99 Giving Day campaign in 2023. Our new Cornerstone Investigator Program supported 104 scientists, contributing to fundamental science research. Looking at our financial numbers for the quarter, total revenue was CNY 155 billion, up 7% year-on-year and stable quarter-on-quarter. Gross profit was CNY 78 billion, up 25% year-on-year and 1% quarter-on-quarter. Non-IFRS operating profit was CNY 49 billion, up 35% year-on-year or down 5% quarter-on-quarter.
Non-IFRS net profit attributable to equity holders was CNY 43 billion, up 44% year-over-year or down 5% quarter-over-quarter. Now, I will hand over to Martin for the strategy review.
Thank you, Pony. Good evening and good morning to everybody. During the course of 2023, we have established a high-quality revenue growth model, which will support our continued economic value creation. This, together with our increased focus on capital allocation discipline, will further enhance shareholder value. Starting with our financial performance, we have seen a healthy increase in revenue since the first quarter of 2023 by increasing high-quality revenue streams and reducing low-quality ones. Importantly, our gross profit growth has consistently surpassed revenue growth due to the margins of our incremental revenue being significantly higher than the 50% overall gross margins for the entire company. This incremental revenue is generated predominantly from our leading social and payment platforms, which have already been built and have their costs covered.
We now consider gross profit growth as a key proxy and, frankly, a better proxy than revenue growth for our organic growth given this shift in terms of the revenue mix. We further enhanced our operating profit growth from gross profit growth through operating leverage. First, we streamlined operations and prudently reduced aggressive market expenditures. We perceive these measures as a less recurring strategy. Second, and more importantly, we're committed to operational efficiency and disciplined resource allocation, which includes thoughtful staff distribution and effective marketing expense management. This approach ensures a focused organization and a lean cost structure moving forward. In the next few slides, I will provide more details on the drivers for our earnings growth going forward. Weixin provides the first set of examples of how we nurtured high-quality revenue streams. The Weixin platform is delivering consistent growth in both DAU and daily time spent per user.
New services within Weixin, such as Video Accounts, Mini Games, and Weixin Search, contribute to greater engagement and overall platform health while at the same time generating additional revenue at very high margins, given they are offered on top of a relatively stable platform cost base. Going into each one of them, firstly, for Video Accounts, total user time spent more than doubled in 2023, driven by strong growth in DAU and time spent per user. Video Accounts' advertising revenue has substantially increased thanks to the increased traffic and improved ad targeting. Despite ad load was kept to much lower levels than industry peers, which then offers a better user experience overall. Secondly, Mini Games experienced a 50% increase in gross receipts in 2023, benefiting from more DAU and higher revenue per user. The growth in gross receipts increased in high-margin platform fees for us.
Mini Games are clearly the industry leader with Mini Games' user retention rate and time spent per user notably higher than in peer services as a result of Weixin's platform stickiness, well-developed ecosystems such as social sharing and notification, and our game technology know-how. Thirdly, Weixin Search now achieves over 100 million DAU, up over 20% year-over-year. Weixin Search content QV grew over 30% year-over-year. Our search revenue grew multiple times year-over-year in 2023 as we ramped up monetization on this under-monetized asset. In addition, our Fintech services provide a second set of examples of high-quality revenue streams. We have spent many years building a solid base for Fintech services in the form of our widely used payment services, with our strict adherence to regulatory requirements and with careful risk management.
In recent months, we completed a comprehensive self-inspection and corresponding ratification process, upgrading our operational compliance capability. We also strengthened our payment ecosystem by improving user security, refining mini-program-based transaction tools, and enhancing cross-border payment experience. On top of this solid base, we're providing additional products and services in collaboration with licensed financial institutions, which generate high incremental margins as these revenues are recorded on a net fee basis. In wealth management, we generate low tick rates but high margin fee income from a large and growing pool of aggregated customer assets by offering customers high-quality products and superb convenience. The products are primarily low-risk money market funds and, to a lesser extent, fixed-income mutual funds.
In consumer loans, our partnership with WeBank and other licensed banks facilitated us distributing small-size cash loans and installment payment services, and we kept the default rate low by applying stringent tech-enabled risk management procedures. For both wealth management and consumer loans, we offer substantially better economics for consumers, partners, and ourselves versus standalone fintech businesses as we reduce customer acquisition costs and credit charges. Now moving on to games, our domestic game business revenue has been soft during 2023, but we expect it to improve from the second quarter of 2024. The reason for slow growth in 2023 was that our two biggest games, Honor of Kings and Peacekeeper Elite, have maintained their leading positions in terms of DAU, but monetization has temporarily stagnated, which caused us to take remedial actions.
For Peacekeeper Elite, we identified a need for more creative monetization strategies and have revamped the leadership of its monetization team. We look forward to the game delivering more innovative and engaging experiences that would also help monetization. We're optimistic that our new monetization team can deliver on this front, given its sister product, PUBG Mobile's team has already delivered a notable rebound in its monetization internationally. For Honor of Kings, our monetization activities have been overly concentrated within this Chinese New Year period in 2023. We're rolling out a more evenly distributed monetization strategy in the year of 2024, which we expect to benefit year-round revenue generation. Looking beyond these two games, several of our recent releases have performed well in terms of DAU and are now converting that DAU success into monetization.
The number of major hit games in China increased from 6 in 2022 to 8 in 2023. We define major hit games as games exceeding average quarterly DAU of 5 million for mobile and 2 million for PC, and at the same time generating over CNY 4 billion annual gross receipts. We view these thresholds as indicative of a major and enduring hit, and games surpassing such DAU and revenue thresholds will contribute to long-term stability and growth of our game portfolio. Having a large and expanding portfolio of major hits illustrates our ability in continually developing new major hits and in operating multiple highly popular games at the same time. During the year, our new major titles are: 1, Battle of the Golden Spatula.
