Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2022 Q2 results announcement webinar. I'm Wendy Huang from Tencent IR team. At this time, all participants are in a listen-only mode. After management's presentation, there will be a question and answer session. For participants who dial in by phone, if you wish to ask a question, please press Five on your telephone to raise your hand. If you are accessing from the Tencent Meeting or 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 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 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 and 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, Ma Huateng, 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. Thanks everyone for joining us. During the Q2, we actively exit non-core businesses, tightening our marketing spending and changing the operating expenses. This enable us to sequentially increase our earnings despite difficult revenue conditions. Total revenue was CNY 134 billion, down 3% year-on-year and 1% quarter-on-quarter. Gross profit was CNY 58 billion, down 8% year-on-year, but up one percent quarter-on-quarter. Non-IFRS operating profit was CNY 37 billion, down 14% year-on-year, but up 0.4% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was CNY 28 billion, down 17% year-on-year, but up 10% quarter-on-quarter. For our key services, we generally retain our first place positions in activities including social, games, long-form video, news, music, literature, payment, and mobile browser. Combined MAU of Weixin and Weixin was 1.3 billion.
Mobile devices MAU of QQ was 569 million. Before I hand over to Martin, I would like to welcome Professor Zhang Xiulan as a new director and a member of Corporate Governance Committee, broadening our board's independence, gender diversity, and areas of expertise. With that, I hand over to Martin for strategy review.
Thank you, Pony, and good evening and good morning to everybody. The internet industry in China has really faced significant changes and challenges since early 2021. As a result, our revenue conditions have become difficult, and financial performance was under pressure over the last few quarters. When we announced our results for the Q4 of 2021 in March, we laid out our strategic plan to proactively embrace changes and reposition our businesses to align with the new industry paradigm. Today in this section, I would like to share with you the encouraging progress that we've made so far. To start with, let me walk you through efficiency initiatives that we have implemented that reduced our costs and are stabilizing our earnings.
First of all, we closed down certain non-core or redundant businesses in areas such as online education, e-commerce, and game live streaming. Second, we rationalized underperforming businesses, including loss-making digital content services and subscale social media products. Third, we tightened our control measures for marketing programs and cut down spending with low return on investments, especially in the area of user acquisition. As a result, we reduced our selling and marketing expenses for the Q2 significantly by 21% year-on-year. Fourth, we migrated all domestic in-house services to Tencent Cloud for higher productivity and enhanced cost efficiency. Fifth, we controlled our headcount by optimizing our workforce and controlled growth in staff costs. At the end of the Q2, our total headcount was down by over 5,000 sequentially.
While our Q2 results reflected the initial cost savings from these efficiency initiatives, we expect to benefit more from them in the coming quarters. In addition to the aforesaid, efficiency initiatives that help us stabilizing earnings, we have been and will be implementing additional efficiency initiatives at business level to support our earnings recovery, even while the macro environment remains challenging. For cloud services, we have been scaling back loss-making activities and shifting focus from customization and subcontracting heavy projects to more rapidly growing our internally developed products, driving margin improvements. For commercial payment, we're proactively managing our funding channels to lower our unit transaction costs. We're targeting our development and operational efforts on higher value services, such as industry-specific use cases, which will enhance our unit economics and margins.
Long-form video, we are introducing more discipline in our content spending and putting a strong focus on return on investment. We're reducing discounts on Tencent Video subscriptions, which has the effect of raising our effective video ARPU. For video accounts, with our ecosystem reaching a virtuous cycle stage of critical mass, where more viewers attract more content creators and vice versa, we can reduce our content procurement spending. With the product reaching scale, we can also devote our engineering resources to optimize bandwidth and server utilization associated with the service, bringing down our unit costs per video view. In addition to the last two stages, if you will, we have also been developing new and high-quality revenue streams that will drive earnings growth in this period.
Today, I will discuss the most immediate of these revenue initiatives, and that is advertising within Video Accounts. Video Accounts has become one of the most popular short video services in China, with substantial user engagement. In the Q2, its total time spent exceeded 80% of Moments level. Its total video views increased robustly by over 200% year-on-year. In addition, several features of the Weixin ecosystem amplify the effectiveness of Video Accounts ads for advertisers. Firstly, we provide transactional functionalities within Weixin, such as Mini Programs where advertisers can create powerful landing pages and facilitate transactions. WeCom, where advertiser salespeople can interact with interested consumers, so advertisers can drive sales and leads conversion seamlessly within the Weixin ecosystem. Secondly, the range of interactions with our users enable us to help advertisers better target their audiences.
Thirdly, our social graph enables advertisers to reach a broad audience base and build deep user engagement. We believe that video accounts in-feed ads represent a very significant value creation opportunity for us because strategically, they allow us to expand our end market share. As advertisers have already been spending aggressively on multiple short-form video platforms, we should be able to capture more advertising budgets. Financially, they layer a new revenue stream with high incremental margin onto our existing cost base. In terms of schedule, we launched in-feed ads in mid-July, initially selling the ads on a contract basis. We will be making additional inventory available on a bidding basis by the end of August. Our monetization framework for video accounts ads is similar to that of Weixin Moments in terms of a progressive climb over time.
For your reference, Weixin Moments took five quarters to reach CNY 1 billion in quarterly ad revenue. We expect to surpass that level more quickly with video accounts given the current size of traffic and already strong advertiser demand for short-form video ads. Video accounts will eventually grow into a substantial revenue source for us over time. Before closing my strategy review section, I would like to share with you how we are positioned to enhance and broaden our revenue growth when the macro environment improves. On top of driving a near-term earnings bottoming out, as well as recovery through efficiency and revenue initiatives that I just talked about. Firstly, we believe that the regulatory environment in China is progressing from rectification to normalization gradually, which should bode well for the industry over time.
Specifically, for platform economy, we saw recent regulatory direction trending more positive and supportive, supporting well-regulated, healthy and sustainable development of the industry. For games, we believe the issuance of new banhao should help the overall industry renew growth over time. We expect to receive banhao in the future, which should benefit our domestic game business. Secondly, several of our businesses were adversely affected by COVID-19 resurgence and economic deceleration, but are significantly geared toward a future economic upturn. Approximately half of our revenues are from activities that closely contribute to and benefit from China's economic activity in the form of FBS and advertising.
