Tencent Holdings (TCEHY) Q4 2021 Earnings Call Transcript

Tencent Holdings (TCEHY 3.23%)
Q4 2021 Earnings Call
Mar 23, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to Tencent Holdings Limited 2021 fourth quarter and annual results announcement conference call. [Operator instructions] And please be advised that today's conference is being recorded. [Operator instructions] And now, I would like to turn the conference over to Ms.

Wendy Huang from Tencent IR team. Thank you. Please, go ahead.

Wendy Huang -- Investor Relations Officer

Thank you, operator. Good evening, everyone. Welcome to our 2021 fourth quarter and annual results conference call. Before we start the presentation, we would like to remind you that it includes forward-looking statements, 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 call tonight.

Our chairman and CEO, Pony Ma, will kick off with a short overview; president, Martin Lau, will discuss strategy review; 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 turn the call over to Pony.

Pony Ma -- Chairman and Chief Executive Officer

Thank you, Wendy. Good evening, everyone. Thank you for joining us. 2021 was a challenging year.

During the year, we embraced change and implement certain measures that reinforces the company's long-term sustainability, but had the effect of slowing our revenue growth. Despite financial headwinds, we have continued to make strategic headway. Our Weixin ecosystem grew increasingly while delivering more value to users and partners. Quantum diversity and video views increased significantly in video accounts.

Many programs facilitate independent merchants to live within their own private domain, powering their fiscal growth GMV year on year. Our healthy growth served 1.3 billion users with 180 billion total visits since its launch, becoming the most viewed new path for verifying health and travel figures during the pandemic. So Tencent Cloud, we deepened the integration among the fast-growing SaaS products. Recon, Tencent Meeting, and Tencent Box together facilitate more efficient collaborations and workflows, both within and between organizations.

Our video cloud solutions ranked number one in the domestic market by revenue. And we also provide other industry-leading test services. In games, we launched League of Legends: Wild Rift and Battle of Golden Spatula, the two highest-ranked new mobile games by BAU in China. We also developed and operate five out of the top 10 mobile games outside China by DAU and increased international contribution to game revenue to 26%.

FinTech business was stable as we operate with the ceding, cooperation, and expertise. Looking forward, we believe the China Internet industry is structurally shifting to a healthier mode characterized by a refocus on user value, technology innovation, and socialize profitability. We are proactively adapting to the new environment by optimizing costs, increasing efficiency, sharpening our focus on key strategic areas, and repositioning our sales for sustainable long-term growth. Summarizing our financial numbers.

Our revenue growth lower, while our costs increased for the fourth quarter, resulting in a year-on year-revenue decline. Total revenue was RMB 144 billion, up 8% year on year and 1% quarter on quarter. Gross profit was RMB 58 billion, down 2% year on year and 8% quarter on quarter. Non-IFRS operating profit was RMB 33 billion, down 13% year on year or 19% quarter on quarter.

Non-IFRS net profit attributable to equity holders was RMB 25 billion, down 25% year on year and 22% quarter on quarter. So, our key services, we generally became our first place position in activities, including social, games, long-form video, news, music, literature, payment, and mobile utilities. Combined MAU of Weixin and retail was 1.27 billion. Mobile devices MAU of QQ was 552 million.

Now I will hand it over to Martin for the strategic review

Martin Lau -- President

Thank you, Pony, and good evening and good morning to everybody. As Pony discussed earlier, 2021 was a challenging year for the Internet industry in China and Tencent as well. Today, I would like to share with you how we see the industry has changed structurally and fundamentally and how we are repositioning ourselves for the new industry environment and why we remain confident in our future. Following a long period of rapid development, the Internet industry in China has revolutionized many aspects of people's daily lives and contributed significantly to the digitization of industries.

However, for several years, industry participants have overemphasized zero-sum competition, aggressive marketing reckless expansion, short-term growth, and corporate benefits, overlooking the most important elements of sustainable growth. As a result, the industry's growth has become frothy and unhealthy. Since early 2021, the Internet industry has faced fundamental changes and challenges. New regulations have been introduced to correct this behavior by industry participants in multiple sectors and to promote fair competition, user protection, and data security.

At the same time, the global macro environment has become more challenging. Amid these changes and challenges, we strongly believe that it is time for the Internet industry to return to its roots of creating sustainable value in a responsible way. In a new paradigm, the industry should focus on the most important and fundamental elements for healthy development including user value, technology and innovation, cost efficiency, long-term sustainability, and balanced benefits among corporations, industry, and society. At Tencent, we believe we are already well-positioned for the new industry paradigm where the long-term oriented corporate culture that focuses us on user value, social responsibility, technology innovations, and compliance, the key elements for sustainable and healthy growth.

In addition, we are proactively embracing changes to better align ourselves with the new industry paradigm. We are progressively implementing initiatives to control marketing and staff costs and to rationalize our non-core businesses. We expect results from these initiatives to become apparent from the second half of 2022 and onwards. We continue to invest in our strategic growth areas, namely SaaS, video accounts, and international games.

We're confident that these repositioning initiatives will enable us to resume growth at a sustainable and healthier pace in a new industry paradigm. Over the course of 2021, our financial performance was under pressure amid structural industry challenges. We experienced lower revenue growth during the year as we adjusted to the new environment. For advertising, our advertisers and our own ad service is adapted to new economic and regulatory conditions.

For our domestic games business, we implement industry-leading minor protection measures to ensure a healthy gameplay environment in China. The direct revenue impact of these measures was lower game spending from mines, which has always been very small. However, more importantly, there was indirect revenue impact arising from shifting of certain development resources away from new games and content development toward minor protection measures implementation. Our margins reduced due to operating deleverage, reflecting three key factors; first, our investments in strategic growth areas, mainly SaaS, video accounts, and international games; second, our increased costs in response to aggressive marketing activities and intense talent competition in the industry during the course of 2020 and 2021; third, higher revenue contribution from business services, which currently have lower gross margin.