It has transitioned from a niche auto chess game to one of the most popular mobile games in the domestic market, ranking top five by DAU and total time spent. Second, LoL Wild Rift now also ranks among the top five mobile games by total time spent and gross receipts in China. We expect to keep adding major hits to our portfolio in the course of this year. We're looking forward to releasing several major new games, which should also contribute to improving revenue trends through 2024. DNF Mobile is a key title for us, given the success and longevity of DNF PC and given a general scarcity of successful action games on mobile. DNF Mobile has just completed a major closed beta test successfully, and given the positive results, we intend to launch the game in the second quarter of this year.
Other high-potential games in our portfolio for 2024 include Honor of Fight, Need for Speed Mobile, and One Piece Mobile. In 2023, we also made notable progress in core technologies, especially those involving AI, that will serve as our growth multiplier going forward. After deploying leading-edge technologies such as the Mixture of Experts (MoE) architecture, our foundation model, Tencent Hunyuan, is now achieving top-tier Chinese language performance among large language models in China and worldwide. The enhanced Hunyuan excels particularly in multi-turn conversations, logical inference, and numerical reasoning, areas which have been challenging for large language models. We have scaled the model up to the trillion parameter mark, leveraging the MoE architecture to enhance performance and reduce inference costs. We are rapidly improving the model's text-to-picture and text-to-video capabilities. We're increasingly integrating Hunyuan to provide co-pilot services for enterprise SaaS products, including Tencent Meeting and Tencent Docs.
We are also developing new GenAI tools for effective content production internally. More generally, deploying AI technology in our existing businesses has begun to deliver significant revenue benefits. This is most obvious in our advertising business, where our AI-powered ad tech platform is contributing to more accurate ad targeting, higher ad click-through rates, and thus faster advertising revenue growth rates. We're also seeing earlier-stage business opportunities from providing AI services to Tencent Cloud customers. Finally, with this high-quality revenue growth model, we have resources to keep investing in our businesses while at the same time returning more capital to our shareholders. Historically, we have continually paid cash dividends to our shareholders and periodically repurchased shares at times when we believed our share price was undervalued, which is particularly true today.
With our record high and growing profit and cash flow, we propose to increase our upcoming cash dividend by 42% year-on-year to HKD 3.4 per share. We intend to at least double our buyback activity year-on-year from HKD 49 billion in 2023 to at least HKD 100 billion in 2024. We believe this commitment to return at least HKD 132 billion or $16.9 billion to shareholders during the year is well supported by our free cash flow, which was $24 billion for the full year of 2023, along with our gross cash position of $57 billion and our investment portfolio of $126 billion. Now, with that, I will pass to James to talk about business review.
Thank you, Martin. For the fourth quarter of 2023, our total revenue was up 7% year-on-year.
VAS represented 45% of our revenue, within which the social network subsegment was 18%, domestic games was 18%, and international games 9%. Online advertising was 19% of our revenue, and fintech and business services represent 35%. For value-added services, segment revenue was CNY 69 billion in the fourth quarter, down 2% year-on-year. Social network revenue of CNY 28 billion was also down 2% year-on-year. Revenue from music-related and game-related live streaming services decreased, while revenue from the video account streaming service, music subscriptions, and mini-games increased. Long-form video subscription revenue increased 1% year-on-year, driven by higher ARPU, while their video subscriptions declined slightly to 117 million. Our self-commissioned drama series, Blossoms Shanghai, ranks first by video views across all online platforms in China year to date, extending Tencent Video's audience lead within the online video industry.
Music subscription revenue increased 45% year-on-year on 21% growth in subscription count and 20% growth in ARPU. Domestic games revenue was down 3% year-on-year to CNY 27 billion. Recently released PC games Valorant and Lost Ark contributed to PC game revenue increasing but were offset by decreased revenue from Honor of Kings and Peacekeeper Elite. International games revenue increased 1% year-on-year in RMB terms or decreased 1% in constant currency terms to CNY 14 billion as Supercell was repositioning some of its games. PUBG Mobile extended its revenue recovery, and Valorant maintained solid growth. In aggregate, our domestic plus international game subsegments reported revenue was down 2% year-on-year, although game gross receipts were slightly up year-on-year.
We expect our domestic and international game reported revenue to improve from the second quarter of 2024 onwards as revamps for big existing games such as Brawl Stars and Peacekeeper Elite have started to yield results, and as we will be launching new games, including Dungeon and Fighter Mobile. Moving to communications and social networks, the Weixin Video Accounts, on the content consumption side, time spent increased over 80% year-on-year in the fourth quarter, driven partly by DAU and mostly by time spent per user, benefiting from our enhanced content recommendation engine. On the content creation side, daily video uploads grew rapidly year-on-year. We provided targeted traffic support for creators in key categories such as knowledge-based content, lifestyle, and music, which contributed to a sharp increase in the number of creators with over 10,000 followers.
With more followers and better live streaming tools, the number of creators that directly generate revenue from their Video Accounts more than tripled year-over-year. For QQ, the number of active QQ Channels grew at a double-digit rate quarter-over-quarter, and we launched a new version of QQ that features a refreshed user interface and enriched functionalities. Moving on to some domestic games highlights, the release of Set 10 drove Battle of the Golden Spatula to double its average DAU year-over-year in the fourth quarter to a new high. Arena Breakout increased its gross receipts and average DAU each by over 30% year-over-year, driven by a new competitive PvE mode, an upgraded battle pass, and more appealing virtual items. Arena Breakout is now the seventh biggest mobile game in China by total time spent.