As an example, our commercial payment volume slowed to low single-digit growth in April as major cities locked down, but recovered to high teens growth in June. For advertising business, the revenue decline rate stabilized in the Q2 before the benefit of launching video accounts in feed ads and under the current macro environment. In conclusion, we remain confident about our resilience in navigating through challenges and our ability to capture opportunities when they arise. Now with that, I'll pass to James to talk about the business review.
Thank you, Martin. For the Q2 of 2022, our total revenue was down 3% year-on-year. The VAS represented 53% of our total revenue, within which the social network sub-segment was 21%, domestic games 24%, and international games 8%. Online advertising was 14%, and FinTech and Business Services was 32% of total revenue. The value-added services segment revenue was CNY 72 billion, broadly flat year-on-year. Social network revenue was up 1% year-on-year to CNY 29.2 billion. Increased revenue from video accounts live streaming services were largely offset by decreased revenue from music and games related live streaming services. Video subscription revenue increased year-on-year as less promotional activity resulted in subscriptions dipping to 122 million but higher ARPU.
We launched several popular self-commissioned drama series such as A Dream of Splendor, which ranked first by video views across all online platforms in China in June. Per QuestMobile, Tencent Video widened its audience lead with its mobile DAU more than 20% higher than that of its closest peer in June. Our music subscription count and subscription revenue increased year-on-year. In July, Tencent Music sold over 6 million units of Jay Chou's digital album, reflecting pent-up demand for user engagement with artists. Domestic game revenue was down 1% year-on-year to CNY 31.8 billion, reflecting transitional industry-wide challenges, including fewer big game releases, lower user spending, and minor protection measures. Revenue from existing games, Honor of Kings, League of Legends, and Moonlight Blade Mobile decreased.
While recently launched games, Fight of the Golden Spatula, Wild Rift, and Return to Empire contributed incremental revenue. International game revenue decreased 1% year-on-year to CNY 10.7 billion due to an industry-wide normalization in user spending on mobile games post-Covid. PC game revenue increased, benefiting from robust growth in Valorant and the launch of V Rising. The Weixin video accounts on the consumer side, total video views increased over 200% year-on-year, benefiting from increased social sharing and improved AI recommendation algorithms, with video views for AI-recommended content increasing over 400% year-on-year. On the producer side, daily active creators and video uploads and video accounts grew over 100% year-on-year, providing additional content breadth and depth to support future consumer engagement.
We increased video accounts mindshare among live streaming fans with a series of live concerts, each attracting tens of millions of viewers, as well as top-tier sponsors. On QQ, we enrich virtual experiences where users interact using their Super QQ Show avatars. We introduced shared virtual spaces where users can make friends and engage in community activities such as holding virtual beach parties and graduation ceremonies. We enabled users to chat over live audio using their avatars. Turning to domestic games, we're using the current digestion period to develop our technical capabilities and sustain our player engagement, which should position us well once conditions normalize. For measuring engagement, one can look at the time spent on our games in the most popular and fastest-growing game categories relative to competing titles in those categories and relative to the past.
The most popular game categories in China are battle arena and action shooter games, within which our flagship Honor of Kings battle arena game was the first place game by total time spent across all games in China in the Q2. While its monetization decreased year-over-year, its total time spent by adult players slightly increased, and our newer battle arena game, Wild Rift, ranked sixth by total time spent. Our action shooter game, Peacekeeper Elite, was the second place game by total time spent industry-wide and also increased its adult player total time spent year-over-year. Among the fastest growing genres, we entered the management simulation category with the July release of League of Legends: Esports Manager, which is currently the highest grossing simulation game year to date.
We entered the extraction shooter category with Arena Breakout, which ranked eighth by total time spent among all games in July. Our auto battle game, Fight of the Golden Spatula, released late last year, has climbed to the fourth highest time spent game industry-wide in the Q2. The international games industry is also experiencing a digestion period, but we're progressing on some key strategic initiatives which we view as positive signposts for the future. Illustrating our studio's game operation capabilities, Riot's two-year-old Valorant achieved record high MAU and quarterly grossing receipts Q2. Valorant has broken into and grown the crowded tactical shooter category through super serving unmet player needs, prioritizing fairness over monetization, and varying highly professional e-sports activities on top of their core compelling competitive experience.
On the acquisition front, our European mobile game studio, Miniclip, recently acquired SYBO, developer of the endless runner game Subway Surfers. Subway Surfers is the most downloaded mobile game globally over the past decade and boosts Miniclip's daily active user base by 30 million to a total of 70 million, positioning Miniclip as one of the biggest developers by DAU worldwide. On the new game front, our Stunlock Studios, v rising game sold over 2 million copies in its first month of early access on Steam. Showcasing our competitiveness in the increasingly important genre of survival open world crafting games. Moving to online advertising. Our advertising revenue was CNY 19 billion in the Q2, down 18% year-on-year, reflecting weakness, particularly in the Internet services, education, and finance sectors.
However, this quarter marked our first sequential revenue growth since the Q2 of 2021, with a tailwind from positive seasonality and a headwind from comparing against the Winter Olympics in the Q1 this year. Ad spending on our platform was impacted in April and May by the pandemic resurgence and logistics disruptions. In June, the year-on-year decline rate narrowed as large e-commerce platforms increased ad spend with us for the 618 promotions as year-on-year comparisons began to ease and as underlying advertising demand slightly improved. In Moments, we introduced frame-breaking ads, which are popular with brand advertisers. We began rolling out video accounts in feed ads on a contract basis in July to influential brands such as BMW, Armani, and Louis Vuitton.
For media advertising, our long-form video ad revenue increased quarter-on-quarter due to stronger content releases and positive seasonality, despite a tough comparison against the Winter Olympics. Looking at FinTech and Business Services, segment revenue was CNY 42 billion, up 1% year-on-year and down 1% quarter-on-quarter. The FinTech services revenue growth paused in April and May as disruptive COVID-19 resurgence has impacted commercial payment activities. Nationwide, our commercial payment volume slowed to low single-digit growth in April, but bounced back to high teens growth in June. On a regional basis, payment volume for every province and tier one city in mainland China has now returned to positive year-on-year growth rates. For business services, our revenue declined slightly year-on-year as we continue to scale back loss-making activities, in particular, projects with a high proportion of subcontracting.
