Good day, and thank you for standing by. Welcome to Tencent Holdings Limited 2022 first quarter results announcement conference call. At this time, all participants are in the listen-only mode. After speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. Now I'd like to turn the conference over to Ms. Wendy Huang from Tencent IR team. Thank you. Please go ahead.
Thank you, operator. Good evening. Welcome to our 2022 first quarter results conference call. 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 it may not be realized in the future for various reasons. Information about the general market conditions is coming from a variety of sources outside of Tencent. This pre-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 and IFRS measures, please refer to our disclosure documents on the IR section of our website. Let me introduce the management team on the call tonight. Our chairman and CEO, Pony Ma, will kick off with a short overview.
President Martin Lau and 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 turn the call over to Pony.
Thank you, Wendy. Good evening. Thanks everyone for joining us. During the challenging first quarter of 2022, we implement cost control initiatives and rationalize certain non-core businesses, which will enable us to achieve a more optimized cost structure going forward. We utilize tools such as mini programs, Tencent Meeting, and WeCom to help enterprises and consumers weather the resurgence of COVID-19 in China, and continue investing in strategic growth areas, including enterprise software, Video Accounts, and international games. Looking forward, we will sharpen our focus and sustain our innovations through challenges and cycles, and continue to create value for our users, partners, and society. Now let me go through the headline financial numbers for the quarter. Total revenue was CNY 135 billion, largely stable year-on-year, or down 6% quarter-on-quarter. Gross profit was CNY 57 billion, down 9% year-on-year, and 1% quarter-on-quarter.
Non-IFRS operating profit was CNY 37 billion, down 15% year-on-year, or up 10% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was CNY 26 billion, down 23% year-on-year, or up 3% quarter-on-quarter. For our key services, we generally retain our certain place positions in activities including social games, long form video, news, music, literature, payment, and mobile browser. Combined MAU of Weixin and QQ was 1.29 billion. Mobile devices MAU of QQ was 564 million. Now I will hand over to Martin and James for the business review.
Thank you, Pony, and good evening and good morning to everybody. For the first quarter of 2022, our total revenue was largely stable year-on-year. VAS represented 54% of our total revenue, within which social network sub-segment revenue was 22%, domestic games sub-segment revenue was 24%, and international games sub-segment was 8%. Online advertising was 13%, and fintech and business services was 32% of total revenue. For value-added services, the segment revenue was CNY 73 billion for the quarter, broadly stable year-on-year. Social networks revenue was up 1% year-on-year to CNY 29 billion, reflecting increased revenue from Video Accounts live streaming service, which was largely offset by decreased revenue from music and games related live streaming services. Total VAS subscriptions grew 6% year-on-year to 239 million.
For Tencent Video, we extended long video market leadership with 124 million subscribers. Our popular content such as drama series Sword Snow Stride and animated series Perfect World Season two demonstrated our strength in IP adaptation of comics and novels. Music subscriptions increased 32% year-on-year to 80 million, driven by high quality content as well as increased consumer willingness to subscribe for music services. Domestic games revenue was down 1% year-on-year to CNY 33 billion as direct and indirect effects of minor protection measures impacted active user and paying user accounts. Recently released games, League of Legends: Wild Rift and Battle of the Golden Spatula, generated incremental revenue, while revenue from Moonlight Blade Mobile and Call of Duty: Mobile decreased. International games revenue grew 4% year-on-year to CNY 11 billion.
Year-on-year growth was slower than in recent quarters, reflecting lower PUBG MOBILE revenue as user spending normalized to post-COVID industry-wide, as well as timing of content upgrade in League of Legends and Clash of Clans. Revenue declined sequentially from a high base in fourth quarter last year, when there was a trued-up adjustment to Supercell's revenue and more consumption during the year-end holidays. With respect to Weixin, Video Accounts continued strong growth momentum, with significant year-on-year increase in daily viewers and time spent. This was supported by expansion in news, knowledge-based, and entertaining content, as well as better recommendation technologies. We also enhanced enterprise messaging and shopping features in Video Accounts to facilitate user engagement and monetization for creators, driving a more vibrant content ecosystem.
Mini programs exceeded 500 million DAUs and sustained rapid growth in GMV year-on-year, with particularly notable growth in retail and restaurant categories as we enhanced the functionalities for customer services and operational analysis. With more public service such as health and municipal services available through mini programs, we're able to cultivate user habits in accessing essential services through mini programs. For QQ, we are enriching features for young users to better create, share, and connect with each other. We provide avatar tools for users to create interesting short videos featuring their own customized Super QQ Show characters. Through status update, users can share videos and music they are consuming so that their friends can access and stream the same content without leaving the QQ app via mini programs, enhancing social interaction and content consumption.
Turning to domestic games, we extended our long-standing leadership among the highest DAU games while also penetrating new and new-to-Tencent Gen Z game genres. In battle arena games, Honor of Kings grossing receipts decreased year-on-year during the Chinese New Year holidays due to fewer commercially successful items. However, the game's adult user base has been stable and grossing receipts resumed year-on-year growth in March on more commercially successful items. Peacekeeper Elite, the number one shooter game in China, enhanced its user engagement by introducing new combat items and battlefield design in its third anniversary content update in April. Among new genres, in auto battler games, Battle of the Golden Spatula released new champions and game mechanics that enriched players' competitive experience. The game ranked number one in the genre and number six in all mobile games by DAU in the first quarter.
It is currently the most successful new game release across the industry from 2021. In real-time strategy games, we launched TiMi Studio Group's Return to Empire in late March. Leveraging partnership with Xbox Game Studios, the game offers high-quality graphics and content to gamers. It was the second most revenue-generated game in the genre industry-wide, measured by grossing receipts in April. Moving on to international games. The mobile game industry outside of China generally experienced slower growth or declines in early 2022 versus COVID-19 impacted period in early 2021. PUBG MOBILE, as a result, experienced a year-on-year grossing receipt decline in the first quarter. However, we're confident in the game's longer-term trends as it moved beyond the COVID comparisons. A Spider-Man themed PUBG game mode launch in January was successful in driving user engagement, while Lamborghini tie-ins released in March became the game's top-selling crossover skins ever.
