Tencent (TCEHY) Q4 2024 Earnings Call Transcript

Image source: The Motley Fool.

Tencent (OTC: TCEHY)
Q4 2024 Earnings Call
Mar 19, 2025, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Wendy Huang -- Investor Relations Officer

Good day, and a good evening. Thank you for standing by. Welcome to Tencent Holdings Limited 2024 fourth quarter and annual 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] And please be advised that today's webinar is being recorded. Before we start the presentation, we would like to remind you that it includes forward-looking statements.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $299,339!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $40,324!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $501,530!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

Continue »

*Stock Advisor returns as of March 18, 2025

which are underlined by a number of risks and uncertainties and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of the group's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website.

Now, let me introduce the management team on the Webinar tonight. Our chairman and CEO, Pony Ma, will kick off with a short overview. President Martin Lau will provide an update on our AI initiatives. Chief Strategy Officer James Mitchell will provide a business review.

And Chief Financial Officer John Lo will conclude with financial discussion before we open the floor for questions. I will now pass it to Pony.

Pony Ma -- Chairman and Chief Executive Officer

Thank you, Wendy. Good evening. Thank you, everyone, for joining us. In 2024, we reinforced the long-term franchise value of our key services.

In Weixin, we strengthened our transaction capabilities with the launch of Mini Shops and upgrades for Weixin Search. Video accounts user time spend grew rapidly on enhanced recommendation algorithms. Our evergreen game portfolio increased from 12 games in 2023 to 14 in 2024, and we nurtured new games with evergreen potential. Three of Tencent Video's drama series rank among the industry as Top 5 in 2024, while Tencent Music extends its industry leadership with 121 million subscribers.

Our marketing services revenue growth outperformed the industry as we upgrade our advertising technology platform and increase user traffic. In fintech, we upgrade our risk control and optimize payment funding costs, strengthening our overall fintech franchise and profitability. On AI, we advanced HunYuan's capabilities, deployed AI for internal AI use cases, and prepared for breakout growth in consumer AI use cases. Financially, our revenue growth rate improved during 2024, meeting double-digit growth in the fourth quarter.

Our growth and operating profit grew faster than our revenues as we shift toward high-quality revenue streams. We are focused on delivering shareholder return, paying out 32 billion Hong Kong dollars in cash dividends and repurchasing 112 billion Hong Kong dollars-worth of our shares during the year. Looking at our financial numbers for the fourth quarter. Total revenue was 172 billion RMB, up 11% year on year.

Gross profit was 91 billion RMB, up 17% year on year. Non-IFRS operating profit was 59 billion RMB, up 21% year on year. And non-IFRS net profit attributable to equity holders was 55 billion RMB, up 30% year on year. Now, I will hand over to Martin.

Martin Lau -- President

Thank you, Pony, and good evening, good morning to everybody. In my section, I will talk about our initiatives in terms of investing in AI for growth. And I will summarize our AI initiatives and how we're investing in AI as both a growth multiplier for our existing businesses and as a new growth driver. And these include the progress we've made with our self-developed HunYuan Foundation Model, our multi-model strategy to provide the best AI experience to users, integration of AI into our enterprise-facing services, how we're unlocking the growth potential of existing businesses with AI; and, finally, our stepped-up investment into AI for the future.

Moving on to the first topic. Our AI initiatives really traces back to 2016 when we first established our AI lab. Since 2023, early part of that, we have been investing heavily in our proprietary HunYuan Foundation Model, which forms an important technology foundation for our consumer and enterprise-facing businesses and will serve as a growth multiplier for us in the long run. Our investments in HunYuan enables us to develop end-to-end foundation model capabilities in terms of infrastructure, algorithm, training, alignment, and data management and also to tailor solutions for the different needs of internal and external use cases.

In terms of milestones, we are an early adopter of new techniques or LLM, including the mixture of expert architecture in March 2024, the Heterogeneous MoE-based HunYuan Turbo in September 2024, and the Hybrid-Mamba-Transformer MoE-based Turbo S model in February 2025. Unlike convention node transformer models that face limitation in context length, our current Turbo S LLM increases the efficiency in handling long sequence through Mamba optimization. We also released our HunYuan T1 deep-thinking model in February 2025, which is among the first Long Chain of Thought models in China delivering performance comparable to top-tier models. In addition to LLMs, we've released multimodal HunYuan Foundation Models with capabilities that span across image, video, and 3D generation.

HunYuan's image generation models achieved the highest score from FlagEval in December of last year. In video generation, our model excels in video output quality and ranked first on Hugging Face in December of last year. And our 3D generation model was the industry's first open-source model supporting text and image through 3D generation. In addition to that, we also contribute to the open-source community actively and have open sourced a series of events models in the HunYuan family for 3D generation, video generation, large language, and image generation.

Several of these models have gained great popularity among developers worldwide. Now, going to our consumer-facing AI products. We adopt a multimodal strategy to provide the best AI experience to our users, so we can leverage our available models to serve different user needs. We need this because different AI models are optimized for different capabilities, performance metrics, and use cases.

And a combination of various models can handle complex tasks better than a single model. Our experience in software businesses, such as online games, also demonstrates that there are synergies in being a developer and an operator. By investing in our own foundation models, we're able to fully leverage our proprietary data to tailor solutions to meet customized internal and customer needs, while, at the same time, making use of external models allowed us to benefit from innovations across the industry. On the product front, our AI-native application, Yuanbao, provides access to multiple models, including chain of thought reasoning models such as HunYuan T1 and DeepSeek R1 and fast-thinking model HunYuan Turbo S with the option of integrating Web search results.

Yuanbao search results can directly access high-quality proprietary content from Tencent ecosystem, such as official accounts and video accounts. By leveraging HunYuan's multimodal capabilities, Yuanbao can process prompts in images, voice, and documents in addition to text. Our cloud infrastructure supports stable and uncapped access to leading models. From February to March, Yuanbao's DAU increased 20-fold to become the third highest AI-native mobile application in China by DAU.