Naruto Mobile, an eight-year-old game developed by our MoreFun S tudios, achieved record-high gross receipts and average DAU in January, benefiting from extensive content updates. We view the success of Naruto as a positive leading indicator for our upcoming One Piece game, also from MoreFun. We launched our party game DreamStar in December. Party games aggregate a range of game modes, and we're still building out the number and variety of DreamStar game modes to compete with the game modes featured in incumbent party games, as well as releasing tools for players to create their own game modes. We view party games as a genre that will require sustained effort over a long period, but we're encouraged that DreamStar ranked among the top 10 mobile games in China by DAU during the Chinese New Year.
We believe that DreamStar is already the industry leader in party games measured by DAU within certain game modes such as social deduction and tower defense. Among our international games, PUBG Mobile increased its DAU and gross receipts year-on-year in the fourth quarter, benefiting from the introduction of the Frozen Kingdom theme mode and an innovative top-tier outfit with upgradable weapons. NIKKE released a new storyline and new characters, and encouragingly, NIKKE's average DAU reached a 2023 year high- level in the fourth quarter. Supercell's five-year-old game Brawl Stars achieved record-high gross receipts and DAU in February 2024 due to enhancements to its friend invitation system, the introduction of a new 5v5 game mode, and a complete redesign of its battle pass. Brawl Stars' resurgence demonstrates the latent franchise value of our evergreen titles and their potential to unleash new growth.
Moving to online advertising, our ad revenue was CNY 30 billion in the fourth quarter, up 21% year-on-year, benefiting from upgrades to our ad tech platform and more advertising revenue in Video Accounts. We generated increased ad revenue from all major categories except automotive, with notable step-ups in revenue from internet services, healthcare, and consumer goods categories. We refined our ad targeting by utilizing more real-time data in the AI powering our ad tech, enabling us to match target users with more relevant ads in a more timely manner across both our homes and our ad network properties. Our Video Accounts' ad revenue more than doubled year-on-year despite maintaining a very low ad load due to increased video views and upgraded ad targeting. Weixin Search increased its revenue several-fold year-on-year in the quarter on growth in commercial queries and RPM.
Summarizing fintech and business services, segment revenue was CNY 54 billion in the fourth quarter, up 15% year-on-year. Fintech services revenue sustained a teens year-on-year growth rate on increased commercial payment volume, wealth management fees, and consumer loan fees. Gross profit grew faster than revenue due to a shift from social to commercial payments. Within commercial payments, daily active users and transactions per user both increased. We enhanced mini-program-based QR code and Palm Payment solutions, helping offline merchants boost repeat sales. For business services, revenue grew around 20% year-on-year in the fourth quarter, benefiting from higher cloud spending by industries such as retail and finance and increased technology service fees on Video Accounts, e-commerce transactions. Business services gross profit more than quadrupled year-on-year due to those technology service fees, as well as supply chain optimization initiatives.
Among our enterprise software as a service products, we deployed AI for real-time content comprehension in Tencent Meeting, deployed AI for prompt-based document generation in Tencent Docs, and rolled out a paid customer acquisition tool for WeCom. We deepened our enterprise SaaS penetration among domestic companies such as Vivo, as well as multinationals such as Novo Nordisk. As a result, our enterprise software revenue from WeCom, Tencent Meeting, and Tencent Docs together more than doubled year-on-year. And I'll now pass to John.
Thank you, James. Hello, everyone. For quarter four 2023 and full year 2023, we have reclassified interest income from above to below the operating profit line. Additionally, investment-related gains and losses and donations, both previously included in other gains or losses net above the operating line, are now combined as net gains or losses from investment and others and presented below the operating profit line.
The reclassification aims to better reflect the results of day-to-day operations. Comparative figures have also been restated. For fourth quarter 2023, total revenue was CNY 155.2 billion, up 7% year-on-year. Gross profit was CNY 77.6 billion, up 25% year-on-year. Operating profit was CNY 41.4 billion, up 42% year-on-year. Net losses from investment and others were CNY 6.7 billion, primarily reflecting impairment provisions against certain investees. Interest income was CNY 3.9 billion, up 52% year-on-year, driven by growth in cash reserves and improved use of term deposits. Finance costs were CNY 3.5 billion, down 3% year-on-year due to reduced Forex losses, partially offset by higher interest expenses. Share of profit of associates and JVs was CNY 2.4 billion versus loss of CNY 1.6 billion in the same period last year.
On a non-IFRS basis, share of profit increased to CNY 4.5 billion, up from profit of CNY 3.1 billion last year, driven by better profitability at certain domestic associates and a successful game released by an overseas studio investee. Income tax expense rose by 111% year-over-year to CNY 9.7 billion, driven by operating profit growth and increased withholding tax provision. IFRS net profit attributable to equity holders was CNY 27 billion, down 75% year-over-year, primarily due to the CNY 106.6 billion gain from the deemed disposal of Meituan recognized in the same quarter last year. Diluted EPS was CNY 2.807, down 74% year-over-year. Now, I'll share our non-IFRS financial figures. For quarter four, operating profit was CNY 49.1 billion, up 35% year-over-year. Net profit attributable to equity holders was CNY 42.7 billion, up 44% year-over-year.
