Tencent, which has been reducing costs and increasing efficiency for a long time, is now spending huge sums of money on AI.

Text by | Wang Yuchan

Edited by | Qiao Qian

In the first quarter of this year, Tencent Holdings once again achieved double - digit growth in both revenue and gross profit. This quarter, the company's revenue reached 180.02 billion yuan, a year - on - year increase of 13%; gross profit was 100.49 billion yuan, a year - on - year increase of 20%; operating profit (Non - IFRS) was 69.3 billion yuan, a year - on - year increase of 18%. So far, the growth rates of Tencent's gross profit and operating profit have outpaced revenue growth for ten consecutive quarters.

This quarter, both the company and the outside world have focused more on AI than on the keyword "WeChat e - commerce" in the previous quarters. On the positive side, AI can potentially benefit all of Tencent's core businesses. However, from a worrying perspective, investing in AI will lead to a significant short - term increase in expenditure.

In the first quarter, looking at the business segments, Tencent's domestic game business grew 24% year - on - year. Before the earnings report was released, considering the low base in the same period last year, analysts had actually raised their expectations (15%), but Tencent still outperformed this expectation. This was due to the revenue growth of "Honor of Kings" and "Peacekeeper Elite", as well as the revenue contributions from the recently released "Dungeon & Fighter: Origins" and "Delta Force". The international game revenue increased 23% year - on - year, thanks to the revenue growth of "Brawl Stars", "Clash Royale" and "PUBG MOBILE".

The revenue from the marketing services business increased 20% year - on - year to 31.9 billion yuan, achieving double - digit growth for ten consecutive quarters. This quarter, the revenue from marketing services in most key industries increased. This growth was mainly due to advertisers' strong demand for advertising inventory on Video Accounts, Mini Programs and WeChat Search.

Ma Huateng, Chairman and CEO of Tencent, said that AI capabilities have made "substantial contributions" to businesses such as performance advertising and long - running games.

The revenue from financial technology and business services increased 5% year - on - year, showing the objective impact of the recovery of the macro - environment.

As for WeChat e - commerce, it is also being intensively deployed. WeChat has recently adjusted this business much more quickly and frequently than in the past few years. Almost every week, new functions are being tested or launched, indicating that the WeChat team, which has always been cautious, is ready to face the explosion of the e - commerce business. A few hours before the release of the earnings report, Tencent announced the establishment of an e - commerce product department in the WeChat Business Group. Zeng Ming, the person in charge, reports to Zhang Xiaolong, the senior vice - president of Tencent and the president of the WeChat Business Group.

Tencent Sees Results from Heavy Investment in AI

In his opening remarks at the earnings conference call, Ma Huateng said that AI capabilities have made tangible contributions to businesses such as performance advertising, brand advertising and long - running games. Considering that AI is a long - term investment and its returns are naturally lagging, the CEO's statement was a bit unexpected.

James Mitchell, the Chief Strategy Officer, said that the core contribution of AI to advertising revenue at present is the improvement of the click - through rate (CTR) of advertisements. Historical data shows that the average CTR of banner ads is about 0.1%, and that of in - feed ads is about 1.0%. With AI optimization, the CTR of some ad slots can be increased to the 3.0% range.

In addition, the earnings report mentioned that by enhancing generative AI capabilities, Tencent has upgraded its advertising technology platform. For example, it has improved image generation and video editing functions to speed up ad production, launched digital human solutions to promote live - streaming activities, and deepened its understanding of products and user interests to improve recommendation effectiveness.

Considering that Tencent is a latecomer in the e - commerce market and still lags behind companies like ByteDance in terms of user consumption data, by deploying AI, Tencent may be able to improve the accuracy of its e - commerce ad push and use its strengths to make up for its weaknesses.

In addition, AI has also assisted Tencent's game business, especially long - running games that are already in the "middle - age" stage. Mitchell said that the application of AI in competitive multiplayer games is particularly crucial. Besides serving as a novice guide and an anti - cheating inspector, AI can also act as a player's companion.

For long - running MOBA games, players' experience is closely related to the number and level of opponents. However, it is an irresistible trend for players of old games to switch to new ones. Once players cannot find opponents of comparable strength in the system, the game experience will be greatly reduced.