In addition to that, we have also started testing AI features in Weixin to enhance user experience, such as for search, language input, and content generation, and we will be adding more AI features in Weixin going forward. Now, moving on to the enterprise-facing side. We have been accelerating AI integration into our cloud business across our infrastructure, platform, and Software as a Service solutions. Through our Infrastructure as a Service, IaaS, solutions, enterprise customers can achieve high-performance AI training and inference capabilities at scale, and developers can access and deploy mainstream foundation models.

For Platform as a Service, PaaS, our TI Platform supports model fine-tuning and inference demands with flexibility. We'll provide powerful solutions supporting enterprise customers in customizing AI assistance using their own proprietary data and developers in generating mini programs and mobile applications through natural language prompts. Our SaaS products increasingly benefit from AI-powered tools, real-time transcription, and meeting summarization functions. Tencent Meeting gained significant popularity resulting in monthly active users for these AI functions doubling year on year to 15 million.

Tencent Docs also enhanced the user productivity in content generation and processing. In 2024, our AI cloud revenue approximately doubled year on year. Increased allocation of GPUs for internal use cases initially for adtech and foundation model training and, more recently, on AI inference for Yuanbao and Weixin has limited our provision of GPUs to external clients and thus constrained our cloud services revenue growth. For external workloads, we have prioritized available GPUs toward high-value use cases and clients.

Since the fourth quarter of 2024, we have stepped up our purchase of GPUs. And as we deploy these GPUs, we expect to accelerate the revenue growth of our overall cloud services. Now, moving on to our existing businesses. We believe our investment in AI has already been generating positive returns for us.

And I will give you three examples on how AI is empowering our existing products and businesses and generating return. For advertising, we enhanced our advertising system with neural network AI capabilities since 2015. We rebuilt adtech platform using large model capabilities since 2020, enabling long sequence user behavior analysis across multiple properties, which resulted in increased user engagement and higher click-through rates. Since 2023, we have been adding large language model capabilities to facilitate more efficient approvals of ad content to better understand merchandise categories and users' commercial intent for more precise ad targeting and to provide generated AI tools for advertisers to streamline the ad creative process, leveraging AI-powered ad targeting capabilities and generative AI ad creative solutions.

Our marketing services business is already a clear beneficiary of AI integration with revenue growth of 20% in 2024 amid challenging macro environment. In games, we adopted machine learning technology in our PVP games since 2017. We leveraged AI in games to optimize matching experience, improved game balance, and facilitate AI coaching for new players, empowering our evergreen games strategy. Our games business is now integrating large language model capabilities, enhanced 3D content production efficiency, and to empower in-game chatbots.

For our video and music services, we're leveraging AI to improve productivity and animation, live action video, and music content creation. Our content recommendation algorithms are powered by AI and are proven effective in boosting content discovery. These initiatives enables us to better unlock the potential of our great content platforms. And finally, as the capabilities and benefits of AI become clearer, we have stepped up our AI investments to meet our internal business needs, train foundation models, and support searching demand for inference we're experiencing from our users.

To consolidate our resources around this all-important AI effort, we have reorganized our AI teams to sharpen focus on both fast product innovation and deep model research, matching our stepped-up execution momentum and decision-making velocity. We increased annual capex more than threefold to $10.7 billion in 2024, equivalent to approximately 12% of our revenue with a notable uplift in fourth quarter of the year as we bought more GPUs for both inference needs as well as for our cloud services. We intend to further increase our capital expenditures in 2025 and expect our capex to account for low teens percentage of our revenue. In terms of R&D, we will continue to invest in our own models and to accelerate the development AI applications of each of our business groups.

We are also investing in marketing to build user awareness and promote the adoption of new AI products including Yuanbao. We believe these investments will generate good economic returns over time, but we also have the capacity to intention to continue returning capital to shareholders, and we intend to buy back at least 80 billion Hong Kong dollars worth of our stock in 2025. So, with that, I'll pass to James.

James Mitchell -- Chief Strategy Officer

Thank you, Martin, and hello, everyone. In the fourth quarter, our total revenue returned to double-digit growth, up 11% year on year. VAS represented 46% of our revenue, within which, the social network subsegment was 17%; domestic games, 20%; and international games, 9%. Marketing services was 20% of our revenue, and fintech and business services, 33%.

Our gross profit grew 17% year on year on increased contributions from high-margin revenue streams, such as domestic games, video accounts advertising, and Weixin Search advertising, alongside cost-efficiency from cloud services. By segment, VAS gross profit increased 19% year on year representing 49% of our total gross profit. Marketing services gross profit increased 19% year on year, too, contributing 22%. And fintech and business services gross profit increased 11%, contributing 29%.

For value-added services, segment revenue was 79 billion renminbi, up 14% year on year. Social networks revenue was up 6%, driven by increased revenue from app-based game item sales, music subscriptions, and mini games platform service fees. Music subscription revenue increased 18% year on year as subscribers grew to 121 million. Tencent Music deepened cooperation with labels and artists and added super VIP privileges, such as AI-powered audio effect matching and collectible artist cards.

Long-form video subscription revenue increased 3% year on year with subscribers growing to 113 million. Our self-commissioned drama series, Love Game in Eastern Fantasy was the most watched drama series across all online platforms in China in November. Domestic games revenue grew 23% year on year against a low-base quarter, driven by evergreen games Honor of Kings, Peacekeeper Elite, VALORANT; and also contributions from recently released games DnF Mobile and Deltaforce. International games revenue increased 15% year on year or 16% in constant-currency terms on robust performances from Brawl Stars and PUBG Mobile and the early access release of Path of Exile 2.

