Tencent Holding (OTC: TCEHY) Q1 2023 earnings call dated May. 17, 2023
Corporate Participants:
Wendy Huang — Investor Relations
Pony Ma — Chief Executive Officer
Martin Lau — President
James Mitchell — Chief Strategy Officer
John Lo — Chief Financial Officer
Analysts:
Alicia Yap — Citigroup — Analyst
Alex Yao — JPMorgan — Analyst
Ronald Keung — Goldman Sachs — Analyst
Kenneth Fong — Credit Suisse — Analyst
William Packer — Exane BNP Paribas — Analyst
Charlene Liu — HSBC — Analyst
John Choi — Daiwa — Analyst
Jerry Liu — UBS Capital Market — Analyst
Robin Zhu — Bernstein — Analyst
Presentation:
Wendy Huang — Investor Relations
Good day and good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2023 First Quarter Results Announcement webinar. I’m Wendy Huang from Tencent IR team. At this time, all participants are in a listen-only mode. After the management’s presentation, there will be a question-and-answer session. [Operator Instructions] 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 that 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 audited IFRS financial measures that should be considered in addition to but not as a substitute for measures of the Group’s financial performance, propelled in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website. Now let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma will kick off with a short overview. President, Martin Lau; and Chief Strategy Officer, James Mitchell will provide a business review. Chief Financial Officer, John Lo will conclude with financial discussion. Before we open the floor for questions. Now I will pass it to Pony.
Pony Ma — Chief Executive Officer
Thank you, Wendy. Good evening. Thank you for joining us. During the first quarter, we resumed a double-digit revenue growth rate as our payment volumes benefit from and facilitate domestic consumption recovery. Our games revenue improved, and our advertising revenue sustained rapid growth. Our non-IFRS net profit increased at a faster pace, reflecting a positive revenue mix shift, operational efficiency, and an easy base period. We are investing in our AI-capabilities and cloud infrastructure to embrace the opportunities brought by foundation models and expect AI to be a growth multiplier that enabled us to better serve our users, customers, and society at large. Now let me go through the headline financial numbers for the quarter.
Total revenue was RMB150 billion, up 11% year-on-year and 3% quarter-on-quarter. Gross profit was RMB68 billion, up 19% year-on-year and 10% quarter-on-quarter. Non-IFRS operating profit was RMB48 billion, up 32% year-on-year and 23% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB33 billion, up 27% year-on-year and 10% quarter-on-quarter. With our key services, we focused on upgrading our technologies and product innovations.
Our franchise in communications and social networks remained strong. Combined MAU of Weixin and WeChat grew 2% year-on-year to RMB1.3 billion, while QQ mobile devices MAU grew 6% year-on-year to RMB597 million. For games, we expand our leadership via extending popularity of established franchise and success of newly listed in China and international market. For digital content, we retained our first-place position by subscription account with high-quality content across video, music, and literature. In FinTech services, commercial payment volume rebound sharply as consumption activities recovered in China.
For cloud, we operate one of China’s largest infrastructure as a service platforms and announced our high performance — performance computing cluster in April, which will significantly enhance the efficiency of our foundation model chain. We are the second biggest provider of PaaS in China by revenue, and we operate leading SaaS tools such as Tencent Meeting, the most widely used standalone video conferencing app. I will now hand over to Martin and James for business review.
Martin Lau — President
Thank you, Pony. Good evening and good morning to everybody. For the first quarter of 2023, our total revenue was up 11% year-on-year. VAS represented 53% of our total revenue, within which social networks sub-segment was 21%, domestic games sub-segment was 23%, and international games was 9%. Online advertising was 14% of total revenue and FinTech and business services was 32% of total revenue. For our value-added service segment, the revenue was RMB79 billion, up 9% year-on-year. Social networks revenue was up 6% year-on-year to RMB31 billion, reflecting growth of in game item sales and music subscription revenue.
Our long form video subscription revenue decreased 6% year-on-year due to delayed content releases during the first quarter. However, we have taken steps to address this situation including, number one, enhancing our content to cater to evolving user demands. For example, we released our self-commissioned drama series The Long Season in April, which became the highest-rated domestic drama series in the past five years for the Douban review aggregator sites.
And number two, extending our collaboration with short-form video services, which should help long-form content reach more users and capture more monetization opportunities. Music subscription revenue increased 30% year-on-year, driven by growth in paying users and ARPU. We upgraded the listening experience and strengthened cooperation with labels and artists, which resulted in higher user engagement and paying propensity. Domestic games revenue resumed growth to 6% year-on-year and reached RMB35 billion. On top of solid performance from key items such Honour of Kings, DnF and CrossFire Mobile, new game Arena Breakout which we released in third quarter last year also contributed notably to the growth.
International games revenue increased by 25% year-on-year or 18% in constant currency terms to RMB13 billion. The robust performance of VALORANT as well as contributions from 2022 releases NIKKE and Triple Match 3D drove up revenue. For communications and social networks, Weixin Video Accounts consumption continued to grow with rapid increases in time spent and video views. In order to drive its continued organic growth, we are nurturing a healthy and active creator community. First, in order to attract more creators, and help them reach their target audience more efficiently, we have upgraded our onboarding programs with greater traffic incentives, wider creator coverage, and more effective content-creation tools.
Second, we have enhanced the e-commerce infrastructure, enabling creators to be benefiting from sales commissions associated with e-commerce transactions. For example, we enriched the customer management functionalities in video accounts shop, facilitating creators to better engage with customers and increase sales conversion. As a result, our creator community is increasingly vibrant. The first quarter daily active creators and daily video uploads more than doubled year-on-year, while the number of creators with over 10,000 followers more than tripled year-on-year.
