Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2023 first quarter results announcement webinar. I'm Wendy Huang from Tencent IR team. At this time, all participants are in a listen-only mode. After the management's presentation, there will be a question and answer session. For participants who dial in by phone, if you wish to ask a question, please press five on your telephone to raise your hand. If you are accessing from the Tencent Meeting or VooV Meeting application, please click the "Raise Hand" button at the bottom left. Please be advised that today's webinar is being recorded. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties, and 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 propelled 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. 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 pass you to Pony.
Thank you, Wendy. Good evening. Thank you for joining us. During the first quarter, we resumed a double-digit revenue growth rate as our payment volumes benefit from and facilitate domestic consumption recovery. Our games revenue improved, and our advertising revenue sustained rapid growth. Our non-IFRS net profit increased at a faster pace, reflecting a positive revenue mix shift, operational efficiency, and an easy base period. We are investing in our AI capabilities and cloud infrastructure to embrace the opportunities brought by foundation models, and expect AI to be a growth multiplier that enable us to better serve our users, customers, and society at large. Now let me go through the headline financial numbers for the quarter. Total revenue was RMB 150 billion, up 11% year-over-year, and 3% quarter-on-quarter.
Gross profit was RMB 68 billion, up 19% year-on-year and 10% quarter-on-quarter. Non-IFRS operating profit was RMB 48 billion, up 32% year-on-year and 23% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB 33 billion, up 27% year-on-year and 10% quarter-on-quarter. With our key services, we focused on upgrading our technologies and product innovations. Our franchise in communications and social networks remains strong. Combined MAU of Weixin and Weixin grew 2% year-on-year to 1.3 billion, while QQ mobile devices MAU grew 6% year-on-year to 597 million. For games, we expand our leadership via extending popularity of established franchise and success of newly released in China and international markets.
For digital content, we retained our first place position by subscription account with high-quality content across video, music, and literature. In fintech services, commercial payment volume rebound sharply as consumption activities recovered in China. For cloud, we operate one of China's largest Infrastructure as a Service platforms and announce our high-performance computing cluster in April, which will significantly enhance the efficiency of our foundation model chain. We are the second-biggest provider of PaaS in China by revenue. We operate leading SaaS tools such as Tencent Meeting, the most widely used standalone video conferencing as app. I will now hand over to Martin and James for business review.
Thank you, Pony. Good evening and good morning to everybody. For the first quarter of 2023, our total revenue was up 11% year-on-year. VAS represented 53% of our total revenue, within which social networks sub-segment was 21%, domestic game sub-segment was 23%, and international games was 9%. Online advertising was 14% of total revenue, fintech and business services was 32% of total revenue. For our value-added service segment, the revenue was RMB 79 billion, up 9% year-on-year. Social networks revenue was up 6% year-on-year to RMB 31 billion. Reflecting growth of in-game item sales and music subscription revenue. Our long-form video subscription revenue decreased 6% year-on-year due to delayed content releases during the first quarter.
However, we have taken steps to address this situation, including, number one, enhancing our content to cater to evolving user demands. For example, we released our self-commissioned drama series, The Long Season, in April, which became the highest-rated domestic drama series in the past five years per the Douban re-review aggregator site. Number two, extending our collaboration with short-form video services, which should help long-form content reach more users and capture more monetization opportunities. Music subscription revenue increased 30% year-on-year, driven by growth in paying users and we upgraded the listening experience and strengthened cooperation with labels and artists, which resulted in higher user engagement and paying propensity. Domestic games revenue resumed growth to 6% year-on-year and reached 35 billion RMB. On top of solid performance from key titles such as Honor of Kings, DnF, and CrossFire Mobile.
New game Arena Breakout, which we released in third quarter last year, also contributed notably to the growth. International games revenue increased by 25% year-on-year or 18% in constant currency terms to RMB 13 billion. The robust performance of VALORANT, as well as contributions from 2022 releases NIKKE and Triple Match 3D drove up revenue. For communications and social networks, Weixin Video Accounts consumption continued to grow with rapid increases in time spent and video views. In order to drive its continued organic growth, we are nurturing a healthy and active creator community. First, in order to attract more creators and help them reach their target audience more efficiently, we have upgraded our onboarding programs with greater traffic incentives, wider creator coverage, and more effective content creation tools. Second, we have enhanced the e-commerce infrastructure, enabling creators to be benefiting from sales commissions associated with e-commerce transactions.
For example, we enriched the customer management functionalities in Video Accounts shop, facilitating creators to better engage with customers and increase sales conversion. As a result, our creator community is increasingly vibrant. The first quarter, daily active creators and daily video uploads more than doubled year-on-year, while the number of creators with over 10,000 followers more than tripled year-on-year. On QQ, we deployed a new architecture to optimize development efficiency across operating systems on a unified code base. This new technology foundation also enhances user security with strengthened data encryption mechanisms and improved users' graphical experience with more advanced rendering solutions. We believe this upgrade will enable faster innovation in QQ's user experience going forward. Moving on to domestic games.
Before discussing product and financial trends, I want to highlight that as a result of our continued and dedicated minor protection program, users aged under 18 contributed less than 1% of total time spent and gross proceeds in the quarter. Time spent and gross receipts from users aged under 18 reduced by 96% and 90% from three years ago, respectively. We'll continue to take our societal responsibility with regard to games content and minor protection very seriously. Looking into the performance of our most popular games, Honor of Kings launched highly appealing Shan Hai Jing-themed outfits with targeted marketing programs during the Chinese New Year season, contributing to record high quarterly gross receipts. CrossFire, a PC game we have operated since 2008, successfully attracted returning players with promotions targeting Internet cafes.