For communications and social networks, Mini Shops, our platform for indexed and standardized merchandise, is progressively adding features to stimulate new and repeat transactions. For example, we introduced a gifting feature, which leverages Weixin social interactions and people's desire to gift each other fun or trendy items. This gifting feature has the benefit that gift recipients must fill in their delivery addresses, which builds out our delivery location graph, making future shopping transactions more convenient for consumers and future delivery more efficient for merchants. Weixin Search continued to grow queries and revenue at rapid rates.

We integrated Tencent HunYuan and DeepSeek large language model capabilities to enhance the relevance and quality of Weixin Search results. And Tencent's own model powered results now cover over 90% of question-based searches. For domestic games, several of our evergreen games benefited in terms of DAU and monetization from IP collaborations and high-profile events during the fourth quarter. Honor of Kings gross receipts grew by a double-digit percentage year on year on higher DAU and popular outfits based on the anime series Detective Conan.

VALORANT gross receipts more than doubled on tie-ins with the World Championship-winning team, EDward Gaming and with Riot's animated series Arcane Season 2. Fight of the Golden Spatula's gross receipts grew by a double-digit percentage on Arcane-themed champions. We're seeking to nurture additional evergreen titles. For example, our recently released game, Delta Force, generated over 1 billion renminbi of gross receipts from PCN Mobile in China during the fourth quarter.

And our pipeline includes highly anticipated games, such as the Hidden Ones, Light of Motiram, GODDESS OF VICTORY: NEW HOPE, and VALORANT Mobile. During this 2025 spring festival period a few weeks ago, our five highest grossing games each increased their DAU versus the 2024 Spring Festival period, demonstrating the health of the game industry and the vitality of our evergreen titles. DAU growth flowed through gameplay and social activity initiatives such as Peacekeeper Elite: Tang Dynasty-themed map and Honor of Kings social space featuring fireworks and selfie spots. Among our international games, Brawl Stars from Supercell in Finland was the third highest mobile game by DAU industrywide outside China for 2024.

Gross receipts grew several times year on year in the fourth quarter, benefiting from the Angels versus Demons season and redesigned battle pass. Path of Exile 2 from our subsidiary Grinding Gear Games in New Zealand is a new action RPG for PC and console featuring an in-depth character development system. The game ranked first among premium games by revenue on Steam for six weeks following its early access release in December. Warframe from our subsidiary Digital Extremes in Canada released a major update Warframe 1999 in the fourth quarter, which boosted DAU and resulted in the game achieving the highest level of fourth-quarter gross receipts in its 11-year history.

For the full year 2024, Warframe's gross receipts increased over 30% year on year, also achieving a life-to-date record level. For marketing services, revenue grew 17% to 35 billion renminbi in the fourth quarter, benefiting from higher user engagement and the ongoing AI upgrade of our advertising platform. Specifically, we enhanced our AI models to facilitate more holistic understanding of users' interests and of how users are responding to ads, enabling our system to make more relevant ad recommendations. Our marketing services revenue increased across most industries.

By inventory, video accounts marketing services revenue grew over 60% year on year on higher user engagement, the AI enhancements mentioned earlier, and increased consumer transactions within video accounts resulting in more closed loop e-commerce advertisements. Mini Programs marketing service revenue increased rapidly year on year, and Weixin Search revenue more than doubled year on year on more commercial queries as well as AI-optimized ad placements and ad formats boosting click-through rates. Looking at fintech and business services. Segment revenue was 56 billion renminbi in the fourth quarter, up 3% year on year.

Fintech services revenue resumed low single-digit year-on-year growth in the quarter, benefiting from improved commercial payment volumes and increases in wealth management and consumer loan services revenues. For commercial payments, revenue improved to largely stable year on year, and the number of transactions grew faster year on year in the fourth quarter versus the third quarter. Business services revenue grew modestly year on year in the fourth quarter, benefiting from higher cloud services revenue and increased technology service fees generated from rising e-commerce transaction volumes. But as Martin mentioned, allocating more GPUs to Tencent's own needs temporarily constrained the growth of cloud services revenue in the quarter.

Business services gross margin rose year on year due to improved efficiency. For WeCom, revenue more than doubled year on year as enterprises are increasingly willing to pay for advanced communication functionalities. And Tencent Meeting grew revenue over 40% year on year, benefiting from increased enterprise adoption. And with that, I'll pass to John.

John Lo -- Senior Vice President, Chief Financial Officer

Thank you, James. Hello, everyone. For the fourth quarter of 2024, total revenue was 172.4 billion renminbi, up 11% year on year. Gross profit was 90.7 billion renminbi, up 17% year on year.

Operating profit was 51.5 billion renminbi, up 24% year on year. Interest income was 3.9 billion renminbi, broadly stable year on year. Finance costs were 2.5 billion renminbi, down 29% year on year due to the exchange -- foreign exchange gain this quarter compared to losses in the same period last year. Share of profit of associates and JV was 9.3 billion renminbi, compared to 2.4 billion renminbi in the same quarter last year.

On a non-IFRS basis, share profit was 7.7 billion renminbi, up 4.5 billion renminbi in the same quarter last year due to associate company-specific factors, including business growth, new content releases, and enhanced operating efficiencies. Income tax expense increased by 22% year on year to 11.8 billion renminbi, primarily driven by operating profit growth. On non-IFRS basis, diluted EPS was 5.91 renminbi, up 33% year on year, outpacing non-IFRS net profit growth due to reduced share count from our share buybacks. On non-IFRS financial figures, for Quarter 4, operating profit was 59.5 billion renminbi, up 21% year on year.

Net profit attributable to equity holders was 55.3 billion renminbi, up 30% year on year. The difference in Y-on-Y growth rates between operating profit and net profit was primarily due to higher non-IFRS share of profit from associates and JV, which went up by 72% to 7.7 billion renminbi this quarter. Moving on to gross margin. For the fourth quarter, overall gross margin was 53%, up 3 percentage points year on year and by segment.

