Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2023 second 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 5 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, and please be advised that today's webinar is being recorded. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties, and may not be realized in the future for various reasons.
Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of the group's financial performance 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. 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 and update on our progress on some strategic growth drivers. Chief Financial Officer John Lo will conclude with financial discussion before we open the floor for questions. I will now pass it to Pony.
Okay, thank you, Wendy. Good evening. Thank you everyone for joining us. During the second quarter of 2023, we sustained a solid revenue growth rate, along with the gravitation to higher quality revenue streams with better margins. This transition, combined with the careful cost discipline developed in the previous years, resulting in profit growth exceeding revenue growth. We achieved a notably rapid growth in advertising revenue, benefiting from deploying machine learning on our advertising platform and from Video Accounts monetization. Let me go through the headline financial numbers for the quarter. Total revenue was RMB 149 billion, up 11% year-on-year, or down 1% quarter-on-quarter. Gross profit was RMB 71 billion, up 22% year-on-year and 4% quarter-on-quarter.
Non-IFRS operating profit was RMB 50 billion, up 37% year-on-year and 4% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB 38 billion, up 33% year-on-year and 15% quarter-on-quarter. Turning to our key services. For communications and Social Networks, combined MAU of Weixin and WeChat grew both year-on-year and quarter-on-quarter to 1.3 billion, with increased synergies among Video Accounts, Mini Programs, and Moments. For games, we released 2 high-quality PC games in China, our most important PC game launches since 2015. In generative AI, we are internally testing our own proprietary foundation model in different use cases and are providing Tencent Cloud Model-as-a-Service solutions to facilitate efficient deployment of open-source foundation models in multiple industry verticals.
I will now hand over to Martin and James for business review.
Thank you, Pony, and good evening and good morning to everybody. For the second quarter of 2023, our total revenue was up 11% year-on-year. VAS represented 50% of our total revenue, within which Social Networks sub-segment was 20%, domestic games sub-segment was 21%, and international games was 9%. Online Advertising was 17% of total revenue, and fintech and business services was 32%. For value-added services, the segment revenue was RMB 74 billion, up 4% year-on-year. Social Networks revenue was up 2% year-on-year to RMB 30 billion, driven by increased revenue from Mini Games and music subscriptions, which was partially offset by lower revenue from music and games-related live streaming services. Long-form video subscription revenue decreased 2% year-on-year.
Video subscriptions declined 5% year-on-year, but increased 2% quarter-on-quarter to 115 million, benefiting from our original animated series and drama series. We're consistently upgrading our content production capabilities. For example, we're now applying Unreal Engine for producing animated content, such as our series, The Land of Warriors, in order to streamline the workflow and enhance production capacity and efficiency. Music subscription revenue increased 37% year-on-year, as both ARPU and subscriptions grew at double-digit rates year-on-year. TME has enriched its subscription offerings in terms of membership privileges and content, and in June, our music subscriptions counts achieved a record high of 100 million. Domestic games revenue was stable year-on-year at RMB 32 billion, partly due to less commercial content scheduling for our biggest games after a very robust first quarter.
Revenue from our relatively new and growing competitive esports games, Arena Breakout and Fight of the Golden Spatula, increased. International games revenue increased 19% year-on-year, or 12% in constant currency terms to 13 billion RMB, benefiting from the robust performance of Valorant, Nikke, and Triple Match 3D. Moving on to communications and Social Networks. Weixin total user time spent increased healthily in the second quarter, benefiting from greater engagement across Video Accounts, Mini Programs, and Moments. Video Accounts expanded its user base and deepened user engagement. Total time spent almost doubled year-on-year in the second quarter, driven by double-digit growth in DAU and much faster growth in terms of per-user time spent. Meanwhile, we achieved strong growth in user interactions, such as likes and comments.
We are strengthening our content ecosystem by facilitating a thriving creative community as daily active creators and daily video uploads sustained robust year-on-year growth in the second quarter. We're providing tools which help creators scale their Video Accounts presence, while also contributing to our ad revenue growth. Building on deeper user engagement and a stronger content ecosystem, we're making significant progress in expanding monetization opportunities within Video Accounts. For advertising, we're in the early stages of establishing a significant revenue stream with high incremental margins. We believe there is still very substantial revenue potential to be realized going forward. Live streaming e-commerce, which is still at early stage of development, achieved 150% year-on-year GMV growth in the second quarter, providing an opportunity for us to create a new high-margin commission-based revenue stream.
During the quarter, we upgraded our consumer shopping experience and boosted repeat sales for merchants by sourcing more branded products, introducing shipping return insurance, and upgrading customer service functionalities. Turning to Mini Programs, we're now serving more than 1.1 billion users on monthly basis, and their engagement grew significantly as time spent per DAU increased double-digit year-on-year in the second quarter. 4 million developers participate in our Mini Program ecosystem, offering a breadth of Mini Programs, ranging from public services and productivity tools to AI-powered power photo editors. Today, I would like to walk you through our recent success in Mini Games as a vertical use case example. Mini Games engage over 400 million MAU and 300,000 game developers build upon the Mini Program framework.
Both leading game companies and smaller studios actively develop and operate Mini Games, including casual games, card games, and many other types of games. In the second quarter, more than 100 Mini Games each achieved quarterly gross receipts of over RMB 10 million. The strong growth of Mini Games demonstrates our compelling value proposition for developers. Firstly, for developers with innovative game concepts, we help them to reduce entry barriers and launch costs. They can build user base through social sharing, pre-existing login, and instant play infrastructure offered by the Weixin ecosystem. Secondly, for developers with successful app games, we enable them to extend their reach to a new audience of non-app users by porting to Mini Games. Thirdly, developers can benefit from advancement in Mini Games infrastructure, leveraging our know-how and game technology.