Our PC game, Valorant, continued its robust performance. Its growing user base, paying propensity, and attractive content drove gross receipts up significantly year-on-year. Valorant has become the sixth most popular PC game by MAU across all genres, and is the highest-ranked new PC game title released in the last four years. Besides our existing titles, we're releasing compelling new games via partnership with globally renowned IPs. One example is Dune: Spice Wars, a real-time strategy PC game based on the sci-fi IP Dune. Published by our subsidiary studio, Funcom, the game achieved initial success since its early access launch on April twenty-sixth. Funcom, which has game rights to notable IPs such as Dune and Conan the Barbarian, is also developing an open-world survival game based on Dune.
Another example is Apex Legends Mobile, a hero shooter battle royale game jointly developed by our LightSpeed & Quantum Studio and EA's Respawn Entertainment, was launched yesterday globally. The mobile game is based on one of the most successful new PC console IPs in recent years. Looking forward, we aim to grow further our existing titles and release multiple big budget new titles, especially from 2023 onwards. With that, I'll pass to James to talk about other businesses.
Thank you, Martin. Turning to online advertising, revenue was CNY 18 billion in the first quarter, down 18% year-on-year and down 16% quarter-on-quarter, as subdued bidding density results in lower eCPMs. Our social and others advertising revenue was CNY 16 billion, down 15% year-on-year and 15% quarter-on-quarter, within which our mobile ad network revenue declined sharply year-on-year due to weak demand and regulatory changes such as restrictions on flash screen ads. Weixin Moments advertising revenue dipped slightly year-on-year as weakness in education and real estate ad spend outweighed growth from FMCG and games ad spend. Official Accounts advertising revenue increased notably year-on-year as we enabled advertisers to better target young users via notification feeds ads, and to run their ads within an environment of high quality and relevant content.
Over 20% of official accounts ad revenue comes from click-to-purchase and click-to-message ads, which are powered by mini programs and WeChat, respectively. Our media advertising revenue is CNY 2 billion, down 30% year-on-year and 27% quarter-on-quarter, within which our video ad revenue declined double digits year-on-year. The Winter Olympics and popular drama series such as The Oath of Love generated incremental video ad revenue, but were more than offset by fewer releases of top-tier variety shows when compared to the first quarter of last year. For the second quarter to date, advertisers in categories such as FMCG, e-commerce, and travel have scaled back their spending due to the COVID situation and attendant supply chain disruptions. We continue to invest in our advertising system and are upgrading our machine learning infrastructure to process data more efficiently.
The upgrade should ultimately enable us to enhance our targeting and thus conversion rates for advertisers. Looking at Fintech and business services, segment revenue was CNY 43 billion, up 10% year-on-year and down 11% quarter-on-quarter. For Fintech, the year-on-year revenue growth moderated due to slower growth in commercial payment volume, reflecting multiple cities taking measures to combat the COVID-19 resurgence in March, resulting in less consumption of both everyday items such as food and beverage, as well as big-ticket items such as travel booking. Our payment volume correspondingly decelerated, especially in categories such as transportation, dining services, and apparel. For business services, our revenue dipped slightly year-on-year as we shifted our focus from prioritizing revenue growth toward customer value creation and quality of growth.
We proactively scaled back certain loss-making activities, such as projects that carry substantial headline revenue, but also substantial costs that we needed to pay to subcontractors, as well as deeply discounted infrastructure-only contracts for basic services such as cloud computing content delivery network. However, we've increased our healthier margin PaaS revenue, especially in video cloud and cybersecurity. For video cloud, taking advantage of our accumulated experience providing in-house interactive entertainment and video chat services, as well as our low latency network infrastructure, we're increasingly migrating our clients from the basic content delivery network to more sophisticated video on-demand, live streaming, and real-time communication solutions. Our real-time communication service meets growing demand for interactive video services in scenarios such as online meetings, customer service, and live streaming e-commerce. Gartner ranked Tencent first among all vendors for communication PaaS revenues in China for 2021.
For cybersecurity, we expanded our client base across network endpoint and business operation security solutions, fulfilling enterprises' needs for protection against cyberattacks, as well as for cybersecurity compliance. To position for the fast-growing demand for next generation enterprise security, we're enhancing our zero trust security solutions that facilitate remote working. These zero trust security solutions leverage our accumulated internal experience in network security management. I'll now pass to John Lo.
Thank you, James. For the first quarter of 2022, total revenue was CNY 135.5 billion, stable year-on-year or down 6% quarter-on-quarter. Gross profit was CNY 57.1 billion, down 9% year-on-year or 1% quarter-on-quarter. Net other gains were CNY 13.1 billion, down 33% year-on-year or 85% quarter-on-quarter, which were primarily non-IFRS adjustment items, including CNY 18.5 billion gain arising from our partial divestment of Sea Limited, partly offset by impairment provisions against investee companies in verticals such as transportation services and online media. Operating profit was CNY 37.2 billion, down 34% year-on-year and 66% quarter-on-quarter.
Net finance costs were CNY 1.9 billion, up 42% year-on-year or 4% quarter-on-quarter, reflecting greater interest expenses due to increased indebtedness as well as lower foreign exchange gains both year-on-year and quarter-on-quarter. Share of losses of associates and JVs were CNY 6.3 billion compared to share of profits of CNY 1.3 billion last year. Non-IFRS share of losses were CNY 2.2 billion compared to non-IFRS share of profits of CNY 0.5 billion a year ago, reflecting revenue decline at certain overseas game associates due to post-COVID user spending normalization, losses recognized from associates in the transportation services verticals, and the impact from JD.com ceasing to be an associate. Income tax expense decreased by 27% to CNY 5.3 billion for the first quarter of 2022 on year-on-year basis.