Our own products revenue grew sequentially, especially in areas such as database, big data, and AI. Hence, our business services gross margin increased quarter-on-quarter, benefiting from the improved revenue mix and reduced cost base. In Platform-as-a-Service, our TDSQL database revenue grew over 30% year-on-year, contributing over 5% of our cloud revenue. Key financial institutions increasingly adopted our database for their core systems. We released a new version of our cloud-native solution, TDSQL-C, with comprehensive upgrades in product architecture, hardware capabilities, and engine kernels. Frost & Sullivan named TDSQL the leader in distributed databases in China, citing our strengths in areas such as scalability and industry solution service support. For Software-as-a-Service, Tencent Meeting launched a marketplace for plugins in June. Examples of plugins include Tencent eSignature, which enables users and enterprises to sign agreements in a secure manner anywhere.
Evernote, which provides a convenient way for participants to create notes during meetings. NeoCRM's plugin, which simplifies scheduling before a call, database access during a call, and maintaining meeting records after a call. Now I'll pass to John to discuss the financial review.
Hi, everyone. For the Q2 of 2022, total revenue was CNY 134 billion, down 3% year-on-year or 1% quarter-on-quarter. Gross profit was CNY 57.9 billion, down 8% year-on-year or up 1.4% quarter-on-quarter. Net other gains were CNY 4.4 billion, down 79% year-on-year or 66% Q-on-Q, which were primarily non-IFRS from such items such as net gains on disposals and the revaluation of certain investments, partly offset by impairment provisions against certain domestic investees. Operating profit was CNY 30.1 billion, down 43% year-on-year or 19% Q-on-Q. Net finance costs were CNY 1.8 billion, down 7% year-on-year and quarter-on-quarter.
The year-on-year change was mainly due to forex gains recognized this quarter compared to losses for the same period last year, but partly offset by the increase in interest expenses due to increase in indebtedness. Share of losses of associates and JV were CNY 4.5 billion compared to CNY 3.9 billion last year. Non-IFRS share of losses were CNY 1.0 billion or CNY 1 billion compared to CNY 0.4 billion last year, mainly reflecting the impact from JD.com ceasing to be our associate. Income tax expense increased by 25% year-on-year to CNY 4.6 billion, primarily driven by low base effect resulted from one-off deferred tax adjustment associated with an investee last year, as well as the provision of withholding tax during the quarter. The effective tax rate was 19.2%.
IFRS net profit attributable to equity holders was CNY 16.6 billion, down 56% year-over-year or 20% quarter-over-quarter. Diluted EPS was 1.915 renminbi, down 56% year-over-year and 20% quarter-over-quarter. On non-IFRS basis, operating profit was CNY 36.7 billion, down 14% year-over-year or up 0.4% quarter-over-quarter. Net profit attributable to equity holders was CNY 28.1 billion, down 17% year-over-year or 10% or up 10% quarter-over-quarter. Diluted EPS was 2.896 renminbi, down 17% year-over-year, or up 11% quarter-over-quarter. Moving on to gross margins. The overall gross margin was 43.2%, down 2.2 percentage points year-over-year or 1.1 percentage points quarter-over-quarter.
By segment, gross margin for VAS was 50.6%, down 2.3 percentage points year-on-year, or up 0.2 percentage points quarter-on-quarter. The year-on-year margin decrease was a result of revenue mix shift within the segment, particularly more revenue contribution from lower margin video accounts, live streaming services, as well as higher staff costs with stable revenue. Gross margin for online advertising was 40.6%, down 8.2 percentage points year-on-year or up 3.9 percentage points quarter-on-quarter. The year-on-year margin decrease reflected higher operating costs, in particular, costs associated with video accounts, staff costs, as well as the fact that full exemption from cultural construction fee no longer available this year.
The Q-on-Q margin improvement was driven by 618 e-commerce festival, video content cost optimization, as well as the absence of content cost from Winter Olympics. Gross margin for FinTech and Business Services was 33.3%, up 1.3 percentage points year-on-year or 1.7 percentage points Q-on-Q. The year-on-year margin improvement was due to favorable mix shift within FinTech services and lower revenue proportion from business services, which carry a lower margin. The Q-on-Q margin improvement was driven by cost optimization and reduction of loss-making activities of cloud services. On operating expenses, selling and marketing expense was CNY 7.9 billion, down 21% Y-on-Y or 2% Q-on-Q, reflecting more disciplined marketing activities, particularly for digital content services.
Selling and marketing expense was 5.9% of revenues, down 1.3 percentage points year-on-year. R&D expenses were CNY 15 billion, up 17% year-on-year or down 2% Q-on-Q. The year-on-year increase was mainly due to higher staff costs and Q-on-Q decline reflected our efforts to optimize workforce and control growth in staff costs. R&D expenses was 11.2% of revenues. G&A expenses excluding R&D were CNY 11.2 billion, up 14% Y-on-Y or down 0.6% Q-on-Q. The year-on-year increase was mainly due to higher staff costs and office expenses. As a quarter end, we had approximately 111,000 employees, up 18% year-on-year or down 5% quarter-on-quarter. Take a look at our operating and net margin ratios.
Non-IFRS net margin was 27.4%, down 3.6 percentage points year-on-year or up 0.4 percentage point quarter-on-quarter. Non-IFRS net margin was 21.6%, down 3.8 percentage points year-on-year or up 2.2 percentage points Q-on-Q. The sequential improvement reflects our business rationalization and cost optimization initiatives as well as lower associates costs. Finally, I'll summarize some key cash flow and balance sheet metrics. Total CapEx was CNY 3 billion, down 57% both year-on-year and quarter-on-quarter. Within CapEx, operating CapEx was CNY 2.1 billion, down 65% year-on-year as we proactively reassessed and tightened our spending plan for the year. Non-operating CapEx decreased by 8% year-on-year to CNY 0.9 billion. Operating cash flow for the quarter was CNY 35.7 billion, up 11...