On QQ, we deployed a new architecture to optimize development efficiency across operating systems on an unified code base. This new technology foundation also enhances user security with strengthened data encryption mechanisms and improved users graphical experience with more advanced rendering solutions. We believe this upgrade will enable faster innovation in QQs user experience going forward. Moving on to domestic games, before discussing product and financial trends, I want to highlight that as a result of our continued and dedicated minor protection program, users aged under 18 contributed less than 1% of total time spent in gross proceeds in the quarter.
Time spent and gross receipts from users aged under 18 reduced by 96% and 90% from three years ago respectively. We’ll continue to take our societal responsibility with regard to games content and minor protection very seriously. Looking into the performance of our most popular games, Honour of Kings launched highly appealing ShanHaiJing themed-outfits with targeted marketing programs during the Chinese New Year season, contributing to record-high quarterly gross receipts. CrossFire, a PC game, we have operated since 2008, successfully attracted returning players with promotions targeting Internet cafes.
CrossFire Mobile, which we had launched in 2015 released a popular themed map outfit and weapon items based on a virtual idol group created for the game. Both CrossFire and CrossFire Mobile achieved record-high gross receipts in the quarter. Additionally, new games we launched recently in high-potential genres have generated strong traction. The Fight of the Golden Spatula, which has stayed as the number one auto-battler game since launch in 2021 increased its gross receipts by more than 30% year-on-year in the quarter. We recently launched a fast-paced game mode that appeals to returning and new players driving average DAU to a record high of over 10 million in April 2023.
The most popular extraction shooter game in China, we have been nurturing a highly engaged user base since launch in July 2022 and stepped up marketing activities during the Chinese New Year. In the first quarter, the title grew and achieved new milestones in DAU and gross receipts. We launched Metal Slug awakening in April, moving a classic arcade game IP to a mobile and multiplayer experience. Metal Slug ranked number one among new action games released year-to-date. Now with that, I’ll pass on to James.
James Mitchell — Chief Strategy Officer
Thank you, Martin, and good morning or afternoon or evening, everyone. For international games, we increased gross receipts by a double-digit percentage-year on-year with strengthened performance from key titles. VALORANT grew its MAU year-on-year on a new map and a new agent and drove up its gross receipts by over 30% year-on-year, with popular Japan-themed and alien-themed weapon items in the quarter. PUBG Mobile resumed sequential daily active user growth in the quarter after several quarters of decline benefiting from new combat features and enhanced player-versus-player gameplay.
We introduced a map editing tool to facilitate user-generated content enhancing user engagement and longevity. Our subsidiary, Miniclip, launched Triple Match 3D in April last year, which has become a breakout success in the highly competitive match game genre leveraging creative gameplay and effective user acquisition. Triple Match 3D is the only title released within the last two years, which has broken into the top ten games in the match genre driving Miniclip gross receipts to a record high in the quarter.
Turning to online advertising, revenue was RMB21 billion in the first quarter, up 17% year-on-year. As a reminder, during the same period last year, our revenue included a several percentage point contribution from the Beijing Winter Olympics. The rapid year-on-year revenue growth was supported by the new revenue stream from video accounts ads, solid demand for mini-program ads, and the continued recovery of our mobile ad network. Sequentially, revenue declined 15% due to adverse seasonality. Ad spend grew year-on-year across most categories benefiting from the consumption recovery.
In China, for example, fast moving consumer goods advertisers increased spending to capture retail sales growth. Travel advertisers increased spending due to rebounding offline activities and large e-commerce platforms increasingly recognized us as a key user acquisition channel boosted[phonetic] spending with us accordingly. We upgraded our machine-learning advertising platform to deliver higher conversions for advertisers. For example, we help our advertisers dynamically feature their most relevant products inside their advertisements by applying our deep learning model to the standard product unit attributes we have aggregated within our SPU database.
Advertising on Weixin properties, which contribute over half of our total advertising revenue, outgrew the overall ad business. Video accounts revenue ramped up as we attracted new advertisers and incremental spending from existing advertisers. The average revenue per thousand impressions of video accounts ads sustained at a premium level versus revenue per thousand impressions from other short-form video platforms. The content platforms, our music ad revenue grew rapidly year-on-year driven by the monetization of ad-supported music content as well as live concert sponsorships. Our long-form video ad revenue declined year-on-year due to fewer releases of popular content.
Our mobile app network revenue increased robustly year-on-year. On the supply side, we increased ad inventory and high conversion rate properties, such as the smartphone manufacturers app stores. On the demand side, we attracted higher spending through return on investment-focused advertisers such as the e-commerce platforms. Looking at FinTech and Business Services, segment revenue was RMB49 billion, up 14% year-on-year. For FinTech services revenue resumed double-digit year-on-year growth benefiting from the recovery of payment activities.
Offline payment transactions rebounded more sharply than online as categories such as retail, travel and dining services benefited from people going out and about more frequently. Meanwhile, year-on-year revenue growth in wealth management and consumer loans continued at healthy rates. For Business Services, year-on-year revenue growth turned positive in the first quarter, benefiting from stabilization for our cloud services after a period of extensive restructuring, plus the initial contributions from technology support fees that we have begun generating under video accounts live stream e-commerce transactions. Business Services gross margin and gross profit increased notably year-on-year as we reduced loss-making activities and optimized costs as we began the live streaming e-commerce monetization.
Within Cloud Services, our smart transportation solutions are assisting the digitization of large-scale transportation projects. For example, we leveraged our expertise scenarios such as cloud infrastructure, digital mapping, and 3D rendering the smart highway projects in Sichuan and Metro systems in Guangzhou. And now I’ll pass to John.