At the non-operating level, our financial performance was also affected by higher losses at several investees, which increased investments in new businesses such as community group buy and incurred heavy expenditure on user acquisition. Although we faced financial pressure in 2021, we believe our underlying services and businesses are in good health. For advertising, as we adapt to the new environment and further upgrade our ad solutions, we expect growth to receive in late 2020. The domestic games, we expect to fully digest the impact of minor protection measures in the second half of 2022.

We benefit from more new game launches when they are new releases BanHao. For IaaS and PaaS, we are repositioning our focus on revenue growth at all costs to customer value creation and quality of growth, which should benefit our customers and margins over the longer term. The long-term video, we are optimizing the cost structure to reduce losses while maintaining its leading position. On the other hand, we also see compelling growth opportunities emerging in our strategic growth areas.

For enterprise software, we are expanding the scale of our communication and collaboration SaaS. For video accounts, we are enriching user connection with creators, advertisers, and merchants. For international games, we have compelling pipeline backed by franchise expansions at our market-leading studios and consistent enhancement of our category-leading studios. In the next few slides, I will discuss more on our latest operational progress in these three strategic growth areas.

Let's start with our communications and collaboration SaaS. SaaS adoption in China is experiencing rapid growth among large enterprises and SMEs. In particular, enterprises are increasingly focused on customer engagement, collaboration, and productivity enhancements in their digitization process. During 2021, WeCom, Tencent Meeting, and Tencent Docs achieved strong user growth and deepened penetration into key inventory vehicles such as education, retail, healthcare, and manufacturing.

With the recent strategic product upgrades, we're strengthening our competitive edges by, firstly, positioning recon as the core platform for enhanced collaboration and productivity among employees and partners, the integration of the Tencent Meeting, and Tencent Docs. Enterprises would benefit from reduced complexity, enhanced user experience, and increased efficiency. Secondly, enabling differentiated CRM functions in WeCom with deepen connection with Weixin. For instance, enterprises using WeCom can build customer engagement through multiple touchpoints within Weixin and enhanced services via the newly launched Weixin customer services.

We're currently prioritizing scale expansion over significant revenue generation as we believe expanding the network effect of communications and collaboration tools is important for future value creation. Having said that, we are confident in unlocking the monetization potential ahead because, firstly, there are proven business models and significant market size for critical enterprise SaaS internationally. Secondly, in China, the significant size and fast growth of past spending is a leading indicator for the monetization potential of critical enterprise SaaS. And thirdly, we can leverage our deep experience in monetizing premium to C products, which share certain similarities with communication and collaboration SaaS.

Turning to video accounts, which has become a new core infrastructure operation ecosystem. Video accounts time spent per DAU and total videos viewed both more than doubled year on year in the fourth quarter. The growth was supported by our successful expansion in creators and content diversity as well as our product enhancements. We achieved a significant breakthrough in our targeted content categories such as news, music, and knowledge-based content.

The number of videos with over 100,000 likes increased robustly, demonstrating deepened user engagement. The proliferation of video accounts also enhanced the strength of Tencent's overall content ecosystem. Taking the Beijing Winter Olympics as an example, by leveraging video accounts and the capabilities of other properties within Tencent, including social sharing on WeChat Moments, professional sports content from Tencent Sports, and editorial coverage from Tencent News. We achieved the highest user reach among Internet platforms in China for the global sports event.

We have been very focused on enriching user connections with creators and merchants and video accounts. An increasing number of media, retailers, and brands recognize our strong differentiation of building private domain and are developing deep engagement with users through this news, nurturing more high-quality original content by leveraging official account created pools and upgrading our creator support SKU. We are also facilitating merchants' operations with enhanced shopping features and marketing tools. As for monetization of video accounts, we're still in the early stage of development.

For live streaming, we are ramping up our tipping revenue, which is already becoming quite sizable that will pass most of the benefits to content creators. We're growing our live streaming e-commerce GMV as well. Later in 2022, we will kick off the testing and optimization of short video feed ads, which we believe will be the largest revenue opportunity within the video accounts. Finally, moving on to international games.

Many of you are aware of our highest-profile franchises and studios. League of Legends is among the top three PC games by MAU. After more than 12 years of its release, the franchise is still expanding, thanks to its excellent gameplay experiences, attractive new game mode, team play tactics, high-quality linear content are chain, and the most popular eSports event in the world. PUBG Mobile is a top-five mobile game by DAU, Flash is the only mobile game franchise with two out of top 10 most popular titles by DAU, namely Clash of Clans and Clash Royal.

Valorant has grown into a leading title in tactical shooter, ranked number one on Twitch in this hyper-competitive category. But you may be less aware of our success in acquiring and monitoring lower-profile studies that focus on a particular category of games and they have iterated their way to leadership within these categories while consistently increasing their revenue and earnings. For example, since we acquired Miniclip in 2015, it has steadily grown through new releases and bolt-on acquisitions to become a leader in mobile sports games. Since we acquired Grinding Gear Games in 2018, game Path of Exile has become the global leader in the action low-paying genre.

Since we acquired Digital Extremes in 2020, it has significant Warframe position as a leading cross-platform side by share. Based on our proven success, we have increased outpace in acquiring emerging studios with promising future. We're confident that our game competencies in Game-as-a-Service model in our extension from PC and console games to mobile platforms as well as our game development publishing expertise, we'll be able to facilitate bigger hits with greater longevity for our category-leading studios. We're already one of the key industry participants in the international markets with our revenue increasing to $7.1 billion in 2021.

Going forward, we aim to grow further our existing titles via deepening market penetration, product enhancements, and operational optimization. In addition, we'll continue to release new titles, which we expect to drive additional growth, particularly for 2023 and beyond. So with that, I'll pass to James to discuss business review.

James Mitchell -- Chief Strategy Officer

Thank you, Martin. For the fourth quarter of 2021, our total revenue grew 8% year on year. VAS represented 50% of our revenue, within which the domestic game sub-segment was 21%, international games 9%, and social networks 20%. Online advertising was 15% of our revenue, and FinTech and Business Services reached 33%.

For Value-added Services, segment revenue was RMB 72 billion for the quarter, up 7% year on year. Social network revenue was up 4% year on year to RMB 29 billion, reflecting more video subscriptions, and revenue contributions from video accounts live streaming services. Our total VAS subscriptions grew 8% year on year to $236 million. Despite content regulations, our video subscriptions increased 1% year on year to 124 million, benefiting from popular animated series, drama series, and sports events.