Up 12% year-on-year and 6% quarter-on-quarter. Free cash flow for the quarter was CNY 22.5 billion, up 30% year-on-year or 47% Q-o-Q, reflecting operating cash flow generation and more disciplined spending towards CapEx and media content. Net debt position was CNY 20.4 billion compared to CNY 11 billion last quarter. In addition to currency translation difference, the sequential increase was mainly due to payment of cash dividend by the company amounting to CNY 13 billion and repurchase of shares by the company amounted to CNY 3 billion, largely funded by free cash flow generation during the quarter. The fair value of our shareholdings in listed investee companies, excluding subsidiaries, was approximately CNY 602 billion as of 30th of June, 2022.
Thank you, management. Again, if you are dialing in by phone, please press 5 to raise a question. If you are accessing from the Tencent Meeting or Zoom meeting application, please click the Raise Hand button at the bottom left. We will take one main question and up to one follow-up question each time. Our first question comes from Ronald Keung of Goldman Sachs. Ronald, your line is open.
Thank you. Thank you, Pony, Martin, James, and John. Hearing all the impressive user and time spent growth of video accounts. Want to hear what is management's expectation of the potential room for advertising revenues from this video account, if we benchmark with other short form video platforms. How do we see e-commerce as a potential within that? Would there be any time spent cannibalization within WeChat as video accounts continue to grow? Thank you.
Yeah, thank you very much for the question, Ronald. In terms of, you know, benchmarking the long-term revenue opportunity for video accounts, you know, we provided a couple of references. One is that video accounts now represent roughly 80% as much time spent as Weixin Moments, and that ratio has, of course, been rapidly climbing. All else equal, the eCPM on video accounts will likely be slightly lower than Moments, but the advertising intensity will be higher. Net-net, the revenue potential per minute of user time spent will be higher. Another way of benchmarking is against the incumbent short form video services. Currently video accounts has lower aggregate time spent, but the CPM appears competitive with those incumbent services or superior to those incumbent services.
You know, I think if you take the two together, they actually tie out fairly similar outcomes to each other. In terms of the risk of video accounts cannibalizing Weixin Moments, then we have not seen such cannibalization, and we do not expect to see such cannibalization because the different services provide different user needs. Just as the growth of Moments did not cannibalize Weixin Chat, you know, we believe the chat experience, the experience of sharing photos and articles with your friends, and then the experience of watching short form videos provided by AI algorithms are three discrete internet use cases.
Thank you, James.
In terms of e-commerce, right? You know, I would say, we do see e-commerce live streaming to be an opportunity potential, but that would take some time. I think in terms of staging, right, you know, we actually have to go from the short form video to live streaming. As you can see, we actually have been building the user habit of live streaming over time, including the very successful launch of some of the live concerts. Once we have built a habit of people watching live streaming, then we actually need to have an ad system, right? You know, which actually can allow some of the merchants to bring traffic not on...
Not just from organic basis, but also by throwing ad dollars to attract the users into their live streaming commerce. Then when that happens, then I you know we need to recruit merchants to be doing live streaming for the purpose of commerce. After all this is done, right, I think you know our ecosystem advantage would start coming into play because our Mini Programs can actually very easily help the merchants to conclude transactions. Our private domain advantage can actually help merchants to accumulate customers of their own and establish a longer-term relationship than just a one-time transaction.
I think, you know, those will be sort of, you know, the progression of the live streaming e-commerce, and we'll try to do it on a stage by stage basis.
Got it. Thanks, Martin.
Thank you, Ronald. Next question comes from William Packer of BNP Paribas Exane. William, your line is open now.
Hi, management. Many thanks for taking my questions. Firstly, could you update us on any developments in the regulatory backdrop following the recent commentary from the authorities around the healthy development of the platform economy and completion rectification? Last quarter, you provided some helpful observations arguing it would likely take time for these high-level directives to filter through to specific regulators, and it also likely follow a sequence. Are there any developments to highlight? Secondly, operating cost growth slowed further in Q2 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. Well, in terms of your first question on the regulatory front, I think, you know, we have given some of the highlights in our strategy section. I think as you have observed, right, you know, the recent regulatory direction is actually trending toward more positive tone for platform economy. The key message is like, you know, one, to promote well-regulated, healthy and sustainable development. Two, to complete the rectification. Three, to carry out regular supervision. That's reiterated in both the State Council meetings as well as the Politburo meetings in late July. I would say along that guiding principle, right, we have seen a number of observations.
Number one is that there's actually no new regulation this year that are materially detrimental to the industry. The second one is, you know, there is a resumption of the issuance of banhao, and there are multiple batches that have been issued. In addition to that, thirdly, we also have seen initiatives to formulate more supporting policies for platform economy across various regulatory bodies. For example, one is NDRC-led interministerial task force that has been set up to foster the development of digital economy and coordinate policies on strategic areas such as big data and Internet Plus. The Ministry of Commerce also announced opinions to promote the development of cultural content. For example, expanding pilot program of game approval, fostering internationally renowned brands in games.
We have seen quite a few new developments along the line of the general more supported direction. Having said that, we do expect the supporting measures will take time to play out. We look forward to seeing more of them coming in the near future.
Will, on your second question around the impact of the various margin initiatives, then Martin talked about the first batch of cost initiatives that we've already implemented. For those, I think you've started to see the marketing expenses come down quite sharply already. You have begun to see a partial, although not full flow through to lower cost of sales. You haven't yet in the Q2, but you will in subsequent quarters see a flow through to G&A from some of the headcount and compensation adjustments we made. Martin also talked about a second batch of expense initiatives, which are more business specific, which will take effect and show through during the H2 of the year.
Finally, we have some high margin revenue initiatives, of which the most immediate is video accounts that will flow through too. We believe, with those three sets of initiatives taken together, we can return the business to year-on-year earnings growth, even if the macro environment remains as it is today.
Thank you. Next question comes from Thomas Chong of Jefferies. Thomas, your line is open.