For example, our infrastructure can now support sophisticated genres such as shooters with fast loading and smooth gameplay. Mini Games also provide Tencent with significant strategic value. First, through Mini Games, we host the largest casual game community in China with hundreds of millions of MAU, substantially exceeding the MAU of the largest app-based casual games in the market. Second, Mini Games allow us to expand our audience base and cultivate new gamers. Over 50% of Mini Games MAU do not play Tencent app games, and half of Mini Games MAU are female. Finally, Mini Games provide us with game distribution and ad revenues, characterized by high margins and platform economics, as opposed to hit-driven dynamics. From a reporting perspective, we report net platform fees to Tencent instead of gross user spend as revenue, and we allocate these fees to social network subsegment instead of games subsegment.
Therefore, growth in third-party Mini Games does not benefit our game segment revenue, but flows through to our VAS segment in the form of high-margin revenues. Developers can also buy advertising and contribute to our advertising revenue. With that, I will now hand over to James to talk about the other business updates.
Thank you very much, Martin. For domestic games, our mobile and PC game, MAU, and DAU each increased year-on-year in the second quarter. After releasing highly commercial content in the first quarter, we reduced such releases in the second quarter. Based on trends quarter to date, this reduction was a temporary phenomenon, and we believe our domestic game revenue should resume year-on-year growth in the third quarter. Taking a longer view, three of our new game launches in the past two years, Fight of the Golden Spatula, Arena Breakout, and Wild Rift, have been steadily building their user bases, and each ranked among the top 10 mobile games from all developers in China by total time spent in the second quarter.
While different new games from different developers show up in the top download and top grossing charts from month to month, we're more focused on cultivating evergreen successes, for which the trend in total time spent is a better leading indicator of longevity as well as long-term revenue generation. For example, Fight of the Golden Spatula achieved a new milestone of 15 million daily active users in June and ranked fourth by total time spent across all mobile games in China in the quarter. Arena Breakout also achieved record DAU in the second quarter and ranked eighth across all mobile games by time spent. As a high production value extraction shooter on mobile, we believe Arena Breakout is the first of its kind globally, and we launched the game in international markets through July. Meanwhile, a number of our existing long life titles demonstrated their ongoing vitality.
Naruto Mobile, which we launched in 2016, achieved all-time highs in gross receipts and average DAUs in the second quarter, driven by engaging gameplay, additional stories, and attractive new characters with distinctive combat techniques. Despite multiple competitive launches over the years, Naruto Mobile is the clear China leader in the fighting genre. Dungeon & Fighter released the 15th anniversary content update in June, featuring a more contemporary anime-type art style and improved combat visuals. As a result, DNF's average DAU increased by a double-digit % year-on-year in June. While the second quarter was a quiet period for new mobile game launches for us, we have recently launched two big PC games in China, which will begin contributing to revenue in the third quarter.
Valorant, a top tactical shooter in international markets, was our most successful PC game release ever in China, measured by the number of active users on launch day. Among all games released since 2019, Valorant is the most viewed game on the leading live streaming platforms. Lost Ark is currently the most played MMO action role-playing game on Steam, with a thrilling combat system, captivating storyline, and vast game world exploration. Since we launched Lost Ark in China in July, the game has become the most popular MMO game on live streaming platforms in China. Turning to international games, we saw ongoing growth from PC games, signs that the post-pandemic dip in activity is moving behind us in mobile games, and positive contributions from certain recently released games.
Valorant continued its strong performance with DAU and gross receipts increasing year-on-year, fueled by the introduction of popular new agent, Gekko, appealing items, including weapon skins, as well as a new game mode, Premier, that offers a professional tournament experience. After a lengthy post-pandemic consolidation period, PUBG Mobile returned to year-on-year growth in DAU and gross receipts in June, driven by an upgraded Royale Pass system, a new dinosaur-themed game mode, and successful brand collaborations with Bearbrick and Ducati. Since its launch in November last year, Nikke has increased user engagement through popular content updates, including new premium characters, added storylines with fully voiced scenes, and successful thematic events. For Online Advertising, revenue grew 34% year-on-year to RMB 25 billion.
While our growth rate certainly benefited from comparison against a pandemic-depressed period a year ago, we believe we outpaced the overall industry, which we attribute to enhancements to the machine learning systems powering our ad platform, as well as robust demand for Video Accounts ad. Advertising spending with us grew at a double-digit year-on-year rate from every major advertiser category except transportation. On Weixin, Video Accounts ad revenue exceeded RMB 3 billion in the second quarter. More broadly, the deployment of commerce tools, such as discovery of live streaming commerce and digital shops within Video Accounts, contributed to the vibrancy of Weixin's overall commerce ecosystem, attracting merchants and brands to allocate increased ad budgets across multiple Weixin properties. Consequently, during the quarter, ad revenue increased year-on-year, not only for Video Accounts, but also for Moments, Mini Programs, and Official Accounts.
For content platforms, our music ad revenue grew notably year-on-year, driven by ad-supported music service, as well as brand sponsorship of offline music events, including TME's Wave event. Our mobile ad network revenue increased significantly year-on-year, benefiting from partnerships with apps with high commercial value inventory. We upgraded our mobile ad networks infrastructure, enhancing efficiency and matching advertisers' demand with traffic supply and delivering higher ROIs for advertisers. Looking at Fintech and business services, segment revenue was RMB 49 billion, up 15% year-on-year. Starting with Fintech services, for commercial payments, daily active users and transaction per user both increased year-on-year, online and offline payment volumes grew year-on-year at similar rates as consumption spending generally picked up.