CrossFire Mobile, which we launched in 2015, released a popular themed map, outfit, and weapon items based on the virtual idol group created for the game. Both CrossFire and CrossFire Mobile achieved record-high gross receipts in the quarter. Additionally, new games we launched recently in high-potential genres have generated strong traction. Battle of Golden Spatula, which has stayed as the number one auto-battler game since launch in 2021, increased its gross receipts by more than 30% year-on-year in the quarter. We recently launched a fast-paced game mode that appeals to returning and new players, driving average DAU to a record high of over 10 million in April 2023.
With Arena Breakout, the most popular extraction shooter game in China, we have been nurturing a highly engaged user base since launch in July 2022, and stepped up marketing activities during the Chinese New Year. In the first quarter, the title grew and achieved new milestones in DAU and gross receipts. We launched Metal Slug: Awakening in April, moving a classic arcade game IP to a mobile and multiplayer experience. Metal Slug ranked number one among new action games released year- to- date. With that, I'll pass on to James.
Thank you, Martin, and good morning or afternoon or evening, everyone. For international games, we increased gross receipts by a double-digit percent year-on-year with strengthened performance from key titles. VALORANT grew its MAU year-on-year on a new map and a new agent, and drove up its gross receipts by over 30% year-on-year with popular Japan-themed and alien-themed weapon items in the quarter. PUBG Mobile resumed sequential daily active user growth in the quarter after several quarters of decline, benefiting from new combat features and enhanced player versus player gameplay. We introduced a map editing tool to facilitate user-generated content, enhancing user engagement and longevity. Our subsidiary, Miniclip, launched Triple Match 3D in April last year, which has become a breakout success in the highly competitive match game genre.
Leveraging creative gameplay and effective user acquisition, Triple Match 3D is the only title released within the last two years which has broken into the top 10 games in the match genre, driving Miniclip's gross receipts to a record high in the quarter. Turning to online advertising, revenue was RMB 21 billion in the first quarter, up 17% year-on-year. As a reminder, during the same period last year, our revenue included a several percentage point contribution from the Beijing Winter Olympics. The rapid year-on-year revenue growth was supported by the new revenue stream from Video Accounts ads, solid demand for Mini Programs ads, and the continued recovery of our mobile ad network. Sequentially, revenue declined 15% due to adverse seasonality. Ad spend grew year-on-year across most categories, benefiting from the consumption recovery in China. For example, fast-moving consumer goods advertisers increased spending to capture retail sales growth.
Travel advertisers increased spending due to rebounding offline activities. Large e-commerce platforms increasingly recognize us as a key user acquisition channel, boosting their spending with us accordingly. We upgraded our machine learning advertising platform to deliver higher conversions for advertisers. For example, we help our advertisers dynamically feature their most relevant products inside their advertisements by applying our deep learning model to the standard product unit attributes we have aggregated within our SPU database. Advertising on Weixin Properties, which contribute over half of our total advertising revenue, outgrew the overall ad business. Video Accounts revenue ramped up as we attracted new advertisers and incremental spending from existing advertisers. The average revenue per 1,000 impressions of Video Accounts ads sustained at a premium level versus revenue per 1,000 impressions from other short-form video platforms.
For content platforms, our music ad revenue grew rapidly year-on-year, driven by the monetization of ad-supported music content as well as live concert sponsorships. Our long-form video ad revenue declined year-on-year due to fewer releases of popular content. Our mobile ad network revenue increased robustly year-on-year. On the supply side, we increased ad inventory in high conversion rate properties, such as the smartphone manufacturer's app stores. On the demand side, we attracted higher spending from return on investment-focused advertisers, such as the e-commerce platforms. Looking at fintech and business services, segment revenue was RMB 49 billion, up 14% year-on-year. For fintech services, revenue resumed double-digit year-on-year growth, benefiting from the recovery of payment activities. Offline payment transactions rebounded more sharply than online, as categories such as retail, travel, and dining services benefited from people going out and about more frequently.
Meanwhile, year-on-year revenue growth in wealth management and consumer loans continued at healthy rates. For business services, year-on-year revenue growth turned positive in the first quarter, benefiting from stabilization for our cloud services after a period of extensive restructuring, plus the initial contributions from technology support fees that we've begun generating on the Video Accounts live streaming e-commerce transactions. Business services gross margin and gross profit increased notably year-on-year as we reduced loss-making activities and optimized costs, as we began the live streaming e-commerce monetization. Within cloud services, our smart transportation solutions are assisting the digitization of large-scale transportation projects. For example, we leveraged our expertise in areas such as cloud infrastructure, digital mapping, and 3D rendering for smart highway projects in Sichuan and metro systems in Guangzhou. Now I'll pass to John.
Thank you, James. Hello, everyone. For the first quarter of 2023, total revenue was RMB 150 billion, up 11% year-on-year. Gross profit was RMB 68.2 billion, up 19% year-on-year. Net other gains were RMB 0.9 billion, down 93% year-on-year. Operating profit was RMB 40.4 billion, up 9% year-on-year. Net finance costs were RMB 2.6 billion, up 37% year-on-year due to increased interest expense. Share of profit of associates and joint venture was RMB 0.1 billion compared to share of loss of RMB 6.3 billion for the first quarter of 2022. On a non-IFRS basis, share of loss was RMB 0.1 billion, improving from share of loss of RMB 2.2 billion last year.