John Lo — Chief Financial Officer
Thank you, James. Hello, everyone. For the first quarter of 2023, total revenue was RMB150 billion, up 11% year-on-year. Gross profit was RMB68.2 billion, up 19% year-on-year. Net other gains were RMB0.9 billion, down 93% year-on-year. Operating profit was RMB40.4 billion, up 9% year-on-year. Net finance costs were RMB2.6 billion, up 37% year-on-year due to increased interest expense. Share of profit of associates and joint venture was RMB0.1 billion compared to a share of loss of RMB6.3 billion for the first quarter of 2022. On a non-IFRS basis, share of loss was RMB0.1 billion, improving from a share of loss of RMB2.2 billion last year.
This was driven by improved profitability of certain domestic associate due to revenue growth and cost control measures. Income tax expenses increased by 118% year-on-year to RMB11.5 billion due to pre-tax profit growth, increased withholding tax provision and a onetime deferred tax adjustment related to an overseas subsidiary. IFRS net profit attributable to equity holders was RMB25.8 billion, up 10% year-on-year. Diluted EPS was RMB2.639, up 10%. Now I will share our non-IFRS financial figures.
Operating profit was RMB48.4 billion, up 32% year-on-year. Net profit attributable to equity holders was RMB32.5 billion, up 27% year-on-year. Diluted EPS was RMB3.353, up 28% year-on-year. Moving on to gross margins. Overall gross margin was 45.5%, up 3.4 percentage points year-on-year. By segment gross margin for VAS was 53.9%, up 3.5 percentage points year-on-year, driven by high-margin games revenue rebound. Gross margin for online advertising was 41.7%, up five percentage points year-on-year, thanks to strong demand for Video Account in-feed ads leading to higher revenue growth with low rate incremental costs.
Gross margin for FinTech and Business Services was 34.5%, up 2.9 percentage points year-on-year. This was due to efficiency improvements and initial revenues from technology support fee for live streaming e-commerce and video accounts. On operating expenses, selling and marketing expenses were RMB7 billion, representing 4.7% of revenues. This reflects a year-on-year decline of 13% primarily due to reduced marketing spend. R&D expenses were RMB15.2 billion, down 1% year-on-year.
G&A expenses, excluding R&D, were RMB9.4 billion, down 16% year-on-year. This reflects reduction in staff costs, including those relating to share-based compensation. At quarter-end, we had approximately 106,000 employees, down 9% year-on-year or 2% quarter-on-quarter. Let’s look at our operating net margin ratios. For the first quarter 2023, non-IFRS operating margin was 32.3%, up 5.3 percentage points year-on-year. Non-IFRS net margin was 22.3%, up 2.9 percentage points year-on-year.
To conclude, I will highlight some key cash flow and balance sheet metrics. Total capex was RMB4.4 billion, down 37% year-on-year. Within total capex, operating capex was RMB1 billion, down 81% year-on-year reflecting our efforts to optimize spending and improve utilization of servers and equipment. Non-operating capex rose by 91% year-on-year to RMB3.4 billion due to ongoing construction projects. Free cash flow for the quarter was RMB51.8 billion up 240% year-on-year. The strong growth was driven by higher operating cash flow, thanks to our games revenue rebound as well as decreased[phonetic] payments for capex and media content. Net cash position was RMB31.5 billion compared to net debt of RMB14.8 billion in the previous quarter. The sequential improvement was due to strong free cash flow generation. Thank you.
Questions and Answers:
Wendy Huang — Investor Relations
Thank you, John. [Operator Instructions] First question comes from Alicia Yap from Citigroup. Alicia, can you speak up?
Alicia Yap — Citigroup — Analyst
Hi Good evening.
Wendy Huang — Investor Relations
Alicia can you speak up.
Alicia Yap — Citigroup — Analyst
Yeah, good evening management. Can you hear me.
Wendy Huang — Investor Relations
We can’t hear you clearly. Maybe you turn up the volume.
Alicia Yap — Citigroup — Analyst
Okay, hi, can you hear me better now.
Wendy Huang — Investor Relations
Yeah, it’s much better enough.
Alicia Yap — Citigroup — Analyst
Okay. Thank you. Thanks for giving me the chance to ask questions and congrats on the solid set of results. First question is related to your gaming business. It is delighted to see a numbers of the old franchise title regain strong popularity and also achieve a record growth receipts during the quarter. So based on your observation and what you have seen from your game performance, are there any notable differences in user gameplay behavior? Or the spending frequency or the willingness pattern that you could highlight that are quite different from what we saw during the pre-pandemic period. Just wondering if some of these robust game activity that you experienced during the quarter is more attributed to your effective promotional campaign? Or this is more the entire industry phenomenal? Second question is on your Business Services. So wondering what’s managements view on the recent price cut action by the major peers? And how would that affect Tencent’s planned initiative and also industry landscape? Thank you.
James Mitchell — Chief Strategy Officer
Yeah, thank you for the questions, Alicia. So on the game business, not to be pedantic, but we feel very strongly that what you referred to as old games are, in fact, evergreen games. And if you look at our game portfolio, many of the biggest, most successful titles, including Honour of Kings, League of Legends, CrossFire, CrossFire Mobile, Peacekeeper Elite, PUBG Mobile, Arena Breakout competitive games, often team-based competitive games that are designed to be balanced, fair and playable for years or for decades. And that is the reality that we’re seeing across the industry with other similar team-based competitive games, and that is the reality we have really sought to nurture with these big evergreen games.