Our wealth management business experienced healthy growth in the second quarter as we enhanced our investor education and services, and users in AUM increased year-on-year. On the regulatory front, we have completed self-inspection and corresponding rectification for Tenpay and upgraded the compliance capability of our payment business. We look forward to progressing our business and providing innovative services under the supportive regulatory framework. For business services, year-on-year revenue growth returned to a low double-digit rate in the quarter, driven by fees collected on Video Accounts, live streaming commerce transactions, plus modest growth of cloud services. Cloud services revenue benefited from increased spending by industries such as finance and automotive. Business service gross margin increased notably year-on-year due to cost optimization, as well as the new fee-based revenue streams. Within cloud services, we launched Model-as-a-Service solutions, leveraging our proprietary vector database and high-performance computing clusters.
We're enabling enterprises in multiple industries, including tourism and public services, to develop customized large models at higher efficiency and lower cost. I'll now pass to John.
Thank you, James. Hello, everyone. For the second quarter of 2023, total revenue was RMB 149.2 billion, up 11% year-on-year. Gross profit was RMB 17.8 billion, up 22% year-on-year. Net other losses were RMB 0.2 billion, mainly due to compliance-related costs, partially offset by net gains from deemed disposals and disposal of certain invested companies. Operating profit was RMB 40.3 billion, up 34% year-on-year. Net finance costs were RMB 3.4 billion, up 82% year-on-year. This increase was due to forex losses this quarter, versus gains in the same period last year, along with higher interest expenses.
Share of profit of associates and JVs was RMB 1.2 billion, compared to share of loss of RMB 4.5 billion for the second quarter of 2022. On a non-IFRS basis, share of profit was RMB 3.9 billion, improving from share of loss of RMB 1 billion last year. This was due to better profitability among certain domestic associates, driven by their revenue growth and improved cost efficiency. Income tax expense increased by 144% year on year to RMB 11.1 billion, due to pre-tax profit growth, increased withholding tax provision, and a true-up of pre-tax adjustment related to overseas subsidiary. IFRS net profit attributable to equity holders was RMB 26.2 billion, up 41% year on year. Diluted EPS was RMB 2.695, up 41% year on year.
Now I'll share our non-IFRS financial figures. Operating profit was RMB 50.1 billion, up 37% year-on-year. Net profit attributable to equity holders was RMB 37.5 billion, up 33% year-on-year. Diluted EPS was RMB 3.875, up 34% year-on-year. Moving on to gross margins. Overall, gross margin was 47.5%, up 4.3 percentage points year-on-year. By segment, gross margin for VAS was 54%, up 3.4 percentage points year-on-year, driven by high-margin game-related revenue, including those from Mini Games; increased music subscription margin due to subscriber growth and ARPU expansion; and cost efficiency improvements across our digital content services.
Gross margin for Online Advertising was 48.9%, up 8.3 percentage points year-on-year, due to increased mix of high-margin Video Accounts ad revenue and improved cost efficiencies. Gross margin for fintech and business services was 38.4%, up 5.1 percentage points year-on-year, reflecting cloud services cost optimization and high-margin revenue from Video Accounts, live streaming, e-commerce transactions. On operating expenses, selling and marketing expenses were RMB 8.3 billion, up 5% year-on-year, and representing 5.6% of revenues. R&D expenses were RMB 16 billion, up 7% year-on-year. G&A expenses, excluding R&D, were RMB 9.4 billion, down 16% year-on-year, mainly due to reduced staff costs, including share-based compensation expenses.
At quarter end, we had approximately 105,000 employees, down 6% year-on-year, or 2% quarter-on-quarter. Let's look at our operating and net margin ratios. For the second quarter of 2023, non-IFRS operating margin was 33.6%, up 6.2 percentage points year-on-year. Non-IFRS net margin was 25.9%, up 4.3 percentage points year-on-year. To conclude, I will highlight some key cash flow and balance sheet metrics. Total CapEx was RMB 4 billion, up 31% year-on-year. Within total CapEx, operating CapEx was RMB 3 billion, up 43% year-on-year, driven by increased investment in GPUs and servers. Non-operating CapEx rose by 6% year-on-year to RMB 1 billion.
Free cash flow for the quarter was RMB 29.9 billion, up 34% year-on-year, due to increased operating cash flow and decreased payment for CapEx. Net cash position was RMB 17.7 billion, down 44% quarter-on-quarter. The sequential change was mainly due to dividend payments and share repurchases during the quarter. Thank you.
Thank you, John. We shall now open the floor for questions. If you are dialing in by phone, please press five to raise a question, then press six to unmute yourself. If you are accessing from the Tencent Meeting or VooV Meeting application, please click the Raise Hand button at the bottom left. We will take 1 main question and up to 1 follow-up question each time. Let's take the first question from Ronald Keung from Goldman Sachs.
Thank you. Thank you, Wendy. Thank you, thank you, Pony, Martin, James, and Wendy. Congratulations on the strong results. Want to ask about, firstly, on advertising, that this has come through very strong at 34%, with Video Accounts that you just mentioned, which is over RMB 3 billion. We're back to the two-year kind of CAGR positive growth. How does management assess the second half outlook on with a few different drivers, with your Video Accounts monetization? You also mentioned about the algo upgrade, with the machine learning at the back, live streaming. These are the positives, while on-- while how, how do we see with this coupled with the macro?
How, how should we think about the, the second half outlook, for advertising growth after this very strong second quarter? Thank you.
Yeah, thank you for the question, Ronald. You know, the second quarter was strong. We, we had a, a unusually easy base month for advertising in April, because that was really the, the sharp point of the lockdowns last year. Then we saw a bit of still fast, but, but not, you know, as fast growth in, you know, May, June, and that continues in July. We continue to see all ad categories except automotive up double digits year-on-year, as we in recent weeks. I think that, you know, looking forward through the rest of the year, you know, obviously, advertising does depend to some extent on domestic consumption trends.