Hi. Good evening. Thanks, management, for taking my questions. I have a question regarding the macro headwinds that we are seeing globally. Understand that management has different initiatives and cost control measures, but just want to get some color with regard to the gaming side. We are seeing our international game and domestic games are impacted by softer gamer spending. Just want to get some color about our gaming strategy on this regard. How would we tackle these macro headwinds going forward? My second question is also relating to the cost side.
Given that we have done a great job in the cost control measure, just want to get some color about the earnings growth with all these initiatives. Should we expect this to happen starting in Q3? Thank you.
Yeah, Thomas Chong. On the cost control, as we mentioned, we've taken a number of steps in the H1 of the year. Some of those have already borne fruit in the Q2 results, others will bear fruit in the H2 of the year. We'll take some further steps, and, you know, we believe that, you know, we can return to earnings growth in the coming quarters, even if our revenue remains as it is now. In terms of the game business, you're right. It is a digestion year for different reasons, both for domestic and international games. You know, our strategy is to accept that and to focus on really deepening our engagement with users, which we've talked about in terms of our leadership in total time spent.
Also, focus on developing our capabilities, especially in the international markets as well. You know, our growth model is not predicated on the game business returning to revenue growth. We believe we can grow earnings even with the game business as it is now. You know, for the game business, both domestically and internationally, we're focused on engagement and capabilities and also developing good new games. You know, we believe that in time as we move into next year, then that will position us very well to resume game revenue growth. But I want to re-emphasize that game revenue growth is not a precondition for earnings growth.
Thank you, Thomas. Next question comes from Eddie Leung. Eddie, your line is open. Okay, it seems that Eddie has some technical problems. Let's move to the next question. Next is John Choi from Daiwa. John, your line is open.
Okay, can you hear me?
Yes, we can.
Okay. Well, thank you for taking my question. My question is more on the cloud business services. I think if you guys mentioned that, you know, with the
More internal strategy shift, focusing more on the quality revenue growth, such as reducing loss-making activities. This has been a major reason. How, you know, how long do you think this will last? You know, or can you provide some color there? You know, at the same time we are hearing the macro conditions are preventing a lot of the cloud deployment from many of your customers. Are you also seeing that have a major bigger impact? Just quickly on the margins, you know, what are the key areas that we could further improve our profitability, you know, except for introduce more on SaaS, PaaS products? A quick follow-up.
Earlier, I think, you know, you guys did mention on the ads video accounts that you will be progressive, but at the same time it will be faster than, you know, what happened to Weixin Moments. Should we be expecting a different, growth or trajectory for video accounts revenue momentum in the coming quarters? Thank you.
Yeah. In terms of cloud, I would say, it is indeed partly macro and partly a you know proactive initiative from our side to reduce the loss-making activities. Now, on the macro side, very clearly, the most impacted industry vertical is actually internet industry. Internet customers basically got impacted the most, as the industry faced macro challenges as a whole. At the same time, the macro environment also impacted some enterprise clients. And even in some cases, already signed contracts deployment actually sort of got impacted because of COVID-19 resurgence in different cities. Those are the factors on the macro side.
On the proactive side, I would say, one is actually we reduce loss-making activities such as, subcontracting and, very heavy customization because those tends to be loss-making, businesses. At the same time, we also refrain from cutthroat pricing. Certain projects which clearly gonna lose money and at the same time they're of, little value add, for example, if it's purely a CDN type of business without, much opportunity for upselling, then, we in the past, would still fight for those projects. More recently, we actually sort of, you know, tend to give them up. Those combination of factors would mean that our revenue actually is seeing less growth. In past quarter, it actually declined year on year.
I think, you know, what we try to drive for is actually an increase in terms of gross profit and a narrowing of the losses, that the business actually incur, over time. I think, you know, we are actually making good progress toward those goals. Now, in terms of margins, I would say, a very important part is actually, given we have very large existing customer base already, you know, we actually focus our development and our operational and marketing effort on upselling our existing customers into our higher margin PaaS and SaaS products, especially, when these products are internal developed. They carry both revenue opportunities as well as, margin improvement and profit generating opportunities.
Now in addition to that, I would say, on the CapEx and on the cost side, right, you know, we actually also try to improve our cost efficiency by managing our supply chain better, by introducing newer technologies such as newer tech and newer chip technologies. In some cases, we actually sort of, you know, work with the chip developers very closely, and sometimes, we'd work with domestic chip developers very closely to get cheaper supplies. At the same time, we actually mentioned that as part of the cost effort, and as a very long initiative of moving all our domestic in-house services all onto our cloud infrastructure.
We finally, after a few years, have got it done, and this actually helped to increase the scale of our cloud infrastructure. By that, it's not just about the procurement, but also on the same tech infrastructure, it's supporting both internal and external clients, and that actually helps to improve our cost efficiency. These are all activities which would help to increase our margin.
On the video accounts, your question was whether the advertising ramp would be faster for video accounts than Moments, and the answer is, yes, it is. You'll see in coming days, we'll launch the bidding for the video accounts in feed ads to supplement the contractual pricing, which should contribute to that ramp. Thank you.
Thank you. We are trying to reconnect with Eddie. Next is Eddie Leung from the Bank of America. Eddie, your line is open now.
Can you hear me?
Yes, we can hear you now. Thank you.
Thank you, Wendy. Apologize. Just a follow-up question about video account. I think you guys mentioned quite a bit about e-commerce advertisers. Definitely, with the connections to mini programs and WeCom, we can see that. Just wondering down the road, like, you know, for example, in 1 or 2 years' time, what type of use cases you can foresee from video account advertising beyond e-commerce transactions? Related to that, how video account will affect the online advertising space. Specifically, do you think it's more competing for budget on other, let's say, you know, online media platforms, or do you think it's creating new advertising demand, and why? Thanks.