Value-added services gross margin was 56%, up 2 percentage points year on year due to a higher mix of high-margin domestic games revenue, margin improvement in music subscription revenue, and a lower mix of low-margin live streaming revenue. Marketing services gross margin was 58%, up 1 percentage point year on year due to growth in high-margin video accounts and Weixin Search revenues. Fintech and business services gross margin was 47%, up 3 percentage points Y on Y due to a higher mix of high-margin revenues alongside improved cost-efficiency in our cloud services. On fourth-quarter operating expenses, selling and marketing expenses were 10.3 billion renminbi, down 6% from a high base in the same quarter last year.

Selling and marketing expenses represented 6% of revenues, down from 7% in the same quarter last year. Total G&A expenses were 31.4 billion renminbi, up 16% Y on Y, substantially driven by increased R&D expenses, which grew 21% year on year to 19.8 billion renminbi, mainly due to higher staff costs and GPU servers' depreciation related to our AI initiatives. G&A excluding R&D was up 8% Y on Y to 11.6 billion renminbi. At quarter-end, we had approximately 111,000 employees, up 5% year on year or 2% quarter on quarter.

For the fourth quarter 2024, non-IFRS operating margin was 34%, up 3 percentage points year on year, largely in line with gross margin expansion. Next, I will highlight some key cash flow and balance sheet metrics. For the fourth quarter, operating capex was 34.9 billion renminbi, up 421% year on year, driven by increased investment in GPUs and service to ramp up our AI capabilities. Non-operating capex was 1.7 billion renminbi, up 103% year on year, primarily driven by data center construction in progress.

Our total capex was 36.6 billion renminbi, up 386% year on year. Free cash flow was 4.5 billion renminbi, down 87% year on year, primarily due to increased capex spending on GPUs, servers, and data centers. On a Q-on-Q basis, free cash flow was down 92% due to timing differences in settlement of certain accrued expenses, higher capex spending on GPUs and servers, alongside with seasonally lower games' gross receipts. Net cash position was 76.8 billion renminbi, down 20% Q on Q, reflecting cash outflows related to capex and share repurchases.

On capital returns. For the full year of 2024, we repurchased 307 million shares with a total consideration of 112 billion Hong Kong dollars, more than doubling both number of shares repurchased and total consideration from last year. Our weighted average number of shares for calculating 2024 diluted EPS decreased by 2% year on year. Subject to shareholders' approval at the upcoming 2025 AGM, we are proposing an annual dividend of 4.5 Hong Kong dollars per share, reflecting a 32% increase from previous year.

The dividend will be payable to shareholders on 30th of May 2025. Thank you.

Wendy Huang -- Investor Relations Officer

Thank you, John. We shall now open the floor for questions. [Operator instructions] We will take one main question and up to one follow-up question each time. The first question comes from Kenneth Fong from UBS.

Kenneth, your line is open.

Kenneth Fong -- Analyst

Hi. Good evening, management. Congrats on a strong quarter, and thanks for taking my questions. Congrats on the strong quarter.

I have two questions. The first one is on the AI capex impact on financials. So, as we step up the capex on AI, our margin will be inevitably dragged by additional depreciation and R&D expenses. So, over the past few years, we have seen meaningful increase in margin as we focus on high-quality growth.

So, going forward, how should we balance between growth and profitability improvement? And my second question is on Mini Shops. In Q3, we launched our Weixin Mini Shops and package gifting function that have been very well received by the user. So, can management share with us the strategy and key initiatives this year for e-commerce? Thank you.

James Mitchell -- Chief Strategy Officer

Hi, Kenneth. Thank you for your question. So, people say the only things that are inevitably in life for death and taxes. And as a company executive, I think it would be remiss if we were to say that lower margins are inevitable.

And we certainly don't believe that's the case. As far as increased research and development spending on AI is concerned, in essentially every year of Tencent's history, we've been increasing our research and development spending on various different projects. So, we don't see R&D spending being a pressure per se on our margins. Capex is a more nuanced topic because we did step up capex to a new sort of higher steady state in the fourth quarter of last year.

And over time, that incremental capex will flow through into incremental depreciation over the next several years. But it's worth digging into exactly where that capex is going to understand whether the depreciation becomes a margin pressure or not. So, the most immediate use of the capex is GPUs to support our ad tech and, to a lesser extent, our games businesses. And you can see from our results, you can hear from what Martin talked about that that capex actually generates good margins, high returns.

A second use of capex was GPUs for large language model training, and there was a period of time last year when there was a belief that every new generation of large language model required in order of magnitude more GPUs. That period of time ended with the breakthroughs that DeepSeek demonstrated. And now, the industry and we, within the industry, are getting much higher productivity on a large language model training from existing GPUs without needing to add additional GPUs at the pace previously expected. Third, there's capex related to our cloud business, which we buy this GPU service, we rent them out to customers, we generate a return.

It may not be the highest return business in our portfolio, but nonetheless, it's a positive return. It covers the cost of the GPUs, and therefore, the attendant depreciation. And then finally, where I think there is potentially the short-term pressure is the capex for 2C inference. And that is an additional cost pressure, but we believe it's a manageable cost pressure because that capex is a subset of the total capex.

And we're also optimistic that, over time, those -- the 2C inference activity that we're generating, just like previous activity within different Tencent platforms, will be monetizing through a combination of advertising revenue and value-added services. So, overall, while we understand that you have questions around the step-up in capex and how that translates into profitability over time, we're actually quite optimistic that we can continue to grow the business while protecting margins. Thank you.

Martin Lau -- President

Yes. Just one sort of point to add to James' very comprehensive answer, which is in the inference for consumer-facing product, there's actually a lot of venues through which we can actually reduce the unit cost by technical means, by software and by better algorithms. So, I think that's also a factor to keep in mind. So, with respect to the Mini Shop, right, I would say, number one, it's a very long-term initiative for us.

