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——Focus on data and change business
On August 16, 2023, Tencent Holdings (HKEx: 00700) released its unaudited comprehensive results for the second quarter and the first half of the year ended June 30, 2023.
According to financial report data, Tencent’s total revenue in the second quarter of 2023 reached 149.2 billion yuan, an increase of 11% year-on-year; according to international financial reporting standards, the profit during the period was 27 billion yuan, a year-on-year increase of 41%; % rose to 18%.
In the first half of 2023, Tencent's total revenue reached 299.2 billion yuan, an increase of 11% year-on-year; according to international financial reporting standards, the profit during the period was 53.4 billion yuan, a year-on-year increase of 24%; the net profit margin rose from 16% in the same period in 2022 to 18 % %.
It can be said that this is a very beautiful interim financial report.
Ma Huateng, chairman and CEO of the board of directors, said: "In the second quarter of 2023, we maintained solid revenue growth and tilted towards higher-margin high-quality revenue sources. This shift, combined with the disciplined cost Discipline, let our profits grow faster than our revenue growth. Our advertising business has achieved significant rapid growth, thanks to our application of machine learning capabilities on the advertising platform and the commercialization of video accounts. We will continue to promote Innovation, including through generative artificial intelligence, we are providing model libraries to our partners with Tencent Cloud Model as a Service (MaaS), and we are also polishing our self-developed proprietary basic models."
From Ma Huateng’s statement, we extracted the following keywords: continuous cost reduction and efficiency increase, revenue structure optimization, AI-based advertising, commercialization of video accounts, and Tencent Cloud Model as a Service (MaaS).
In other words, it is these five major factors that have contributed to Tencent's outstanding performance. It is foreseeable that these will also be the strategic focus of Tencent for a long time to come.
Strategic Keyword 1: Continuous Cost Reduction and Efficiency Increase
Financial report data shows that in the second quarter of 2023, Tencent’s revenue will be 149.21 billion yuan; gross profit will be 70.84 billion yuan, a year-on-year increase of 22%, and the gross profit rate will reach 47.5%.
The operating profit was 40.3 billion yuan, a year-on-year increase of 34%, and the operating profit margin was 27%.
The profit during the period was 27.023 billion yuan, a year-on-year increase of 41%, and the net profit margin was 18%.
Source: Tencent Financial Report
After checking the quarterly gross profit rate from 2021Q4 to now, we found that except for the slight decline in the quarterly gross profit rate in 2022Q4, on the whole, the quarterly gross profit rate showed a trend of rising quarter by quarter, and Q2 in 2023 reached the high point (47.5%) in recent years.
Data source: Charting of Tencent’s financial reports over the years: Data Ape
And Tencent's cost reduction and efficiency increase will also start in 2022, which can also be seen from the changes in the number of employees.
Data source: Charting of Tencent’s financial reports over the years: Data Ape
Judging from the data in the above figure, the number of Tencent employees reached a high point (116,000) in 2022Q1, and then decreased quarter by quarter. In 2023Q2, the number of employees was 104,500, a decrease of 11,500 compared with the previous high point, a decrease of 10%.
In May 2022, at Tencent's 2022Q1 financial performance meeting, Ma Huateng said: "Facing industry challenges, the company has implemented cost control measures and adjusted some non-core businesses, which will help achieve a more optimized cost structure in the future." Since then, "cost reduction and efficiency increase" has officially entered Tencent's strategic level.
In 2022, Tencent cut off many non-core businesses, and removed or shut down more than 16 well-known apps, including Sogou Maps, Sogou Search App, Penguin E-sports, Kandian Express, Tencent Kandian and other key products. Newly hatched projects such as Little Goose Pinpin.
It is reported that the action of reducing costs and increasing efficiency not only appears at the business level, but also extends to the life level. For example, in the cafeteria of Tencent employees, employees are limited to picking up meals at one window, canceling free breakfast and dinner benefits for outsourced employees, canceling employees’ free pick-up boxes and The benefits of fruit and so on.
On December 15, 2022, Tencent held an internal staff meeting online. It is worth noting that the theme of the meeting is still "cost reduction and efficiency increase". At this internal staff meeting, Ma Huateng's attitude was more resolute than before. He not only had a general attitude of "continuing to strengthen and persist in reducing costs and increasing efficiency in the future", but also gave specific instructions that "many businesses should be cut down. Cut it off, don't miss it."