It's important to bear in mind that, first of all, domestic consumption trends weren't that good during the second quarter, and yet we grew 34% year-on-year. Secondly, we have our own, sort of endogenous drivers, particularly around the ad tech enhancements, as well as the monetization of Video Accounts. Then thirdly, in the event that domestic consumption were to be substantially weaker later in the year, the, the natural response from advertisers would be to, to pull back first from the lower ROI inventories that they've been purchasing. You know, we believe that the ad tech platform enhancements we've put in place, leveraging large neural network models, have substantially improved the ROI of advertising on our platform, and therefore, you know, if there were to be weakness, we'd probably see it later than other people.
You know, overall, certainly very cognizant of the macro risks, but, you know, there's been macro risk all year and, you know, optimistic that we'll continue outgrowing the industry through the rest of the year.
Thank you, James. Me following up on that, on generative AI, which is the top of theme. To the business side, want to hear more about our to consumer. Any things that we're thinking on chatbots or anything within our Tencent ecosystem, and kind of linking onto that advertising question, we see any forms of monetization from a generative AI usage scenarios? Thank you.
Yeah. In terms of the generative AI, I think, and more broadly, the foundation model, I would like to say we look at the opportunity and the technology much more broadly than just sort of a chatbot, you know, and, you know, a question and answer type of experience. You know, of course, that is a product form factor, which can be added to our large DAU products like Kuaishou and QQ over time. I think, you know, just to look at it more broadly, right, you know, AI is really... You know, the more we look at it, you know, the more excited we are for it as a growth multiplier across our many businesses.
It would serve to enhance efficiency, and the quality of our user-to-user services, and at the same time, you facilitate the improvement in terms of our ad targeting, data targeting, and also the cost-efficient production of a lot of our content. There are really multiple ways through which we can benefit from the continued development of generative AI. In terms of just the development, I would say, there are multi initiatives that's going on at the company. The first one, obviously, is building our own proprietary foundation model, and that is actually progressing very well. The training is actually on track and making very good progress.
We have started internal testing in our different businesses, including games, ads, cloud, fintech, for them to start testing the model and start working on the integration. In terms of the performance of the model so far, I think, you know, based on our own testing, it's among the top leading foundation models produced in China. We're very relentlessly working on the upgrade and the iteration, right, to prepare it for launch at some point in time in latter part of this year. In terms of additional efforts, we are also on the cloud side, providing a Model-as-a-Service solution for enterprises, right?
Basically providing a marketplace so that different enterprise clients can choose different types of open source large models for them to customize for their own use with their own data. We have a whole set of technology infrastructure, as well as tools to help them to make the choice, as well as to do the training and do the deployment. We believe this is gonna be a pretty high value added and high margin product for the enterprise clients. At the same time, our different products have already been deploying different types of AIGC tools in order to enhance their efficiency or improve their product competitiveness.
For example, Tencent Meeting has already been deploying a model that is developed by one of our investing companies to provide summary of the meeting notes, and it's actually providing pretty good user experience and productivity gain for the customers. I think, you know, we are actually embracing generative AI on multiple fronts, and they are all making very good progress. Over the mid to long run, we believe this is actually a very positive driver for our business.
Wonderful. Thank you, Martin and James.
Thank you, Ronald. Next question, will be Kenneth Fong from Credit Suisse.
Hi, good evening. Thanks, management, for taking my questions, and congrats for another solid set of results. My first question is on games. Understand that the lack of key title launches has been the reason behind the rather flattish domestic game revenue. The new games aside, given that our legacy games monetization level is still very low, how should we think about the longevity of existing titles and potentially growth going forward? Down to the VAS GPM, 2Q was flat on a quarter-over-quarter basis, which historically is normally down a few percentage points. How should we think about the margin sustainability going forward? I have a follow-up. Thank you.
Hi, Kenneth. On your second question, the improvement in Value-Added Service business gross margin is structural, and it flows from a number of positive mix shifts. One mix shift is the very rapid increase in mini-game activity, and as Martin discussed, mini-games, we book on a net revenue basis rather than a gross revenue basis. The flow through from mini-game reported revenue to gross profit is substantially higher than for the traditional game business. Another factor that's affected us more recently is the reduction in live streaming entertainment revenue at our subsidiaries, Tencent Music and Huya. As you're probably aware, that revenue is unusually low margin.
Those are two examples of structural shifts away from lower-margin revenue streams toward higher-margin revenue streams, which we view as ongoing, and therefore, we believe, you know, the higher levels of value-added service gross margin are sustainable. On the game question, then, you know, we, we believe that the primary driver of the flat domestic game revenue in the second quarter was not lack of new titles. You know, we did launch some PC game titles. We, we didn't launch many mobile game titles, but even if we had, we think the firewall cycle means they would contribute more later in the year than during the second quarter. The primary factor was our decision to temporarily release less commercially impactful content.
you know, during the first quarter, we released a large quantity of commercially impactful content that resulted in our game grossing receipts increasing quite notably, substantially more than our game domestic revenue. In the second quarter, we, we took a, a sort of a pause period, and in the third quarter, we've, you know, resumed releasing this commercially impactful content. In terms of the longevity of our evergreen games, then, you know, we, we cited, you know, some data points around, you know, both bigger and smaller games, as well as around some of the newer games that we hope to cultivate into evergreen status, including, Fight of the Golden Spatula, including, Arena Breakout, including Wild Rift.
You know, I think in general, if you compare our competitive esports-type evergreen titles with, you know, more content-driven titles, then there's a gigantic difference in terms of retention. You know, for many of our competitive esports titles, there are actually periods, and Fight of the Golden Spatula has been doing this in recent months, where net churn is, is negative, meaning that new content, in this case, Set 9, has caused more returning users or more lapsed users to return to the game than we actually churned out of the game, which is something you, you don't really see in content-driven games. You know, we, we have many years of experience of operating evergreen games.