The effective tax rate was 18.2%. Our net profit attributable to equity holders was CNY 23.4 billion, down 51% year-on-year or 75% quarter-on-quarter. Diluted EPS was CNY 2.404, down 51% year-on-year or 75% quarter-on-quarter. Now, I'll share with you our non-IFRS financial figures. Operating profit was CNY 36.5 billion, down 15% year-on-year or up 10% quarter-on-quarter, reflecting lower marketing expenses as a result of our cost optimization measures. Net profit attributable to equity holders was CNY 25.5 billion, down 23% year-on-year or up 3% quarter-on-quarter. Diluted EPS was CNY 2.62, down 23% year-on-year or up 3% quarter-on-quarter. Moving on to gross margin. The overall gross margin was 42.1%, down 4.2 percentage points year-on-year or up two percentage points quarter-on-quarter.
The year-on-year decrease reflected the result of stable revenue with increased operating costs, mix shift towards lower margin products and our continued investments in key strategic initiatives. The quarter-on-quarter increase was due to seasonal revenue mix shift towards high margin businesses such as games. By segment, gross margin for VAS was 50.4%, down 4.7 percentage points year-on-year or up 1.7 percentage points quarter-on-quarter. The year-on-year decrease reflected stable segment revenue with increased costs, including content costs for games, server and bandwidth costs, in addition to our investment in strategic initiatives, in particular Video Accounts. The quarter-on-quarter increase was driven by seasonal revenue mix shift towards higher margin businesses within the segment. Gross margin for online advertising was 36.7%, down 8.4 percentage points year-on-year or six percentage points quarter-on-quarter.
Year-on-year decrease was due to revenue decline and increase in operating costs, including those associated with our Video Accounts and the content costs of Beijing Winter Olympics, as well as the fact that the full exemption from cultural construction fee was no longer available this year, which was also the main reason for quarter-on-quarter decrease. Gross margin for Fintech and business services was 31.6%, roughly stable year-on-year or up 4.5 percentage points quarter-on-quarter. The quarter-on-quarter increase was driven by revenue mix shift towards higher margin Fintech businesses within the segment, as well as our recent initiative to reduce loss-making cloud service contracts. On operating expenses, selling and marketing expenses were CNY 8.1 billion, down 6% year-on-year or 31% quarter-on-quarter. Excluding stock-based compensation, selling and marketing expenses decreased by 7% year-on-year and 32% quarter-on-quarter.
Year-on-year decrease reflected our marketing expense optimization measures. Quarter-on-quarter decrease reflected lower marketing spending on games and business services due to both seasonality and expense optimization measures. Selling and marketing expenses were 5.9% of revenues, broadly stable year-on-year. R&D expenses were RMB 15.4 billion, up 36% year-on-year or 10% quarter-on-quarter. Excluding share-based compensation, R&D expenses increased by 27% year-on-year or 6% quarter-on-quarter. The year-on-year and quarter-on-quarter increases were mainly due to greater staff costs reflecting our ongoing investment in key strategic initiatives, as well as the impact of recent acquisition of subsidiaries. R&D expenses were 11.4% of revenues. G&A expenses excluding R&D were RMB 11.3 billion, up 47% year-on-year or 9% quarter-on-quarter. Excluding share-based compensation, G&A expenses excluding R&D increased 25% year-on-year or decreased 7% quarter-on-quarter.
The year-on-year increase reflected greater staff costs driven by headcount increase to support our ongoing investment in key strategic areas, crypto expenses incurred by our overseas subsidiaries, as well as expenses from recently acquired subsidiaries. At quarter end, we had approximately 116,000 employees, up 30% year-on-year or 3% quarter-on-quarter. Let's take a look at the operating and net margin ratios. Due to the combined reasons I mentioned earlier, non-IFRS operating margin was 27%, down 4.6 percentage points year-on-year or up four percentage points quarter-on-quarter. Non-IFRS net margin was 19.4%, down 6.1 percentage points year-on-year due to lower operating margin and the turning from profit to losses share from associates as a whole.
non-IFRS net margin increased by 1.5 percentage points quarter-on-quarter due to seasonal revenue mix shift to higher margin businesses as well as marketing expenses optimization measures. Finally, I'll share some key financial metrics on the cash flow and balance sheet for the quarter.
Total CapEx was CNY 7 billion, down 10% year-on-year or 40% quarter-on-quarter. Within total CapEx, operating CapEx was CNY 5.2 billion, down 21% year-on-year. Non-operating CapEx increased by 54% year-on-year to CNY 1.8 billion. Operating cash flow for the quarter was CNY 33.8 billion, down 34% both year-on-year and Q-on-Q. Year-on-year decline among normal working capital change was partly due to lower cash receipts from games and online advertising, while our R&D and staff costs continued to grow. Quarter-on-quarter decline was primarily due to our annual bonus payment recorded in the first quarter each year. Free cash flow for the quarter was CNY 15.2 billion, down 54% year-on-year and 55% quarter-on-quarter. Net debt position was CNY 11 billion compared to CNY 20.2 billion last quarter.
The fair value of our shareholdings in listed investee companies excluding subsidiaries was approximately CNY 606 billion or $95 billion as at the end of the quarter. We repurchased approximately 8.9 million shares with about CNY 3 billion for the quarter. Thank you.
Operator, let's open the floor for questions now.
Thank you. Your first question comes from the line of Alicia Yap from Citigroup. Your line is now open. Please go ahead.
Hi. Thank you. Good evening, management. Thanks for taking my questions. My first question is that, you know, in light of the latest situation in China, can management share with us your insight on what you have been able to observe over the past two months in terms of any change of the consumer behavior or your business partners' sentiment as related to your digital content consumption, the consumer willingness to spend, and then your business partners' online ad budget spend, and also the cloud infrastructure migration timing, you know, given the latest lockdown? How will the latest macro headwinds affect your gaming, payment, advertising, or even your cloud business outlook into the second half?