Yeah, Eddie. It's obviously competing with other short-form video platforms. You know, advertisers have a budget for short-form video, and, you know, they already split that two ways, and going forward, they're increasingly splitting that three ways. You know, advertisers say we're gonna spend X amount online, Y percent of that will be on short-form video, and, you know, previously we didn't tap into the X percent, and now we've begun doing so. You know, that's where we think the budgets will come from. In terms of the e-commerce commentary then, you know, with regard to the Q2, what we called out was really that we saw an uplift in our e-commerce advertising spending in June, and an uplift for the overall quarter versus the Q1.
you know, there's a number of reasons for that, including the proliferation of Mini Programs. Also including, you know, some of the changes in the China internet landscape meant that some big e-commerce companies which underspent on Tencent properties in the past have begun spending more aggressively on Tencent properties. So there's been a market share shift in our favor from those really big companies. you know, in terms of video accounts, advertisers, you know, by category then, you know, just as with Moments, we expect a broad spread of categories. So e-commerce is one, but internet services is another. Consumer goods, food and beverage, automobiles are all important as well.
You know, automobiles actually are another area where advertising has been slightly healthier in the last couple of months for us.
That's very helpful. Thank you.
Thank you. Next, we will take the question from Alicia Yap of Citigroup. Alicia, your line is open now.
Hi, can you hear me?
Yeah, we can.
Okay. Hi, good evening, management. Thanks for taking my questions. I have two. The first one is regarding the global gaming landscape. Obviously, we mentioned this is a post-pandemic digestion period. Is that fair to assume this digestion period will start to normalize in the next couple quarters? How should we factor in the inflation issues into the gaming virtual item pricings versus the entertainment spending priority among the global gamers? Will gaming industry also face challenges on the backdrop of this global macro weakness? Or if we actually maintain the virtual item pricing despite this inflationary environment, will gaming actually become more affordable entertainment choices that we could actually see benefiting from there?
Any thoughts that management could help us think about this growth prospect of the global gaming industry would be helpful. Second, very quickly on the cloud business. I understand we have made some progress on enhancing and upgrading the various productivity software service. Monetization may be still at early stage. Any color on the latest adoption rate for this new solution? Will this slight decline year-over-year that you mentioned on business services revenue taper off in the H2, that we could start to see the positive growth earlier than expected? Thank you.
Alicia Yap, on the game question, you know, there's a great deal to unpack there, and I won't even begin to start because it's actually not the most important thing for us. You know, whether the international game industry returns to growth as we enter next year or takes longer depends on whether the weakness we're seeing now is primarily a post-COVID phenomenon, which should cycle out late this year, which would be positive, or whether it's primarily a macroeconomic phenomenon, which could, you know, last for longer, depending on how global economics play out. Historically, the game industry has not been very economically sensitive. However, historically, the game industry was more of a upfront purchase model.
Now with much of the monetization of games being driven by in-game kind of cosmetics decisions, one could argue that the game industry has become more discretionary in nature. There are consumers who you know have been playing their favorite game, have been purchasing items in their favorite game, and then when conditions are more difficult in terms of employment or inflation they reduce their spending while still continuing to play the game. You know the reality is we just don't know and you know no one really knows what the answer is to those imponderables. You know what we do know is that we have some exciting games in the pipeline. We'll be launching Undawn in China in the coming weeks, which we're very excited about.
We have Warhammer 40,000: Darktide coming up internationally in the coming months. What we do know is that irrespective of whether the game business for us takes, you know, months or quarters to re-accelerate, we can, you know, grow the rest of our business and indeed grow our overall earnings, irrespective of what's happening with that game recovery. Thank you.
Now, in terms of the productivity software and the monetization, I would say this is definitely a revenue opportunity, right? You know, and it's one of the revenue opportunities that we have in our coffer. But because it's not the most-
Immediate and sizable in the near future. That's why we didn't talk about it in the strategy update. Instead, within the strategy update, we only talk about the ads within the video accounts. Longer term, obviously, this is a revenue opportunity. In terms of the stage, I would say the adoption is still at the beginning. While it's encouraging, it's still small in absolute numbers. We believe there needs to be a longer conversion and educational process, through which we can get the enterprises to start paying for these productivity software. As a matter of fact, if you would notice, right, you know, this conference call now we have actually moved from a previous webcast to our own Tencent Meeting service.
In effect, our IR department has become a paid user of our own productivity software. We hope the service level is actually satisfactory, and you would actually help us to promote this service to other enterprises. Now, in terms of the business services and in particular cloud, right, which is the biggest component, I would say, for the moment, we're actually much more focused on making sure that we can grow our gross profit pool. At the same time, we can narrow our absolute dollar in terms of losses of the cloud business. This is actually the more near-term objective. I would say in terms of the revenue growth, right, I think, you know, we're probably pushing it into the next year.
Thank you. Our next question comes from Charlene Liu from HSBC. Charlene Liu, your line is open now.
Thank you so much, Wendy. I would like to ask if we can get some comments on recent news on potential further divestment of your portfolio companies, Meituan. Can you tell us your thoughts more broadly on the subject, and whether there is any lesson learned from our early disposal of JD and Sea stakes this year? A related question is on how are you thinking about your buyback plans under the backdrop of Prosus and Naspers lowering their holding in Tencent, as well as our long-term and continual investment in strategic areas like international games, SaaS, and Video Accounts? Thank you very much for the opportunity.
Thank you, Charlene Liu. The specific news article you cited was not accurate. We are very focused on capital returning capital to shareholders, given we believe our share price is very undervalued and, you know, also undervalued in the context of our investment portfolio. If you look at, you know, what we've done year to date, we've returned around $17 billion-$18 billion to Tencent shareholders, and we've been largely neutral in terms of our investments, divestments in other companies, excluding the substantial JD divestiture. Our focus from a sort of investment perspective has been buying back and dividending to our own stock, and that will likely remain the case going forward for some period of time.
In terms of your question as to how we can fund ongoing buybacks and dividends, you know, if you take our Q2 results, we generated annualized free cash flow of mid-teens billion dollars, and that's after investing in CapEx and so forth to support video accounts and support international games and support enterprise software. In addition to that, we've disclosed that we have an investment portfolio whose market value was $90 billion at the end of the quarter, and we've demonstrated with JD and Sea that we're willing to work down that investment portfolio over time to more effectively return capital to Tencent shareholders.