So, any particular initiatives is just sort of one of many things that we can do to build up this ecosystem over the long run. And secondly, I would say that -- I would like to remind the audience about the positioning of the Mini Shop, right? It's really a unified platform that connects all the components of our Weixin ecosystem. And there is a standard and indexed merchandise information, data structure so that the merchandise information can actually flow freely across the different components of the Weixin ecosystem. And that's -- the purpose is actually for our consumers to be able to find quality products and merchants.

And if you look at the different components of the Weixin ecosystem, right, there is social infrastructure. There is content. There is Search. There is Mini Programs.

There's transaction platform. And there's also WeCom. So, there's a lot of components within the unified Weixin ecosystem that Mini Shop really wants to operate in. And if you look at the gifting, it's really one feature within the social component of the ecosystem.

And so, it's just sort of one of the many, many different features that we can add in order to really leverage the full Weixin ecosystem. And from the initial feedback, as you said, right, it's actually quite well received. We see a lot of people sort of using this function to gift to their friends during the Chinese New Year period. And this gifting actually also magnified the word-of-mouth effect of quality products because you will only gift the products that you felt is actually sort of good.

And for the people who receive the products, which sort of magnify the initial purchase, they would enter their address into the delivery address. And that would actually help us to get build infrastructure of delivery graph, and that would actually sort of help us to complete transactions in an easier way for a lot of people who have entered their address. And usually, it actually would also induce the people who receive the gifts to sometimes like gift further to their friends. So, overall, I think the word-of-mouth effect is very good, and the feedback from the merchants have been good.

But it's only one component within the overall Weixin ecosystem right now. So, we felt over time, we continue to build up this ecosystem, this platform with patience, and we treat it as a marathon rather than a sprint. And we felt we can go actually very far along this path. And if you look at the GMV of Mini Shop, it continues to grow at a very fast pace in the fourth quarter of last year.

Wendy Huang -- Investor Relations Officer

Thank you, Martin.

Kenneth Fong -- Analyst

Thank you [Inaudible].

Wendy Huang -- Investor Relations Officer

Thank you, Kenneth. Next, we will take the question from Alicia Yap from Citigroup.

Alicia Yap -- Analyst

Thank you. Good evening, management. Thanks for taking my questions. And also, congrats on the strong set of results.

Two questions. First is for the enterprise-facing service that you mentioned, just wondering if management can illustrate a little bit the demand and adoption rate that you have seen for your SaaS service over the past two months? And how you foresee the demand growth in the coming quarters? And for the SaaS products, besides Tencent Meetings and Tencent Docs that you mentioned, so can management also share with us some of the software solution that we plan to roll out that could potentially help to cross-sell and upsell to our cloud customer? And second question is on the consumer-facing application. So, I think in addition to Yuanbao, which, overseas, has achieved very strong breakout the last couple of months, there's also this ima.copilot and also the Weixin is also with the enhanced search features. So, just wondering how will all these products eventually evolve over time, and will Yuanbao position as the AI gateway that consolidating all the search and discovery entrants that will be complementary to the WeChat super-app? Thank you.

Martin Lau -- President

OK. In terms of the IaaS service demand, it's actually very strong. But as I said earlier, and then sort of James also talked about it, right now, we're actually supply constrained. Part of the reason why you see such a big step up in terms of the capex in the fourth quarter is because we have a bunch of rush orders for GPUs for both inference as well as for our cloud service.

And we would only be able to capture the large increase in terms of IaaS service demand when we actually install these GPUs into the data center, which would take some time. So, I would say we probably have not really captured a lot of that during the first quarter. But over time, it will capture quite a bit of it with the arrival and installation of the GPUs. And in terms of the different software solutions, right, so you mentioned Tencent Meeting, Tencent Docs, and WeCom is another very strong product.

As a matter of fact, this is actually our biggest SaaS product in terms of revenue, and it actually has grown a lot, double-digit revenue year on year in the previous quarter. And in addition to that, we also see security PaaS software and audio video PaaS software, including real-time communications as well as live broadcasting software that we're actually selling to our cloud customers. And quite a bit of these also can be enabled with AI to provide extra value to our customers. And then on the consumer-facing application.

Yes, we actually have a whole host of different consumer-facing applications, and you should expect more to come. I think AI is actually in a very early stage. So, it's really hard to talk about what the eventual state would look like. But I would say, one, each product will continue to evolve into very useful and even more powerful products for users.

So, Yuanbao can be sort of a very strong AI-native assistant. And the ima.copilot could be your personal library and also a collaborated library for team collaborations. And Weixin can have many, many different features to come, right? And in addition to these products, I think our other products would have AI experiences, including QQ, including browser and other products. So, I think we would see more and more AI -- consumer AI-facing products.

And at the same time, each one of the products will continue to evolve. I think if you look at Yuanbao, it is indeed consolidating a lot of different functionalities, but it will not be the only gateway. Each one of our products would actually try to look for unique use cases in which they can leverage AI to provide a great user experience to their users. But at the same time, our different products can also work together in order to provide the right pathway for our AI products to grow their own user base.

So, I think that will be continuing to evolve, and that would be helpful for us as we build a whole host of AI solutions and applications with consumers.

Wendy Huang -- Investor Relations Officer

Thank you, Martin. Thank you. We will take the next question from Shi Jialong from Nomura.

Jialong Shi -- Analyst

Thanks, Wendy. Thanks, management. And good evening. Congratulations, again, on a very solid quarter.

My question is actually a follow-up on the last question. So, we saw Tencent Yuanbao shows very strong growth momentum since this year. So, can management elaborate the strategies to further grow the user base in this very competitive market? Yuanbao is a hybrid of -- is a hybrid AI chatbot and AI search provider, so I just wonder which part of the two is Tencent most excited about? And also relating to that, how big a market share will AI search eventually represent in the entire search market in the future in terms of search queries? And how do you guys plan to monetize AI search in the future? Thank you.