My second question is, can management elaborate a little bit on your prepared remarks related to your video on-demand, live streaming, and also the real-time communication solution? So how will that, you know, these events solution translate to a better pricing eventually that also will help you optimizing your operating costs that could potentially support future business revenue, business service revenue growth and also the margin profile for this segment? You mentioned some customer adoption rate. Any color that you can share on this on-demand service so far? Thank you.
Alicia, thank you for the two questions. There are a number of sub-questions within them, but I'll try to cover off most of the topics you raised. In terms of observations on changing consumer and enterprise sentiment, at a high level generalization, you know, the behavior is very tied to you know, the COVID situation in different cities around China. As you're probably all aware, you know, Shanghai has experienced a very severely unfortunate COVID outbreak. We've seen on the consumer side that the commercial payment volume has remained below trend and down year-on-year for many weeks in Shanghai. You know, the trend is gently improving now, but it's still below where it would otherwise be.
On the other hand, Shenzhen provides a case study of a city that had a small scale COVID outbreak in March and got on top of it very quickly. If we look at the consumer commercial payment volume in Shenzhen, there was a sharp leg down in March with the lockdowns and then a fairly rapid recovery in April. In May, the commercial payment volume is largely back to the previous trend rate and growing year-on-year in Shenzhen. So in terms of, you know, how will the latest macro headwind affect our businesses, it's really a question primarily of, you know, how COVID behaves in different cities across the country.
Drilling into some of your sub-questions, you know, on the digital content side, then, you know, if I were to differentiate the COVID outbreaks in 2022 versus those we previously experienced in 2020, what we saw in early 2020 was that because the COVID outbreaks happened straight after the Chinese New Year period, many people were in a vacation mindset, a holiday mindset, and they remained in a holiday mindset during the lockdown. There was a relatively fast upturn in usage of entertainment-related applications. On the other hand, it took consumers and enterprises and teachers and students several weeks to become comfortable with productivity-related applications. This time around, the COVID outbreaks happened several weeks after the Chinese New Year holiday.
People were generally back at work, back at school, and they sought to continue working or studying, but from home. We saw a slower uptake of entertainment-related applications, but a much faster uptake of productivity-related applications, such as Tencent Meeting. I think that accelerated uptake of productivity applications reflects, first of all, the fact that many more enterprises and consumers and education establishments are now familiar with how to use Tencent Meeting, and WeCom and Tencent Docs. Secondly, the fact that a number of enterprise software services, in particular, the Tencent Meeting, have boosted their market share substantially over the past two years. That's on the digital content.
In terms of how will the macro headwind affect specific businesses, you know, unfortunately, COVID is affecting negatively most people in China, particularly in the affected cities. You know, we're not exempt from that. I think that the negative impact is particularly notable on advertising, partly because of the overall pressure on GDP, partly because many companies, especially multinationals, run their marketing budgets out of Shanghai. Then there's you know, some impact on our payment volumes, as I mentioned, although that's more differentiated city by city rather than universal nationwide. Some negative impact on cloud project launches, and then harder to see the impact on the game business. I hope that covers off your first question.
On the second question around the video on demand opportunity, in general, our belief is that over time, customers are migrating from bare bones content delivery network toward a more sophisticated, you know, real-time video communications and ultimately toward integrated communications platform as a service solutions. As they migrate, the competitive barriers to entry become higher, and the margins correspondingly become healthier. Starting with content delivery network, you know, there are many companies in China that are reselling telco bandwidth for CDN. You know, we have some competitive advantage in that we have very substantial in-house infrastructure, including lease lines that we actually own and operate. You know, frankly, it is a somewhat commoditized business. It's prone to price wars and margin compression.
As you move to real-time video, then there's only a handful of companies that have the algorithms in order to provide low latency video solutions. You know, we're one of them because we have the unique advantage of having supported billions of video chats for Weixin and QQ users for many years. As you move into communication platform as a service, I think we're somewhat uniquely advantaged in that there are many enterprises where the salespeople are individually using Weixin anyway to communicate with their customers. It's very natural for the enterprises to then aggregate those salespersons' customer relationships through the WeCom software and ultimately systematize with the provision of video chat, video communication within WeCom.
In terms of the customer adoption rate, you know, I think both globally and in China, we're very optimistic about the trends we see and the trends we expect to see in the future. If you think about how corporations interact with consumers online, initially, they did it just by operating a website that would include a telephone number. Then they facilitated email within the website, then consumers wanted to move to live chat. In the future, I think it's an inevitability that many consumers for many products will want to move from message chat to video chat. You know, for companies being able to provide low latency real-time video interaction with consumers will just become a necessary cost of doing business and a key competitive tool.
We're optimistic about, you know, communication platform as a service and about low latency real-time communications, you know, and for the future.
Great. Thank you. Our next question comes from Eddie Leung from Bank of America. Please ask your question.
Good evening, guys. I have a question on your new cloud strategy. Just wondering if the changes will have any indication on the mix of your clients going forward. Will that change the mix of clients in terms of vertical industries, the size of your clients, as well as the sophistication of your clients? Thank you.
Well, I think that, you know, cloud services in China is a little bit dissimilar from cloud services in the Western world in that historically and currently, about 50% of revenue industry-wide is from other internet companies. You know, 50% is sourced from, you know, all sorts of, you know, primarily initially offline businesses such as financial services, such as manufacturing, such as governments and local services. You know, our shift is not intended, you know, to, necessarily change that current demand reality. I think that, you know, the shift is necessary in order to provide services cost effectively, and therefore attractively, to the offline first businesses that are moving online.
Because, you know, at the moment in China, and, you know, this was true in the West a few years ago, that there's a propensity for, you know, companies, for cloud vendors to provide, in a very customized, very cost-heavy solutions, so really to act as more as, system solution, providers or IT consultancy services. You know, while that is achievable in an environment of kind of infinite capital, it's not scalable and it's not sustainable. Therefore, you know, it's not where the long-term growth will come from. You know, we've made a proactive decision that we are focusing on, you know, scalable and therefore sustainable and profitable, opportunities. You know, I think if you look at the West, it's been very hard for companies that, you know, try to do both to be successful in both.