In addition to that, we have an unlisted or private investment portfolio where the book value is over $50 billion, and we believe there's been substantial appreciation on that over $50 billion book value. You know, we also look for opportunities to return capital from that private investment portfolio in the form of dividends, distributions, and buybacks. I think if you add all of the above, the annual free cash flow in the teens of billions of dollars, the listed and unlisted investments in excess of $150 billion, then you'll see that we have substantial ammunition relative to our $370 billion market cap to continue doing dividends and buybacks at an aggressive rate.
In terms of what are the lessons we have learned from the JD and Sea distributions. I would say that, you know, we've learned how to process some of the logistics efficiently, which is good. That means we can do future such distributions or sales more rapidly. We've also developed our ability to manage relationships around those transactions and, you know, demonstrate that while we have sharply reduced our stake in JD, as an example, we continue to have a very good business relationship with JD and also with Sea on an ongoing basis. Finally, you know, I think our investors have responded quite favorably to the dividends and distributions, and that, you know, encourages us to think about how to continue down that capital return path going forward.
Thank you.
Thank you very much.
Thank you, Charlene Liu. Next question comes from Gary Yu of Morgan Stanley. Line's open.
Hi. Thank you for the opportunity to ask question. My first question is related to our fintech or payments business. How should we look at the revenue opportunity going forward? This is a revenue line which mostly related to consumption or macroeconomy. So how should we look at that in H2 or maybe going into next year? Second is a follow-up on video accounts. I think we mentioned that our time spent is exceeding 80% of Moments. If assuming these should surpass the time spent on Moments very soon. So does it mean that you know sometime next year or you know in the foreseeable future, video accounts will very soon become our number one kind of advertising channel within the Tencent ecosystem with revenue even exceeding the Moments.
If we compare with other peers, are we confident that we can, you know, have a revenue per time spent, which is at least equivalent or even better than some of the other short video peers? Thank you.
Yeah. Thank you for the questions, Gary. On the FinTech business then, you know, I think sometimes people operate under the misapprehension that, you know, Tencent operates more in the virtual world rather than the physical world and is therefore, you know, immune to slowdowns and unaffected by re-accelerations in the broader economy. There may have been some truth to that misperception many years ago, but it's no longer the case today. You know, today, the FinTech business is you know, our biggest single activity. And if you look at payment merchant acceptance businesses like Visa or Mastercard in the Western world, then, you know, they're very clearly geared to economic activity. They slowed down a great deal when Western economies slowed down, and they re-accelerated as Western economies reopened.
You know, the same thing is proving true for our payment business. As we mentioned in the introductory remarks, our payment volume growth slowed to low single digits year on year in April and May, when cities, you know, went through the COVID-19 shocks. Then accelerated to high teens growth year on year in June, and accelerated again in July. You know, the payment volume growth correlates quite neatly with the payment revenue growth. We had a sharp deceleration just as Visa and Mastercard did because of the COVID-19 shocks, and now we're experiencing an upturn.
To the extent the China economy re-accelerates, then, you know, certainly our payment business, also our advertising and our business services activities, should enjoy the benefits just as they have suffered during the slowdown period. That's on the FinTech question. In terms of the video accounts and, you know, how we stack up versus peers, from a monetization perspective, then we have been running in-feed ads within the video accounts for several weeks now. Those in-feed ads are sold on a contract basis currently. You know, the eCPM on those contract ads is moderately lower than the eCPM on contract ads on Moments, but it's higher than the blended eCPMs for ads on the two incumbent short video services.
We will be rolling out bidding price ads within video accounts in the coming days. You know, from that experience, we will have a clearer picture of what the long-term eCPM is for video accounts based on the two incumbent services. Based on the data that we've seen so far from both the contract priced ads and before that from the quality and the enthusiasm of the sponsors for the live stream concerts on video accounts, I'd say that we're quite optimistic that the eCPMs we'll achieve for our video accounts ads should be at least par with the eCPM of the leading short video platform in China today.
Thank you, Gary. We will take the next question from Jerry Liu of UBS. Gary, your line is open.
Yes. Thank you. Thanks for management, Wendy. Yeah, I wanted to ask about maybe a little bit of the reverse of some of the questions earlier about cost control. You know, it sounds like with payments, with advertising, we're seeing some improvements in these businesses in just recent months and weeks. And sooner or later we're gonna have new games coming through. So one of the investor questions we've been getting is, as that happens, are we gonna ramp up some of the sales and marketing and spending? So I get that, you know, if revenue's flattish, then we're seeing is we can still get to an earnings growth environment.
Now, would we, if we have the opportunity, go back to a slight investment mode to drive revenue growth? Thank you.
I think the assumption is correct, right? You know, if we have new game, then of course we'll actually support it with a marketing campaign and we believe that will be money well spent, and especially if it's on a pretty significant title like Undawn.
If I may ask a follow-up. Yeah, so there's been some questions recently about just the ramp of video accounts. I'm just wondering what is the kind of limiting factor, the bottleneck to the pace of the ramp, if you will? I know in the past, for example, with Moments, we've talked about user experience in terms of how fast we crank up the ad load. Is that also the key consideration here? Or what is maybe the priority to determine the pace we can ramp up advertising? Thank you.
Yeah. That's continual optimization and re-optimization process where, you know, we expand the percentage of video accounts users who can see ads. We show them one ad per user day. We measure the performance of that ad. We optimize. You know, we increase the number of ads per user day. We measure the performance of the incremental ads. We re-optimize. You know, for Weixin Moments, that optimization and re-optimization took a long time because it was the first time we'd done it at scale, at least within a Weixin property. Because we didn't have external comps to benchmark against. For the video accounts, we're going through that process faster, because we have the experience of Moments, because we have the external comps to benchmark against.
Also, I believe because our machine learning, hardware and software are better now than they were then. By point of reference, I think if you look back at Moments then, you know, the time lag between us launching, contract price ads versus bidding ads was many quarters, versus for, video accounts it's a few weeks.
Thank you.
Thank you, Jerry. Next question comes from Ellie Jiang from Macquarie.
Right. Thanks.
I think you're live.
Hi. Hello. Thanks. Hi. Can you hear me?