This was driven by improved profitability of certain domestic associates due to revenue growth and cross-control measures. Income tax expenses increased by 118% year-on-year to RMB 11.5 billion due to pre-tax profit growth, increased withholding tax provision, and a one-time deferred tax adjustment related to an overseas subsidiary. IFRS net profit attributable to equity holders was RMB 25.8 billion, up 10% year-on-year. Diluted EPS was RMB 2.639, up 10%. I'll share our non-IFRS financial figures. Operating profit was RMB 48.4 billion, up 32% year-on-year. Net profit attributable to equity holders was RMB 32.5 billion, up 27% year-on-year. Diluted EPS was RMB 3.353, up 28% year-on-year. Moving on to gross margins.
Overall gross margin was 45.5%, up 3.4 percentage points year-on-year. By segment, gross margin for VAS was 53.9%, up 3.5 percentage points year-on-year, driven by high-margin games revenue rebound. Gross margin for online advertising was 41.7%, up 5 percentage points year-on-year, thanks to strong demand for Video Accounts in feed ads, leading to higher revenue growth with low rate incremental costs. Gross margin for Fintech and business services was 34.5%, up 2.9 percentage points year-on-year. This was due to efficiency improvements and initial revenues from technology support fee for live streaming, e-commerce and Video Accounts. On operating expenses, selling and marketing expenses were RMB 7 billion, representing 4.7% of revenues.
This reflects a year-over-year decline of 13% primarily due to reduced marketing spend. R&D expenses were RMB 15.2 billion, down 1% year-over-year. G&A expenses, including, excluding R&D, were RMB 9.4 billion, down 16% year-over-year. This reflects reduction in staff costs, including those relating to share-based compensation. At quarter end, we have approximately 106,000 employees, down 9% year-over-year or 2% quarter-on-quarter. Let's look at our operating net margin ratios. For the first quarter 2023, non-IFRS operating margin was 32.3%, up 5.3 percentage points year-over-year. Non-IFRS net margin was 22.3%, up 2.9 percentage points year-over-year. To conclude, I will highlight some key cash flow and balance sheet metrics.
Total CapEx was RMB 4.4 billion, down 37% year-on-year. Within total CapEx, operating CapEx was RMB 1 billion, down 81% year-on-year, reflecting our efforts to optimize spending and improve utilization of servers and equipment. Non-operating CapEx rose by 91% year-on-year to RMB 3.4 billion due to ongoing construction projects. Free cash flow for the quarter was RMB 51.8 billion, up 240% year-on-year. This strong growth was driven by higher operating cash flow, thanks to our games revenue rebound, as well as decreased free payments for CapEx and media content. Net cash position was RMB 31.5 billion, compared to net debt of RMB 14.8 billion in the previous quarter. The sequential improvement was due to strong free cash flow generation. Thank you.
Thank you, John. We shall now open the floor for questions. If you are dialing in by phone, please press five to raise a question and then, press six to unmute yourself. If you are accessing from the Tencent Meeting mobile meeting application, please click the "Raise Hand" button at the... We will take one main question, one follow-up question each time. first question, comes from the, Alicia Yap from Citi.
Hi. Good evening.
Alicia, can you speak up?
Yeah. Good evening, management. Can you hear me?
Uh—w e can't hear you clearly. Maybe you turn up the volume.
Okay. Hi, can you hear me better now?
Yeah, it's much better now.
Okay. Thank you. Thanks for giving me the chance to ask questions, and congrats on the solid set of results. First, questions related to your gaming business. It is delighted to see a numbers of the old franchise title regain strong popularity and also achieve a record growth receipt during the quarter. Based your observation and what you have seen from your game performance, are there any notable differences in user gameplay behavior or the spending frequency or the willingness pattern that you could highlight that are quite different from what we saw during the pre-pandemic period? Just wondering if, you know, some of these robust game activity that you experienced during the quarter is more attributed to your effective promotional campaign or this is more, you know, the entire industry phenomenon.
Second questions is on your business services. Wondering what's management view on the recent price cut action by the major peer and how would that affect Tencent's planned initiative and also industry landscape? Thank you.
Yeah. Thank you for the questions, Alicia. You know, on the game business, you know, not to be pedantic, but we feel very strongly that, you know, what you referred to as o ld games are in fact, you know, Evergreen games. If you look at our game portfolio, many of the biggest, most successful titles, including Honor of Kings, League of Legends, CrossFire Mobile, Peacekeeper Elite, PUBG Mobile, Arena Breakout are, you know, competitive games, often team-based competitive games, that are designed to be balanced, fair, and playable, you know, for years or for decades.
That is the, you know, reality that we're seeing across the industry with other similar, team-based competitive games. That is the reality, you know, we've really sought to nurture with these big, Evergreen games. So, you know, in terms of why the games performed well in the first quarter, then, you know, we believe it comes down largely to appealing content. We released appealing content.
You know, players responded to that appealing content by investing in some cases more time, and in other cases, more money or both. So the more money translates into more gross receipts and, therefore more revenue. In terms of, you know, whether there were special promotional campaigns. You know, we always promote the virtual outfits. I think over time, we've become progressively better at promoting the right virtual outfits, you know, at the right time of the calendar year. The business has become more akin to luxury goods, in that there are certain virtual outfits we promote to tie into the Lunar New Year. There are others we promote to tie into the May Day holidays, into the summer period, and so on and so forth.
That's, you know, ongoing trend as opposed to a single quarter phenomenon. In terms of how user behavior has changed from pre-COVID to today. You know, we don't see a dramatic change. I think it's probably fair to say that, you know, in the three years since China went into COVID, despite mixed economic trends, purchasing power has generally increased. You know, the removal of the minor game players skews up the spending power from, you know, those who are still playing games who are older. It's, you know, natural that there's more, you know, ability to spend more on high quality content now than, you know, was the case three years ago. That's in terms of the games and particularly the Evergreen games.