In the first half of 2023, Tencent continued to reduce costs and increase efficiency. Sales and marketing expenses decreased by 4% year-on-year to 15.3 billion yuan, and general and administrative expenses decreased by 5.5% year-on-year to 50 billion yuan.
Strategic Keyword 2: Optimizing Revenue Structure
While reducing costs and increasing efficiency, Tencent further optimized its revenue structure.
According to financial report data, among the total revenue in 2023Q2, value-added service revenue is 74.2 billion yuan, accounting for 50%; online advertising revenue is 25 billion yuan, accounting for 17%; financial technology and enterprise service revenue is 48.6 billion yuan, accounting for 32%. %; other income was 1.36 billion yuan, accounting for 1%.
Source: Tencent Financial Report
Compared with the same period in 2022, the proportion of online advertising increased by 3 percentage points, and the proportion of value-added services decreased by 3 percentage points. The proportion of financial technology and enterprise services remained unchanged.
Figure: The quarterly proportion of each segment over the years Data source: Tencent financial report
Judging from the quarterly proportions of each division in the above figure, the performance is relatively stable and there is no particularly large change. Therefore, it can be inferred that the main focus of Tencent's optimization of revenue composition is the revenue composition within each segment, that is, to dig out businesses with high profit margins within each segment, thereby increasing the profit margin of each segment.
From the perspective of the growth rate of each segment, the value-added service revenue increased by 4% year-on-year. Thanks to the contribution of "VALORANT", "Triple Match 3D" and "Goddess of Victory: Nicky", game revenue in the international market (12.7 billion yuan) increased by 19% year-on-year (12% after excluding exchange rate factors); domestic market games Revenue (31.8 billion yuan) remained stable, and social network revenue (29.7 billion yuan) increased by 2% year-on-year.
In the financial report conference call, Tencent President Liu Chiping believes that game revenue does not actually fully reflect Tencent's development in the game field. He said that the user base of casual games on the Tencent platform is very large, and the small games on Tencent’s casual game platform contributed significantly in the second quarter, generating high gross profit margins and game distribution and advertising revenue with platform economic effects. However, this part of the income is not reflected in the game section for the time being, but in the form of commissions.
Figure: Revenue and Growth Rate of Each Segment Source: Tencent Financial Report
Online advertising revenue in the second quarter increased by 34% year-on-year, mainly due to the continuous optimization of the machine learning advertising platform and the strong demand for video account advertising.
Financial technology and enterprise service revenue increased by 15% year-on-year. Financial technology services mainly benefited from the increase in offline and online commercial payment activities, while the improvement in enterprise service revenue was mainly due to the revenue generated from the live streaming transactions of video accounts and the The growth of cloud services.
From the perspective of growth rate, online advertising has the strongest growth, followed by financial technology and enterprise services. Among value-added services, games in the international market performed well.
From the perspective of the gross profit margin of each segment, the gross profit margin of value-added services is 54%, the gross profit margin of online advertising is 49%, and the gross profit margin of financial technology and enterprise services is 38%. The other income part is still in a state of loss.
Table: Cost-to-Revenue Ratio of Each Segment Source: Tencent Financial Report
From the perspective of changes in the gross profit margin of each segment, the gross profit margin of online advertising has increased by 8 percentage points compared with the same period in 2022; the gross profit margin of value-added services has increased by 3 percentage points; the gross profit margin of financial technology and corporate services has increased 5 percent.
At present, the gross profit margin of value-added services is still the highest, but the gross profit margin growth of online advertising is stronger.
This also verifies our previous inference: the focus of optimizing the revenue structure is to tap businesses with high profit margins within each segment, thereby increasing the profit margin of each segment. As shown in the figure below, the gross profit margin of each segment in 2023Q2 has reached the highest point in recent years.
Figure: Quarterly Gross Margin Source: Tencent Financial Report
Strategic Keyword 3: Advertising AI
According to Tencent, one of the main reasons for the strong growth of online advertising is: the continuous optimization of machine learning advertising platforms.
According to an article on the official website of Tencent Technology, Tencent has built an industry-leading Tai Chi machine learning platform through self-development.
In 2022, in order to solve the problem of "advertising model iterative process research and development efficiency", Taiji Advertising's one-stop platform will be launched. The goal is to commercialize the advertising model iterative business process through "Shangtaiji" and provide end-to-end one-stop model research and development for the advertising business experience.