You know, generally, if you're still in the you know, project deployment industry, then you know, that remains your bread and butter. Versus those companies that have gone, you know, all in on you know, truly cloud-based solutions, have been the ones that have benefited most from the changing industry profile. You know, we have a big chunk of our revenue from other internet companies, and that will continue. In the long term, the greater growth will come from a whole range of other industries. You know, we have roughly half of our revenue within that segment from you know, infrastructure and the other half from platform software and industry solutions. You know, we aspire to grow both, but particularly the latter.
Thank you. Our next question comes from Ronald Keung from Goldman Sachs. Please ask your question.
Thank you. Thank you, Pony, Martin, James, and John. Want to ask about our online advertising. With the COVID lockdowns and consumption worsened into second quarter, just want to hear how management thinks about the online advertising growth and maybe potential timing for stabilization or some forms of inflection, I think, taking into different drivers like macro across different verticals, easier base for some of the verticals and any potential Video Accounts monetization in that. Thank you.
Yeah. Thank you. You know, what we've said in previous calls was that as we moved into the second half of 2022, then all our sequential advertising trends should inflect positively. Because first of all, we'll lap a number of, you know, discrete regulatory changes, both affecting our advertisers and also affecting our own advertising media. And then secondly, because, you know, over time, we will bring on stream additional inventory, including the Video Accounts. You know, the new factor since we last spoke has been the outbreak of COVID in a number of locations.
You know, depending how quickly COVID is brought under control, you know, will determine whether our previous comments still holds true or whether the timetable gets pushed back because, again, the COVID is hurting, you know, consumption, which is unhelpful. It's also hurting, you know, logistics, especially logistics through Shanghai, which is a logistics hub, which is more unhelpful. Finally, it is impacting the city in China where most multinationals actually have their headquarters and make their marketing decisions, which is further unhelpful.
Thank you. Our next question comes from William Packer from BNP Paribas. Please go ahead.
Hi, management. Many thanks for taking my questions. Firstly, we've had lots of comments recently from various authorities talking to both the healthy development of the platform economy and, in addition, the completion of rectification in recent weeks. Could you help us understand how you think those two important objectives and the implications for Tencent? Secondly, operating cost growth slowed in Q1 relative to recent quarters, demonstrating good cost control. Could you help us think through the trajectory of cost growth over the rest of the year and the key puts and takes? Many thanks.
Okay, I'll take the first question. It is true that in the past two months, the Chinese government has actually released quite a bit of supportive signals towards digital economy and platform economy at the top level. In particular, I would point to yesterday in a CPPCC meeting, Chairman Wang Yang stated that clearly to support a stronger and high quality as well as a larger scale digital economy. Our Vice Premier Liu He also reiterated the intention to firmly support platform economy as well as private economy. I think, you know, that's consistent with last month, as of the end of last month, April 29th, when the Politburo meeting convened, it stated the intention to foster a healthy development of the platform economy.
To complete rectification actions on the platform economy, to implement and normalize deregulation, and also to introduce specific measures to support healthy and compliant growth of the platform economy. We can clearly see that from the senior-most level, there is a pretty clear supportive signals released. I think, you know, for this to translate into a real impact on our business, there is gonna be a time lag and process. I would say it would take time for the specific regulators and ministries to translate this direction into real actions. I think, you know, in the Politburo direction, it's pretty clear to state the sequence, right?
You know, there is a completion of the rectification actions, and then implement normalized deregulation, and then introduce specific measures to support. While we would not be expecting these three actions to be specifically sequential, I would say the sequence is pretty much in that order. It would take some time for the corrective measures to be turning into normalized deregulation, and then the specific supportive measures would be introduced. We would be working closely with the regulators in the hope to see this transition to happen. I think, you know, a positive development is that in April the publishing bureau started to approve ban hao the publishing licenses for games.
It's definitely an encouraging sign. We felt when the transition continued to happen, then the compliance and also well-behaving companies would start to benefit.
Hi. Well, on the cost growth, let me break it into sort of four categories. You know, first of all, you can see in the first quarter that our sales and marketing expense growth slowed, which is, you know, good for us. It's a little bit of a double-edged sword in that a number of other internet companies have also slowed their sales and marketing spend, which, you know, has impact on our advertising revenue. But, you know, it is something that we can control relatively quickly and we have controlled relatively quickly. A second bucket is around our general and administrative expenses, which are largely tied to headcount and cost per head. In the first quarter, for a number of reasons, those general and administrative expenses continued to grow at a rapid rate.
However, you can see that our headcount growth is slowing down. The heads we're adding are, generally speaking, often lower cost heads, and in general our cost per head is also decelerating. As we work through this year, we should expect the G&A expenses to decelerate. A third bucket is around the cost of sales and the impact on gross margin. You know, within this bucket, there are some actions we're taking, you know, for example, managing costs within a Tencent Video that, you know, may take a few months to flow through. There's other actions we're taking, such as exiting some of the lower margin business services activity where, you know, we see the benefits sooner.
Finally, you know, easy to forget is that to get to our, you know, net income, you run through our associate item. You know, associate contributions have moved from a profit to a loss year-over-year. One of the biggest reasons for that is simply that a number of our, you know, big associates in which we have substantial stakes ramped up their community group buying initiatives in the last year.
You know, if you add it all up, you know, investee A spent CNY X billion on community group buying, and we're actually accounting 15% of that loss, and investee B spent CNY X billion on community group buying, and we're associate accounting 12% of that loss, and so on and so on, then in a way, our associate income line, effectively, you know, is a community group buying business all by itself. Because, you know, you add up multiple companies, you know, 10, 15, 20% stakes, and get something that looks like, you know, our own community group buying business. As you may be aware, those companies who were investing very aggressively in community group buying in the last 12 months have now fairly sharply slowed down that investment.
you know, that will start flowing through their P&Ls, and therefore, also through our P&L, but via the associate income line. those are, you know, four buckets within the cost discussion to think about. Thank you.