Music subscriptions increased 36% year on year to 76 million, thanks to expanded sales channels and high-quality content and services. Our domestic games revenue was up 1% year on year to RMB 30 billion as growth from Honor of Kings plus new games Battle of Golden Spatula and League of Legends: Wild Rift was largely offset by softness from Moonlight Blade mobile and Dungeon & Fighter. Revenue decreased quarter on quarter due to seasonality and to the direct and indirect effects of the controls on minus playing games. International games revenue grew 34% year on year to RMB 13 billion.

The increase reflected popular content updates in Valve in Clash Royale, a true-up adjustment to super sales revenue upon periodic revenue deferral periods, as well as consolidation of digital extremes. In Weixin Video Accounts, we broadcast the 2022 CCTV Spring Festival Gala, incorporating unique features for sharing clips and moments. 120 million viewers watched this Gala in video accounts. We exclusively carried the first several online concept by boy-band Westlife with 27 million viewers and rock group Mayday live-streamed their New Year's Eve concert on video accounts attracting 14 million viewers.

For Q2, we're upgrading the services code base to facilitate more and most associate experiences. We're integrating Unreal Engine's graphic capabilities to enable advanced real-time rendering and physics simulation, providing more attractive visuals and life-like interactions. For example, we're testing an application of Unreal Engine in Super QQ Show where users can customize their 3D animated avatars for use in social scenarios. Turning to our games in China.

We're calculating our key IP franchises more deeply and broadly. For Honor of Kings, we're developing new games, animated series, and a movie based on its popular characters. We're increasing and creating thematic game content that links to physical world experiences. For example, we provided events tied into the Winter Olympics in Peacekeeper Elite QQ Speed Mobile and QQ Dancer Mobile.

In terms of minor protection implementation, during the fourth quarter, total time spent from users under 18 declined 88% year on year, contributing 0.9% of our domestic games total time spent. Total grossing receipts from these users decreased 73% year on year, contributing 1.5% of our domestic games total grossing receipts. Martin spoke about our international game strategy earlier. Here, I just note some individual title highlights.

Pokémon UNITE's jointly developed by TiMi Studios and the Pokémon Company on Google Play's Best Game of the Year award for its dynamic gameplay and cross-platform experience. As of December, it had accumulated 50 million downloads. Superstar released one of the biggest updates in Clash Royale's history, materially boosting the game's DAU and grossing receipts. Valorant's new marking character drove user engagement and consumption and Valorant's inaugural Global Esports tournament enjoyed an enthusiasm response.

Building on League of Legends' setting and characters, Riot released animated series Arcane, which top Netflix's English language TV series viewership chart during the week following its release and set a benchmark for high-quality video game adaptations. League of Legends were Championship Final has attracted a record 74 million peak concurrent viewers, consolidating its lead as the most popular and highest production value eSports tournaments in the world. Moving to online advertising. Segment revenue was RMB 22 billion in the fourth quarter, down 13% year on year and 4% quarter on quarter as lower bidding density reduced average CPMs.

Weakness in education games and Internet services Ad spend due to regulations on those sectors, more than offset strength in consumer staples ad spending and consolidation of Sogo. Internally, we've incorporated regulatory changes, which generally reduce our ad inventory, including limitations on launch between ads, restrictions on ads for the elderly and minors, and the personal information protection law. Our social and others advertising revenue was RMB 18 billion, down 10% year on year and 4% quarter on quarter. While spending per advertiser declined for the reasons discussed, we expanded our advertiser coverage and Weixin's daily active advertisers increased over 30% year on year.

Over one-third of the moment ad revenue was generated from ads using mini-programs as landing pages and ad connecting users to customer service representatives via WeCom. Our media advertising revenue was RMB 3 billion, down 25% year on year and 8% quarter on quarter as video ad revenue declined due to fewer releases of top-tier drama series and variety shows. Looking at FinTech and business services. Segment revenue was RMB 48 billion, up 25% year on year and up 11% quarter on quarter.

For FinTech services, year-on-year revenue growth is primarily driven by increased commercial payment volume benefiting from an expanded merchant acquiring network and increased volume of mini-programs transactions. We strengthened our payment ecosystem by enhancing user security, upgrading mini program-based transaction and customer management functions for SMEs, and reducing transaction friction by tools such as Weixin Pay score. We now support digital as an additional funding option within Weixin Pay, as part of the PBOC's digital yuan pilot phase. For business services, revenue growth was mainly driven by increased usage by the Internet services, public transportation, and retail industries.

We have developed three proprietary check designs for AI inference, smart network interface cards, and video transcoding to enhance our product performance and cost-efficiency. We released a distributed cloud-native operating system called Orca, which reduces costs for customers migrating from on-premise on cloud and enables consistent app deployment and information technology services management from the cloud. We're assisting leading manufacturers such as Foxconn and Sany Heavy industry in their digital transformations, leveraging our AI Internet of Things and proprietary cloud solutions, clients can automate their production and quality control processes and thereby increase productivity and cost-efficiency. And I'll now pass to John to discuss the financials.

John Lo -- Chief Financial Officer

Thank you, James. Hello, everyone. For the fourth quarter of 2021, total revenue was RMB 144.2 billion, up 8% year on year or 1% quarter on quarter. Gross profit was RMB 57.8 billion, down 2% year on year or 8% quarter on quarter.

Net other gains were RMB 86.2 billion, up 162% year on year or 275% quarter on quarter, which were primarily non-IFRS suggesting items such as net gains on BIM disposals or disposal of certain investee companies, including a one-off gain of RMB 78 billion arising from the cessation of td.com as an associate. Operating profit was RMB 19.7 billion, up 72% year on year or 106% quarter on quarter. Net finance costs were RMB 1.9 billion, down 17% year on year or 4% quarter on quarter. Share of losses of associates and joint ventures were RMB 8.3 billion, compared to share of profit of RMB 1.6 billion last year.