You know, there's many other kinds of games, including content-driven games, and we're seeking to reinforce our position in those other kinds of games. You know, the big games that we really talked about this quarter were typically these Evergreen games. On the business services side, and specifically cloud and the impact of price cuts. You know, the impact of these price cuts on Tencent as a whole is, you know, not notable. As you know, cloud only represents a mid-single digit percent of our total revenue. You know, within that, the price cuts only apply to Infrastructure as a Service, which is a subset of that mid-single digits.
Even within Infrastructure as a Service, if you look at the, you know, price cuts that have been widely announced in the industry in recent weeks, they apply to long-term prepaid contracts. You know, those long-term prepaid contracts are generally entered into by small and medium-sized businesses, but not by larger enterprises. You know, this is an industry where over time the input costs of servers and bandwidth and so forth are generally falling, and it makes sense that the participants in the industry pass on those falling input costs into falling pricing to their customers. You know, the percentage of our revenue that is, you know, impacted by this particular round of price adjustments is, you know, in the few basis points range.
It's not a major moving part for Tencent as a whole. You know, what's more important for us is just continuing to, you know, double down on our competitive strengths within cloud, and continuing to provide the best possible service to our customers, of which price is one but not the only facet. Thank you.
Thank you.
T hank you, Alicia. We will take the next question from Alex Yao from JPMorgan.
Thank you, management, for taking my question. Congrats on a strong quarter. I have two questions. Number one is on the balance sheet. The current deferred revenue increased sharply by 18% year-on-year this quarter. This is a big change compared to the trend in the past several quarters. Can you elaborate the reason? Should we expect a strong VAS and the gaming revenue in the next perhaps two to three quarters? The second question is around the fintech development. We noticed you guys recently launched an installment loan product to selected Weixin Pay payment users. Can you discuss how fast will you roll out the product to the rest of the Weixin Pay users? How should we think about the financial impact on your fintech segment? Thank you.
Yeah. firstly, I would like to explain a little bit about, you know, what is inside the deferred revenue. Actually, there are a lot of components, you know, including the virtual game items, including business cooperation agreements, prepaid advertising, prepaid crowd, prepaid tokens, a lot of different type of prepays in there.
In terms of year-on-year growth, I think it's more, you know, due to the fact that, you know, the online games, you know, actually doing very well in terms of the cash consumption. However, you know, Well, if you look at, you know, the. We should look at the total deferred revenue rather than just, you know, the current deferred revenue because, you know, it represent, you know, some of the items that might extend, you know, beyond one year. If you look at, you know, the total deferred revenue, actually it dropped by, you know, 1% and on year, quarter-on-quarter basis, it increased by 17%, you know, due to reasons that I've mentioned.
F or BCA, it's quite natural that, you know, it will drop quarter-over-quarter because it's, it is amortized, you know, according to the original contract. In terms of, you know, the prepay advertising, actually, you know, it dropped, you know, partly due to seasonality and, partly due to the BCA amortization that I've just mentioned. If you look at, you know, the deferred revenue, I suggest we should, you know, add the two up to arrive at the, you know, the actual, you know, deferred revenue, you know, for the whole company.
In terms of, the installment, loan product, that's actually tied to consumption. This is more like, i f somebody buys an item of high value, then, you know, it actually allows the user to select to pay for the item on an installment basis. This is a product which we're pilot testing right now, and we're not in a hurry to roll it out on a broad basis. This is a product which is designed alongside with some principles which we design our fintech products. Number one, it's actually sort of, you know, in full compliance of the regulatory authority's regulation. Number two, this is something which our users want. It is designed with a very key focus on generating user value because, you know, the users when they want to buy an item, and it's a clear consumption need.
If they have the credit worthiness right, you know, then we are in a good position to give them an installment loan. In some cases, the merchants actually want to see that happen as well. Then, in terms of risk management, we're actually very focused on risk management in this product. That's why we are pilot testing it and want to understand all the credit performance first before we roll it out on a gradual basis. Over time, we would want to work with licensed financial institutions in terms of expanding this product.
Overall, I think this is consistent with our gradual expansion of our range of financial value-added services to our users as well as to merchants that are using our payment platform. At the same time, we have very strong focus on the factors that I talked about as well as self-restraint in terms of the overall scale growth. Because we felt this is actually the ultimate risk control mechanism. If we grow this product on a gradual basis, while at the same time we accumulate a lot of experience and know-how, then the risk management will be done at a high quality way. And this is how we want to manage our financial products going forward.
Thank you, Alex. We will take the next question from Ronald Keung from Goldman Sachs.
Thank you. Hi, hi. Thank you, Pony , Martin, James, John, and Wendy . I guess the first question maybe on the macro and the advertising side that, how is our view on the consumption outlook from here, now that we've passed the two quarters of reopening thus far? If we look at the ad revenue and Video Accounts kind of contribution adding, should we think of a kind of two-year CAGR growth rate? Should we see further improvement in the rest of 2023 as e-commerce and other parts of the business ramp up? A second question, just want to hear how we think about the foundation model AI landscape.
If you could share some of where Tencent sees to be and to see kind of where will kind of we see this foundation model mostly be of commercial value to our business, knowing the different regulations, many kind of different players trying to come in, and the availability of infrastructure and chips. How do we see this business driving our future multiple growth drivers and the cloud growth into the second half and next year? Thank you.