You know, some of our earlier evergreen games, like League of Legends and Honor of Kings, are still very healthy today in terms of users and monetization. You know, one aspect of operating those games, you know, for decades rather than, than years or quarters is, you know, alternating between heavier commercialization quarters versus lighter commercialization quarters. But, you know, the benefit is, is those games are and enduring for, for, you know, decades. And, you know, that's what we now also hope to achieve with the newer, would-be evergreen games, such as Battle of the Golden Spatula, Arena Breakout, and Wild Rift. Thank you.
The other point I would like to make is, I think the game revenue actually does not really capture fully the development in our game franchise, because it doesn't really cover the very fast growth in our presence within the casual game segment, through the development of our Mini Programs platform, right? You know, Mini Programs platform is now by far the largest casual game platform in China. Vis-a-vis any of the casual game title or platform within China, I think, you know, it has multiple times in terms of user base and multiple times in terms of gross receipts. You know, the financial benefit actually does not show up in the game revenue.
It actually, 1, shows up as only commission instead of the full, gross receipt, and it's actually, showing up in the VAS revenue rather than in the games revenue. A very important development and growth of our casual game segment was actually not covered in the game revenue.
Got it. My second question is on the advertising side. We noticed that we have a lot of initiatives, including internally, we upgrade our ad system that lift our ROI overall and lead us to outperform peers. Externally, we also noticed some cross-platform cooperations, like in 618 with a key e-commerce platform and some mini game ads with another short-form video platforms. With near-term macro is still uncertain, how much more of this kind of operational initiative or opportunities that we can capture to drive growth that will lead us to continue to outperform peers going forward? Thank you.
I think there's a number of, you know, both longer-term and more immediate opportunities. You know, in the immediate but also ongoing opportunities, if you look at Video Accounts, ad load is, you know, a tiny fraction of what our peers are already operating at. So, you know, going forward, we will progressively enhance our ad load, and that translates mechanically into more revenue. In addition, our peers generate around 50% of their advertising revenue from endemic or sort of native advertisers who are conducting e-commerce within their short video services. So as we grow e-commerce within the Video Accounts, leveraging our existing Mini Programs and Tenpay infrastructure, we're in a good place to cultivate, you know, that, you know, approximate doubling in advertising revenue opportunity.
As Martin discussed, the, the time spent, which is the ultimate raw material for advertising revenue, in Video Accounts, almost doubled year on year as well. A very long runway for Video Accounts, driven by higher time spent, driven by, normalizing ad load, driven by cultivation of endemic advertisers. In terms of advertising technology, and if you look at the big, you know, ad tech-driven companies in the West, such as Meta, you know, that's a never-ending journey in terms of just continuing to, you know, invest more in, in, you know, CPU and then GPU-driven machine learning infrastructure. Continuing to enhance the, the, neural network models for, for doing the ad targeting, continuing to shrink the rate at which you update the models from weekly, to daily, to hourly, to minute by minute, to real time.
You know, that, that's a gift that, that, you know, appears to never stop giving. And, you know, for better or worse, we're still, you know, not at equivalency with, with Meta in, in some of that ad tech deployment. You know, we believe, we have, you know, a longer road to run because we're, we're not as far along the road, and also because we have so many different kinds of inventory, and so many different kinds of data that are not available to, to either our global or our local peers. You know, beyond that, we have new advertising inventories, such as the, the, search inventory within Weixin. Overall, w-we believe that, you know, there's a, an ample runway for growth.
You know, yes, the overall economy is uncertain, but, you know, it has been uncertain for the past couple of years. It was uncertain in the first half of this year. You know, we've been able to grow through that, and we believe we'll, you know, keep growing going forward as we enhance the return on investment to advertisers, and therefore enhance what advertisers are willing to spend with us.
That's very clear. Thank you, Martin and James. Co- congrats again.
Thank you.
Thank you.
We will take the next question from Alicia Yap from Citi.
Hi, good evening, management. Can you hear me okay?
Yes.
Okay. All right. Thanks for taking my questions. My first question is on the Tencent Cloud Model-as-a-Service solution. Does management view this solution to be initially adopted by larger enterprise within the industry that process large volume of data? Besides tourism and public service that you mentioned, what other industry vertical do you plan to penetrate? Do you expect the medium size and the smaller size enterprise could also benefit and deploy this service? Lastly, is this Model-as-a-Service solution a high recurring revenues and a higher margin than the existing business service offering that you have? Second question, I wanted to follow up on the advertising.
If, if management can elaborate a little bit on what exactly the integrations of the machine learning on your ad platform that benefit the ad revenue growth. It does looks like it is just the very beginning, and we might see more positive impact from this AI on the ad revenue growth in the coming future. Any color you could share will be appreciated. Thank you.
Yeah, in terms of the AI and Model-as-a-Service solution, we, you know, we, we think a lot of industries would actually benefit from it, right? You know, initially, it would definitely be larger companies. In terms of the verticals, in addition to tourism and public, public services, we believe verticals such as financial institutions, retail, enterprises, especially the large ones, and industrial companies, and even some mid-size internet companies, right? You know, I think, you know, these are the companies which has data and user engagement, and, I think, you know, they would be able to train their models and really assist in their interaction with their customers.
I think over time, as the industry become more mature, obviously, the medium-size and smaller-size enterprises will probably benefit, but I don't think they will be benefiting from using training their own model, right? They would probably be benefiting from using, you know, the, the, the already trained models directly, so, you know, through APIs. That's sort of the way the industry will probably evolve over time. In terms of the business model, I think, obviously, the, the revenue model is still evolving, but I would say theoretically, what you talk about, about the higher margin and higher recurring revenue, is gonna be true because we, we are adding more value to the customers.
Once the customers start using these services, right, you know, it will be built into their interaction with their customers, which will be much more sticky than if, if it's in their backend systems. I think, you know, that would probably be true. In terms of the ad platform, I would say, I think James talked about quite a bit of that, right? You know, the, the If you look at the key changes or key things that we have done with respect to machine learning on ad platform, I think, you know, the traditional challenge for us is that we have many different platforms, we have many different types of inventories. We have a very large coverage of user base and with a lot of data, right?