Your line is kind of breaking. Hello?
Right. How about right now?
Now it's much better.
Hello?
Go ahead.
Okay. All right. Sure. I do apologize for that, and thanks very much for taking my question. This is Ellie Jiang of Macquarie. My first question relates to video accounts. I'm just supplementing the previous questions that were asked. Obviously the user engagement momentum is very strong, as well as a very clear roadmap that we have and that bodes well for monetization. Just looking at this very holistically, what are the synergies within the Weixin ecosystem? And how does that compare with ad formats such as Moments and official accounts, given our perspective of a full funnel strategy? And I'll ask the second question about games later. Thank you.
I think that Martin touched on some of the synergies in the opening remarks, including the fact that, you know, when an advertiser buys a video account, they can have that link through to their Mini Program, which is their private domain transactional environment that they value very highly. Including the fact that, they can have the ad link through to WeCom so that a consumer who's interested in a high-value product, such as an electric vehicle, can then, you know, chat with a salesperson for the electric vehicle OEM or dealer.
There's no cannibalization right now, both from the perspective of user time spent, as well as from ad dollars spent.
Sure. Thank you. That's very clear. My second question would be in terms of our international game and also how that aligns with our investment strategy. Our broader investment strategy would be to emphasize on strategic growth. Right now we're in the phase of rebalancing our portfolio. Given the recent news headlines about Tencent potentially raising stake in a global game company, how should we think about global M&A opportunities? How does that align with Tencent's international game strategy? Thank you.
Yeah. In terms of our international game strategy, there are sort of three, you know, prongs for delivering new games. One is the existing international investees bringing new games to market. You know, some of those investees, consolidated investees such as Riot and Supercell are very well known to investors. In the last five years, we've invested in a range of other investees such as Stunlock that are less well known to investors. You know, with the success of V Rising or we hope the forthcoming success of Warhammer 40,000: Darktide, we believe there'll be, you know, more understanding of the value of these international studios.
Secondly, we have our big domestic studios such as Quantum, TiMi, Aurora and MoreFun that are developing games that will be released both in China and overseas, such as Undawn. Thirdly, you know, we continue to be quite active in terms of acquiring new game studios. We called out the fact that, you know, Miniclip, as you probably know, a consolidated subsidiary, has recently acquired SYBO. You know, SYBO brings with it the game Subway Surfers. You know, Subway Surfers has 30 million daily active users, which is actually a gigantic number.
I mean, normally in China, when we look at international game studios, you know, the revenue is very impressive, the product's very impressive, but, you know, the daily active users are an order of magnitude smaller than, you know, what equivalents would achieve in China, because the China game market has many users. You know, 30 million daily active users is a big number by anyone's standards, including our standards. As you can see from SYBO and, you know, its 30 million people playing Subway Surfers each day, we continue to be active in acquiring game studios outside China.
Thank you, Ellie Jiang.
Right. Sure. That's very clear. Thanks for the insights.
Thank you. We will take the last question from Alex Yao of J.P. Morgan. Alex, your line is open now.
Thank you, management, for taking my question. Two questions. Number one, can you share with us your latest thoughts on fintech development strategy? For example, does Tencent need to apply for a financial holding company license? Does Tencent need to establish a separate credit scoring unit and apply for a relevant license? Are you guys going to build your fintech business in a similar or different way compared to comparable size fintech peers? So that's the number one question. Number two, I think, you know, after hearing your aspects of video accounts monetization, am I getting it right that you guys are monetizing this ads property in a philosophically different way compared to your approach on Moments?
Thinking about the long-term monetization potential, would you say you will run the ad load in a similar level as the current peers in the market, given that the ads loaded on Moments after years of monetization is still significantly below general purpose of feed based products? Thank you.
In terms of our FinTech development, I think it's actually relatively stable and progressing quite well. As you can see, FinTech is already a pretty significant part of our overall business. In the past year, we have been engaging with the regulatory authorities to make sure that each part of the FinTech business is completely compliant. We've gone through a lot of business changes to make sure that, you know, these are all done. In terms of the financial holding company, we are still working with the regulators on the licensing part. I would say, you know, whether we're gonna be getting a financial holding company license, it would not have a major impact on our businesses.
The key goal is actually to understand what will be satisfying the regulators' most stringent requirements. If the end result of the exercise is that, you know, we will be applying, and the regulator will give us one license, then that would be great. We believe it would not have an impact on our business. Our business can continue to be conducted. Likewise, for the other specific questions about whether you need a license here or you need a license there, or whether you need to make some changes to the current practice, we believe we have actually been through the examining exercise for the past year and a half.
We're pretty comfortable that we know exactly what we need to do in order to continue to grow our FinTech business.
On the video accounts monetization, has the philosophy changed versus Moments monetization? No, the philosophy is exactly the same, in that we prioritize the user experience first. You can see that that prioritization is paying off because the number of video views within video accounts grew over 200% year-on-year. Now, there are some differences between now and when we began monetizing Moments. One difference is that the benchmarks are much clearer for short-form video than they were for Moments. The second difference is that the machine learning software and hardware is better. A third difference is arguably that the cost to the consumer of an ad load within short-form video is lower than within a social network such as Moments.
Because within short-form video, the consumer is continually previewing videos, swiping through those she doesn't want to watch and accepting those she does want to watch. If in the same way she sees an advertisement she doesn't want to watch, she swipes through it, she doesn't view that as necessarily detracting from her overall engagement with the short-form video product. That's why if you look at the two incumbent short form video services in China, they're able to maintain ad loads of roughly 14%-16%. For Moments, as you may know, the ad load, you know, we show 3 to 4 ads per user day. Given not all users see all of those ads for various reasons, the effective ad load is closer to 2%-3%.
Yes, we do expect video accounts to overtake Moments in terms of ad load, given where the two incumbent peers are already at today.
Thank you. We are now ending the webinar. Thank you all for joining our first results webinar held about internally developed Tencent Meeting software. If you wish to check out our press release and other financial information, please visit the IR section of our company website at www.tencent.com. The replay of this webinar will also be available soon. Thank you, and see you next quarter.