However, the addition of AI companions (commonly known as "bots") can relieve the pressure of player loss in old games. Although the existence of bots is not a new thing, players have generally had the impression that bots have poor game skills. In the future, with the improvement of AI technology, bots can become more intelligent and truly provide players with an experience comparable to that of real opponents.

Moreover, for Tencent's currently booming e - commerce business, there is also room for imagination in AI empowerment. Liu Chiping, President of Tencent, said that WeChat e - commerce will not engage in the "lowest price in the whole network" traffic - consuming war. Instead, it will improve the user experience through accurate user insights (empowered by AI) and scenario integration (such as "shopping while chatting"). "Both AI and e - commerce strategies aim at 'deepening ecological synergy and strengthening scenario closed - loops'," Liu Chiping said.

Of course, all of this comes at a cost. In the fourth quarter of last year, Tencent had the highest capital expenditure among all Chinese technology companies. This quarter, Tencent continued to spend generously, with capital expenditure surging 91%, most of which was spent on purchasing GPUs.

Meanwhile, R & D expenditure increased 21% year - on - year, mainly due to the increase in employee costs and greater investment in AI. Sales and marketing expenses increased 4% year - on - year, mainly for promoting AI - native applications such as Yuanbao. In contrast, the advertising expenditure for new game releases decreased.

"We believe that the operating leverage effect of our existing high - quality revenue sources will help absorb the investment costs related to AI and ensure a healthy financial performance during this investment period. These strategic AI investments will create long - term value for users and society and bring considerable incremental returns to the company," Ma Huateng said.

WeChat E - commerce on the Verge of Explosion

In the first quarter of this year, Tencent made extremely frequent product and policy adjustments to WeChat e - commerce, such as adding new entrances for WeChat stores, strongly promoting the gift - giving function, opening the function of attaching products to Moments, launching the "Influencer Square", launching the lottery function for official accounts, and canceling the category restrictions for "0 - deposit goods promotion". All these indicate that this cautious team is ready to embrace the explosion of the e - commerce business.

The signal released by the organizational adjustment on the day of the earnings report release was even more obvious. The WeChat Business Group established an e - commerce product department, which is responsible for exploring the trading model within WeChat, accelerating the development of trading infrastructure and trading ecosystem, and operating the new WeChat trading model. Zeng Ming, the former head of the Open Platform Basic Department, was appointed as the head of the newly established e - commerce product department and reports to Zhang Xiaolong, the senior vice - president of Tencent and the president of the WeChat Business Group.

A Tencent insider told 36Kr that the adjustment was to better support the growth of merchants and content creators and promote the development of businesses such as WeChat stores, official accounts and Mini Programs. The WeChat Open Platform optimized its organizational structure internally, establishing an Open Platform Department and an e - commerce product department, while the work functions of the relevant teams remained unchanged.

After the e - commerce business gets on track, in addition to generating new e - commerce revenue, it can also form a positive cycle of "exposure - conversion - repurchase", which will bring new impetus to Tencent's advertising, financial technology and business services businesses, which are currently affected by the macro - economy.

According to the estimation of Dolphin Research by Changqiao, the advertising revenue of Tencent's Video Accounts in the first quarter (mainly from external circulation + e - commerce, with the proportion of self - selected ads being relatively low due to net revenue recognition) may have exceeded 8 billion yuan, a year - on - year increase of more than 50%, accounting for 25% of the total advertising revenue. In the past six months, the ad loading rate of Video Accounts has been stably maintained in the range of 3% - 4%, indicating that the advertising potential of Video Accounts has not been fully released.

Moreover, as the scale of WeChat e - commerce expands, Tencent's business services can also obtain more commission income. For the financial business, it can make up for Tencent's current lack of online physical transactions. Liu Chiping said that by observing the data in the first quarter, Tencent found that the number of transactions continued to increase, but the transaction price actually decreased. "Our speculation is that this may be the final stage of supply - side competition, and the demand side has begun to pick up," Liu Chiping said.

For the upcoming 618 Shopping Festival, Liu Chiping said that Tencent plans to focus on brand resource support and traffic matrix integration (search/recommendation/social fission, etc.) with the goal of consolidating the advantages of closed - loop e - commerce within the WeChat ecosystem.