Tencent experiences a 47% increase in profit, driven by the success of its games and AI tools.

• On Wednesday, Tencent reported quarterly profits that exceeded analysts' expectations, thanks to the robust performance of its gaming division.
• Despite an analyst forecast, revenue growth was only 8%.
• The company also noted it was starting to see benefits from artificial intelligence.

On Wednesday, the Chinese social media and gaming company reported better-than-expected profit in the third quarter ended Sept. 30, driven by growth in games, advertising, and cloud services.

In the third quarter, Tencent's profit attributable to shareholders increased by 47% year-on-year to 53.23 billion yuan ($7.37 billion), surpassing the LSEG's estimate of 46.18 billion yuan.

Tencent is predicted by management to produce "substantial" free cash flow in the upcoming year, which can be utilized for both dividend payments and share buybacks.

Despite analyst predictions of 167.82 billion yuan, the company's revenue only increased by an annual 8% to 167.19 billion yuan.

Tencent's WeChat Pay, one of the two major mobile payment apps in China, saw a reversal of a decline in value for unspecified transactions in October, indicating an early sign of stimulus taking effect, company management said on an earnings call later in the session.

Beijing's determination to revive the national economy is expected to lead to long-term growth, despite the company's warning that economic recovery would take time. In late September, Chinese authorities made a series of announcements aimed at supporting growth, resulting in stock market gains.

The gaming industry continued to be the driving force behind the company's growth, with domestic revenue increasing by 14% year-over-year to 37.3 billion yuan and international games revenue rising by 11% to 14.5 billion yuan on a constant currency basis.

The company noted that existing and new games had "evergreen potential."

The revenue generated from marketing services, previously referred to as online advertising, experienced an annual growth of 17% to 29.99 billion yuan, making it one of the fastest-expanding categories outside of gaming. Tencent attributed this growth to the strong demand from advertisers for its short-videos, mini programs, and search features within its messaging app, known as Weixin in China and WeChat internationally.

In the third quarter, the global monthly average users of the messaging app increased by 3% compared to the same period last year, reaching 1.38 billion.

The revenue drop from real estate and food and beverage was more than offset by the advertising spend from games and e-commerce.

AI developments

The company highlighted the advantages of using its own AI technology, during a worldwide surge in the AI industry.

Tencent stated in an earnings release that we are witnessing tangible benefits from incorporating AI into our products and operations, particularly in marketing services and cloud, and we will continue to invest in AI technology, tools, and solutions that enhance user and partner experiences.

Management stated on the Wednesday earnings call that cloud revenue for training AI in China is not growing as rapidly as it is in the U.S. This is due to a smaller enterprise market in China, a less developed software-as-a-service ecosystem, and a smaller number of AI startups in the country that are purchasing cloud capabilities.

The company reported an increase in commercial queries and click-through rates on Weixin due to its advanced language model capabilities.

In June, Tencent enhanced its advertising feature that utilizes AI to pick or generate targeted ads that are embedded within articles and videos found within its messaging app. This update resulted in a nine-fold increase from the previous year in the number of accounts utilizing the feature, with over 200,000 users, as stated by the company.

Tencent aims to strengthen its short video accounts and mini-program e-commerce offerings to challenge ByteDance's Douyin, the local version of TikTok, and leading online shopping platforms.

Tencent reported that mini programs' gross merchandise value increased by "high teens" in the third quarter compared to the previous year, reaching over 2 trillion yuan as users utilized the app for various services such as food ordering, electric vehicle charging, and medical services.

Services account for most of the GMV, management stated during the earnings call.