Tencent posted significantly elevated spending in the June quarter as the Chinese technology company continues to build out computing capacity for its artificial intelligence initiatives. Capital expenditures rose 65% from the prior quarter to 52.8 billion yuan, equivalent to $7.8 billion, while free cash flow turned negative at 13.8 billion yuan during the period.
Company leadership defended the substantial investment outlay by emphasizing potential returns on AI-related spending. Chief Executive Ma Huateng stated the firm was substantially increasing its procurement of computing resources to convert user engagement into revenue through its AI models and applications. Chief Strategy Officer James Mitchell told analysts that while the company could achieve “decent” near-term returns by leasing all available compute capacity, Tencent intended instead to use some capacity to develop proprietary AI models and applications that would deliver superior economic returns over longer timeframes.
Second-quarter financial results showed mixed performance. Revenue increased 11% year-over-year, while reported profit climbed nearly 1%. Adjusted profit, excluding one-time items and non-cash elements, totaled 68.4 billion yuan, up 9% from the same quarter the prior year. Domestic gaming revenue accelerated to 47.3 billion yuan, up 17% year-over-year, driven by titles including Delta Force and Valorant across platforms. Marketing services revenue expanded 22% year-over-year to 43.6 billion yuan, boosted by artificial intelligence-enhanced advertising recommendation capabilities. International gaming revenue declined 0.8% year-over-year on reported basis, though rose 4% on a constant currency basis.
Tencent’s cloud services business expanded at a low-twenties percentage rate, supported by AI demand and international growth. The company raised prices for cloud customers. The firm is developing multiple AI models, including the recently launched Hy3, which it has begun expanding internationally, and is working on a larger Hy4 model intended to outperform larger competing models. Tencent stock traded down 26% year-to-date in Hong Kong as investors expressed concern about rising capital intensity amid intense competitive pressure in China’s AI sector.
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