So in terms of why the games performed well in the first quarter, then we believe it comes down largely to appealing content. We released appealing content, players responded to that appealing content by investing in some cases, more time and in other cases, more money or both, and the more money translates into more grocery receipts and therefore more revenue. In terms of whether there were special promotional campaigns, we always promote the virtual outfits. I think over time, we’ve become progressively better at promoting the right virtual outfits at the right time of the calendar year. So the business has become more akin to luxury goods and that there are certain virtual outfits we promote to tie into the Lunar New Year. There are others we promote to tie into the May Day holidays into the summer period and so on and so forth. But that’s an ongoing trend as opposed to a single quarter phenomenon
And then in terms of how user behavior has changed from pre-COVID to today, we don’t see a dramatic change. I think it’s probably fair to say that in the three years since China went into COVID, despite mixed economic trends, purchasing power has generally increased. The removal of the minor game players skews up the spending power from those who are still playing games or older. So therefore, it’s natural that there’s more ability to spend more on high-quality content now than what is the case three years ago. So that’s in terms of the games and particularly the evergreen games.
There’s many other kinds of games, including content-driven games and we’re seeking to reinforce our position in those other kinds of games. But the big games that we really talked about this quarter were typically these evergreen games. On the business services side and specifically cloud and the impact of price cuts, the impact of these price cuts on Tencent as a whole is not notable. As you know, cloud only represents a mid-single digit percentage of our total revenue. Within that, the price cuts only apply to infrastructure as a service, which is a subset of that mid-single digits. And then even within infrastructure as a service, if you look at the price cuts that have been widely announced in the industry in recent weeks, they apply to long-term prepaid contracts and those long-term prepaid contracts are generally entered into by small and medium-sized businesses, but not by larger enterprises.
So this is an industry where over time, the input costs of servers and bandwidth and so forth are generally falling and it makes sense that the participants in the industry pass on those falling input costs into falling pricing to their customers. But the percentage of our revenue that is impacted by this particular round of price adjustments is in the few basis points range. So it’s not a major moving part for Tencent as a whole. What’s more important for us is just continuing to double down on our competitive strengths within cloud and continue to provide the best possible service to our customers, of which price is one, but not the only facet. Thank you.
Alicia Yap — Citigroup — Analyst
Thank you.
Wendy Huang — Investor Relations
Thank you, Alicia. We will take the next question from Alex Yao from JPMorgan.
Alex Yao — JPMorgan — Analyst
Thank you, management, for taking my question and congrats on a strong quarter. I have two questions. Number one is on the balance sheet that current deferred revenue increased sharply by 18% year-on-year this quarter. This is a big change compared to the trend in the past several quarters. Can you elaborate the reason? And should we expect a strong VAS and the gaming revenue in the next perhaps two to three quarters? And then the second question is around the FinTech development. We noticed you guys recently launched an installment loan product to selected Weixin payment users. Can you discuss how fast will you roll out the product to the rest of the Weixin Pay users and how should we think about the financial impact on your FinTech segment. Thank you.
John Lo — Chief Financial Officer
Yes. Firstly, I would like to explain a little bit about what is inside the deferred revenue. Actually, there are a lot of components, including the virtual game items, including business cooperation agreements, prepaid advertising, prepaid crop, prepaid tokens, a lot of different type of prepaids in there. So in terms of year-on-year growth, I think it’s more due to the fact that the online games actually doing very well in sort of the cash consumption. However, well, if you look at the — we should look at the total deferred revenue rather than just the current deferred revenue because you know it represents some of the items that might extend beyond one year.
So if you look at the total deferred revenue, actually, it dropped by 1%. And on a quarter-on-quarter basis, it increased by 17% due to the reasons that I have mentioned. And I think for BCA, it’s quite natural that it will drop quarter-over-quarter because it is amortized according to the original contract. And in terms of the prepaid advertising, actually, it dropped partly due to seasonality and partly due to the BCA amortization that I’ve just mentioned. So if you look at the deferred revenue, I suggest we should add the two up to arrive at the actual deferred revenue for the whole company.
James Mitchell — Chief Strategy Officer
In terms of the installment loan product, that’s actually tied to consumption. So this is more like if somebody buys an item of high value, then it actually allows the user to select, to pay for the item on an installment basis. And this is a product which we are pilot testing right now, and we’re not in a hurry to roll that out on a broad basis. And this is a product which is designed alongside with some principles, which we design our FinTech products.
Number one, it’s actually sort of in due compliance of the regulatory authorities regulation. And number two, this is something which our users want.
So it is designed with a very key focus on generating user value because users when they want to buy an item, and it’s a clear consumption need. And if they have the credit worthiness right then we are in a good position to give them an installment loan. And in some cases, the merchants actually want to see that happen as well. And then in terms of risk management we are actually very focused on risk management in these products and that’s why we are pilot testing it and once you understand all the credit performance first before we rolled it out on a gradual basis. And over time, we would want to work with licensed financial institutions in terms of expanding this product.
So overall I think this is consistent with our gradual expansion of our range of financial value-added services to our users as well as to merchants that are using our payment platform. But at the same time, we have very strong focus on the factors that I talked about as well as self-restraint in terms of the overall scale growth because we felt this is actually the ultimate risk control mechanism. Now if we grow this product on a gradual basis, while at the same time, we accumulate a lot of experience and know-how then the risk management will be done at high-quality way. And this is how we want to manage our financial products going forward.
Wendy Huang — Investor Relations
Thank you, Alex. We will take the next question from Ronald Keung from Goldman Sachs.
Ronald Keung — Goldman Sachs — Analyst
Thank you. Thank you, Pony, Martin, James, John and Wendy. I guess first question maybe on the macro and the advertising side that how was our view on the consumption outlook from here now that we’ve passed the two quarters of reopening thus far. If we look at the ad revenue and video accounts kind of contribution adding, should we think of a kind of two-year CAGR growth rate? Should we see further improvement in the rest of 2023 as e-commerce and other parts of the business ramp up? And then a second question, just want to hear how we think about the foundation model AI landscape. If you could share some of where Tencent sees to be and to see kind of where will kind of we see this foundation model mostly be of commercial value to our business, knowing the different regulations, any kind of different players trying to come in and the availability of infrastructure and chips, how do we see this business driving our future multiple growth drivers and the cloud growth into the second half and next year? Thank you.