Diluted EPS was CNY 4.443, up 46% year-on-year. Moving on to gross margins. For quarter four, overall gross margin was 50%, up 7.4 percentage points year-on-year, and by segment. Gross margin for value-added services was 53.7%, up 3.9 percentage points year-on-year. This was due to a higher mix of high-margin mini-games performance service fee and reduced contribution from low-margin music and games-related live streaming revenue, along with our cost control measures. Gross margin for online advertising increased to 56.8%, up 12.6 percentage points year-on-year. As Martin highlighted, our high-quality revenue streams, particularly Video Accounts' ad revenue generated from our own traffic, with platform costs already paid for, contributed to our incremental margins. Our efficiency efforts also led to margin improvement. Gross margin for Fintech and business services was 43.9%, up 10.3 percentage points year-on-year.
This was driven by margin enhancement following Cloud business restructuring, emerging high-quality revenues, including Video Accounts, e-commerce, technology service fee, structural shift towards high-margin products within fintech services, and our efficiency initiatives. For quarter four, operating expenses, selling and marketing expenses were CNY 11 billion, up 79% year-on-year, against a low base last year, driven by more spending on promotion advertising to support new content release. It represented 7.1% of revenues. R&D expenses were CNY 16.4 billion, up 3% year-on-year. G&A expenses, excluding R&D, were CNY 10.8 billion, down 6% year-on-year due to lower staff costs and optimized operating lease expenses. At quarter end, we had approximately 105,000 employees, down 3% year-on-year, quarter-on-quarter stable. Let's look at our operating and net margin ratios.
For fourth quarter 2023, non-IFRS operating margin was 31.7%, up 6.6 percentage points year-over-year. Non-IFRS net margin was 28.2%, up 7.1 percentage points year-over-year. Next, I will highlight some key cash flow and balance sheet metrics. For quarter four, total CapEx was CNY 7.5 billion, up 33% year-over-year. Within total CapEx, operating CapEx was CNY 6.7 billion, more than triple year-over-year, driven by increased investment in GPUs and servers. Non-operating CapEx decreased by 78% year-over-year to CNY 0.8 billion. Free cash flow was CNY 34.2 billion for quarter four, up 48% year-over-year. For full year 2023, as highlighted by Martin, our free cash flow was $24 billion, or CNY 167 billion, up 89% year-over-year.
Net cash position was CNY 54.7 billion, up 50% quarter-over-quarter, reflecting strong free cash flow generation, partly offset by cash outflows for share repurchases and strategic investments. To conclude, I'll discuss our share repurchase and annual dividend. For the full year of 2023, we repurchased 152 million shares with a total consideration of HKD 49 billion. As a result, our total issued shares after accounting for employee share options and award issuance decreased by 0.9% year-on-year as at the end of 2023. The weighted average number of shares for calculating our 2023 diluted EPS also decreased by 0.9% year-on-year. Subject to the shareholders' approval at the upcoming 2024 AGM, we are proposing an annual dividend of HKD 3.4 per share, reflecting a 42% increase from the previous year.
This dividend will be payable to shareholders on the 31st of May 2024. 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 Google Meet application, please click the Raise Hand button at the bottom. We will take one main question and up to one follow-up question each time. So we will take the first question from Kenneth Fong from UBS.
Hi. Good evening, management. Thanks for taking my question. My first question is for online game. As we highlight in our strategy for online games, we will work on enhancing the flagship titles, building emerging franchise games, and launch of new titles.
Can management share with us the timing and when we should see it benefiting our overall online game growth? For the industry top-down, we also see some gradual relaxation on the number of Banhao being approved and also games with a high commercial value. But at the same time, we also see some industry headwind, like lower player spend with more competition. So how should we think about the medium-term growth for the online game ahead? I have a follow-up question. It's for the live streaming e-commerce. Last year, we made very meaningful progress and have stepped up hiring and building of our team for live streaming e-commerce. Can management share with us some update, like our current scale, the roadmap ahead, and how we are differentiating with our peers? Thank you.
Hi, Kenneth. Perhaps I'll answer the online game question.
So you identified a number of potential factors that could affect our growth, including Banhao issuance, lower player spend, and I think more competition. In reality, we don't think any of those are the key issues that we've been facing. We've received a decent number of Banhao, certainly sufficient for our aspirations. Our games are generally much lower RPU than the industry, and therefore, we haven't seen and we wouldn't expect to see lower player spend as an external macro factor. And then continued competition is sort of an inevitability in an industry that's still a high-growth, high-returns industry. So we believe that the key challenge for us is just getting our own house in order. And we have three strategies that are underway now for getting our own house in order. One is revamping, changing the leadership for our existing games.
And we did that with Brawl Stars, and we've seen a very sharp upturn in Brawl Stars revenue, reaching new records and becoming the biggest Supercell game. We've done that. We've made changes with PUBG Mobile, and that's seen a big upturn. And more recently, we've made changes with Peacekeeper Elite. So where we need to make changes, we're now making those changes. Secondly, we have a number of games that over the last 2-3 years have aggregated very substantial user bases. And now we're in the process of monetizing those games. And you can see that relatively clearly with Battle of the Golden Spatula, with Wild Rift, with Arena Breakout, among others. And then thirdly, we've been focusing on bringing bigger-budget games that iterate on prior successes to market.
You'll see those coming through the rest of this year, including Dungeon and Fighter Mobile, where, as a result of a very successful internal test, we've actually accelerated the launch date to be in the second quarter of this year over the next three months. So as a result of the above, we believe that our game revenue will improve from the second quarter of this year onwards. The extent of our success in those three strategies will determine the medium-term growth rate. Thank you.
In terms of the live streaming and Video Accounts e-commerce, I think we have made very good progress in the course of 2023, but that's only the beginning of nurturing of this exciting opportunity. In terms of GMV, in the course of 2023, it's grown a lot to more than CNY 100 billion.
