【TMGM Financial Recap】Revenue Surpasses 200 Billion for the First Time, AI Investment Dragged Down Profits. Tencent delivers a dramatic financial report in Q2!

Tencent's quarterly revenue surpassed 200 billion yuan for the first time, local games returned to double-digit growth, and marketing services grew by more than 20%, with core business foundations still solid. However, net profit has nearly zero growth, capital expenditures have surged 176% year-on-year, and free cash flow has turned negative. AI investment is reshaping Tencent's financial structure at a pace exceeding market expectations.  

Overview of the financial report

Revenue was 204.785 billion yuan, up 11% year-on-year and 4% quarter-on-quarter, exceeding the market expectation of 202.84 billion yuan. Cumulative revenue for the first half of the year reached 401.243 billion yuan, a year-on-year increase of about 10%.

gross profit was 118.433 billion yuan, up 13% year-on-year and 6% quarter-on-quarter. Overall gross margin increased from 57% in the same period last year to 58%. 

GAAP net profit was 56.022 billion yuan, up only 0.7% year-on-year and down 4% quarter-on-quarter, far below the market expectation of 58.4 billion yuan. This is the most disappointing figure in the entire financial report. 

Non-IFRS adjusted net profit was 68.415 billion yuan, up 9% year-on-year and 0.8% quarter-on-quarter, slightly above the market expectation of 68.227 billion yuan. Non-IFRS operating profit was 75.636 billion yuan, up 9% year-on-year. 

The gap between GAAP net profit and adjusted net profit exceeds 12 billion yuan, mainly due to surging costs driven by AI-related investments. Excluding the impact of new AI products, Non-IFRS operating profit grew 19% year-on-year to 86.1 billion yuan. The 10 percentage point gap between "19% profit growth excluding AI impact" and "9% profit growth after accounting for AI impact" is the market's core focus on this financial report.  

Financial Report Highlights: 
Value-added services (games + social networks): revenue was 98.4 billion yuan, up 8% year-on-year. 

Local market games: 47.3 billion yuan, up 17% year-on-year. This marks the return of domestic games to double-digit growth after several seasons, mainly driven by four core products: Delta Force: Hawk Ops, VALORANT, VALORANT: Source Action, and Rock Kingdom: World. Among them, "Delta Force: Hawk Ops" and "Valorant" both hit record daily active users this season. 

International market gaming: 18.6 billion yuan, down 0.8% year-on-year due to exchange rate impact, up 4% year-on-year at constant exchange rates. The growth of Wuthering Waves and VALORANT was offset by a decline in revenue from some Supercell games. Tencent's Miniclip "Arrows - Puzzle Escape" became the most downloaded mobile game globally in the second quarter. 

Social network revenue: 32.5 billion yuan, up 0.8% year-on-year.

Marketing Services (Advertising): Revenue of 43.6 billion yuan, up 22% year-on-year. This is the fastest-growing segment this quarter, driven by continuous optimization of AI-driven ad recommendation models, the upgrade of the intelligent placement product matrix "Tencent Marketing AIM+," and the strengthening of WeChat's ecosystem closed-loop marketing capabilities. Customer coverage remains stable above 80%, and AI creative capabilities have improved material production efficiency by nearly 80%. 

Fintech and enterprise services: revenue of 60.3 billion yuan, up 9% year-on-year.

Fintech is driven by commercial payments, wealth management, and consumer loans; Enterprise services benefit from rising demand for AI-related cloud services, international business expansion, and growing demand for general cloud services. This quarter, Tencent Cloud supported Indonesia's leading operator XLSMART in completing a large-scale public cloud migration. 

The biggest variable in the financial report: 

Tencent's capital expenditure in the second quarter reached 52.784 billion yuan, a year-on-year increase of 176% and a quarter-on-quarter increase of 65%, far exceeding the market expectation of 32.1 billion yuan. Cumulative capital expenditure in the first half of the year was 84.72 billion yuan, already surpassing the total of 79.2 billion yuan for the entire year of 2025. 

Capital expenditures are concentrated in AI infrastructure: computing power procurement, data center construction, and hardware investment required for model training and inference. JPMorgan has raised Tencent's full-year capital expenditure forecast for 2026 to 200 billion yuan; Daiwa has also sharply raised its forecast from 108 billion yuan to 181 billion yuan. 

R&D expenditure was 27.278 billion yuan, up 34.7% year-on-year and 21% quarter-on-quarter. 

General and administrative expenses were 38.808 billion yuan, up 22% year-on-year, mainly used for Hy model upgrades, WeChat AI projects, and AI capability building for existing products. 

The operating cost of technical infrastructure was 15.212 billion yuan, about doubling year-on-year. 

Depreciation expenses were 11.161 billion yuan, up 46% year-on-year. 

In its financial report, Tencent disclosed that the company is "building a brand-new, AI-empowered Tencent across three dimensions: intelligence, applications, and infrastructure." In the intelligent layer, the official version of Hy3 was released in July, with calls in its first week increasing more than 68 times compared to the previous generation. According to OpenRouter data, it consistently ranks among the top three globally in terms of usage; On the application layer, WorkBuddy and CodeBuddy achieved breakthrough user growth, with WorkBuddy's PC access surpassing 20 million in June; WeChat AI assistant "Xiaowei" has launched small-scale grayscale testing. Hy4 is planned to launch soon. 

Conference call summary 

In the post-earnings call, Tencent President Martin Lau directly responded to the sharp increase in capital expenditures. He stated that Tencent's capital expenditure is divided into two parts: capital expenditure on existing businesses (which still have strong cash flow generation capabilities) and capital expenditures on AI-native businesses (model training, inference needs, AI cloud business). He made three key judgments: 

First, computing power procurement itself has already generated book profits. "For the prepayments and calculations we made months ago, we can actually sell them today for over 30% profit, which is even higher than the price we paid initially." This means that even without considering self-use, simply renting computing power can be profitable.  

Second, Tencent has an alternative plan to "rent computing power." "If we changed our business model today to purely rent computing power, not only would we not lose money, but we would actually be profitable. So we always keep this alternative option, which is why we feel reassured. ” 

Third, they place greater emphasis on the long-term value of self-developed models and applications. Martin Lau clearly stated that by advancing sequentially by "first building models with computing power, then developing applications with models, and finally leasing the remaining computing power," they will gradually establish a "highly scalable, highly profitable, cash-generating exclusive AI native business for Tencent."  

These three layers of logic point to the same conclusion: Tencent's AI investment is not purely "burning cash," but a strategic layout with exit mechanisms, profit margins, and long-term value. But whether the market will accept this logic remains to be seen.