James Mitchell — Chief Strategy Officer
So Ronald, on the advertising question, we believe China is experiencing a broad-based consumption upturn. The upturn is not uniform across every category, but it’s more pronounced for everyday low ticket price items, more patch sheet for high-ticket price items. Now in terms of how that translates into our advertising revenue we’re experiencing strength basically across the board. So fast-moving consumer goods, e-commerce, finance, online services, health care, travel, all behaving robustly on the weaker side, there are no categories that are notably weak at this point in time. And there are categories such as automobiles or electronic products where the end demand is erratic, but what we can see is that companies in those categories are still very keen to drive sales and one of the ways they do that is by advertising on our platform.
On your question about the two-year CAGR, I believe, that in the first quarter, the two-year CAGR for our advertising revenue was minus 2%. And so while we don’t give guidance, I think the answer to your question, logically should be in the affirmative. As a reminder, in the course of 2021, we began that year with our biggest advertiser category was education-related spending, which dropped very sharply during the course of the year. We also lost several important advertising formats such as the full-screen ads in our ad network during the course of the year. So the two-year comparison does get relatively easier for the industry and for us as we move forward over the coming months. So I hope that’s helpful on the advertising side.
Martin Lau — President
On the AI and foundation model side, I think you actually asked a lot of questions and it’s actually very difficult to answer one by one, but I’ll try to pick on some of the key items. So in terms of going forward, we do believe that number one, there’s going to be many models in the market going forward for the large companies, I think each one of us have a foundation model. And the model will be supporting our own use cases as well as offer it to the market both on a 2C basis as well as on a 2B basis. And at the same time, there will be many start-ups, which will be creating their own models, some of them may be general foundation model. Some of them may be more industry and vertical models and they will be coming with new applications.
I think overall, it’s going to be a very vibrant industry from a model availability perspective. And then in terms of applications, I think there will be a lot of different applications. Overall, the user to machine interactions, in particular, search and information generation and those type of applications would actually be more disruptive. And at the same time, there will be more of a rush of applications appearing in those use cases. So general search, vertical search in terms of content aggregation, a lot of these kind of applications will see new disruptors coming into play. In terms of the user-to-user interaction type of services like social network and short video network and games, long video content, there will be — a lot of usages that helps to increase the quality of content, the efficiency at which the content are created as well as lowering the cost of content creation. And that will be net beneficiary to these applications.
Now in terms of — you asked about regulation. We felt the government’s general stance is like it’s supportive of regulation, but the industry has to be regulated. And I think this is not something that’s specific to China, even around the world. And you look at the US, there’s a lot of public discussion about having regulation and even the Founder of OpenAI has been testifying and asking for regulation in the industry. So I think that is something which is necessary, but we felt under the right regulation and regulatory framework, then the government stance is supportive of innovation and the industry will actually have room for healthy growth.
And that availability of chips at this point in time, chips are largely available and there are some workarounds of GPUs that can be sold in China. And I think everybody is actually trying to get supplies. There may be short-term shortages here and there, and everybody is actually clamoring for allocation. But over time, these chips will be available and other players who want to build foundation models will be able to get the chips to build the models.
Ronald Keung — Goldman Sachs — Analyst
Thank you. This is super useful. Thank you, Martin and James.
Wendy Huang — Investor Relations
Thank you. We will take the next question from Kenneth Fong from Credit Suisse.
Kenneth Fong — Credit Suisse — Analyst
Hi. Good evening, management. Thank you for taking my questions and congrats on the strong results. I have two questions. The first one is regarding the gap between revenue and earnings growth. I noticed that in our quarter, our earnings have outpaced topline growth meaningfully on the back of video account monetization, operating leverage, as well as cost optimization. How should we think about this gap over the next two quarters, consider all these are moving parts and drivers? And my second question is related to the tax. Effective tax rate is quite high this quarter driven by one-off deferred tax of overseas subsidiaries. But we didn’t seem to find adjustment in the non-GAAP net profit. So how should we think about this one-off impact in our adjusted net profit, if any? Thank you.
James Mitchell — Chief Strategy Officer
Yeah. Thank you, Kenneth. So as you observed, the gap between revenue growth and non-IFRS net income growth was unusually wide this quarter on a year-on-year basis. On the other hand, if you look at the two-year CAGR, then the revenue growth and the operating profit — non-IFRS operating profit growth was basically identical on a two-year CAGR. So what’s the right message to take for looking forward, it’s somewhere in between, meaning that the breadth of the gap this quarter between revenue and non-IFRS profit growth was abnormally large because of the low base of non-IFRS profit in the same quarter a year ago. And we do expect that gap to narrow as the base effect normalizes. On the other hand, we believe we are a structurally more cost-conscious, more efficient company going forward than we were in the past, which would be helpful for margins and many of our newer revenue streams, such as video accounts such as monetization of the e-commerce live streaming such as the Mini Program and mini game revenue is coming in at relatively high gross margins, which is a positive margin mix shift for us versus in previous years and we’ve been generally subject to negative margin mix shifts. So overall I think that we can aspire to potentially grow profits in line with or faster than revenue. But the delta between profit growth and revenue growth was unusually wide in the first quarter because of the base effect and some of the other factors that we mentioned.
John Lo — Chief Financial Officer
Yes. The deferred tax adjustment is not an non-IFRS adjustment. We usually look at the effective tax rate on a yearly basis rather than on a quarterly basis as there are bits and pieces of true-up happening from time to time, including, say, for instance, this time there might be some withholding tax in order as we want to make more money of the country as well as adjustment on some of the deferred tax in here. But to give you an overall view of the effective tax rate, we expect that on a non-IFRS spaces in the course of 2023, it will be in the range of 18% to 20%.