But to put it in context, right, it's still very small compared to the size of Video Accounts. And it's also a fraction of mini-programs, e-commerce, GMV. So in order for us to really capture the very big opportunity within this business, we have a number of strategies that's ongoing. Number one, we want to really upgrade the management of the overall ecosystem, including improving the product quality control, improving the process through which we handle user complaints and user feedback. And overall, we want to improve the shopping experience for the customers. Second is actually through better category management. We actually want to work through each one of the high-potential product categories and make sure that we have high-quality merchants and attractive products for the customers. And that actually requires very meticulous work, quite a bit of workforce addition, and also have to be rolled out one by one.
We also want to work on better tools for merchants and brands so that they can do business and look at their business analytics and help them to make pricing decisions better. So there's a whole set of merchant tools that we're going to be adding. Overall, we also want to market this overall platform and the availability of these products to the consumers. That's on WeChat and that's using Video Accounts so that we can actually increase the awareness of our shopping experience within Video Accounts. Finally, we are looking to increase the integration between Video Accounts, shopping experience and infrastructure, and the mini-programs that are already operated at scale by a lot of merchants. We believe by doing a combination of the above, we can continue to grow the GMV of our Video Accounts e-commerce in a healthy way.
It's very important for us to build a very solid foundation for this platform at this point in time so that we can actually usher in a very long and significant growth track for this business going forward.
Thank you.
We will take the next question from William Packer from Exane BNP Paribas.
Hi, management. Thanks for taking my questions. Firstly, domestic gaming growth weakened during the 2021-22 rectification period. Then in last August, you talked to weaker Q2 trends reflecting seasonality and less commercial content. You're again talking to weak monetization at key games for Q4 and Q1. Should we think of these challenges as the new normal for evergreen domestic games? Does this reflect that these games are now ex-growth? You therefore need to rely on new releases? Then my follow-up question is regarding regulation.
The market was somewhat alarmed in Q4 regarding new draft rules for the video games industry, which could curtail in-game monetization. Could you update us on latest developments there? When should we expect a new draft? How should we think about the potential impact on your business? Thanks very much.
I will. So perhaps I'll start on your first question. If you look at our commentary in Q2, what we reported in Q4 is actually sort of a consequence of the commentary in Q2, if you will, in that, as you may know, for our two biggest games, we have roughly a nine-month amortization period from gross receipts into reported revenue. So we saw weak monetization, therefore weak gross receipts from Q2 onwards last year.
That impacts us most heavily in Q4 because in Q4, we lose the benefit of relatively strong gross receipts from Q1. As a result, that's why if you look at the reported revenue for Q4, it was down year-on-year because of the lagged effect of weak monetization in Q2 and Q3. But if you looked at the gross receipts, the actual cash inflows, it was slightly up year-on-year in Q4. So what we saw in Q2 is the driver of what we saw in Q4 as opposed to being two sort of separate or contradictory phenomena. In terms of whether our big games are ex-growth, we clearly don't think that's the case. We're very active investors across the game industry.
We can see that big games with longevity, with substantial user bases, enjoy. They experience upswings and downswings, but over the longer term, they're only becoming more powerful, whether you look at a Call of Duty or a Grand Theft Auto or a Fortnite. And we certainly believe that that is the case in China, that longevity is an asset rather than a liability, just as it is in the luxury goods industry. No one would say that a luxury goods brand with longevity is inferior to a newly emerged luxury goods brand. And we can see it with our own games. We can see that PUBG Mobile is now rebounding strongly. We can see that Brawl Stars and also actually the entire Supercell portfolio of games is rebounding strongly. We expect a number of our other games to also see substantial rebounds.
So again, because of the time lag between cash inflows versus reported revenue, that will show up in our P&L from the second quarter. But we are already experiencing improvements in cash inflow. So that's on the first question around where we are with games. And then maybe on the game regulation side.
Yeah, on the regulation, we actually don't know when the new draft will be released or whether it will be released. But it's no longer our concern because after the original draft was released, there's concern by the market. And I think the regulators have actually come out very explicitly in explaining that the purpose of the draft was actually to provide a healthy environment for growing the industry rather than constraining the industry.
And two is we're actually very encouraged by the supported measures that were unleashed after the initial concern was expressed by the market, including in the very beginning of this year, there is a single batch of domestic Banhao, which is more than 100, including there's an expedited approval of imported game licenses. And also our flagship mobile game, Dungeon & Fighter Mobile, has been approved in that batch. And also, if you just look at what's the focus of people's concern, right? It's about high ARPU games. And that's really not relevant to us because our ARPU is actually on the very low end of the overall industry. So I think, to be fair, it's no longer one of our concerns anymore.
Thank you, Martin. Next, we will take the question from Alicia Yap from Citigroup.
Hi, good evening. Can you hear me, management? Thanks for taking my questions.
My main question is on the AI-powered functionality. So in addition to enhancing and powering the internal advertising targeting capability, what is your expectation of the AI-powered functionality to generate decent traction of revenue from the external cloud and business services customers near-term, or should we actually expect any near-term benefit more reflecting on the continual improvement on the advertiser ROI and also e-commerce merchants' conversion rate? Second, a very quick follow-up is I understand the user profile for mini-games is quite different from the mobile app game user, but just curious to see if there's any preference shift or cannibalization of the time spent from the app games to the mini-games that also contribute to the slower growth of domestic games in the past few quarters. Thank you.