Ronald, on the advertising question, you know, we believe China is experiencing a broad-based consumption upturn. You know, the upturn is not uniform across every category, but it's more pronounced for everyday low ticket price items, more patchy for, you know, high ticket price items. Now, in terms of how that translates into our advertising revenue, we're experiencing strength basically across the board. Fast-moving consumer goods
E-commerce, finance, online services, healthcare, travel, are all behaving robustly. On the weaker side, you know, there are no categories that are notably weak at this point in time. There are categories such as automobiles or electronic products where the end demand is erratic, but what we can see is that, you know, companies in those categories are still very keen to drive sales. You know, one of the ways they do that is by advertising on our platform. On your question about the two-year CAGR, I believe that in the first quarter, the two-year CAGR for our advertising revenue was minus 2%. While we don't give guidance, I think the answer to your question logically should be in the affirmative.
As a reminder, in the course of 2021, we began that year with, you know, our biggest advertiser category was education-related spending, which, you know, dropped very sharply during the course of the year. We also lost several important advertising formats such as the full-screen ads in our ad network, during the course of the year. The two-year comparison does get notably easier for the industry, and for us, as we move forward over the coming months. I hope that's helpful on the advertising side.
On the AI and foundation model side, I think you actually asked a lot of questions, and it's actually very difficult to answer one by one. I'll try to pick on some of the key items. In terms of going forward, we do believe that number one, you know, there's gonna be many models in the market going forward. For the large companies, I think each one of us will have a foundation model. The model will be supporting our own use cases as well as offer it to the market, both on a 2C basis as well as on a 2B basis.
At the same time, there will be many startups which will be, you know, creating their own models. Some of them may be general foundation models, some of them may be more industry and vertical models, and they will be coming with new applications. I think overall it's gonna be a very vibrant industry from a model availability perspective. Then in terms of applications, I think there will be a lot of different applications. You know, overall, the user-to-machine interactions, in particular search and information generation and, you know, those type of applications would actually be more disruptive. At the same time, there will be more of a rush of applications appearing in those use cases.
You know, so general search, vertical search, in terms of content aggregation, a lot of these kind of applications would see new disruptors coming to play. In terms of the user-to-user interaction type of services like social network and short video network and games, long video content, you know, there will be, you know, a lot of usages that helps to increase the quality of content, the efficiency at which the content are created, as well as lowering the cost of content creation. That would be net beneficiary to these applications. Now, in terms of, you asked about regulation, we felt the government's general stance is like, you know, it's supportive of regulation, but the industry has to be regulated.
I think this is not something that's specific to China, even around the world. If you looked at the US, there's a lot of public discussion about having regulation. Even the founder of OpenAI has been testifying and asking for regulation in the industry. I think that is something which is necessary, but we felt under the right regulation and regulatory framework, then the government stance is supportive of innovation, and the industry will actually have room for healthy growth. That availability of chips at this point in time, chips are largely available and there are some workarounds of GPUs that can be sold in China. I think, you know, everybody is actually trying to get supplies.
There may be short-term shortages here and there, and everybody is actually clamoring for allocation. Over time, these chips will be available and, you know, all the players who want to build foundation models will be able to get the chips to build the models.
Thank you. This is super useful. Thank you, Martin and James.
Thank you. We will take the next question from Kenneth Fong from Credit Suisse.
Hi. Good evening, management. Thank you for taking my questions. Congrats on the strong results. I have two questions. The first one is regarding the gap between revenue and earnings growth. Notice that in our quarter, our earnings have outpaced top line growth meaningfully on the back of our Video Account monetization, operating leverage, as well as cost optimization. How should we think about this gap over the next few quarters, consider all these moving parts and drivers? My second question is related to the tax. Our effective tax rate is quite high this quarter, driven by one-off deferred tax of overseas subsidiaries. We didn't seem to find the adjustment in the non-GAAP net profit. How should we think about this one-off impact in our adjusted net profit, if any? Thank you.
Yeah. Thank you, Kenneth. As you observed, the gap between revenue growth and non-IFRS net income growth was unusually wide this quarter on a year-on-year basis. You know, on the other hand, if you look at the two-year CAGR, the revenue growth and the operating profit, non-IFRS operating profit growth was basically identical on a two-year CAGR. You know, what's the right message to take for looking forward? It's somewhere in between, meaning that the breadth of the gap this quarter between revenue and non-IFRS profit growth was abnormally large because of the low base for non-IFRS profit in the same quarter a year ago. And, you know, we do expect that gap to narrow as the base effect normalizes.
On the other hand, we believe we are a structurally more cost-conscious, more efficient company going forward than we were in the past, which should be helpful for margins. Many of our newer revenue streams, such as Video Accounts, such as monetization of the e-commerce live streaming, such as the Mini Program and Mini Game revenue, is coming in at, you know, relatively high gross margins, which is a positive margin mix shift for us versus in previous years, we've been generally subject to negative margin mix shifts. You know, overall, I think that, you know, we, we can aspire to potentially grow profits in line with or faster than revenue.
The delta between profit growth and revenue growth was unusually wide in the first quarter because of the base effect and some of the other factors that we mentioned.
The deferred tax adjustment is not a non-IFRS adjustment. We usually look at the effective tax rate on a yearly basis rather than on a quarterly basis, as there are bits and pieces of true-up happening from time to time, including, say, for instance, you know, this time there might be, you know, some withholding tax in order as we want to remit more money out of the country, as well as, you know, adjustment on some of the deferred tax in here. To give you an overall view of the effective tax rate, we expect that on a non-IFRS basis, in the course of 2023, it will be in the range of 18%-20%.