You know, and, and all these things make it actually very complicated for us to target customers based on just rule-based or, or CPU-based targeting system, which was actually what we have been deploying. Key change is that we have deployed a lot of GPUs, so moving from CPUs to GPUs, and we have built a very large neural network to basically accept all these different complexities and be able to come up with the optimal solution. As a result, our ad targeting becomes much more effective at much higher speed and, and more accurate in terms of targeting.
As a result, right, you know, it actually provides a very strong boost to our targeting ability and also the ROI that we can deliver through our ad systems. As James talked about, this is sort of in your early stage of this deployment and continuous improvement of our technology, and I think, you know, this trend will continue.
Thank you.
Thank you, Alicia. Next question will be Robin Zhu from Bernstein.
Thank you. Thanks, management. Hi, I guess 2 questions, please. 1 specifically on games. Could you talk about the upcoming launch slate? What in particular excites you on the new games front, given, you know, everyone's desire to have visibility on that front? Could you talk about the progress of AAA game development? You know, I know the company pivoted, what, 2 or 3 years ago now. Just wanted to get an update on how you think that's doing. Then, I guess, 1 housekeeping point on Mini Games. It's clear that management's very excited about it. Why not disclose some financials around it and what that's doing?
There used to be a line on smartphone games that you stopped disclosing at the end of last year. You know, thoughts on bringing that back. Second question on e-commerce. Again, another kind of important growth driver. Wondering if management can share some thoughts on the size of total e-commerce across WeChat? You know, how much that's growing and how much that is live streaming at the moment, and whether management have, you know, plans or targets in terms of getting to peer levels of scale on, on the e-commerce front. Thank you.
Hi, Robin. You know, on the games, you know, we have a number of titles, both domestically and internationally, that we're looking forward to releasing in the coming months. You know, in no particular order and with no implied favoritism, you know, on the domestic side, we, we have the.
High Energy Heroes game. We have an Honor of Kings tie-in. We have a Need for Speed game. On the international fronts, you know, just in the last 2 weeks, I think Riot demonstrated their new fighting game at the big fighting tournament in Las Vegas, which received an excellent reception. Grinding Gear Games has, has shown off Path of Exile 2 that has garnered a very positive reception. We have a number of, you know, games being, you know, made in China and, and distributed globally that, that are, are also important and interesting. In terms of the mini game disclosures, then, you know, we review, you know, what, what we should disclose on a, you know, ongoing basis, and, and we'll bear your counsel in mind.
Thank you.
In terms of e-commerce, I would say, before the launch of Video Accounts and live streaming e-commerce, right, you know, we already have a lot of commerce activities that's happening on our Mini Programs. That's in the trillions of annualized GMV range. I think, you know, out of that, you know, a meaningful portion is actually related to physical products, e-commerce. You know, if you look at physical product, e-commerce GMV, it's exceeding RMB 1 trillion in terms of annualized GMV. If you look at live streaming, right, you know, that's, that's a new source of revenue and a new series of e-commerce activities.
So far, the size of it is in the tens of billions RMB annualized run rate. That's why we feel that it's actually sort of, you know, at a very early stage of development. The fundamental difference here is that these are e-commerce revenues that we can charge a take rate, and at the same time, it actually helps a lot of the merchants to acquire new customers, right? If you look at the Mini Programs, e-commerce activities, you know, the merchants are essentially using their own channels to serve existing customers and try to drive repeat purchases from existing customers.
Whereas, in the live streaming, e-commerce activities, they're actually leveraging this platform to market their products and services to a new set of customers, right? You know, and, and, so it actually represent a different dynamics, and at the same time, we felt, it, it complements the Mini Programs e-commerce activities as well over time. I, I, I would say the live streaming e-commerce activity is a very nice addition to the overall e-commerce activities within the overall ecosystem. It would actually be much more revenue generating for us as well because it generates commission revenue. It also generates more advertising within Video Accounts because, you know, all these merchants will be spending a-ad dollars in order to drive new customers into their live streaming, e-commerce sessions.
Thank you. We will take the next question from William Packer, from the BMO. William, your line is open.
Hi, management. Many, many thanks for taking my questions. Firstly, there have been quite a few moving parts in regulation since the last earnings call, including a significant fine, but also positive commentary on the platform economy from various state institutions. Firstly, like last quarter, could you update on recent domestic gaming, short-form video, and fintech regulatory developments in recent months? As a follow-up, the Cyberspace Administration of China have proposed new rules to protect minors online. Could you update us on any potential impact of those new rules on your business? Excluding video games, which you've already provided, do you have an estimate on the revenue exposure to those aged 18 and below? Thank you.
Okay, I think we have been talking about industry regulation. Last time, in the previous times, we have said it has been trending toward normalization. I would say this time around, in addition to be trending toward normalization, there's actually sort of, you know, a bit of a more supportive stance. This is actually from a number of different new developments. Firstly, as you can see, the top leadership has recently repeatedly reiterated the prominent role of private sector and also platform economy, and has reiterated its intention to foster platform companies' healthy and sustainable development. So that's number one. In terms of the different vertical ministries, right, you know, I think, you know, there are a number of different illustrations.
Around fintech, the financial regulators in early July has basically stated they have concluded the disciplinary action on the fintech sector. Going forward, they're gonna be focused on normalized regulation and also supporting and encouraging platform economies.
to continue their effort in financial inclusion. In terms of the investment category, the NDRC on July 12th have issued a statement recognizing internet platforms investments in startups. These startups have contributed to technology innovation, and Tencent was specifically mentioned in relation to two investments. In terms of games, we see a continued normalized issuance banhao. I think, you know, across all these different segments that we have a significant business in, we have seen the regulatory environment trending towards normalization as well as a more supportive overall stance.