Source: Tencent official website
Taiji advertising platform is a high-performance machine learning platform designed by Taiji advertising system that integrates model training and online reasoning. The platform has the training and reasoning capabilities of trillion-parameter models. At present, the platform supports dozens of model training and online reasoning for Tencent’s advertising recall, rough sorting, and fine sorting; at the same time, the Taiji platform provides one-stop feature registration, sample supplementary recording, model training, model evaluation, and online testing capabilities, which greatly improves improved developer efficiency.
● Unified platform service: 25 systems are unified to Tai Chi, and 60+ steps are reduced to 7 steps;
● Large-scale model launch and efficiency improvement: large-scale models with 100 billion parameters are fully launched in recall/rough sorting/fine sorting;
● Improve the efficiency of feature exploration: the iterative time for fine-sorting features into the model is from 20 days to >5 days, and the recall/rough sorting is from 11 days to >3.5 days;
● Feature model lineage perspective: supports various estimation models, from feature input samples to model training, evaluation, full-link resource consumption on the line, and perspective on training speed.
Taiji one-stop productizes the information of these features and models, provides capabilities such as feature & model basic information, related lineage query, API openness, etc., and realizes application capabilities such as data consistency, feature quality analysis, and link cost analysis. Feedback to the advertising model production line to help improve efficiency and reduce costs.
Tencent Taiji machine learning platform uses mixed deployment resources in offline advertising training scenarios to greatly reduce resource costs. It provides 50W core cheap mixed deployment resources for Tencent Advertising every day, helping Tencent Advertising offline model training resource costs to reduce by 30%. At the same time, through a series of optimization methods Make it equal to the stability of mixed deployment resources and normal resources.
Figure: Online advertising revenue and growth rate Source: Tencent Financial Report
Judging from the data in the above figure, online advertising revenue in 2023Q2 increased by 34% year-on-year and 19% month-on-month, both of which performed extremely well.
Tencent said that in the future, it will further deepen the efficiency improvement of key nodes and introduce more intelligent technologies.
Strategic Keyword Four: Commercialization of Video Accounts
In 2023Q2, among the online advertising revenue, the advertising revenue of the video account exceeded 3 billion yuan. In the corporate service revenue, the revenue generated from the video account live streaming transactions also contributed. The commercialization of video accounts has achieved initial results.
From the time point of view, the video account's status in Tencent will be greatly improved in 2021, and commercialization will be accelerated in 2022.
In December 2022, Ma Huateng called the WeChat video account "the hope of the audience" within the company. Since then, the commercialization of the video account has become a strategic focus.
According to the team of Tencent Video Account, the total user usage time of the video account has exceeded 80% of the total user usage time of Moments in 2022. The number of above-mentioned creators increased by 308%, and the popular content with 100,000+ likes increased by 186%. In 2022, the scale of income anchors will increase by 101%, and the total income of anchors will increase by 447%.
In December 2022, the monthly active users (MAU) of the video account will be 820 million, and the daily active users (DAU) will be 364 million based on the caliber of completed broadcasts. This volume is already in the first echelon of the industry.
Zhang Xiaochao, the person in charge of the video account business, said that in terms of commercialization, the current video account has advertising docking platforms for mutual selection between China and Taiwan, a delivery center where creators can open stores, and live broadcasts to generate income.
In January 2023, the video account will start to collect 1%~5% technical service fees from merchants. In March 2023, the video account released plans such as a creative sharing plan and a paid subscription service.
According to Zhang Xiaochao, the person in charge of the video account business, the creative share plan is to install a new advertising system under the original video. This advertisement does not require long-term offline blending, but only needs to be automated online. After the author agrees to mount the advertisement in the comment area, the system will mount it according to the video content. The subscription area is derived from the idea of launching a subscription function in the official account system, which will help knowledge bloggers establish a commercial paid subscription system. In addition, the video account also considers hanging product windows, audio, etc. on public business cards.
Different from the logic of Douyin’s recommendation algorithm, these commercialization tools of the video account are not based on the logic of the recommendation algorithm, but the monetization model explored based on the linkage between the video account and other WeChat components. This monetization model actually follows the development path of the video account envisioned by Zhang Xiaolong. In 2021, Zhang Xiaolong described in the WeChat public class that " the ID of the video account is the cornerstone. It can carry video content, live broadcasts, and small programs, etc." . The video account team then used "atomic components" to describe the flexible connection between the video account and other applications in the WeChat ecosystem.