Kenneth Fong — Credit Suisse — Analyst
Thank you, James and John. Very clear.
Wendy Huang — Investor Relations
Thank you, Ken. Our next question will be from Esmi Paul from [Technical issue]
Unidentified Participant — — Analyst
Hi. Thank you, Wendy, and also management for the opportunity to ask questions and also congrats on the solid results. So I do have a follow-up question on generative AI. So I think in the previous question, you very helpfully explained the use cases and also monetization strategy. So just a follow-up in March. So the media reported that we may have already started developing the Hongyuan [indecipherable]. So can you just share more updates on the potential product launch? And official fallout will be in relation to the training data of Hongyuan. Does that encapsulate open internet data? And also what’s the impact on interoperability and also digital walled gardens? Thank you.
Martin Lau — President
Okay. So in terms of our foundation model building exercise Hongyuan and the — I think, the headline is that we are making good progress. And if you look into the different components, right? So the model building is actually progressing well. I think you mentioned about data and data collection is basically across the entire Internet. And with specific addition of the data in China. And in terms of data in China, it’s on high-quality public data as well as high-quality of data within our content ecosystem. As you know, we have actually a lot of contents that are in-house and that is quite unique addition to the overall data.
In terms of the training, we are scaling up our training organization and the entire production line of training. And in terms of infrastructure, it’s a core strength for us, given our cloud business. And we have also recently, as Pony mentioned, announced our high-performance computing cluster based on NVIDIA H800 GPUs. And so that would actually give us an additional efficiency in terms of the training. And I think one key strength for us is obviously the use cases, right? We have different products, teams that are already planning some interesting offerings alongside with their products. So overall, I think, it’s actually making good progress and we continue to believe that AI is growth multiplied for the industry and in particular, for Tencent because as we mentioned last time, our core user-to-user services is not subject to disruption, but can benefit greatly from being enhanced by foundation models because it can actually help these services to generate content, appealing content on large scale at the low cost.
And all these are helpful to improve the quality of the service, improve monetization and also lower the cost. And then foundation models also facilitates our introduction of used machine services. For example, it provides a new angle for us to provide to our search, both within Weixin and on our browsers as well as if you look forward, a bit longer, right? There could be interesting digital assistance that can be launched in our services and of course, cloud is actually very important as well because we felt that Weixin model over time can actually provide very compelling services on the cloud for our enterprise clients and also enable our PaaS and SaaS to be more competitive.
Unidentified Participant — — Analyst
All right. Sure. Thanks. That’s helpful.
Martin Lau — President
Thank you.
Wendy Huang — Investor Relations
Thank you, Esmi. Next question comes from William Packer, BNP.
William Packer — Exane BNP Paribas — Analyst
Hi, management. Many thanks for taking my questions. Firstly, last quarter, you provided a helpful update on develops around the domestic regulatory backdrop. Specifically, could you update us on recent news flow around domestic gaming, short-form video and FinTech. And as a follow-up, the domestic gaming momentum improved markedly in the quarter, with comps easing over the course of the year and new content coming to the market. Could we expect growth to accelerate and potentially to return to double digits for that business line? Thank you.
Martin Lau — President
Okay. In terms of the regulatory environment, I think, on the overall basis regulatory environment continues to trend toward normalized regulation and the government is actually very focused on economic development as well as supporting a healthy development of the digital economy and industry. Some new — the latest news fight is on April 28th, President Xi, chaired a meeting of the Poly Bureau. And he called for promoting regulated healthy development of platform companies and encouraging innovation of leading platform companies. I think this is a very significant continuation of the expression of support for the overall industry. And in terms of the different industries that you talk about, right?
In terms of domestic gaming, I would say, it continues a status of normalized regulation and game licenses have been approved on a regular basis. And that’s part of the reason why we’re seeing a pretty good traction on the overall gaming industry in China. In terms of short-form video, I think there has not been much update and it’s not a focus of a regulatory action so far. In terms of FinTech, I would say the industry is starting to move into the process of normalization of regulation. And if you look at the entire history, right, in the year of 2021, the PBOC started requiring self-review of FinTech services by platform companies for the entire industry and it also conducted a routine inspection on Tempe, which was widely reported. Through that process, we have been fully cooperative, and we have proactively adjusted our operations accordingly, according to the requirement of PBOC.
So I think the inspection now is approaching and conclusion, the inspection results are in the process of being finalized. When such results are concluded and released then we believe we would then see the regulators will be focused on normalized regulation and they will also devote more resources in supporting the development and innovation in the overall industry. So that’s the regulatory update both on a macro basis and with respect to the different industries.
James Mitchell — Chief Strategy Officer
And, well, on games, I recognize your question was primarily around the domestic China game business. But if you take a step back, then our global game revenue grew at a low double-digit rate year-on-year in the quarter, which was gratifying. And we believe that the industry globally has now worked through some transitional challenges, including sort of post-COVID hangover in the West, including the lack of new game licenses in China. And as a result, the industry can revert closer to its historic high single-digit growth rate, CAGR and whether we outperform or underperform the overall industry will be largely a function of the quality of the content we can bring to bear.
But generally speaking, over time, we have been able to outgrow this global game industry growth rate of high single-digits through a combination of operating some of the biggest, best, most evergreen games that I talked about earlier as well as housing some of the most successful and creative studios in the game industry as well as operating high-growth game platforms, such as our emerging mini game platform. So for all those reasons, we think that there’s everything to play for and that the industry is back on a growth track globally and we should work towards growing with or faster than the industry globally. Thank you.
Wendy Huang — Investor Relations
Thank you. We will take the next question from Charlene Liu from HSBC.