Now, in terms of the CAC consultation paper on minors protection, I think our view is that, you know, number one, we actually fully support and embrace the policy because this is something that we have already been doing across many of our different products. For example, in games, we have already implemented the mandatory protection measures, and the measure is actually much more stringent than what the consultation proposed. Within Video Accounts, right, the time spent limit in teenage mode for us is 40 minutes per day, which is at the low end of the consultation time span of 40-120 minutes per day.
Overall, we expect no material impact to our business because minimal revenue is actually generated from minors. We will continue to be very committed to your minor protection and full compliance of relevant regulations, and work very constructively with the regulatory authorities on this consultation and the subsequent implementation.
Many thanks for the color.
Thank you, Will. We will take the next question from Charlene Liu from HSBC.
Thank you. Thank you, Wendy. The first question I have is on profit growth. Obviously, we've seen GPM and bottom line both came out ahead of consensus estimates. The high-margin Video Accounts monetization obviously played a role in the results. I wanted to ask: how should we think about profit growth trend for the second half of this year or even for 2024, particularly in the context of, you know, further monetization of Video Accounts and potential recovery of domestic games growth? Can we, can these factors sustain kind of stronger growth in profit against top line? I have a follow-up later. Thank you.
Hi, thank you for the question. You know, we believe that we, we are benefiting from, you know, three factors on margins. One is the mix shift to higher-margin revenue, and, you know, you singled out, Video Accounts. I'd also say that, you know, the deployment of ad tech generally allows us to begin to sell inventory that was previously unsold, and so that's a very high incremental margin business for us. It also results in more competitive bidding for inventory that we were previously selling, which is again, you know, higher price translates into higher margins. Ad tech, in general, boosts our margins. In Mini Games, as we've discussed quite extensively, a very substantial, sort of GMV revenue stream, but we're only booking a minority percentage of that into reported revenue.
The flow-through on the reported revenue is, is much higher margin than for our, our mainstream game business. You know, the e-commerce fees are also disproportionately high margin because they're leveraging on the very substantial fixed investments into the Mini Program and Video Account infrastructure. That's one bucket. A second bucket is that we have scaled back certain lower-margin revenue streams, including some of the resale businesses within cloud, including the live streaming entertainment that I referred to earlier at Tencent Music and Huya. Thirdly, you know, we, we, we just have a different culture now of, of being very focused on, on cost discipline and, and efficiency. You know, that culture is here to stay.
I think for those three reasons, you know, we believe we'll continue to grow profits faster than revenue, you know, beyond the second half of this year and, and, into the future.
Thank you. That's really clear. Can I also get a sense on how much Mini Games is contributing to social network revenue, and how much is Mini Games ads contributing to ad revenue? How should we think about synergies versus competition of Mini Games against our online game business, please? Thank you.
Well, why don't I talk about the synergies versus competition, and perhaps John will, will give you some thoughts on, on the first part of your question. On the, the dynamic, in general, you know, we see three broad categories of games in China today. There are, you know, competitive esports type games that, handled properly, are relatively evergreen in nature. You know, we, we have a, a very strong position in that market with all of the top games, and now with Wild Rift, Arena Breakout, and Battle of the Golden Spatula, we, we believe we're nurturing three more of those games.
you know, they are evergreen in nature, and, you know, they'll be generating cash flow for us for, for, you know, decades rather than years to come, we think. You know, secondly, there's the more story or content-driven games, which historically has been a weaker area for us. There's been a number of, you know, very good launches by, by our competitors, you know, we, we think that that signals, to some extent, a, a renaissance in that category, and we would like to participate over time in that renaissance. We have some big narrative-driven, content-rich games in development. You know, time will tell how successful they are. For us, it, it's sort of greenfield and, and, you know, largely upside.
Then thirdly, there are casual games. You know, if you look at the Western world, then, you know, every year or two, there's a new app-based casual game, you know, an Among Us or a Fall Guys, that, you know, generates great attention, especially among younger users. Then, you, you know, typically reaches a certain point, and then, you know, declines through that point. The really big development, in the past five years, which we've been following extremely closely, has been the emergence of platforms, in particular the Roblox platform. You know, while the individual app-based games come and go in the casual category, in the platforms, then, you know, the, the individual experiences also come and go, but the platforms appear to inexorably grow in terms of, of both users and, and revenue.
We believe that the right way to address the casual game opportunity is primarily, not entirely, but primarily through the platform model. You know, we have a platform that is over 5 times bigger than any single app-based casual game in terms of users and, and also in terms of revenue. You know, it, it's growing at an extremely rapid rate year-on-year as new casual game experiences appear on that platform. In terms of the cannibalization, then, you know, there's 3 sort of broad buckets of users of roughly similar size. One bucket is those who have historically played app and, and client-based games, continue to do so, do not play the mini-games. A second bucket is, is those who had not previously played Tencent games at all and are only now playing Tencent mini-games.
Then a third bucket is those who do both. You know, we don't see any evidence of cannibalization, because even for those who do both, they're generally playing different kinds of games, you know, different day parts, for the mini-games versus what they're doing for the app-based or client-based games. In our view, the mini-game platform is, you know, largely incremental rather than cannibalistic to our app-based games. It gets us into, you know, this big emerging casual game opportunity, and it gets us into it in a way that we think is, is the best way to get into it, which is as a Roblox-like platform, rather than as a standalone app with a standalone game experience that flourishes for a period of time and, then it gives way to the next hit.
Yeah, in terms of the mini-games contribution, Social Networks is at single-digit %, and also with, you know, the Online Advertising is of single digits.
Thank you. This is a really good color. Thanks, James. Thanks, John.
Thank you. We will take the next question from Lexie Wu from Haitong International.