Yeah, in terms of the AI short-term benefit, I think financial benefit should be much more indexed toward the advertising side because if you think about the size of our advertising business as quoted CNY 100 billion a year, and if you can just have a 10% increase, right, that's CNY 10 billion and mostly profit, right? So that's the scale of the benefits on the advertising side, and especially as we see continued growth of our advertising business and when we add in the Video Accounts, e-commerce ecosystem, that just has a very long track of growth potential. And also the low ad load right now within Video Accounts. But on the other hand, if you look at the cloud and business services customers, then you're really facing a relatively nascent market. You still have to sell to these customers.
We spend a lot of time working with all the customers in different industries and trying to figure out what's the best way of leveraging AI for their business. Then you have to go through a long sales cycle. At the same time, it's competitive because your competitors will actually come in and say, "Oh, they can also provide a similar service." And despite we believe we have a superior technology and product, it's actually very cutthroat. And your competitor may actually sort of come in and say, "Oh, they're going to cut prices," even though there's an inferior product. So, all these things, all the low-margin, highly competitive, and long sales cycle of the B2B business would actually come into play in that side of the business.
So when you compare the two sides of the equation, you can actually clearly see that ramping up advertising is actually going to be much more profitable from the short term. Of course, right, we'll continue to do both, right? And we believe that the value that we provide to our customers are not just measured in how much profit we make from them, but also in how much improvement that we make to their business over the long run. And we believe as China moves into an economy which is much more focused on productivity and as the cost of human costs actually sort of keep on increasing, right? So some of the dynamics of the U.S. market in having a more profitable business services business would actually come in, but that would take quite some time to realize.
On your question about whether our Mini Games are cannibalizing time spent or revenue generation for our app-based games, we're very confident that our Mini Games are not a tribe of cannibals. They're a sort of tribe of pioneers and explorers and developers of new territory. I say that because from a time spent perspective, our app-based games have been performing fine. You can see the increased time spent for games like Battle of the Golden Spatula or Arena Breakout while it really is substantial. We've disclosed previously that only less than half of the Mini Games MAU are also app-based game MAU. When we look at it from a user spend perspective, there's an even starker illustration because only a teens percentage of the Mini Games paying users are also app-based game paying users.
Only a single-digit % of the app-based game paying users are also mini-game paying users. So we don't believe that there's cannibalization taking place between mini-games and app-based games.
Thank you. Thank you. We will take the next question from Ronald Keung from Goldman Sachs.
Thank you. Thank you, Pony, Martin, James, John, and Wendy. I have two questions. One is we've read about the shareholder return. So compared with just regular dividends, buybacks, and we used to have some distribution in specie, how should we view 2024 and maybe in the medium-term upside potential to a total annual kind of shareholder return, let's say, in dollar terms or in % of market cap? Which one will we usually kind of assess more and how do we plan to reward shareholders maybe around the investment portfolio value? And then my second question is on Video Accounts e-commerce.
Martin, you mentioned about the Video Accounts e-commerce and combining with mini-program e-commerce. Is it fair to say we are eventually building a more open platform in transactions, not forcing every transaction through our own kind of shop infrastructure because mini-program is more like a platform? So would that look more like Meta, which is like kind of Facebook-style open platform, building that e-commerce system versus the very closed system in the short video platforms? Thank you.
Hi, Ronald. So, on the shareholder return question, we assess the total return dynamically. Now, for the dividends and the buyback, we view those as more sort of programmatic in nature versus the distributions somewhat more opportunistic in nature. But overall, we would be intent to return very substantial capital to shareholders during the course of this year.
In terms of the role of the investment portfolio, then actually, over the last two years, the investment portfolio has returned substantially more capital to shareholders than it has absorbed. And even if you exclude the JD and then Meituan distributions, the investment portfolio has been self-funding, meaning new investments that they've made have been funded by divestments or dividends or distributions from what we already own in the investment portfolio. And looking at 2024, at this point in time, our expectation is that the investment portfolio will be once again self-funding and therefore a source of cash rather than the use of cash.
In terms of the Video Accounts e-commerce, I would say I think that's a good question, right?
We actually had a lot of discussion on that topic in the sense that what's the architecture of the e-commerce activities that should be happening on the platform, given we have mini-program e-commerce, and that actually is a very significant platform already. I think our view is that going forward, we have actually both open platform and closed platform. They serve actually different purposes. Open platform is along the line of mini-programs. These are actually much more suitable for brands which actually are well recognized. They actually have a very large sales channel for promoting mini-programs. For example, if they have a very large chain of offline stores, they can actually ask their customers to add the mini-programs and then shop online. At the same time, they need to have pretty strong brand recognition for the consumers to keep coming back to the mini-programs.
But the shortcoming of the mini-program is that the merchants, basically, it's very hard for them to get new customers online. They can only rely on their own channels. But even with that, the mini-programs e-commerce platform had actually grown to a very large size. Now, on the other hand, when we look at Video Accounts, live streaming platform, the new platform is actually a closed platform in the sense that we actually want to put in much more active management of the ecosystem so that the shopping quality is actually very much better than an open platform, especially for merchants which are not well-known, right? Because if these are smaller merchants, white label merchants, then we want to make sure that their products actually exceed a certain level so that it would create a good experience for the users.
It also has the access to the Video Accounts traffic so that it can actually acquire new customers. Now, over time, we're going to connect the open platform with the closed platform. We provide a curated connection so that the open platform can actually benefit from the traffic of the Video Accounts. While at the same time, the small merchants can actually also benefit from their private domain when they actually start selling on our platform.
So when we curate the connection between the open platform mini-programs with Video Accounts shops, then I think we can actually get the best of both worlds and help different types of merchants to maximize their sales and maximize their exposure to consumers on the platform, while at the same time, making sure that our users actually have a great shopping experience on our platforms, either on the open platform or the closed platform.
Got it. Thank you, Martin and James.