Thank you. Our next question comes from Charlene Liu from HSBC. Please go ahead.
Thank you. Thank you very much for the opportunity. I would like to ask a question regarding the growth margin for the advertising business. We saw that. Sorry. I apologize. I think across various ad products, we wanted to get a sense on which one are we gonna see maybe faster or slower recovery, and how would that shift, you know, affect the online advertising GPM going forward? 'Cause, you know, I think it came in a bit lower versus our expectations. I apologize for the noise again.
Yeah. No, no trouble at all with the noise. I think in terms of the advertising results for the quarter, then, you know, it's worth being aware that, you know, the Olympics, the Winter Olympics, you know, cost us CNY hundreds of millions between the sort of broadcast rights and, you know, the actual operating expenses around it, and that's a low margin activity that, you know, has a negative impact on the blended advertising gross margin. As we spoke about in Q4, you know, the Video Accounts growth translates at the moment into, you know, more cost than revenue impact. For better or worse, Video Accounts continue to grow video views very quickly in Q1.
You know, some of that flows through into the advertising segment costs. Looking forward, you know, what happens with Video Accounts monetization, and it will be an important driver of how incremental margins behave for the advertising business. You know, beyond that, within advertising, we have a mix of, you know, owned and operated properties that are inherently high margin, you know, like Moments and Video Accounts, you know, owned and operated properties that are lower margin, such as our media services, and then the ad network business that is inherently low margin. You know, depending, you know, how a growth pans out between those three categories will have a big impact on the blended gross margin.
You know, that in turn is a function of which advertiser categories rebound fastest, because certain advertiser categories, you know, luxury goods, for example, skew toward the high margin owned and operated properties. Certain other categories, such as e-commerce may skew towards low margin ad network. It also depends on, you know, the impact of the advertising system changes we're putting through which, you know, may show up at different times for different inventories. Thank you.
Thank you. Our next question comes from Jerry Liu from UBS. Please ask your question.
Hi, good evening. Thank you. I would like to just ask a couple of things on gaming, maybe separating domestic and international. First on domestic, with the ban hao restarting, I'm wondering if we can be a little bit more positive on growth on either grossing or revenue growth later this year, or should we have a little bit more patience given some of the titles might be coming later? Then on the international side, first of all, I was wondering if we did have that accounting adjustment that was discussed last quarter, if we had that in the first quarter at all.
Secondarily, can we see the international grossing accelerate or will the normalization, you know, from COVID take a bit longer to play out? Thank you.
Yeah. Thank you for the game questions. On the international games then, yes, we had a sort of catch up of revenue in Q4 related to one of our subsidiaries, Supercell. And then there was a you know, sort of accounting catch down of revenue in Q1 related to Riot, but the catch down was smaller in magnitude than the catch up. In terms of the outlook then, you know, we don't have a crystal ball, but generally speaking, you know, the game business outside China, particularly for popular mobile games, you know, had a very buoyant period, you know, from late 2020 through late 2021. You know, now, it's facing a tough comparison against that period.
When I say it, I mean, you know, the industry as a whole, and there's a number of, you know, listed companies with big mobile games that have reported a similar phenomenon. I think it's reasonable to expect that for PUBG Mobile, there'll be, you know, tough comparatives for another few months before the year-on-year trends normalize toward the end of this year. You know, separate from PUBG Mobile then, most of our big PC games are doing fine. You know, that they didn't benefit from COVID as much necessarily, and they aren't hurt by a COVID hangover. You know, we have very kind of long life mobile games, you know, like Clash of Clans, which are also doing fine.
The revenue bounces around a little bit quarter -on- quarter depending on the content released in a given quarter. You know, the user trends and the propensity to pay appear to be stable to growing over time. As we look into 2023 and beyond, you know, that's when we expect more sort of big budget games that we've been you know, ramping up in the last two years to be released and to start meaningfully impacting the international game revenue positively. On the domestic game business, I think that as Martin suggested, the ban hao approval is you know positive for a number of reasons.
One being that, you know, more games can be published, another being the signaling effect in that it appears that, you know, the regulators are now much happier with, you know, where the industry is, and therefore it's a more, you know, stable environment where, you know, people don't need to sort of look over their shoulder and try to second-guess whether there's, you know, other regulatory changes looming on the horizon. So, you know, overall, we're very happy with the ban hao approvals. We ourselves didn't get, you know, a game on that approval list this time, which, you know, is fine.
You know, the period with no ban hao approvals obviously hurts most those startup companies which don't have any games and therefore don't have any cash flow versus, you know, the bigger, more established companies that already have games, already enjoy cash flow and, you know, could ride out that period, more comfortably. You know, we think that it was sort of very rational, that you know, the ban hao starts with, you know, the smaller game companies and then will move up to the bigger game companies, including ourselves in the future.
I think in terms of the outlook then, yes, with more ban hao being issued and, you know, with the industry now on a more stable regulatory footing than, you know, it's reasonable to expect that the industry grossing trends will, you know, begin to improve as we move through the year, and, you know, over time, that will then translate into reported revenue trends. It's not an immediate process and, you know, it will take several months to play out.
Thank you. Next question comes from John Choi from Daiwa. Please ask your question.
Thank you very much for taking my question. I have two questions. First of all, I think Weixin Video Accounts has continued to gain good traction. Can management you know, elaborate a bit more about the potential of this you know advertising business in the longer run? I know that we are still focusing on user engagement and you know, carefully you know, trying to grow the business. But eventually, would it be fair for us to see a similar advertising business ad loads or business potential such as our peers in this area? That's my first question. My second question is, we noticed that the investees the value has come up a lot this quarter given the market volatility.
Has this made us to rethink of our investment strategy going forward and what would be our key focus? I think, you know, management did mention previously that there will be more of a balanced approach, but I was wondering if this might be a more opportunity for us to play aggressive offense or a bit more conservative going forward. Thank you.