Charlene Liu — HSBC — Analyst
Thank you. Thank you for taking my question. I would like to ask about overseas M&A. Clearly, we have seen really strong numbers in the international game segment in Q1. I’d like to get an update from the management on M&A strategy for this segment and your view on competitive landscape, especially after some of the M&A activities from our competitors and how should we think about growth for the rest of the year? I have one follow-up on advertising. Thank you.
James Mitchell — Chief Strategy Officer
So thank you for the question, Charlene. The competitive landscape for acquisitions of game companies outside China has been fairly stable for the past few years and while there are a number of companies that are acquisitive in the space, often their objectives do not overlap with our objectives, meaning they may be companies with a big console installed base and they’re trying to acquire game studios to supercharge that console installed base or there may be companies, which are valued on near-term earnings and they’re trying to bolt-on additional earnings versus in our case, we’re not married to any single hardware device. And so we’ve been acquisitive with mobile game studios, acquisitive with PC game studios periodically active with console game studios as well. And in addition, we’re very willing to look forward three or five or seven years when we do these investments and acquisitions and so it’s often the case that we’re looking at a company that has released a successful niche game the previous year.
And we know for a certainty that company’s revenue will be declining for the next couple of years because it will be digesting the success of the first game. And in many cases, we know the company will be loss making for a period of time because we’re scaling up the team to work on a much bigger sequel, but we don’t yet have the bigger revenue from the bigger sequel. And that fits us. It doesn’t fit everyone. And therefore, there are certain studios that naturally come to us and certain studios that naturally go elsewhere, which is fine. So I wouldn’t say that we’ve seen a dramatic change in the game industry acquisitive landscape so far. Now of course, depending on whether certain big deals one particular very big deal goes through or not then we could see more change in the future and we’ll need to be active and reactive around that.
Charlene Liu — HSBC — Analyst
That’s good. That’s good to know. And my second question on advertising. Earlier, management team mentioned that Weixin contributed over half of the total ad revenue, can the management elaborate on revenue contribution by app products, for example, in the previous quarter in the first quarter across moments, video accounts, ad network, et cetera? And going forward, how should we think about revenue mix across these products and GPM trend? Thank you.
James Mitchell — Chief Strategy Officer
Well, in terms of the revenue position, we won’t be super specific. But Weixin, as we said, is the majority within that moment is historically the largest contributor mini programs and official accounts are substantially smaller and roughly similar to each other and video accounts have sort of leapfrogged over mini programs and official accounts because there’s a lot of inventory in video accounts and has very high revenue per 1,000 impressions in video accounts. Outside Weixin then the biggest set of properties is the mobile ad network, which has had quite a pronounced bounce back in the last six to nine months. And then beyond that, there’s a drop off to the long-form video, music, news and some smaller properties around QQ and Qzone. So that’s the composition. In terms of the margin profile then basically all of the owned and operated properties with the exception of long-form video, the high gross margin versus long-form video and the ad network are inherently much lower gross margin.
Charlene Liu — HSBC — Analyst
Thank you.
Wendy Huang — Investor Relations
Thank you, Charlene. Next we will take the question from John Choi from Daiwa.
John Choi — Daiwa — Analyst
Hey. Thank you for taking my question. I have a question on a follow-up on the gaming side. I think if you look at domestic game, this quarter, we’ve seen a very strong gain revenue due to existing. I think James mentioned evergreen but as we go into the second quarter, second half, we do have much more gaming — new game launches for domestic market. So I mean, can you kind of elaborate the growth trends in terms of the revenue roughly [phonetic] as we head into the second half, should we be seeing accelerating growth on back of that? And just a quick some housekeeping question. This quarter, actually, we noticed very strong operating cash flow of more than $60 billion, but also the investing outflow cash flow was $65 million. So any color there? Thank you.
James Mitchell — Chief Strategy Officer
So on gains, I’m not necessarily going to answer your question because we don’t provide guidance as to whether revenue lines are accelerating or decelerating beyond observing. But firstly, the strength in the first quarter was partly due to what I referred to as evergreen games. But we also saw very good growth from a number of games released in the last one to two years. And it’s often the pattern with us, the quarter we release a game, it generates relatively little monetization. And of course, that monetization doesn’t translate into our P&L because of our deferral policy. But then over subsequent quarters, if it’s a good game, we see the monetization improving. We see the revenue — the deferral starting to flow through into reported revenue.
If it’s a really good game, we see the daily active user count increasing. And so recently, a number of games to fit that profile, including the Arena Breakout, which is the leading extraction shooter game in China, where we’ve seen good growth in DAU and in monetization as players become familiar with this new type of game that exists before. We’ve seen very good growth in terms of both users and monetization from the Auto Chess game, Golden Spatula that has over 10 million daily active users, which is rare for a new game in China and a very rare for a game to build to that level over the course of two years as opposed to get to that level very quickly and then fade away. And also quite good trends in the first quarter for our League of Legends Wild Rift mobile game. Now obviously looking through the rest of this year, we have a number of big games that we intend to release domestically that we’re excited about. But again, with some of those games, they’ll monetize well from day one. With others, they’ll monetize more gradually over time. Thank you.
John Lo — Chief Financial Officer
In respect of the net cash flow using investing activities of RMB65 billion actually it’s a little bit tricky because it usually increase some items which is pretty normal in nature. Say, for instance, out of that RMB65 billion, RMB50 billion is related to net fixed-term deposit placement. And other than that, items just like capex, media content and M&A and each of those items are maybe around RMB4 to RMB4 point something billion each.
Wendy Huang — Investor Relations
Thank you. Next we will take the question from Jerry Liu from UBS.