Thank you. The next question comes from Robin Zhu from Bernstein.
Thank you, management, for taking my question. I guess a couple of questions, please. One on AI. I mean, you guys have talked a lot about ads and fintech and so on.
Gaming is commonly thought to be one of these areas where generative AI could have quite a big impact potentially when it comes to game design, production, AI NPCs, and so on. There's been different views on how much is hype and how much is reality. I'd be curious where you stand on how quickly you want to move on some of these areas. Then a follow-up again on gaming is I think a couple of quarters ago, you mentioned that there was a periodic kind of slowdown in the productivity of AAA game development. Just wanted to get your thoughts on where you are on that. The aspiration to do kind of a new big title on the level of your top games every so often, every few years, aspiration to do console and PC beyond just the mobile ecosystem? Thank you.
I think in terms of the application of AI to games, then like many things, the boundary between hype and reality is a function of how far forward one is willing to look and we're willing to look very far forward. And all of the areas you mentioned, such as AI-powered NPCs, such as AI-accelerated graphical content generation, graphical asset generation, are areas that over the years to come, not over the months to come, will benefit meaningfully from the deployment of AI. And I think it's also fair to say that the game industry has always been a mixture of, on the one hand, innovation around gameplay techniques and, on the other hand, deployment of enhanced content, renewed content into existing gameplay.
It's reasonable to believe that AI will be most beneficial for the second of those activities, but one will continue to require very talented individuals and teams to focus on the first of those opportunities, which is the creation of innovative gameplay. Secondly, in terms of productivity related to AAA game development, then I think that for our international studios, there were some bumps due to COVID in the current game development cycle, and those are now largely behind us. So we believe that productivity is now on a more normal footing. Looking forward, we have a number of what we expect to be substantial hits in the pipeline, both domestically and internationally. We're doing some things the same as before and some things differently. On the differently side, we're focusing on fewer bigger budget games.
Typically, we're seeking to make the biggest bets around games that either iterate on a successful IP, such as the Honor of Kings fighting game around the Honor of Kings IP, or games that are iterating around proven gameplay success within a niche and taking those to a more mass market. So a stereotypical example would be moving the Dark Souls combat into Elden Ring. In our case, I mentioned earlier, we have the learnings from games such as Naruto that will be updated with state-of-the-art graphics and technology for games such as One Piece. In addition, on the marketing front, we now cooperate with a range of platforms, including Douyin, both in terms of the user-generated content marketing as well as in the paid advertising marketing.
So overall, we think those enhance our position, those changes enhance our position in AAA game releases, and we look forward to the results. Thank you.
Thank you, James.
Thank you. Next question from Charlene Liu from HSBC. Charlene, your line is open.
Can you?
Yeah, we can hear you. Go ahead.
Great. Thank you so much. I have two questions. First is on fintech. Recently, Tencent has lifted registered capital. I would like to find out a little bit more on how that may be used on consumer loans or perhaps overseas business, and how would that affect Tencent's balance sheet and whether the management can update us on the growth strategy on fintech segment in 2024. So that's the first one. The second one would be related to AI developments. Obviously, we've seen developments in AI create new revenue streams and cost optimization for overseas internet platforms.
The management has already discussed where some of the monetization opportunities lie. Can we better understand benefits, which we have been able to reap on the cost front from AI adoption, and how much more upside we can expect to see from here, and how long will it take for Tencent to realize these gains? Thank you.
In terms of the fintech side, Tencent has been approved to increase the registered capital substantially, and the money is actually going to be moving from Tencent balance sheet to Tencent balance sheet. Since Tencent is actually a consolidated entity, it's not going to change our consolidated balance sheet. I would say this capital increase is essentially a recognition of the increased size of Tencent's business and also a sign of approval for future development of the company. We viewed it very positively.
Now, in terms of our fintech strategy, I think the fintech strategy centered around the payment platform. We will continue to build out our payment platform and to improve its basic services reliability as a platform that would support economic activities and consumption for the economy. We'll continue to roll out new functionalities and better functionalities, including improving the mini-programs payment ecosystem so that we not only provide a payment service at the spot for the merchants, right? We actually also help to establish a link between the merchants and the consumers so that in the future, the merchants and consumers can further interact. Maybe the consumers can actually do repeat purchases, the merchants can do future engagement with the consumers, and it can also provide after-sale service. So I think there's a lot that we can do to improve the overall payment experience.
We'll provide more tools to SMEs so that SMEs can increasingly digitize their business and gain efficiency. We'll roll out new payment technologies like Palm Payment, for example, in order to increase the convenience of the payment service. And we'll also improve the payment experience for foreigners in China, right, so that it can help to foster an even more vibrant tourism industry in China. So if we continue to do that, right, the payment platform will continue to grow with the economy, to grow with consumption, and grow with cashless penetration in China. So on top of that, we also felt that we can actually roll out value-added financial information services, such as wealth management, such as loan service, such as installment service that I actually described in the prepared remarks. And these are very high-margin, high-value-added services that we can offer alongside with licensed financial institutions.
Overall, I think the philosophy for us to grow in the fintech business is that, one, is we want to be fully compliant. Two, is that we want to make sure that we manage risk in an absolute high-quality manner. We want to create more value than capturing value for merchants, for consumers. And at the same time, we want to work on constructive relationships with licensed financial institutions. And if we can keep on doing all of these, right, then the fintech business will continue to thrive.