Non-IFRS share of losses of associates and, JV were RMB 0.8 billion, compared to non-IFRS share profit of RMB 2.7 billion last year, reflecting increased investment in community retail initiatives by certain associates and losses recognized from an associate in the transportation service vertical. Income tax expense was RMB 3.9 billion this quarter. IFRS net profit attributable to equity holders was RMB 95 billion, up 60% year on year or 140% quarter on quarter. Diluted EPS was RMB 9.788, up 60% year on year or 140% Q on Q.

For the full year of 2021, total revenue was RMB 560.1 billion, up 16% year on year. Gross profit was RMB 245.9 billion, up 11% year on year. Operating profit was RMB 271.6 billion, up 47% year on year. IFRS net profit attributable to equity holders was RMB 224.8 billion, up 41% year on year.

Effective tax rate for 2021 was 8.2%. The lower effective tax rate versus last year was mainly due to the recognition of big accounting profit from certain investment-related fair value markups often disposals during the year, including JD.com step-down game. Now I'll share with you our non-IFRS financial figures. For the fourth quarter, operating profit was RMB 33.2 billion, down 13% year on year or 19% Q on Q.

Net profit attributable to equity holders was RMB 24.9 billion, down 25% Y on Y and 22% quarter on quarter. Diluted EPS was RMB 2.547, down 25% year on year, or 22% quarter on quarter. For the full year 2021, operating profit was RMB 159.5 billion, up 7% year on year. Net profit attributable to equity holders was RMB 123.8 billion, up 1% year on year.

Moving on to gross margin. For software, the overall gross margin was 40.1%, down 3.9 percentage point year on year, or four percentage points quarter on quarter, reflecting our continued investment in key strategic areas. Decline margins in domestic gains and advertising as well as the revenue mix shift toward lower-margin businesses. By segment, gross margin for VaS was 48.7%, down 2.8 percentage points year on year, or 4.3 percentage points quarter on quarter.

Both year on year and Q on Q decreases mainly reflected revenue sharing costs associated with video account services, content costs associated with esports events and live streaming services, as well as revenue mix shift within the network. Gross margin for online advertising was 42.7%, down 10.6 percentage points year on year or 3.7 percentage points Q on Q. Both year on year and Q on Q decreases mainly reflected our continued investment in key strategic areas, most notably infrastructure and bandwidth to support the rapid growth of our video account services, as well as increased content costs, Whereas overall our advertising revenue faced headwinds from both regulatory changes in various advertising categories, as well as in on the advertising industry itself. Gross margin for FinTech and business services was 27.1%, down 1.4 percentage points year on year and quarter on quarter.

Both year-on-year and quarter-on-quarter decreases were substantially driven by revenue mix shifts within the segment, as well as our continued investment in cloud computing, talent, and operations. On operating expenses. Selling and marketing expenses were 1.6 billion, up 16% Y on Y and 11% Q on Q. -- for year-on-year and quarter-on-quarter increase were primarily driven by greater marketing spend on international gains, partly offset by decreased spending on digital content strategies.

-- marketing business were of revenues broadly stable year on year. R&D expenses were RMB 14 billion, up 25% Y on Y or 11% Q on Q. Both year-on-year and quarter-on-quarter increases were primarily driven by brick-and-mortar expense on international gains, partly offset by decreased spending on digital content services. Selling and marketing services were equal 1% of revenues, broadly stable year on year.

R&D expenses whereas RMB 14 billion, up 25% year on year or 2% Q on Q. The year-on-year increase was mainly due to greater salesforce, R&D expenses represented about 9.7% of revenues. G&A expenses excluding R&D were RMB 10.4 billion, up 20% year on year or 2%, quarter on quarter. The year-on-year increase reflected greater salesforce and office-related expenses.

Excluding share-based compensation, G&A expenses increased by 22% year on year or 15%, quarter on quarter. As at quarter end, we had approximately 117,000 employees, up 31% year on year or 5% quarter on quarter. Let's take a look at operating and net margin ratios. For the fourth quarter, non-IFRS operating margin was 23%, down 5.5 percentage points year on year or 5.7 percentage points Q on Q.

Non-IFRS net margin was 17.9%, down 7.9 percentage points year on year or 4.9 percentage points quarter on quarter due to the above-mentioned reasons as well as the negative impact from our associate earnings. Let's move on to earnings per share and dividends. For 2021, IFRS basic EPS was RMB 23.597 and diluted EPS was RMB 23.164. Non-IFRS EPS was RMB 12.992 and EPS was RMB 12.698.

On 23rd of December 2021, we declared a special interim dividend in the form of distribution in specie of JD.com shares. Based on today's closing price of JD.com, the market value of this special interim dividend is about HKD 12 per share. Subject to the shareholders' approval at 2022 AGM, we are proposing an annual dividend of HKD 1.6 per share payable to shareholders on the 6th of June, 2022. This is stable when compared with last year.

Finally, I will share some key financial metrics on the cash flow and balance sheet for the quarter. Total capex was RMB 11.7 billion, up 21% year on year or 65% quarter on quarter. Within total capex, operating capex was RMB 8.1 billion, that should be stable year on year. Non-operating capex increased 122% year on year to RMB 3.6 billion, mainly reflecting acquisition of brand-new ph during the quarter.

Free cash flow for the quarter was RMB 33.5 billion, up 21% year on year or 39% quarter on quarter. Net debt position was RMB 20.2 billion compared to RMB 26.1 billion last quarter, mainly reflecting free cash flow generation and on-market divestitures of certain listed securities, partially offset by a strategic investment in other companies. The fair value of our shareholdings and listed investor companies, excluding subsidiaries, was approximately RMB 983 billion or US$154 billion at the end of 2021. Thank you.

Wendy Huang -- Investor Relations Officer

Thank you, John. Operator, we shall now open the floor for questions. We will take one main question and one follow-up question each time.

Questions & Answers:

Operator

Yes. Thank you. Our first question comes from the line of Charlene Liu from HSBC. Your line is open.

Please go ahead. Please ask your question.

