Chinese tech giant Tencent reported its second-quarter earnings on August 14, with the gross profit among the standout figures. Tencent’s gross profit for the latest quarter reached RMB 85.9 billion (USD 12.02 billion), reflecting a 21% YOY increase. This achievement pushed the gross profit margin to 53.3%, the highest it’s been in seven years. Additionally, the adjusted net profit hit a record RMB 57.31 billion (USD 8.02 billion), up 52.6% YOY, translating to a profit margin of 35.6%.
Interestingly, this significant growth in gross profit wasn’t a result of cost-cutting measures. On the contrary, Tencent saw a notable rise in selling expenses, R&D salaries, and bandwidth and server costs. The improvement in the gross profit margin stemmed from the expansion of high-margin businesses, which helped refine the company’s overall structure. Specifically, this was driven by increased revenue from video account commissions, video account advertising, and minigame advertising.
When examining individual business segments, Tencent’s gaming division, after several quarters of stagnation, finally reported a 9% year-on-year (YOY) growth in Q2—a period traditionally known for slower performance. The game Dungeon & Fighter: Origins was particularly impactful in driving this growth. Both domestic and overseas gaming revenues rose by 9%, maintaining a 3:7 ratio, with the overall gaming segment generating RMB 48.5 billion (USD 6.79 billion) in revenue.
In terms of social network revenue, there was a 2% YOY increase to RMB 30.3 billion (USD 4.24 billion), supported by higher income from music and long video subscriptions, alongside increased fees from minigame platforms and mobile game virtual item sales. However, this growth was partially offset by a decline in music and game live streaming revenues.
The online advertising business saw a 19% YOY increase, reaching RMB 29.9 billion (USD 4.19 billion), primarily driven by the growth in WeChat Channels and long video revenues. In Q2, user time spent on WeChat Channels and mini-program game ads rose by 20%. According to estimates from Dolphin Research, WeChat Channels generated RMB 6–7 billion (USD 840–980 million) from external and e-commerce ads this quarter, marking a 105% YOY increase.
Fintech and business services revenue grew by 4% YOY to RMB 50.4 billion (USD 7.05 billion). However, the growth rate of fintech services revenue slowed to a low single-digit percentage, largely due to the contraction in consumer spending amidst a downturn in the macroeconomic environment. Nevertheless, the business services segment achieved double-digit growth, benefiting from the expansion of cloud services revenue—including the commercialization of WeCom, the enterprise version of WeChat—and the increase in merchant technical service fees from WeChat Channels.
Tencent’s Q2 financial report has been characterized by investors as lacking imagination yet fundamentally solid. While new businesses and games displayed steady growth, the user base across all segments, including social and entertainment, appears to have plateaued, raising questions about future growth drivers.
WeChat Channels: A rising star in a tightening economy
As a significant contributor to the recent surge in gross profit, the commercialization of WeChat Channels is accelerating visibly. On August 12, Tencent announced an upgrade to WeChat Channels, streamlining the flow of store and product information across multiple WeChat scenarios, including public accounts (subscription accounts and service accounts), WeChat Channels (live streams and short videos), mini programs, and search. This move represents a strategic shift aimed at broadening the platform’s e-commerce footprint.
The WeChat team, traditionally known for its conservative approach, has taken a bolder stance in a challenging environment. In the first half of this year, Douyin’s live commerce sales growth slowed significantly, reflecting a broader consumer environment that remains sluggish and public enthusiasm for spending that has clearly waned.
This concern was highlighted by analysts during the earnings call. Tencent president Martin Lau addressed this by noting that, unlike other short video platforms, Tencent has not observed a slowdown in gross merchandise volume (GMV) growth. He pointed out that Tencent’s e-commerce GMV scale remains relatively small compared to competitors, offering significant room for growth.
Lau emphasized that Tencent has repositioned its live commerce business to align more closely with the broader WeChat ecosystem. This approach suggests that Tencent is not relying solely on WeChat Channels and live streaming but is integrating these elements into a comprehensive ecosystem.
Lau also acknowledged the current slowdown in live commerce, attributing it to the natural growth ceiling of this rapidly expanding sector. To counter this trend, Tencent aims to differentiate its ecosystem from pure live commerce, anticipating that economic conditions will eventually improve. Lau expressed confidence in the long-term recovery of the economy and consumer spending, suggesting that it’s a matter of “when” rather than “if.”
Gaming: Recovery and future expectations
Over the past 12 quarters, Tencent’s gaming segment has only achieved double-digit YOY growth once, with 10.8% in Q1 2023, while most other quarters showed single-digit or even negative growth. After a period marked by low-quality new releases and declining revenue from older titles, Tencent’s gaming segment reported a 9% growth in Q2, despite it being a traditionally slow season. The domestic market performed better than expected.
Dungeon & Fighter: Origins, though released late in the quarter, has shown strong early performance, contributing to the quarter’s growth. Tencent is hopeful that this game will become a new evergreen title under its premium development strategy. Tencent’s chief strategy officer James Mitchell indicated that the game’s early retention rates are promising, drawing parallels with other successful titles like League of Legends, Teamfight Tactics, Peacekeeper Elite, and Honor of Kings, which also demonstrated strong retention in their early days.
Looking ahead to Q3, the summer season is expected to further boost the gaming segment, with Dungeon & Fighter: Origins anticipated to make a more substantial contribution to revenue. Tencent has already prepared content for the game for the next 2–3 years. Upcoming game releases, including Delta Force: Hawk Ops, Roco Kingdom Mobile, and Codename: Breaking Dawn (Honor of Kings), are also on the horizon. Additionally, the minigame business, though not directly contributing to Tencent’s gaming revenue, is experiencing strong growth, with revenue from minigames increasing by over 30% YOY in Q2.
Mitchell also mentioned that Tencent is not currently monetizing minigames through in-app purchases on iOS, but discussions with Apple are underway to potentially enable this revenue stream. Traditionally, Apple does not allow apps on its store to offer in-app payment services for other apps, taking a commission instead. Tencent hopes to negotiate terms that are economically sustainable and fair for all parties involved, including developers and users.
Mitchell expressed optimism that a positive outcome could be reached, emphasizing that such an arrangement would benefit Tencent, Apple, and the broader gaming community.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Wang Yuchan for 36Kr.