Thank you, James and John. Very clear.
Thank you, Ken. Next question will be from Esme Pau from—
Hi. Thank you, Wendy, and also management for the opportunity to ask questions. Also congrats on the solid results. I do have a follow-up question on generative AI. I think in the previous question, you very helpfully explained the use cases and also monetization strategy. Just to follow up, in March, so the media reported that we may have already started developing the Hunyuan. Keen to hear more updates on the potential product launch. The first follow-up will be in relation to the training data of Hunyuan. Does that encapsulate open internet data? Also, what's the impact on interoperability and also digital walled gardens? Thank you.
Okay. In terms of our foundation model building exercise, Hunyuan and, you know, I think the headline is that we're making good progress. If you look into the different components, right? The model building is actually progressing well. I think you mentioned about data, and data collection, is basically across the entire internet, and, you know, with specific addition of the data in China. In terms of data in China, it's on high-quality public data, as well as high-quality public data within our content ecosystem. As you know, we have actually a lot of contents that are in-house, and, that is a quite unique addition to the overall data.
In terms of the training, we are scaling up our training organization and the entire production line of training. In terms of infrastructure, it's a core strength for us, given our Cloud business. We have also recently, as Pony mentioned, announced our high-performance computing cluster based on NVIDIA H800 GPUs. That would actually give us an additional efficiency in terms of the training. I think one key strength for us is obviously the use cases, right? You know, we have different products. Teams are already, you know, planning some interesting offerings alongside with their products. Overall, I think, you know, it's actually making good progress, and we continue to believe t hat AI is a growth multiplier for the industry and in particular for Tencent.
Because as we mentioned last time, our core user-to-user services is not subject to disruption, but can benefit greatly from being enhanced by foundation models. Because it can actually help these services to generate content, appealing content on large scale at a low cost. All these are helpful to improve the quality of the service, improve monetization, and also lower the cost. Foundation models also facilitates our introduction of user-to-machine services. For example, it provides a new angle for us to provide to our search, both within Weixin and on our browsers. As well as, if you look forward a bit longer, right?
You know, there could be interesting digital assistants that could be launched in our services. Of course, cloud is actually very important as well, you know, because we felt that the foundation model over time can actually provide very compelling services on the cloud for our enterprise clients, and also enable our PaaS and SaaS to be more competitive.
All right, sure. Thanks. That's helpful.
Thank you.
Thank you, Esme. Next question comes from William Packer from BNP.
Hi, management. Many thanks for taking my questions. Firstly, last quarter you provided a helpful update on develops around the domestic regulatory backdrop. Specifically, could you update us on recent news flow around domestic gaming, short-form video and fintech? As a follow-up, domestic gaming momentum improved markedly in the quarter. With comps easing over the course of the year and new content coming to the market, could we expect growth to accelerate and potentially to return to double digits for that business line? Thank you.
Okay. In terms of the regulatory environment, on the overall basis, regulatory environment continues to trend towards normalized regulation. The government is actually very focused on economic development as well as supporting a healthy development of the digital economy and industry. The latest news bite is on April 28, President Xi chaired a meeting of the Politburo, he called for promoting regulated, healthy development of platform companies and encouraging innovation of leading platform companies. This is a very significant continuation of the expression of support for the overall industry. In terms of the different industries that you talk about, right?
In terms of domestic gaming, I would say, it continues a status of normalized regulation, and game licenses have been approved on a regular basis. That's part of the reason why we're seeing pretty good traction on the overall gaming industry in China. In terms of short-form video, I think, you know, there has not been much update and, you know, it's not a focus of a regulatory action so far. In terms of fintech, I would say, the industry is starting to move into the process of normalization of regulation. If you look at the entire history, right? You know, in the year of 2021, the PBOC started requiring self-review of fintech services by platform companies for the entire industry.
It also conducted a routine inspection on Tenpay, which was widely reported. Through that process, we have been fully cooperative, we have proactively adjust our operations accordingly, according to the requirement of PBOC. I think the inspection now is approaching and conclusion. The inspection results are in the process of being finalized. When such results are concluded and released, we believe we would then see the regulators will be focused on normalized regulation. They will also devote more resources in supporting the development and innovation in the overall industry. That's the regulatory update, both on a macro basis and with respect to the different industries.
Well, on games, I recognize your question was primarily around the domestic China game business. If you take a step back, then, you know, our global game revenue grew at a low double-digit rate year-on-year in the quarter, which was gratifying. We believe that the industry globally has now worked through, you know, some transitional challenges, including the sort of post-COVID hangover in the West, including the lack of new game licenses in China. You know, as a result, the industry can revert closer to its historic high single-digit growth rate, CAGR. And, you know, whether we, you know, outperform or underperform the overall industry will be largely a function of the quality of the content we can bring to bear.
Generally speaking, over time, we have been able to outgrow, you know, this global game industry growth rate of high single digits through a combination of operating some of the biggest, best, most Evergreen games that I talked about earlier, as well as housing some of the most successful and creative studios in the game industry, as well as operating high-growth game platforms such as our emerging mini-game platform. You know, for all those reasons, you know, we think that there's, you know, everything to play for and that the industry is back on a growth track globally. You know, we should work towards growing with or faster than the industry globally. Thank you.
Thank you. We will take the next question from Charlene Liu from HSBC.
Thank you. Thank you for taking my question. I would like to ask about overseas M&A. Clearly, we've seen really strong numbers in the international game statement in Q1. I would like to get an update from the management on M&A strategy for this statement and, you know, your view on competitive landscape, especially after some of the M&A activities from our competitors. How should we think about growth for the rest of the year? I have one follow-up on advertising. Thank you.