Martin Lau -- President

Well, in terms of Yuanbao -- well, right now, it is a chatbot and search. But over time, I think it would actually proliferate into all capable AI assistant with many different functionalities serving different types of people. So, if -- it would range from sort of students who want to learn, and it would include all kinds of different people who actually knowledge workers who want to complete their work and would sort of cover deep research, which allows people to very deep research into different topics. And so, I think it's going to be having many, many different applications.

And I think the unique advantage of Yuanbao, obviously, it's about innovation. It's about sort of continuously adding features and functionalities to fulfill the user needs. But I think Yuanbao has got the unique advantage of having access to the content ecosystem of Tencent, especially around official accounts and video accounts. These are sort of very high-quality information sources.

And at the same time, we felt our multimodal strategy actually sort of helps the users to get access to the best model and also have the advantage of using a combination of models to fulfill their complex needs. And in the future, as I actually alluded to, many of our different large DAU products would actually start to add different AI features and functionalities. And some of them would have pathway and access to Yuanbao and our array of products would actually sort of help each other out. So, I think those are the things that we can do continuously, which sort of would be competitive.

But at the same time, there are some unique advantages that we have, too.

James Mitchell -- Chief Strategy Officer

And on your more general question about AI prompts vis-a-vis traditional search, I think different people will have different opinions, and it will take time to play out. But at a high level, if we look at the history of Web search subsuming Web directory, if we look at our own behavior, with AI prompts vis-a-vis traditional search, I think it's possible that AI search will subsume traditional search. Because ultimately, web directory traditional search, AI prompt all represent mechanisms for accessing the Internet's knowledge graph. But within them, AI prompts brings new technology, new efficiency, also new transactional capabilities through agenetic AI that were not possible in traditional search.

And so, in terms of how the AI prompt will be monetized, time will tell, but I think that we can already see in the Western world, the first monetization is through subscription models and then, over time, in performance advertising will follow. I think in China, it will start with performance advertising, and then value-added services will follow. Thank you.

Jialong Shi -- Analyst

Thank you.

Wendy Huang -- Investor Relations Officer

Thank you. We will take the next question from Ronald Keung from Goldman Sachs.

Ronald Keung -- Analyst

Thank you, Pony, Martin, James, John, and Wendy. So, two questions. First on advertising. With a healthy 17% growth that we saw, should we view this fourth-quarter exit rate as a proxy, let's say, to 2025 this year? And given the talk about the AI-powered enhancements, and we've seen from Meta machine learning and advantage plus shopping, all of these AI could drive growth acceleration for some of the global peers.

So, is there a possibility for even acceleration of this marketing services growth line as we head into this year with more AI applications of that? Separately on games. How should we view the growth outlook this year for domestic and international, especially the higher-base effect for domestic by the second half of this year. And with AI, what are the implications to this business? You talked about longevity but also competition and cost structures in this games industry? Thank you.

James Mitchell -- Chief Strategy Officer

So, why don't I lead off with advertising and gaming trends briefly, and then I'm not sure if Martin would address game AI. We'll determine that in due course. I think on the advertising, we're very pleased with the growth rate in the fourth quarter, which clearly outpaced the industry. There were no particular special tailwinds to call out.

It was fairly organic growth, and it was very broad-based against pretty much every industry that we monitor. And we think that's because, across pretty much every industry we monitor, the AI enhancements, we're deploying and delivering superior return on investment for advertisers versus what they previously enjoyed and versus what's available elsewhere. You compared us with some of our global peers, which I think is the right thing to do, with the caveat that some of our global peers tend to move to a sort of fully loaded ad load much earlier in the evolution of their products. For example, short video versus we tend to gradually incrementally increase the ad load for our newer products like short video.

And that remains the case. And so, I think there is a difference in how quickly we choose to sort of race down the runway versus some of our global peers. But overall, as long as the macro environment doesn't change dramatically, then I think we feel quite comfortable with our advertising business. As far as the game business is concerned, you're asking about a higher base effect in the second half of the year.

I mean, I guess, it's the curse of this kind of industry that if you do well, then people worry about the base effect a year later. But I think that there are some observable facts about our game business today. One is that we ended last year with our deferred revenue, much of which comes from the game business, up high-teens percentage year on year. And so, that deferred revenue will flow through into reported revenue through the first half but also through the second half of next -- 2025 and some in 2026.

And then a second observable fact that we called out in the prepared remarks is that the user behavior on our games during Chinese New Year was quite a nice sort of insight into whether our games are generally increasing or not increasing popularity. And so, for all five of our highest grossing games to see daily active users up year on year in the Chinese New Year this year versus the Chinese New Year period last year is a positive leading indicator. So, those are both sort of observable facts. There's also subjective opinions.

Subjectively, we believe we have a couple of games that are well on their way to graduating to evergreen status as well. And we mentioned one of them Delta Force. And so, that's a really important opportunity tailwind. Secondly, as we talked about in the prepared remarks, we're -- we have a number of new games in the pipeline that we're excited about.

And then thirdly, we do believe that games benefit in direct and potentially a less direct way from AI technology enhancements. The direct way is the game developers using AI to assist them in creating more content more quickly and serving more users more effectively. And then the indirect way, which may be more of a multi-decade rather than the second half of this year story is that as -- if you manage uses AI more broadly, then we think there'll be more time and also more desire for high agency activities among people who are now empowered by AI. And so, one of the best ways for them to express themselves in a high agency way rather than a passive way is through interactive entertainment which is games.

Martin Lau -- President

And I think just one more point to add, which is sort of when we think about the competitive dynamics, right, we actually felt AI would allow evergreen games to be more evergreen. And we are already seeing sort of how AI can help us to execute and magnify our evergreen strategy. And part of it is within production, right, you can actually produce great content now within a shorter period of time so that you -- you can keep updating the games with higher frequency of high-quality content. And with the PvE experience, when you have smarter bots, right, you actually sort of make the game more exciting and more like PvP.