Jerry Liu — UBS Capital Market — Analyst
Hey, thanks, management. Yeah, I wanted to go back to the advertising business and ask about e-commerce. So first, e-commerce as a category has been an area of strength. So I just wanted to ask whether we think some of this is share gains, Tencent taking in the ad industry from other players. And second of all, how do we think about the development of e-commerce, especially within video accounts. I remember previously, we talked about how this is something that could take some time to ramp up. But I’m also seeing that in the first quarter, we started to generate more technology fees from e-commerce live streaming in video accounts. So I’m wondering if we could see more ramp-up of e-commerce related monetization here? Thank you.
James Mitchell — Chief Strategy Officer
Yes. So in terms of the big e-commerce companies advertising with Tencent, then we’re certainly experiencing share gains. I think that those share gains arise for a number of reasons. One is changing perceptions about sort of ecosystem competition, meaning in the past, there were some companies that chose not to advertise with us because they viewed us as an ecosystem rival and they may have reassessed that perspective over time. And then secondly, we’re deploying much more sophisticated machine learning now to our advertising targeting that is particularly beneficial for big e-commerce companies with a gigantic range of SKUs because now we can ingest those SKUs and then display the right SKU to the right user within the e-commerce companies advertisements. So that’s on the e-commerce companies advertising with us.
Martin Lau — President
So in terms of e-commerce in relation to live streaming and video accounts, we felt there is actually a very big opportunity. And part of it is already proven in the other short video companies. When you have short video, you can actually lead to live streaming and live streaming can lead to e-commerce transactions. But in addition to that, we felt that we can have some unique value-added components that we can provide to the merchants because we have a private domain. We also have mini programs which can actually allow us to connect with the video accounts. And as you know, there’s actually a very big transaction ecosystem that’s already happening on mini programs. And if we can actually start connecting that with video accounts and live streaming then it would actually make the overall e-commerce ecosystem much more vibrant.
And we also have payments, which is a very important enabler. So when we have all these additional components added to the video accounts and live streaming. We felt there’s actually a very large headroom for us to grow in e-commerce. But we want to do it on a gradual basis so that we can build the infrastructure right, we can actually provide the best balance between user experience as well as the ROI for the merchants. And at the same time, most importantly, we actually want to make sure that the transaction ecosystem is actually of high quality. So instead of having a lot of onetime buyers of low-quality products or certain products which are very high margin for the merchants and they basically sort of spend all the money on advertising instead of on the product quality, we actually want to make sure that the ecosystem is built right, so that it delivers the right value for the users as well as for the merchants and the overall transaction ecosystem is healthy. So that will take some time, but we felt if we do all these right, there’s actually a very long runway for us to grow this part of the business.
Jerry Liu — UBS Capital Market — Analyst
Understood. Thank you.
Wendy Huang — Investor Relations
Thank you, Jerry. We will take the last question from Robin Zhu from Bernstein.
Robin Zhu — Bernstein — Analyst
Hi. Thank you. Thanks, management for taking the question. I guess two questions, if I may. One, just on your operating expenses. I mean, you’re clearly showing impressive cost discipline and with operating expenses trending the way they have. Just curious to hear your thoughts on at what point does the company pivot more towards spending on growth, whether it’s on new games, whether it’s on AI and kind of related services and/or what in your mind is the trigger to kind of go back on the front foot and spend more if the consumption recovery to date hasn’t done that already? And the second question on gaming. James, you mentioned a while back, the macro was having an impact on kind of willingness to pay and gaming ARPU as a result. Just curious to hear your thoughts on whether the recovery in Q1 is pent-up demand and therefore, would there be questions about sustainability. And how the recoveries looks between kind of games, high ARPU games where whales dominate versus these large DAU games where everyone kind of buy skins and ARPU is generally lower. Thank you.
James Mitchell — Chief Strategy Officer
Thank you. So on the second question, we saw quite a broad-based recovery for our game business. I think out of our top 15 games, 12 of them were up year-on-year. So this wasn’t a matter of one or two games bouncing while the others languished. Our overall portfolio uplifted and whether that’s due to pent-up demand or just underlying demand, time would tell. But I explained earlier why I think it’s underlying demand. On the operating expenses then there will be situations, whether it be a new game launch or buying and then depreciating GPUs for our large language model where we need to invest and we would invest aggressively. But that said, I think that we will also keep operating expenses under quite tight control going forward and one reason is because we’ve become structurally more efficient.
Second reason is that generally, we’re mix shifting toward inherently higher margin activities as with bulk those up while exiting some inherently low-margin activities. And more broadly, you spoke about when do we need to pivot to investing for growth. And I think actually, if you dig into our range of businesses, there’s a number of emerging growth drivers, be it the video accounts advertising monetization, be it the e-commerce live streaming monetization, be it the mini program and mini games. And what’s interesting is each of those are very sizable opportunities, which are becoming meaningful and have very long runways to expand over time. But, none of those, do we need to spend a great deal of extra money to make them more popular.
We aren’t incurring gigantic subsidies on providing community group buying food solutions. We aren’t inducing users who would otherwise be on another short video service to install video accounts and spend time on video accounts instead. We’re just providing what we think are very attractive and somewhat differentiated experiences to users within our bigger apps particularly Weixin. And letting users over time, discover those, enjoy those, socialize those, and spend more time and ultimately more money on those. So I don’t think that we’re in a sort of non-growth mode. And at some point in the future, we need to flick a switch and dramatically increase sales in marketing or subsidies to go back to growth mode. I think we’re in growth mode right now. It’s just that the nature of our growth drivers is that they do not require heavy subsidies. They do not require heavy sales and marketing activity. Thank you.
Robin Zhu — Bernstein — Analyst
Thank you.
Wendy Huang — Investor Relations
Thank you, Robin. We are now ending the webinar. Thank you all for joining our results call. If you wish to check out our press release and other financial information, please visit the IR section of our company website at www.tencent.com. The replay of this webinar will also be available soon. Thank you and see you next quarter.