I will take the first question. In terms of Video Accounts, it is true that we are very encouraged by the strong growth momentum of Video Accounts, in terms of videos viewed as well as time spent. I think if you wanna think about the monetization potential, I would say eventually, right, you know, it should have similar monetization per time spent with the similar products in the market. It will take time to get there. Along the way, we'll continue to improve the user experience so that we try to strike a better balance between monetization and user experience. A case in point is like our Moments advertising.
We would be probably releasing inventories into the market on a more gradual basis than the industry peers. Along the way, we'll continue to make improvements. Our ad load may or may not be the same. Most likely, I would say our ad load probably will not be the same, will probably be more self-restrained in terms of the ad load.
With that, we can actually achieve potentially a higher CPM eventually by continuously improving the technology by leveraging the fact that both the user base as well as the content are actually high-end in nature and leveraging the fact that there's better connection with the overall Weixin ecosystem, including official accounts and the social graph as well as the social communication infrastructure and the connection to mini programs so that the conversion can actually increase. The fact that, I would say, you know, when you have a shorter total amount of time spent on a platform versus a longer time, the more of a diminishing marginal return actually starts coming.
The first 20 minutes is probably gonna be worth more than the last 20 minutes. You know, that's sort of the overall way through which we think about this. Over time, always try to strike a better balance between monetization and user experience, but also try to unleash the full potential of the monetization of this platform.
On your second question around our portfolio of investments in other listed companies and the reduction in the value thereof quarter- on- quarter. You know, as a first point, if you look at the reduction in value, actually a very big percentage of that reduction was due to proactive steps we took that I think are very good for investors. Meaning, you know, we distributed the stake in JD worth about $16 billion directly to investors. We disposed of, you know, $3 billion stake in another company, and the proceeds of that have then partially been used for buybacks of our own stock. We also disposed of a couple of billion dollars of stakes in other companies.
All in, during the first quarter, if you compare the capital we sort of raised from divestments and distributions, it was about four times bigger than the capital we put to work investing in other companies. Of course, you know, when we do those divestments and distributions, it's inevitable and naturally desirable that the value of our portfolio that remains is diminished by the divestments and distributions. You know, looking forward, we continue to be active in divestments. You know, we're very cognizant of the multiple macro risks out there, particularly the fact that central banks in the developed world are generally increasing interest rates at very rapid rates.
You know, this is something that hasn't been seen for decades, and it has implications for how investors value some of the, you know, high growth, low margin, high duration, tech companies which represent a portion of our portfolio. We are very thoughtful about, you know, those risks and managing those risks. One of the ways that we do manage those risks is through the step up in the pace of divestments, distributions and so forth. That said, we also are a company that, you know, generates very substantial free cash flow. We're a company, by virtue of our position, we have insight into emerging technology trends, among consumers, among enterprises. You know, we see new opportunities, interesting opportunities emerging.
Sometimes we see, you know, old opportunities which we're familiar with from previous investments reemerging as valuations decline. You know, we're being very selective. We're being very disciplined, both in terms of, you know, investing carefully and also divesting when necessary. We continue to find opportunities and, you know, we continue to put capital to work against those opportunities.
Right. Thank you. Our next question comes from Gary Yu from Morgan Stanley. The line is open. Please ask your question.
Hi. Good evening. Thank you for the opportunity to ask question. I actually have two follow-up question to the prior questions. First one is on advertising margin. I understand that there are multiple factors affecting the margin. Could management help us to kind of quantify or rank, you know, different factors in terms of level of impact? Be it, you know, lower eCPM from our more profitable inventory, and also, you know, some of the COVID impact, some of it is Video Accounts investment. So how should we look at kind of margin trend going forward, based on these, you know, various impact? The second question is regarding the comment on cost optimization. Is there any room for, you know, more aggressive control in terms of headcount-related, you know, G&A or R&D, expenses?
I you know understand that there is a slight increase in headcount still in first quarter. Is there any further room for, you know, more optimization, either from non-core business, or any other areas where we can see more aggressive, you know, cost cutting, from this area? Thank you.
Yeah. On the advertising margins, you know, I think that last quarter we tried to prioritize or rank, force rank the various factors that were affecting our advertising business. You know, the top factor was really, you know, regulations impacting demand, regulations impacting categories such as, you know, education and games, and reducing the demand for advertising. A lesser factor was regulations impacting supply, such as the flash screen ads. You know, those have some negative impact on our ad network business, but, you know, less so on Moments or official accounts where the challenge was more of a demand problem. You know, refreshing that framework this quarter, the paramount driver is COVID.
You know, the COVID situation is tragic and it has you know negative consequences for advertising spend for the three different reasons that I talked about earlier. You know, for us and while the current COVID outbreaks being brought under control, then you know they're very. It's a great challenge for the advertising industry. Again, the good news is that you know while it's taken a period of time for the COVID to be brought under control in Shanghai, it was brought under control very quickly in Shenzhen.
There is a precedent in the very recent past for successfully bringing COVID under control. You know, the less good news for our advertising business is that, you know, Shanghai is the sort of capital, if you will, for you know, media advertising marketing decisions in China, particularly for multinational companies, and Shenzhen is not. You know, with the situation in Shanghai, it has a disproportionate impact on advertising nationwide. Thank you.
Thank you.
In terms of cost control, I answer the second question. In terms of cost control, I think for cost items in relation to the organization and staff, our principle is that the optimization is done based on structural changes and structural needs. We are not likely gonna react to temporary factors, which will go away in the short to medium term. If we look at the current situation, the incremental negative impact is actually largely related to COVID. That's why we felt, you know, we're not gonna react to this by optimizing our organization and staff further. We may pursue other cost controls such as reduction in marketing costs.
If there's further lockdown then there's probably not that much need to do as much marketing, for example. You know, that would be the routes that we'll be looking at. I think organization and staff is gonna be much more based on structural factors.
Right. Our next question comes from Elinor Leung from CLSA. Please ask your question.
