• Tencent on Wednesday reported quarterly profit well above analysts’ expectations, amid strength in its gaming business.
• Revenue grew by 8%, but nevertheless came just under an analyst forecast.
• The company also noted it was starting to see benefits from artificial intelligence.

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

Tencent reported profit attributable to shareholders surged by 47% year-on-year to 53.23 billion yuan ($7.37 billion) in the third quarter, compared with an LSEG estimate of 46.18 billion yuan for the period.

Management said they expected Tencent would generate "significant" free cash flow next year that it could use for dividends and share buybacks.

The company's revenue rose by an annual 8% to 167.19 billion yuan, short of the 167.82 billion yuan analyst forecast.

In an early indication of stimulus taking effect, value for unspecified transactions ticked up in October, reversing a decline in the third quarter, company management said on an earnings call later in the session. Tencent operates WeChat Pay, one of the two major mobile payment apps in China.

The company cautioned that economic recovery would take time, but expected growth to accelerate in the long term, given Beijing's resolve to revive the national economy. In late September, Chinese authorities began a series of announcements aimed at supporting growth, fueling stock market gains.

Gaming remained the company's backbone, with the unit's domestic revenue up 14% year-on-year to 37.3 billion yuan, while that for international games shot up by 11% to 14.5 billion yuan on a constant currency basis.

The company, which bought a 5% stake in the hit China-made game Black Myth: Wukong that released worldwide in August, noted that existing and new games had "evergreen potential."

Management said the firm's strategy for games would focus on developing evergreen hits by increasing investments in different studios or sometimes by publishing titles.

Marketing services revenue, previously called online advertising, surged by an annual 17% to 29.99 billion yuan, making it one of the fastest-growing categories outside gaming. Tencent attributed the growth to "robust advertiser demand" for its short-videos, mini programs and search features within its messaging app — called Weixin in China and WeChat overseas.

Global monthly average users for the messaging app rose by 3% from a year ago to 1.38 billion in the third quarter.

Advertising spend from games and e-commerce gained ground, more than offsetting a revenue drop from real estate and food and beverage.

AI developments

The company also boasted the benefits of employing its self-developed artificial intelligence tools, amid a broader global boom in the AI space:

"We are increasingly seeing tangible benefits of deploying AI across our products and operations including marketing services and cloud, and will continue investing in AI technology, tools and solutions that assist users and partners," Tencent said in an earnings release.

However, management noted on the Wednesday earnings call that cloud revenue for training AI in China is not "exploding" as it is in the U.S. They said this is due to a smaller enterprise market in China, a less vibrant software-as-a-service ecosystem and fewer AI startups in the country that are buying cloud capability.

The company said that search within the Weixin app saw growth in commercial queries and click-through rates, thanks to large language model capabilities.

In June, Tencent upgraded an advertising feature that uses AI to select or help create targeted ads that sit inside articles and videos based inside its messaging app. That update drove a nine-fold increase from last year in the number of accounts using the feature — to more than 200,000 users, according to the company.

Tencent has sought to build up its short video accounts and mini-program e-commerce offerings to compete with ByteDance's Douyin — the local version of TikTok — and major online shopping platforms.

In the third quarter, Tencent said mini programs' gross merchandise value — an industry measure of sales over time— expanded by the "high teens" from a year ago to more than 2 trillion yuan, as people used the app for help with ordering food, electric vehicle charging and medical services.

Most of that GMV comes from services instead of physical goods, management said on the earnings call.