Thank you for the question, Charlene. The competitive landscape for acquisitions of game companies outside China has been fairly stable for the past few years. You know, while there are a number of companies that are acquisitive in this space, often their objectives do not overlap with our objectives. Meaning they may be companies with a big console installed base, and they're trying to, you know, acquire game studios to, you know, supercharge that console installed base. Or there may be companies which are, you know, valued on near-term earnings, and so they're trying to, you know, bolt on additional earnings. Versus in our case, we're not married to any single hardware device.
You know, we've been acquisitive with mobile game studios, acquisitive with PC game studios, periodically active with, you know, console game studios as well. In addition, we're very willing to, you know, look forward three or five or seven years when we do these investments and acquisitions. It's often the case that, you know, we're looking at a company that has released a successful niche game the previous year. You know, we know for a certainty that company's revenue will be declining for the next couple of years because it will be digesting the success of the first game.
In many cases, we know the company will be loss-making for a period of time because we're scaling up the team to work on a much bigger sequel, but we don't yet have, you know, the bigger revenue from the bigger sequel. You know, that fits us. It doesn't fit everyone. You know, therefore, you know, there are certain studios that, you know, naturally come to us and certain studios that, you know, naturally go elsewhere, which is fine. I wouldn't say that we've seen, you know, a dramatic change in the game industry acquisitive landscape so far.
Of course, you know, depending on whether certain big deals, one particular very big deal goes through or not, then, you know, we could see more change in the future and, you know, we'll need to be active and reactive around that.
That's good. That's good to know. My second question on advertising. Earlier, you know, management team mentioned that Weixin contributed over half of the total ad revenue. Can the management elaborate on revenue contribution by app products? For example, in the pre-previous quarter, in the first quarter, across Moments, Video Accounts, you know, ad network, et cetera. Going forward, how should we think about revenue mix across these products and GPM trend? Thank you.
Well, in terms of the revenue composition, we won't be super specific. You know, Weixin, as we said, is the majority within that. Moments is historically the largest contributor. You know, Mini Programs and Official Accounts are substantially smaller and roughly similar to each other. Video Accounts have sort of leapfrogged over Mini Programs and Official Accounts because there's a lot of inventory in Video Accounts, and there's very high revenue per thousand impressions in Video Accounts. You know, outside Weixin, the biggest set of properties is the mobile ad network, which has had quite a pronounced bounce back in the last six to nine months. You know, beyond that, there's a drop-off to you know, the long-form video, you know, music, news, and some smaller properties around QQ and QZone. That's the composition.
In terms of the margin profile, then basically all of the owned and operated properties, with the exception of long-form video, are high gross margin, versus long-form video and the ad network, are inherently much lower gross margin.
Understood. Thank you.
Thank you, Charlene. Next we will take the question from, John Choi from Daiwa.
Okay. Thank you for taking my question. I have a question on, you know, on follow-up on the gaming side. I think if you look at domestic game, you know, this quarter we've seen a very strong game revenue due to existing, you know, I think James mentioned Evergreen. As we go into the second quarter, second half, we do have a much more gaming new game launches for domestic markets. I mean, can you kind of elaborate the growth trends in terms of the revenue or growth thing as we head into the second half? Should we be seeing accelerating growth, you know, as from on back of that? Just a quick, you know, some housekeeping question.
This quarter, I think we noticed, very strong operating cash flow of more than RMB 60 billion, but also the investing outflow cash flow was RMB 65 billion. Any color there? Thank you.
On games, I'm not necessarily going to answer your question because we don't provide, you know, guidance as to, you know, whether revenue lines are accelerating or decelerating beyond observing that firstly, you know, the strength in the first quarter was partly due to what I refer to as, you know, Evergreen games. We also saw very good growth from a number of games released in the last one to two years. You know, it's often the pattern with us that when the quarter we release a game, it generates relatively little monetization. Of course, that monetization doesn't translate into our P&L because of our deferral policy. Over subsequent quarters, if it's a good game, we see the, you know, monetization improving. We see the revenue, the deferral starting to flow through into reported revenue.
If it's a really good game, we see the daily active user count increasing. Recently a number of games have fit that profile, including the Arena Breakout, which is the leading extraction shooter game in China, where we've seen, you know, good growth in DAU and in monetization as, you know, players become familiar with this new type of game that didn't exist before. We've seen very good growth in terms of both users and monetization, from the auto chess game, Golden Spatula, that has over 10 million daily active users, which is, you know, rare for a new game in China. Very rare for a game to build to that level over the course of two years, as opposed to it gets that level very quickly and then fade away.
Also quite good trends in the first quarter for our League of Legends: Wild Rift mobile game. Now, obviously, looking through the rest of this year, we have a number of big games that we intend to release domestically that we're excited about. Again, you know, with some of those games, they'll monetize well from day one. With others, they'll, you know, monetize more gradually over time. Thank you.
In respect of the net cash flow using investing activities of RMB 65 billion, actually is a little bit tricky because it usually increase some items which is pretty normal in nature. Say, for instance, you know, out of that, RMB 65 billion, RMB 50 billion is related to net fixed term deposit placement. Other than that, you know, items just like CapEx, media content, and M&A, and each of those items are maybe around, you know, RMB 4 billion-RMB 4 point something billion each.
Thank you. Next, we will take the question from Jerry Liu from UBS.