Thank you very much, management, for the opportunity to ask questions. The first question is regarding the resumption of the game approval. Given in the first month there's only 45 new game is approved, do you think there is a structural change in the market that the government is going to approve less games than before the suspension? If that's the case, how is that going to affect our future game growth if we get less new game in the future? The second question is regarding the mobile ad network. We see a sharp decline in the quarter because of the regulatory change, and what do you think the future of these mobile ad network in the future? Thank you.
I think on mobile ad network, you know, it's an industry that is prevalent globally. It's an industry that's sort of necessary for the economic survival of smaller and medium-sized apps and websites. It's an industry that's here to stay in China. It's been through, you know, many previous shocks, but, you know, we haven't talked about it as much in the past because, you know, during the PC internet era, Tencent was really a laggard or not present in a PC ad network. It was only with the boom in mobile internet that, you know, we became a substantial participant in mobile ad networks. You know, this cycle, the two big participants in mobile ad network, us and ByteDance, are different from, you know, the big participants in prior cycles.
You know, ad network has rebounded from prior cycles and, you know, I'm sure it will rebound from this cycle because on the supply side there's enormous amount of inventory sitting in these small and medium sized apps that you know needs to be monetized for the apps to survive. On the demand side, there's always advertisers who are looking for incremental traffic even if it's from you know less branded media sites. On the game ban hao, you know the answer is yes. We believe that generally speaking, there will be fewer game approvals in the future than there were in the pre-2018 period.
You know, we've held that belief now for a couple of years, and it's a big part of the reason why in the last two years we've reconfigured our game business from top to bottom to focus on releasing and usually developing fewer, bigger-budget and hopefully better games. You know, we think that we are really the pioneer in the industry in terms of doing that. At any point in time, we generally have you know, a similar or smaller pipeline than some of our competitors who have much larger headcount.
The reason is because we're putting, you know, more headcount against each game in the belief that only a limited number of games will secure the ban hao in the future, and therefore we wanna make, you know, that limited number of games be all that they can be. You know, I think that while we're very early in this, you know, the results so far are quite positive. If you look at, you know, 2021, then two of the games that we released were the two most successful games in the industry as measured by users. You know, this year with the Return to Empire game is now the number two in the strategy genre. That's a small user but high ARPU genre.
You know, more importantly, looking forward, we're pretty excited about the quality of the content that we have in our pipeline. Again, it's a narrower pipeline with, you know, fewer, but we think bigger, better titles than would have been the case three years ago because of this, the regulatory environment, as well as the change in user tastes. Even without the regulatory change, users are becoming more sophisticated, more informed about the quality of games. Therefore it makes sense to focus more resources on fewer bigger bets.
Operator, let's take one last question.
Thank you. Our last question comes from the line of Alex Yao from J.P. Morgan. Please ask your question.
Thank you management for taking my question. A couple of follow-up questions. Number one on cloud. In this quarter, we have seen the revenue impact on cloud, given the strategy of the transition. Can you share with us the margin trends since the transition? That's the first one. Second one is on the video, the long-form video business. I understand you guys are sharply focusing on cost optimization and margin improvement this year. Does this also apply to the video business? Is improving margin and achieving breakeven one of your key priority in this line of business? Thank you.
In terms of, you know, the impact on the cloud in respect of the growth margin, it actually improved a bit, you know, because of, you know, the fact that we have mentioned of getting away from loss-making contracts. It did help, you know, us in this quarter.
In terms of your question about Tencent Video, then, you know, people use the word healthy a great deal, probably too much in connection with Chinese internet. You know, our aspiration is not to get our video business to a temporary breakeven situation. It is to, you know, over time move our video business to a structurally healthy and sustainable position. You know, in reality, there have been quarters in the past when Tencent Video has already achieved breakeven, but, you know, we didn't sustain that. You know, what's critical is really sustaining it. Achieving one quarter breakeven is not difficult in the video industry. You know, you can choose not to commission expensive content.
You can choose, even though you've already commissioned expensive content, not to air the content in that quarter, because then the reported, you know, P&L that quarter is flattered. You can choose in the current quarter to write off capitalized video content. You have a big loss this quarter, and then, you know, the next quarter, you air that content, it still picks up some traffic and revenue. The incremental margin optically is very high, even though the true economic return is not attractive. You know, those are all things that one can do if one wants to be at breakeven next quarter. You know, that's not what we're aspiring to achieve. We're aspiring to just move the business to a structurally healthy position.
You know, I think we've already done what I hope is the most challenging part, which is that, you know, Tencent Video was the eighth or ninth company to enter the space in China. It's now the clear leader in terms of subscribers, in terms of subscription revenue, in terms of advertising revenue. As I mentioned, it has already achieved breakeven in some past quarters. You know, now we want to move toward a sustainably profitable position. You know, part of that is continuing to optimize the revenue through price rationalization and so forth. Another part of it is being continually selective about the content that we air.
You know, when we were moving from ninth place to seventh place to fifth place, we had to compete in every kind of content because we didn't know which content really mattered. Now that we're in first place, we have much greater clarity on, you know, what content counts, what content doesn't. We can be more selective about allocating our spending to the content that counts.
Finally, you know, somewhat differentiated, we also have, you know, the opportunity that we're seizing to benefit from, you know, the vertical integration with, you know, upstream IP over which we already have influence, whether that's because the upstream IP is a web novel within China Literature, or it's content produced by New Classics Media, or it's a mobile game from the Tencent game portfolio. You know, the long-form video industry in China has been an extremely challenging industry for many years. Now it's as difficult as it's ever been. The industry has also now moved toward a much more rational stance in terms of costs, in terms of ARPU.
You know, we're seeking to continue that shift and, you know, ultimately make this, you know, a good return business, just as long-form video elsewhere in the world is a good return business. Thank you.
Thanks, James. Thank you everyone for joining the call today. We are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website at Tencent.com. The replay of this webcast will also be available soon. Thank you, and see you next quarter.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.