And within PvP, a lot of the matching and balancing and coaching of new users can actually sort of be done in a much better way when you apply AI. So, all these would actually help already popular and large-scale games to be even more popular and more attractive for the users.

Ronald Keung -- Analyst

Got it. Thank you.

Wendy Huang -- Investor Relations Officer

We will take the next question from Alex Yao from JPMorgan.

Alex Yao -- Analyst

Thank you, management, for taking my question. And congrats on the strong quarter. My first question is regarding the commercial payments. It's encouraging to see that your commercial payment revenue has turned from negative growth in Q3 to year on year flat in Q4.

Can you share with us your observation of how the commercial payment activity trends are so far in the first quarter of 2025? And then my second question is a follow-up to the AI and the capex. You guided a capex to revenue ratio of low teens for 2025, which is a similar ratio as for '24. So, basically, this guidance implies a significant slowdown of capex growth. Can you talk us through the rationale behind this capex to revenue ratio? Is it because you foresee a slowdown in demand growth for GenAI, or is it because the big step up in 2024 will be sufficient to address the GenAI demand in 2025? Thank you.

Martin Lau -- President

In terms of commercial payments, what our observation is that the volume of transactions actually sort of increase further, but then the pricing pressure on the ASP actually continued. So, net-net, it's still -- from a value perspective, it's still kind of flattish. So, the way we interpret it is that I think consumers propensity to spend is actually coming back. But then on the supply side, there's still a lot of pricing pressure.

So, hopefully, this is sort of a good sign that we are toward a tail end of a tough market, right? And then when consumers demand continue to improve, then over time, the suppliers will be less cutthroat. And over time, that would translate into value growth. But I think that's something that we'll have to see going forward.

James Mitchell -- Chief Strategy Officer

And on your question about capex for revenue, then yes, it is because the step-up in late 2024 should be sufficient to address GenAI and other needs in 2025 at this sort of new normal run rate. We incur a time lag between ordering the GPU service and fully deploying them in data centers. And so, during the fourth quarter, during part of the first quarter, we were in that situation. But as Martin spoke to, exiting the first quarter, we're deploying the GPUs, and we get the benefit of them both for our internal inference needs for Yuanbao as well as our external Tencent Cloud needs for renting out to our clients and generating direct revenue.

And I think that if you step back and look at the bigger picture then, there was a period last year when people are capex was big enough relative to our China peers, relative to our global peers. And now, out of the listed companies, I think we had the largest capex of any China tech company in the fourth quarter. So, we're at the forefront among our China peers. In general, the China tech companies are spending less on capex as a percentage of revenue than some of their Western peers.

But we believe for some time, that's because the Chinese companies are generally prioritizing efficiency and utilization -- efficient utilization of the GPU servers. And that doesn't necessarily impair the ultimate effectiveness of the technology that's being developed. And I think DeepSeek's success really sort of symbolize and solidify -- demonstrated that -- that reality. Thank you.

Martin Lau -- President

But the only point I want to add is this is a very dynamic situation, right? So, what we are giving is actually sort of our expectation. But frankly, right, the expectation can change. If suddenly sort of there's a search demand, then we can definitely sort of increase our order for GPUs. So, I think we'll be sort of very flexible and dynamic in responding to the market dynamics.

Wendy Huang -- Investor Relations Officer

Thank you. We will take the next question from John Choi from Daiwa.

John Choi -- Analyst

Thank you for taking my question. My first question is a follow-up on advertising. So, can management share some more color? I think on the prepared remarks, you guys mentioned that we've seen increase from most industry, like which verticals have benefited most? And also, in terms of the advertisers, we noticed that Video Accounts, Mini Programs, Weixin Search, all went up quite a bit. So, in terms of the advertisers' behavior, how has this changed, and how has this benefited our advertising revenue growth? And my second question is on capital allocation.

I think management shared that the share buyback in this year will be less than last year. But on the other hand, the dividends will increase. So, what is our priority when it comes to capital allocation? And meanwhile, how should we think about investments in M&A as we are seeing a very strong demand in the AI industry at the current stage? Thank you.

James Mitchell -- Chief Strategy Officer

Sure. So, on your advertising question, some of the categories where we saw year-on-year growth included e-commerce, financial, fast-moving consumer goods, games, local service, education, healthcare. So, a long list of categories across the board. And as we deploy these AI enhancements, generally, we do so first in video accounts and then it sort of percolates across other Weixin properties, across the Tencent properties, and across our ad network.

And so, the benefits become increasingly broadly felt over time. So that's on the advertising question.

Martin Lau -- President

In terms of capital allocation, I think the key thing, overriding principle is actually we want to invest in order to generate return for the company and for the shareholders right now. And it means different areas in different times. So, there were times in which we invest a lot in the ecosystem and our ecosystem partners and build a very large investment portfolio. And then we started returning cash to our shareholders through dividends and share buyback.

And now, there's AI and we felt there's a lot of potential in AI to generate return for the future. So, I think we basically now want to create a investment strategy that we invest in our future. But at the same time, we also provide current period returns through dividend and buybacks right now. So, I think that's the overriding principle.

And if you look at our ability to do that, I would say we have a very strong financial capability to do that because we have very strong cash flow on a operating basis. We also have a very large and valuable investment portfolio. And a big part of it is actually very liquid. So, we have enough financial resources to invest in the future, both in AI as well as if needed, right, invest in some investment activities.

Our investment portfolio is essentially self-funded and, at the same time, provide current period returns to shareholders, right? So, as we look -- for this year, we have already announced that we're going to pay cash dividend of 41 billion Hong Kong dollars, and we would slightly reduce our share buyback from -- last year, we said we're going to buy back 100 billion and this year, we said we're going to buy back 80 billion, right? So, basically, you can call it a 20-billion flexibility buffer for us to sort of sit through the year and see whether we need to invest in -- further in AI. But if you look across the two years, right, last year, we said the dividend was 32 billion, and our share buyback was 100 billion. That's 132-billion target return. And this year, our target return is 80 plus 41, 121.