Hey. Thanks management. Yeah. I wanted to go back to the advertising business and ask about e-commerce. First, you know, e-commerce as a category has been an area of strength. I just wanted to ask whether we think some of this is share gains Tencent's taking in the ad industry from other players. Second of all, how do we think about the development of e-commerce, especially within Video Accounts? I remember previously we talked about how this is something that could take some time to ramp up. I'm also seeing that in the first quarter, we started to generate more technology fees from e-commerce live streaming in Video Accounts.
I'm wondering if we could see more ramp up of e-commerce related monetization here. Thank you.
Yeah. In terms of the big e-commerce companies advertising with Tencent, we're certainly experiencing share gains. I think that those share gains arise for a number of reasons. One is, changing perceptions about sort of ecosystem competition. Meaning in the past, there were some companies that chose not to advertise with us because they viewed us as a, you know, ecosystem rival. They may have reassessed, you know, that perspective over time. Secondly, we're deploying much more sophisticated machine learning now to our advertising targeting that is particularly beneficial for, you know, big e-commerce companies with a gigantic range of SKUs.
You know, now we can ingest those SKUs and then display the right SKU to the right user within the e-commerce company's advertisements. That's on the e-commerce companies advertising with us.
In terms of e-commerce in relation to live streaming and Video Accounts, we felt there's actually a very big opportunity. Part of it is already proven in the other short video companies. When you have short video, you can actually lead to live streaming, live streaming can lead to e-commerce transactions. But in addition to that, right, you know, we felt that we can have some unique value-added component that we can provide to the merchants because we have a private domain. We also have Mini Programs which can actually allow us to connect with the Video Accounts. As you know, there's actually a very big transaction ecosystem that's already happening on Mini Programs.
If we can actually start connecting that with the Video Accounts and live streaming, you know, it would actually make the overall e-commerce ecosystem much more vibrant. We also have payment, which is a very important enabler. When we have all these additional components added to the Video Accounts and live streaming, we felt there's actually a very large headroom for us to grow in e-commerce. We want to do it on a gradual basis so that we can build the infrastructure right. We can actually provide the best balance between user experience as well as the ROI for the merchants.
At the same time, most importantly, we actually want to make sure that the transaction ecosystem is actually of high quality. Instead of having a lot of one-time buyers of low-quality products or certain products which are, you know, very high margin for the merchants and they basically sort of, you know, spend all the money on advertising instead of on the product quality, we actually want to make sure that the ecosystem is built right so that it delivers the right value for the users as well as for the merchants and the overall transaction ecosystem is healthy.
That will take some time, but we felt, you know, if we do all these right, there's actually a very long runway for us to grow this part of the business.
Understood. Thank you.
Gary. We will take the last question from Robin Zhu from Bernstein.
Hi. Thank you, and thanks very much for taking the question. I guess two questions, if I may. One just on your operating expenses. I mean, you're clearly showing impressive cost discipline and with operating expenses trending the way they have. Just curious to hear your thoughts on, you know, at what point does the company pivot more towards spending on growth, whether it's on new games, whether it's on AI, and kind of related services, or, you know, and/or what in your mind is the trigger to kind of go back on the front foot and spend more, if the consumption recovery to date hasn't done that already? A second question on gaming.
James, you mentioned a while back that macro was having an impact on kind of willingness to pay and gaming ARPU as a result. Just curious to hear your thoughts on, you know, whether the recovery in Q1 is pent-up demand and therefore, you know, would there be questions about sustainability, and how the recovery looks between kind of, you know, games, high ARPU games where whales dominate versus these large DAU games where everyone kind of buys skins and ARPU is generally lower? Thank you.
Thank you. On the second question, we saw quite a broad-based recovery for our game business. You know, I think out of our top 15 games, 12 of them were up year-on-year. This wasn't a matter of, you know, one or two games bouncing while the others languished. You know, our overall portfolio uplifted. You know, whether that's due to pent-up demand or just underlying demand, time will tell. You know, I explained earlier why I think it's underlying demand. On the operating expenses then, you know, there will be situations, whether it be a new game launch, or, you know, buying and then depreciating GPUs for our large language model, where we need to invest, and we will invest aggressively.
You know, that said, I think that we will also keep operating expenses under quite tight control going forward. You know, one reason is because, you know, we've become structurally more efficient. Second reason is that generally we're mix shifting toward inherently higher margin activities as we're bulk those up while exiting some inherently low margin activities. You know, more broadly, you spoke about when do we need to, you know, pivot to investing for growth. You know, I think actually if you dig into our range of businesses, there's a number of emergent growth drivers, be it the Video Accounts, advertising monetization, be it the e-commerce live streaming monetization, be it the Mini Program and Mini Games.
What's interesting is, you know, each of those are very sizable opportunities which, you know, are becoming meaningful and, you know, have very long runways to expand over time. You know, in none of those do we need to spend a great deal of extra money to make them more popular. You know, we aren't incurring gigantic subsidies on, you know, providing community group buying food solutions. We aren't, you know, inducing users who would otherwise be on another short video service to, you know, install Video Accounts and spend time on Video Accounts instead. You know, we're just providing what we think are, you know, very attractive and somewhat differentiated experiences to users within, you know, our bigger apps, particularly Weixin.
You know, letting users, over time, discover those, enjoy those, socialize those, and spend more time and ultimately more money on those. You know, I don't think that we're in a sort of non-growth mode and, you know, at some point in the future, we need to flick a switch and dramatically increase sales and marketing or subsidies to go back to growth mode. I think we're in growth mode right now. It's just that the nature of our growth drivers is that they do not require heavy subsidies. They do not require heavy sales and marketing activity. Thank you.
Thank you.
Thank you, Robin. We are now ending the webinar. Thank you all for joining our results call. 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.