Charlene Liu -- HSBC -- Analyst

Thank you, management for the opportunity. I have a question and a follow-up on online advertising segment. In the press release, we understand the company is only expecting advertising business to resume growth in late 2022, is that fair to assume that we could see negative growth sustain through at least the first three quarters? And I guess in the context of ongoing challenges in macro and regulatory development, how would you assess content advertising business outlook relative to the market at large for the coming year or two? I have a follow-up on regulations. Thank you.

Pony Ma -- Chairman and Chief Executive Officer

Charlene, thank you for the question. So in terms of inferring the trends in the first few months of 2022, that seems to be a logical inference. In terms of Tencent's advertising trends versus the industry as a whole, for the last several quarters, there's been a pretty notable impact on us relative to the industry due to our advertiser mix, which has spilled over to certain categories of advertisers that are heavily regulated, sharply reducing their bidding and therefore, pulling down effective revenue per thousand impressions. So specifically, if you look at the online education sector, then a year ago, that was low to mid-teens percent of our total advertising revenue.

And in the fourth quarter, that dropped to a low single-digit percentage of our total advertising revenues. So in that sector by itself, largely explains the decline in advertising revenue year on year. There's obviously a number of additional factors that work around regulations for the advertising industry itself. But generally speaking, the greatest impact has been from the regulations on advertiser categories such as education, games, and insurance.

And then there's been a lesser impact from measures that have the effect of reducing our ad inventory. Such as the limitation on loading screen ads and then measures that provide us with ongoing ad inventory, but reduce the targeting around the ad inventory, such as the personal information protection or have had a smaller negative impact. So I hope that that answers the advertising question.

Charlene Liu -- HSBC -- Analyst

Absolutely. My follow-up question is still related to online advertising. I would like to know -- regarding the new laws on clear labeling of ads and one click to close features, how should we think about or potentially quantify the impact on our advertising business in terms of ROI pricing and revenue? Thank you.

James Mitchell -- Chief Strategy Officer

Yeah. I would refer back to the previous answer, meaning that if you look at the negative factors hurting our advertising revenue in the fourth quarter, then the biggest negatives were those related to regulations on specific advertiser industries. The regulations on us as an advertising media were less impactful. And then within the regulations on us, the more impactful were those that completely removed inventory rather less impactful where those adjust how we use the inventory.

So I think the changes that you referred to as looming in the future fit into that last category, historically have been less impactful for us.

Charlene Liu -- HSBC -- Analyst

Understood. Thank you very much, James. Thank you, again.

James Mitchell -- Chief Strategy Officer

Thank you.

Wendy Huang -- Investor Relations Officer

Operator, please have the next question.

Operator

Yes. Thank you. Our next question comes from the line of Kenneth Fong of Credit Suisse. Please go ahead.

Ask your question.

Kenneth Fong -- Credit Suisse -- Analyst

Hey. Thank you, management for taking my question. I have a question on the investment side. Late last year, we distributed our JD shares as dividends.

And we also disposed part of our stake in Sea. So given that we still have a very sizable investment on our balance sheet. So how should we think about and what sort of criteria we would think in terms of unlocking the value for our remaining investment. And for the proceeds, given that our share price is significantly undervalued, how should we also think about balancing between like share buybacks, new investment, and unlocking our investment on the balance sheet.

Thank you.

James Mitchell -- Chief Strategy Officer

Portfolio distributions and exits, then there's a couple of perspectives to bear in mind, one perspective is a portfolio management perspective, that as an investor, we actively invest very largely in private companies that have not yet listed. Over 80% of our investments are typically in private companies. On the other hand, at any point in time, the majority of our portfolio by market value is in public companies. And that's because we have a long history of investing companies when they're private and then helping them grow until and beyond them becoming public companies.

So that's where we play, so to speak. And as a consequence, it is incumbent on us to continually be divesting, reducing our stakes in publicly listed companies in order to fund continued investments in private companies and help them grow and become all that they can be. In addition, there's a capital perspective, which is that, while we invest in other companies, we also look at the appeal of investing in our own stock price. And at times when we consider our own stock price highly attractive, then we may step up the investments in our own stock versus investments in other companies.

So in reality, every year for the past several years we have conducted billions of dollars of divestment, the last four months we've conducted two divestments or distributions which you referenced JD&C that were unusually high profile and has put the spotlight on the fact that we divest, but that is not new news, and it's just part of a continual process, which is attractive more triply than usually in the past few months. So that's on your first question. In terms of your second question about, how do we balance investments in the business versus investments in other companies versus buybacks and so forth? And our core business is highly cash flow generative and our core business is very capable of funding the investments internally that we're making in areas such as video, accounts, enterprise software, and international game expansion. Beyond that, we do invest in other companies as well, and when we're considering the merits of investing in other companies versus conducting share buybacks or distributions directly to shareholders.

Then, of course, there's a number of variables we look at one of which is the relative valuation of our own stock. And so you can see that in the past few months, we have been active in terms of the distribution in kind of the JD stock we've been active in terms of buying back shares on the market. And we've also declared our regular dividend. So those are the three channels through which we have been returning capital to shareholders.

Thank you.

Kenneth Fong -- Credit Suisse -- Analyst

Thank you, James.

Operator

Thank you. Our next question is from the line of John Choi of Daiwa. Please go ahead with your question.

John Choi -- Daiwa Capital Markets -- Analyst

Thank you and good evening and thank you for taking my question. I have a question and probably a follow-up a bit later. First of all, about your headcount. I guess you guys are starting to kind of so call right-size headcount in some of the business areas.

So, I would like to know how would this, also prioritizing headcount will perhaps have an impact to our growth strategy for some of the key growth areas that you guys mentioned like SaaS, EDO accounts international games going forward? Are we -- in general, should we be expecting more of a reasonable growth, but with better profitability going forward? And as a follow-up perhaps is on your investment side that you just mentioned, James. Given that the market volatility, a lot of the private and public valuations of these companies have come down a lot. Does this mean, apart from your share buyback that you just discussed, are we -- is it a good opportunity to us to be more strategic on some of the opportunities that you guys have been doing in the past such as small game studios and others? And what are the -- some of the challenges and opportunities that you see in this area? Thank you.