Hi, thank you for taking my question. I have two here. First one is related with the game. Just curious, given that these days, the domestic game license approval has been moving towards normalization, do you feel competition heats up and market share got, like, more dispersed lately? Secondly, with the, you know, we, we know that with the domestic China's macro trending weak, so just curious, if we take a close look at your business lines, which will be the most vulnerable and which will be the most resilient? What kind of the measures did you take or plan to take to deal with macro headwinds? Any color would be, would be helpful. Thank you.
Why don't I start on both of those, and Martin may supplement? On the competitive environment for games, you know, I'll repeat some of the answer to the last question, which is we see these three broad categories. You know, one being the more competitive esports games, where, you know, we already have a very strong presence. We're doubling down on that with the success of the three new esports games we've talked about. A second being the more content or narrative-driven games, where, you know, competition has intensified. A number of companies have brought some good games to market recently. That doesn't come at our expense, because historically, we generate very little revenue in that category. You know, rather, it's a category that we're looking forward to entering more actively in the years to come.
Then thirdly, with the casual games, where, you know, there's a number of industry peers who, who are sort of seeking to be, you, you know, the, the Among Us, and, and, you know, we're seeking to be a Roblox. You know, that's fine. Both businesses are good businesses, but, you know, we, we certainly are, are very happy with, you know, the business choice we have made of, of adopting the platform approach. That's on the, you know, game competition aspect. In terms of the sensitivity to the macro environment, then, you know, if we just touch briefly on each of advertising, fintech and games.
You know, starting with games, you know, while it was clearly not the best quarter for our domestic game revenue, you know, I think that was completely unrelated to macro. In fact, you know, an environment where macro is challenged, consumers are shifting to lower ticket price experiences, or consumers are shifting from goods to services, in theory, is pretty good for the game industry. You know, as a parallel, I'd point you to the movie theater industry in China, the movie ticketing, where, as you may know, movie ticketing has been extremely strong in the last two to three months as people look for, you know, affordable, you know, entertainment, driven experiences rather than, you know, highly priced luxuries and so forth.
I think the game business, both in China and globally, historically, has not been economically cyclical, and, you know, we don't believe it will become economically cyclical now in China. In terms of the advertising business, you know, that could be economically cyclical, it should be economically cyclical. However, you know, it's not sensitive so much to, to net exports or, or, you know, property prices. It, it's more directly sensitive to consumption spending, and so far, you know, consumption spending has been recovering, you know, albeit at a very gradual, measured pace.
You know, again, we believe that, you know, whatever happens going forward to the macro environment and, you know, if net exports and real estate and so forth, eventually impact consumer, that, you know, we will outperform because we're in the early stages of monetizing Video Accounts, because we're in the early stages of deploying ad tech, and because we deliver very high ROIs, which mean advertisers should stay with us for longer. Then on the fintech business, and particularly the commercial payments within fintech, you know, that does reflect economic activity, particularly consumer activity, you know, somewhat in a real-time. You know, I think that, that is the business where, you know, macro variable, you know, plays the most into, you know, our, our revenue fluctuations.
We, we do have a number of different services within fintech beyond the immediate commercial payments. We talked about how in this supportive regulatory environment, we, we look forward to extending and, and launching, you know, new such services. You know, commercial payment is probably the area where, you know, for better or worse, we're, we're most directly exposed to macroeconomic fluctuations on a month-to-month basis. Thank you.
If I want to add, right, you know, I, I would say on the banhao side, we actually are very excited about the issuance of new banhaos. Because, you know, the game industry is really driven by innovation, and, you know, without innovation, the market doesn't grow. I think, you know, the fact that we have seen a growth in the overall market is because of the fact that we are seeing new innovations of new games, right? You know, when the overall market expanding, I think we benefit. We'll be bringing new titles to the market, and at the same time, I think, you know, if you look at the Mini Games platform, right, you know, it actually benefits from the fact that there is more and more innovation within the market.
Now, in terms of your second question on the consumption side, I think, you know, James have given a very good analysis of our own business. I just want to talk about sort of, you know, some overall thoughts. What we have seen is consumption is recovering from the COVID period. It may not be as fast as the market expects or, or, or wishes, but we also see that the focus of the top leaders, government leaders, on economic development and on supporting growth is actually very clear. At the same time, the government is rolling out a series of policies and measures to drive economic growth. At the same time, we also believe that there's a lot of resilience and entrepreneurship within the China economy.
It will take time for the different measures to be rolled out, to be implemented, and to take effect. If you look at our own business right now, we are given in this waiting mode for the recovery to come in at a faster rate. We are already delivering a strong and solid set of revenue growth and even faster profit growth under the current environment. That's due to the fact that we have very high-quality revenue streams, and we have very strong discipline that has been developed during the difficult times. We feel actually very good about our overall positioning.
That's very helpful. Thank you.
Thank you. In the interest of time, we will take the last question from Thomas Chong from Jefferies.
Hi, good evening. Thanks, management, for taking my questions. I have a question relating to the fintech side. Can management comment about how we should think about the take rate trend, given that it is still relatively low? On the other hand, for other fintech segments, such as online credit, wealth management, and insurance, is there any priorities for these new business going forward? Thank you.
Well, in terms of take rate, I think this would stay largely stable. Having said that, I think, you know, there are a number of different Value-Added Services that we can actually offer to merchants. You know, in those Value-Added Services, we can actually sort of, you know, charge additional fees for the additional value that we offer, we offer to them. In terms of the financial products, I think given the conclusion of the disciplinary action of the regulators, and the regulators clearly stating that they will be supporting healthy growth of fintech industry, we believe there will be more opportunities going forward.
Thank you. Thank you all for joining our results webinar. We are now ending the call. If you wish to check out our press release and other financial information, please visit the IR section of our company website at Tencent. The replay of this webinar will also be available soon. Thank you, and see you next quarter. Bye.