On the AI question and the cost-benefit, as you would expect, we are increasingly going to be deploying AI, including generative AI, in areas such as accelerating the creation of animated content, which is a big business for Tencent Video and a profitable business for Tencent Video, in terms of game content, as we discussed earlier, potentially in terms of creating code in general. But the benefit will show up not in substantial cost reductions. It will show up in more rapid content creation and, therefore, more rapid monetization and revenue generation. And not to repeat the same point too many times, but the immediate benefit and the biggest benefit is really around the advertising revenue uplift. Martin gave the example of if we can improve click-through rates by 10%, then that's CNY 10 billion in incremental revenue, probably CNY 8 billion in incremental gross and operating profit.
In reality, you should view 10% as being in the nature of a floor, not a ceiling. Facebook has seen a substantially bigger improvement in click-through rates. For some of our most important inventories, we've actually seen our click-through rates increase by 100% in the past 18 months. So when we're thinking about where are the financial benefits of AI, then it's advertising click-through rate and, therefore, advertising revenue first and foremost. And that's a very high-flow-through business for us. Thank you.
Thank you.
Thank you. We will take the next question from Alex Yao from J.P. Morgan.
Thank you, management, for taking my question. My first question is regarding the recent partnership with Douyin, which we believe had quite a bit of ripple effect to the whole game live-streaming and gaming industry. What are the changes have you seen this partnership has brought to us?
So that's the first one. And then the second one is on the path of Video Accounts monetization. Clearly, I think the industry incumbent has demonstrated the short video monetization capability across advertising, e-commerce, and the local services. What are your thoughts and strategy on Video Accounts making inroads into local services? Thank you.
Hi, Alex. So maybe I'll answer the first question on marketing our games through additional channels, including Douyin. So as I mentioned with regard to Robin's question, we are doing that. We're providing more content that the users then virally share on short video platforms, including Video Accounts like Xiaohongshu, Bilibili, Douyin, and so forth. And we're also investing in advertising our games more actively on short video services. So that's on the game marketing side.
In terms of live-streaming e-commerce, I think we have discussed it in detail.
I think it's very, very synergistic with the Video Accounts, with live-streaming, as well as with the advertising that sits within Video Accounts. If we can actually have a closed loop in terms of knowing what are merchants, what are the products that were sold, what's the user experience after the sales, then the ability for us to improve the conversion rate on a full-chain basis is actually much stronger. That's why it's very important for us to build out the e-commerce infrastructure and ecosystem in anticipation of supporting a very long and significant growth on our Video Accounts advertising business. Now, on the other hand, I think the local service is actually not something that we are focused on at this point in time. Local services, from our perspective, is actually much more of a provision of content.
So along that line, we actually would consider working with our partner, some other partners, for example, Meituan, who have been our close partner for a long time, to actually have them generate the content, and we actually help them to promote the local services.
Thank you. In the interest of time, we will take the last question from James Lee from Mizuho.
Thanks for taking my question. James, can you hear me? Yeah, we can hear you. Yeah, great. Great. Thanks for taking my questions. My question is on cloud and AI. On the cloud side, I think a competitor recently announced a pretty large-scale price discount for their cloud offering. So just curious, what are you seeing in terms of enterprise demand and probably most importantly, price elasticity? Now, on AI, how should we think about your positioning in large language model?
Just curious, what stage are you in now? Can the model handle multiple modalities of data input and output? And just curious on that position at this point. Thanks.
Maybe I'll start with cloud. So for better or worse, the cloud industry is an industry where input prices are always falling. And so naturally, the cloud service providers are always reducing the costs they pass on to their customers. So price cuts have always existed and will always be the trend within the cloud services industry for as long as Moore's Law continues to drive down the cost of compute. And we don't see a dramatic change in the competitive situation, just as we didn't see a dramatic change when there was a round of high-profile but low-impact price cuts for SMBs a year ago. What does matter is, first of all, being cost-competitive.
And in order to be cost-competitive, one needs scale, which several companies in China are at similar scale, including us. And one needs supply chain optimization. And we've been very active on supply chain optimization in the last several quarters. And as we optimize the supply chain, we bring down our input costs faster, and we can cut our output costs further as a result. And then the second factor that matters is the ability to upsell from infrastructure into platforms such as our security platform, our real-time communications platform, our database platform, as well as upsell into software as a service, including Tencent Meeting and WeCom and other enterprise SaaS products we've spoken about. So that's really where we're focused. It's on delivering more value to our cloud customers by continually optimizing supply chain and by continually upgrading the depth and complexity of services that we can provide.
In terms of our Hunyuan model, I think we actually have talked about it quite a bit in our prepared remarks. We believe Hunyuan actually is now performing at the top tier in Chinese language among LLMs in China and worldwide. This belief is supported by the very comprehensive testing that we have done internally. From a technology perspective, this is a model that is leveraging the mixture of experts architecture that's already scaled up to the trillion-parameter mark. Also, it's exhibiting very good performance in multi-turn conversations, logical inference, and numerical reasoning, some of the toughest areas to conquer in large language models. At this point in time, we are actually very focused on the text technology because this is actually the fundamentals of the model. From text, we have built out text-to-picture. From text, we have built out text-to-video capabilities.
The next important evolution is actually what we have seen with Sora, right? Sora has done an incredible job with text-to-a-long video. This is something which we would be developing in the next turn. When we continue to improve the text fundamental capability of Hunyuan, at the same time, we'll be developing the text-to-video capability because we actually think that this is actually very relevant to our core business, which is a content-driven business in the area of short video, long video, and games. That's the area in which we'll be developing and moving our Hunyuan into. If you look into the future, we felt Hunyuan would continue to be stronger and stronger in the fundamental model capability. At the same time, it'll be starting to develop better and better text-to-multimedia capability.
Thank you. 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 shortly. Thank you, and see you next quarter.