Judging from the comparison between the operating data of the video account and the revenue data of Q2, the two are extremely mismatched, and the degree of commercialization of the video account is far from enough.
It is rumored that in order to continue to strengthen the commercial monetization ability of video accounts, Tencent’s commercial monetization department is expected to take over the full monetization of video accounts around September, and further dig into the advertising monetization capabilities and e-commerce monetization capabilities of video accounts.
Strategic Keyword Five: Tencent Cloud Model as a Service (MaaS)
On June 19, 2023, the Tencent Cloud Industry Large Model and Intelligent Application Technology Summit was held in Beijing. For the first time, it officially announced the development progress of the industry large model, and released Tencent Cloud MaaS (Model-as-a-service, model as a service) for B-end customers. services) service solutions. Tang Daosheng, Senior Executive Vice President of Tencent Group and CEO of the Cloud and Smart Industry Business Group, explained Tencent's understanding of MaaS at the meeting.
Tang Daosheng said that Tencent Cloud will build industry-selected model stores based on the Tencent TI platform, covering ten major industries such as finance, culture, tourism, government affairs, media and education, and providing more than 50 solutions. On the basis of these capability models, enterprise users only need to add their own unique scene data to quickly generate exclusive models.
Source: Tencent
In addition to providing basic industry models and data, Tencent Cloud also launched a fine-tuning solution for large industry models based on the Tencent Cloud TI platform. Aiming at the problems of high cost and difficult implementation, the Tencent Cloud TI platform realizes low-cost implementation for industry scenarios. On the basis of a small amount of computing power, to improve the effect of specific tasks, such as intelligent customer service scenarios, the training performance can be increased by 10 times, and the training cost can be reduced by 90%.
In terms of computing power, Tencent Cloud has created a new generation of HCC (High-Performance Computing Cluster) high-performance computing clusters for model training. Tang Daosheng said that HCC has been highly recognized by many customers, and several AI unicorns have cooperated with Tencent Cloud.
It is worth noting that Tencent also uses large models to intelligently upgrade its own SaaS products, including Tencent Conference, Tencent Qidian Smart Customer Service, and AI Code Assistant.
All of these contribute to the improvement of corporate service income.
According to the financial report disclosure, 2023Q2 enterprise service revenue has improved, achieving low double-digit year-on-year growth. One of the main reasons is the slight growth of cloud services. The increase in cloud service revenue was mainly driven by increased spending in industries such as finance and automotive.
Zhong Xiangping, Vice President of Tencent Group and President of Tencent Smart Transportation and Mobility, said that Tencent is continuing to explore AI, big data, cloud computing and other digital technologies to drive the upgrade of car service experience, and is currently helping more than 40 car brands to improve the cockpit service experience. At the same time, Tencent Smart Car Cloud is helping leading companies such as Weilai and Bosch accelerate the development of autonomous driving technology.
In 2023Q2, financial technology and enterprise service revenue totaled 48.6 billion yuan, a year-on-year increase of 15%, and a quarter-on-quarter decrease of 0.1%.
Figure: Financial Technology and Enterprise Services Revenue and Growth Source: Tencent Financial Report
The reason for the quarter-on-quarter decline in revenue is most likely due to the price reduction of cloud services. On May 16, 2023, Tencent Cloud announced price cuts for a number of core cloud products, with some product lines dropping by as much as 40%. The price reduction policy will come into effect on June 1.
Based on the above analysis, it can be seen that Tencent is using AI to reconstruct its own business. From the perspective of financial data, online advertising has achieved remarkable results; in terms of enterprise services, initial results have been achieved, basically resisting the impact of cloud service price cuts. In terms of value-added services, commercialization of video accounts, and financial technology, no relevant financial progress has been seen so far. Especially commercial payment in the financial technology business, which is the most obvious business affected by the macro economy, Tencent said that it is currently in the mode of waiting for the speed of economic recovery to accelerate.
According to the revenue of the three major business segments, value-added services (games + social networking) still account for half of Tencent's total, while financial technology and enterprise services rank second. From the perspective of subsequent development, when will financial technology and enterprise services surpass value-added services and become Tencent's largest business? Will online advertising maintain rapid growth and reach 30% of revenue as soon as possible?
These issues will continue to test Tencent's management.
Let us wait and see.
★ Follow the Data Ape official account, and reply to "Tencent Financial Report" in the background to download the full version of Tencent's 2023 Q2 financial report.
Text: Qiqi / Data Ape