James Mitchell -- Chief Strategy Officer

Thank you for the question, John. So I'll start with the investments question. So, I would say that the valuations have become more volatile and consequently, we have become more active. And you can see that with the JV and the disease situations, but we've also been more active on divestments in a number of other situations as well.

So year-to-date, our rate of divestments is running at approximately the same as our rate of investment in many plans of dollars range. And there are investments we have made in public companies where the valuations have held up very well. And so we're taking the opportunity to adjust our stakes in those public companies and free our capital to invest in situations where valuations have dropped very sharply because of macroeconomic or other reasons, including our own stock price. So that's on the investments front.

And then I think Martin will address the question about headcount and whether our control of headcount will result in us having slower growth in video accounts, enterprise software, and international games.

Martin Lau -- President

Well, in terms of control of headcount, the main background is that if you look at the headcount growth for the past few years, it has been actually quite rapid. And part of that is actually driven by the fact that we have been investing in strategic areas, but part of it is actually driven by increased competition within the industry, and also expansion of our businesses into many different areas. And I think we have actually talked about shift in terms of the overall industry, paradigm and now the entire industry is actually focused on core businesses, and more efficiency, and more cost rationalization. So along this, what we are going to be doing in terms of controlling headcount is that in some of the non-core businesses we streamline, or in some cases, we may exit.

And in certain areas, where there's a very fast growth in terms of headcount, we will slow it down. And every year we have natural turnover and in some cases, we actually slow down the replacement of the turnovers. But, overall, what we will be seeing is that our headcount would still be higher by the end of the year than the previous year. We'll continue to invest in the key strategic areas.

We're continuing to invest in our core businesses, and we continue to hire people with special expertise and technology expertise, we'll continue to hire outstanding fresh grads. But at the same time, it's really a rationalization of some of the non-core and underperforming businesses that would be more noticeable. So that's the way we think about it. So overall, we want to increase the muscle of the overall organization.

So in terms of the key areas of growth, in terms of the core businesses that we want to grow for the long run, we'll continue to invest. So it's not going to have an impact on those businesses.

Wendy Huang -- Investor Relations Officer

Operator, shall we take the next question?

Operator

Yes. Thank you. Our next question comes from the line of Elinor Leung of CLSA. Please go ahead with your question.

Elinor Leung -- CLSA -- Analyst

Hi. Thank you management for the opportunity to ask the questions. My question is on the gaming side. Previously, you mentioned that we direct some of the resources to handle the protection minors.

I wonder if that is done, so we can reallocate the resources back to our game development. And how do you see the domestic game market growth for 2022 if there's no new game approval for the whole year? Thank you.

James Mitchell -- Chief Strategy Officer

Hi, Elinor. Thank you for the question. So, we can't be very helpful on the domestic game market growth because this is still a somewhat product-driven industry, and we don't have perfect visibility into what the rest of the industry is up to. But the generalization, there are a large number of games that have already received that ban-out, not yet been published and we assumed will be published in the course of 2022.

It's also true looking at history that in periods when there's fewer new game releases, the existing games may grow faster than they otherwise would. Now, I think that in the past few months that hasn't happened because of the direct and more especially the indirect impacts of the minor protection measures, but at least for ourselves, and we think our larger peers in the game industry, we've now collectively, fully, and completely implement those measures. And so the resources can be shifted back from implementing the new minor protection measures toward operating and enhancing the game content.

Wendy Huang -- Investor Relations Officer

Thank you. Operator, let's move to the next question.

Operator

Yes. Thank you. Our next question comes from the line of Gary Yu of Morgan Stanley. Please go ahead.

Your line is open.

Gary Yu -- Morgan Stanley -- Analyst

Hi. Thank you for the opportunity to ask question. I have one question regarding margin and cost and I may have a follow-up on regulation. So, last year, we talked about strategic investment in three areas, and therefore, expecting a slower product growth.

This year, in addition, to continue focus in these areas, we also talk about other cost optimization, potentially margin enhancement from that perspective. So, how should we look at margin outlook in 2022? And indirectly, how should we look at kind of profit growth relative to revenue going forward? Thank you.

Martin Lau -- President

I would say those are transition years, I think 2020, mid-2021, we faced an industry in which everybody is actually trying to grow and expand and there's a very tough competition across the board, ranging from talent competition to very aggressive marketing and that's sort of driving a lot of the margin compression that you talk about. And that's not just for us, and that's actually in the entire industry. And during the presentation, we actually talked about there is actually a fundamental shift in terms of the industry paradigm from this growth at all cost to a much more fundamental and value-based, efficiency-based, and healthier and sustainable growth mode for the industry. And so that's why everybody is actually doing cost optimization and rationalization.

So, I would say that these two years are years in transition for different reasons and once we have actually gone through the optimization across the board on marketing costs, on staff cost, and on operating costs, then we probably see a more stable type of margin structure starting from 2023.

Gary Yu -- Morgan Stanley -- Analyst

Thank you. And I have a follow-up on regulations specifically related to our FinTech. So how should we look at the potential risk of a separation of WeChat Pay from our main retail apps or at least some risk or potential limitation or sharing data between the FinTech business and retail core business, if there is any regulatory change on the corporate structure? Thank you.

Martin Lau -- President

Well, I think these are different things, right. From a corporate structure perspective, you're probably referring to the financial holding company, and this is one exercise that we're doing. We are working very closely with the regulators in investigating our eligibility and our needs to establish a financial holding company. And very clearly, the regulatory body is actually trying to use the financial holding company to monitor systemic risk and to reduce systemic risk, which we think is actually positive for both the industry as well as for the companies, which have been given the license to be a financial holding company, and we actually have seen two financial holding company license being issued.

So the framework and the criteria will become clearer over time. And we thought, if we fulfill the criteria and we need to establish a financial company, then we embrace it. And we felt there needs to be some organizational change, but it should not impact the business in a material way. And so overall, it should be a neutral, short-term and over the long run, we felt it would be positive because the regulators have always been supported of the licensed entities based on the experience that we have seen on rebank, it's very clear that the license entities would actually see more regulatory recognition and support.

Gary Yu -- Morgan Stanley -- Analyst

Thank you. That's very clear.