But if you add the overspending of our share repurchase last year of 15, right, then this year's number is actually sort of similar to last year's target. So, I think we are trying to provide a very good balance between current period investment return as well as future investment, but we have a very strong set of financial resources to do that.

Wendy Huang -- Investor Relations Officer

Thank you. We will take the next question from Robin Zhu from Bernstein. Robin, you need to unmute yourself. Maybe we take the next question from Thomas Chong from Jefferies.

Thomas Chong -- Analyst

Hi, good evening. Thanks, management, for taking my question. And congratulation on a very strong set of results. My question is going back to the previous question on spending and also on higher margin business and monetization.

So, given the fact that we have been pursuing high-quality growth strategy for the past couple of years and we are also looking into margin expansion story with operating profit growth to be faster than revenue growth. But we also point out that as time goes on, the delta between the two will narrow down. So, I think putting -- connecting all the dots together and putting all puzzles, how should we think about the margin expansion story in 2025 and the next few years? Thank you.

James Mitchell -- Chief Strategy Officer

Why don't I take a stab at that. So, at some level, the reason or a key reason why we have enjoyed operating margin leverage in the past two years, in particular, is because we have enjoyed gross margin leverage. And the reason why we've enjoyed gross profit leverage to revenue is because while our sort of base business has a blended gross margin of around 50%, there's a number of new revenue streams that contribute the majority of our revenue growth which are coming in at gross margins of 70%, 80%. And so, as that mix shift has been underway, that has been pulling up gross margin and resulting in gross profit growing faster than revenue.

Now, of course, there is, over time, a base effect or more accurately a sort of asymptotic effect really. If the blended gross margin gets closer to the incremental gross margin then inevitably, the rate of improvement in the blended gross margin decelerates. So, I think that's true over the longer term. But that said, when we look at our high-quality revenue streams, such as the video accounts ads, such as the search ads, such as some of the value-added financial services, such as e-commerce transaction fees, such as our own games, then generally, those continue to grow faster than our overall revenue and continue to enjoy -- contribute substantially higher margins than our blended margin.

And so, we believe that we will continue to enjoy that gross profit leverage and therefore, operating profit leverage vis-a-vis revenue on a sort of in a progressive asymptotic basis.

Martin Lau -- President

Of course, AI investment would actually sort of go against that, right? So, you just have to sort of rebalance the two.

James Mitchell -- Chief Strategy Officer

Yeah.

Martin Lau -- President

I think just to make the full picture clear.

Wendy Huang -- Investor Relations Officer

Thank you. In the interest of time, we will take the last question from Liao Yuan from CITIC Securities.

Yuan Liao -- CITIC Securities -- Analyst

Thanks, Wendy. Thanks, management, for taking my questions. Congrats for the strong quarter. My question is regarding AI and AI agent.

We have seen many companies release their own large language models and AI agent. Just wanted to know how our management view the key competitive factors in the future of large language model, and what our competitive advantage are? Thank you.

Martin Lau -- President

So, what -- what's -- I didn't catch the last part of it. What's the --

Yuan Liao -- CITIC Securities -- Analyst

Yeah. What is the competitive advantage? Because we see a lot of AI agent in the market, so how should we to increase the user engagement in the future by adding more features and functions?

Martin Lau -- President

Yeah, I think there is sort of AI -- well, there are many types of AI agents, right? And the AI agent is essentially a model leveraging the model capability and then sort of having connections to different software tools in order for a complex task to be completed, right? It's a pretty general concept and you can have AI agents. On a stand-alone basis, you can have AI agents living in different apps and the way we look at it is there will be sort of a multitude of AI agents. But I think for us, we would be able to build stand-alone AI agents by leveraging models that are of great quality and at the same time by leveraging the fact that we have a lot of consumers on our different software platforms like our browser, like Yuanbao over time. But at the same time, right, even within Weixin and within QQ, we can have AI agents.

And the AI agents can actually leverage the ecosystem within the apps and provide really great service to our users by completing complex tasks, right? If you look at Weixin, for example, Weixin has got a lot of users, a very long user time per day as well as high frequency of users opening up the app, that's one advantage. The second advantage is that if you look at the activities within Weixin is actually very, very diversified, right? It's not just sort of entertainment, it's not just transactions, it's actually sort of social communication and content and a lot of people will conduct their work within Weixin, a lot of people conduct their learning within Weixin and there are a lot of transactions that go through Weixin. And there's a multitude of Mini Programs, which actually allowed all sorts of different activities to be carried out, right? So, if you look at the Mini program ecosystem, we can easily build an agent based on a model that actually can connect to a lot of the different Mini Programs and have activities and complex tasks completed for our users. So, I think those are all very distinctive advantages that we have.

Now, of course, these are experiences that we want to build very carefully. We want to build very patiently so that it would deliver the right experience to the users with a lot of attention to their data security, to their sense of comfort and security, right? So, these are the kind of things that we need to pay attention to when we build these products. But over time, I think those are great opportunities for us.

Wendy Huang -- Investor Relations Officer

Thank you, Martin. We are now ending the Webinar. Thank you, all, for joining our results Webinar today. 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 soon be available. Thank you, and see you next quarter.

Duration: 0 minutes

Call participants:

Wendy Huang -- Investor Relations Officer

Pony Ma -- Chairman and Chief Executive Officer

Martin Lau -- President

James Mitchell -- Chief Strategy Officer

John Lo -- Senior Vice President, Chief Financial Officer

Kenneth Fong -- Analyst

Alicia Yap -- Analyst

Jialong Shi -- Analyst

Ronald Keung -- Analyst

Alex Yao -- Analyst

John Choi -- Analyst

Thomas Chong -- Analyst

Yuan Liao -- CITIC Securities -- Analyst

More TCEHY analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has positions in and recommends Tencent. The Motley Fool has a disclosure policy.