Operator

Thank you. Our next question is from the line of William Packer of BNP Paribas. Please go ahead.

William Packer -- BNP Paribas -- Analyst

Hi, management. Many thanks for taking my questions. Firstly, on the domestic gaming limitation --

Martin Lau -- President

William, you're a little bit quiet at least for me.

William Packer -- BNP Paribas -- Analyst

All right. Can you hear me better now?

Martin Lau -- President

Yes. Much better.

William Packer -- BNP Paribas -- Analyst

Great. Sorry about that. On the domestic gaming front, thus far, restrictions on time and spend have been focused on minors. Should we expect any restrictions on adult timing or spend on gains? And then a follow-up -- on the last call, you talked to some of the wider technological and cultural benefits of domestic gaming industry.

Do you think those arguments be gaining traction with the relevant stakeholders? Thanks.

Martin Lau -- President

Well, we think the vast majority of the Tencent is actually on minor protection, and this is something that we have been very focused on and the industry has been very focused on -- and we know the regulators have been very focused on, and we're making good progress on that. We can't speculate on whether there are additional regulations or not, right? But so far, we haven't heard. And in terms of the benefits of games, I think, as -- number one, it's actually very clear. It's actually very factual that the entire tech industry is actually a big ecosystem in which applications actually drive technology improvement and it drives hardware and software improvement.

And it's a spectral and I think as we are able to -- as we continue to demonstrate the fact it should be more understand -- more understood by all kinds of stakeholders.

William Packer -- BNP Paribas -- Analyst

Thanks for the color.

Operator

Thank you. Our next question is from the line of Alicia Yap of Citigroup. Please go ahead.

Alicia Yap -- Citi -- Analyst

Hi. Thank you. Good evening, management. Thanks for taking my questions.

I have a first question on the broader value-added service outlook. So it seems like after the regulatory headwinds in gains on the domestic gaming revenue could enter a new norm of the slower growth. And then, we also see various digital content and community platform revenues also face a numbers of regulatory and competition headwinds. So could you help us to look beyond the short-term challenges? And how should we think about a longer-term sustainable growth profile for the broader value-added service revenue stream? Do you think we need some breakthrough of new business model or even some new infrastructure setting such as the metaverse or others to revise the growth potential for this segment? And then I have a follow-up.

James Mitchell -- Chief Strategy Officer

So, Alicia, on your first question about whether we were entering a new normal of no growth of value-added services revenue. Then if you refer back to the 2018 period, there was similar deceleration in game industry growth in China for comparable reasons. And at that time, there was a great deal of discussion around new normals and ex- growth and so on and so forth. And, of course, over the next couple of years, as new games came to market, those fears and concerns moved into the background.

And I think that that's the situation we're in now. The game industry is actually the youngest. It's the most vigorous and it's the most well-positioned to benefit from technology change of all the entertainment industries and the entertainment itself is a superset of industries that are generally growing faster than GDP growth due to the satisfaction of Maslow's hierarchy of needs. So our belief is that the China economy will grow rapidly over time.

Entertainment and leisure spending will grow more rapidly and then activity around games will also grow very rapidly. To the extent that metaverses and other concepts layer on, on top, that's beneficial. And of course, we have our international game business, which is subject to different regulatory cycles and hasn't experienced the deceleration that domestic game business has experienced. But I think overall, we have a pretty constructive view on the industry as a whole, both now and for the future.

Alicia Yap -- Citi -- Analyst

I see. Thank you. Second question is, can you clarify a little bit on this from Supercell's true-up adjustment revenue that you mentioned in the press release. So is this a one-quarter catch-up on some deferred, should we see on the next couple of quarters, there will also be this catch-up.

So how should we think about that? Thank you.

James Mitchell -- Chief Strategy Officer

Yeah. So from a quantification perspective in our international game revenue, excluding the Supercell catch up, excluding FX changes was 24% year on year. So that's, I think, a good reflection of the underlying growth trends. In terms of the nature of the catch-up, it was a recognition in the quarter of cash receipts that we had received in previous quarters, but hadn't booked into the P&L in previous quarters.

From time to time, the auditors for our various game subsidiaries, review the assumptions under which they translate the cash receipts into revenue. And those assumptions can change because of changing player behavior, but they can also just change because of different theoretical assumptions, which was the case here, we previously calculated payer life based on when players began playing the game. Now we're calculating the payer life based on when players begin spending money in the game. So there hasn't been a change in the underlying player behavior.

There's just been a change in how we think about quantifying the life from when they made a purchase within the game. Looking forward, we went through a similar exercise for Riot Games in the first quarter of 2022, and that will exert a small a negative impact on our international game revenue growth in the first quarter of 2022. So I think for better or worse, as a number of studios in a number of jurisdictions within our international game business, that's a source of fundamental strength, but it's also a source of quarterly reporting noise. And over time, the noise will cancel out, but in any given quarter, the noise can be a negative fact for a positive factor.

And so that's why we just wanted to mention that in the fourth quarter, the headline number benefited from this positive adjustment, but the underlying recurring number was at the mid-20% revenue growth that I referenced. Thank you.

Alicia Yap -- Citi -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Robin Zhu of Bernstein. Please go ahead. Your line is open.

Robin Zhu -- Sanford C. Bernstein -- Analyst

Thanks, everyone. I just have a couple of questions, please, if I may. One is on enterprise SaaS growth. I mean you mentioned that you guys are growing this business.

Firstly, could you comment on the state of the business and the impact from macro, from the Internet industry slowing down, whether you're seeing any disruptions on this front? And if you could go into a little bit more detail on -- you mentioned you're pulling back from growth at all cost, which kind of projects are being cut or are you doing less in order to realign the business? And then as a follow-up, if you could comment on the margin impact of both enterprise as I presume right now business services as a whole is margin dilutive to the overall business. Is there a timeline where you'd expect that to change where it becomes margin accretive for FBS or business services to grow much faster than average? Thank you.

James Mitchell -- Chief Strategy Officer

OK. On the cloud business, what was -- in the past was actually that we happen and also the entire industry has been trying to grow the scale of the business so that you can actually get into as many customer relationships as possible. And then, in some cases, you would have to undertake very heavy discounts in terms of prices, or in some cases, you have to develop very custom made solutions for customers, and in some cases, the revenue is actually involving hardware resale, in which you are going to be registering very low margin, or sometimes a negative margin. So this is something that -- and then there's very big marketing costs and sales channel cost that you have to provide in order to get the business.

So this is, sort of, what we meant by growth at all costs. And I think over time, what we felt would be happening is that we would be -- once we have reached the right scale and also customer relationship then we can actually start focusing on healthy growth, which includes a provisioning of products, which are self-developed, and which are more standard products, and which we can reuse over and over again for many different customers. And that's how we can actually defray the development costs over a much larger pool of revenue and pull-off customers. And at the same time, we are going to be up-selling our customers into PaaS and these PaaS would actually carry much higher margin than IaaS and will be much more disciplined in terms of IaaS pricing and also in terms of not engaging in reselling of hardware at a loss.

And in terms of the PaaS, we have called out a number of different PaaS, which are actually registering a good margin and at the same time, which are growing quite nicely, including security, including video cloud, including real-time communication database, video-on-demand. And we felt that these PaaS services would continue to grow over time and that would actually improve the quality of our business and as well as the margin profile of the business. And, of course, within the enterprise, there's also the SaaS, which we actually also discussed in quite full length in terms of communications and collaboration tools, and I think we have given a very full account for that. So I'm not going to repeat what we talked about.

And overall, what you've seen is that the cloud business, including IaaS and PaaS, is not just margin diluted, right? It's actually registering net loss, and also for SaaS, it's incurring costs, but not having any significant revenue, right. So these are actually loss-making businesses. But over time, you can actually improve the margin profile of the cloud business. And at the same time, you can start monetizing on the SaaS then margin profile of these businesses would start to improve.

So that's what we are engineering for over the mid to long-term.

Operator

Thank you. Our next question is from the line of Richard Kramer of Arete Research. Please go ahead.

Richard Kramer -- Arete Research -- Analyst

Thank you very much. One, just to follow on with Martin from some of the comments you've made already. I know you've given some reasons in the mix and the backdrop, but the page 27 makes it clear that these are record low margins for Tencent. And in this context of a transition from old to new paradigms and looking at what's obviously a difficult 2022, can you talk about whether the industry overall will see a lower level of medium-term structural profitability? And then I have a follow-up for James.

Thank you.

Martin Lau -- President

Perfect. I think the industry would see a structurally lower growth rate, right? In the past, if you look at the industry the profitable business is actually engineered for 20%-plus to 30% growth rate. And there are a lot of businesses which are actually registering loss and in some cases, huge losses and really relying on the capital markets for the portion of their business. And I think this overall industry structure has to change and so overall, the heavy loss-making companies would actually need to start rationalizing costs in a much more significant way.

And then we -- the profitable companies would actually have to cope with a lower revenue growth rate, but I think it's going to be a more sustainable growth rate. And if we can actually do that, right, then the margin profile coming out of this may be actually quite healthy. But --

Richard Kramer -- Arete Research -- Analyst

And maybe a --

Martin Lau -- President

We're really transitioning from a very abnormal industry structure for a couple of years.

Richard Kramer -- Arete Research -- Analyst

OK. Thanks. And then maybe a second one for James. Just given the transition that you've laid out and the industry needing to go back to its roots, and clearly, around the world, there's a lot of scrutiny of what is thought of as big tech.

Would you consider or might it make sense to devolve Tencent into a series of pure-play businesses beyond the financial holding company question, maybe spinning out the cloud and business services or other areas so that investors would have a choice of which elements of your business to own and Tencent might not seem so large in the eyes of your regulators?

James Mitchell -- Chief Strategy Officer

That's an interesting question and I think it's more of a question for Pony than for me.

Pony Ma -- Chairman and Chief Executive Officer

I think that -- let me answer this question. This is a highly speculative. I think this is not something that we consider at this point in time. The most important thing is actually each one of the businesses have to be optimized for its own service and for its own sustainable and healthy growth.

And I think that's actually more important than just sort of doing some reengineering on how you draw up the pieces. So, I think that's what we're focused on. Thank you.

Wendy Huang -- Investor Relations Officer

Thank you, operator. Let's take the -- one last question.

Operator

Yes. Our final question comes from the line of Alex Yao of J.P. Morgan. Please go ahead.

Alex Yao -- J.P. Morgan -- Analyst

Thank you management for taking my question. I have two questions. One is on the gaming side of the business, given the sharp reduction in minor revenue contribution to domestic gaming revenue, should we expect the gaming revenue growth to remain weak in first half of 2022? And then I have a follow-up for Martin to comment on financial holding company structure. Do you guys need to or do you guys not need to restructure the FinTech asset into a financial holding company structure? Thank you.

Martin Lau -- President

Hi, Alex. On the first question, I mean, yes, mathematically, we made the changes that reduced the time spent in the revenue by minus during the course of the second half of 2021. And so there will be a negative impact on our year-on-year growth rate through the first half of 2022.

John Lo -- Chief Financial Officer

So on the financial income question, we have right now investigating our – both the need as well as our eligibility to get the license for that – but what we're saying is that without -- this is not going to impact our business and it's going to be neutral. And over the longer term, once we actually sort of receive the right license, it could be positive.

Wendy Huang -- Investor Relations Officer

Thank you, operator. We are closing the call now. 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 webcast will also be available soon.

Thank you, and see you next quarter.

Operator

[Operator signoff]

Duration: 77 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 -- Chief Financial Officer

Charlene Liu -- HSBC -- Analyst

Kenneth Fong -- Credit Suisse -- Analyst

John Choi -- Daiwa Capital Markets -- Analyst

Elinor Leung -- CLSA -- Analyst

Gary Yu -- Morgan Stanley -- Analyst

William Packer -- BNP Paribas -- Analyst

Alicia Yap -- Citi -- Analyst

Robin Zhu -- Sanford C. Bernstein -- Analyst

Richard Kramer -- Arete Research -- Analyst

Alex Yao -- J.P. Morgan -- Analyst

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