(Yicai) May 14 -- Tencent Holdings reported its net profit jumped 21 percent in the first quarter, with the Chinese tech giant investing more than CNY30 billion (USD4.4 billion) in artificial intelligence.

Net profit was CNY58.1 billion (USD8.6 billion) in the three months ended March 31, the Shenzhen-based firm said in a financial report released yesterday. Based on non-international financial reporting standards, the profit rose 11 percent to CNY67.9 billion from a year earlier.

Tencent's revenue climbed 9 percent to CNY196.5 billion (USD28.9 billion), while its gross profit increased 11 percent to CNY111.3 billion, with gross margin rising to 57 percent from 56 percent.

Whether Tencent is lagging in AI, Chairman and Chief Executive Pony Ma said at an earnings conference call, "One year ago, we thought we boarded the ship, but later found out that the ship was leaking. Now, we feel like we've stood on the ship, but can't sit down yet. We still hope the ship can move faster.

"The firm's reorganized AI research and development team has rebuilt the AI infrastructure and formed the Hy3 preview model, which is leading in performance among models of the same parameter scale," Ma pointed out.

Tencent's operating profit rose 9 percent to CNY75.6 billion based on non-IFRS, with operating margin stable at 38.5 percent. Excluding new AI products, non-IFRS operating profit would have grown 17 percent to CNY84.4 billion.

Capital expenditure topped CNY31.9 billion last quarter, up 16 percent from a year ago and 63 percent from the fourth quarter of last year. Capital disbursements reached CNY37 billion, primarily used for AI-related investment. Free cash flow stood at CNY56.7 billion.

Capital expenditure would further rise, an executive from Tencent noted. Tencent Cloud has long been lacking sufficient graphics processing unit resources, making it difficult to meet external customers' needs, which has an impact on its ability to generate more revenue and gain market share, the person stressed.

"Tencent Cloud has not actively leased out GPU capacity to ensure internal use," the executive said. More domestic chips will be put into use in the second half of this year, with expectations that the situation with computing power supply will be improved due to the supply of domestic GPUs and application-specific integrated circuits gradually increasing, the person added.

There are short-term and long-term investments in the AI area, the executive noted, adding that Tencent will not manage each related product on a quarterly basis, but will review them based on the asset portfolio and life cycle.

For example, deploying GPUs to advertising tech is a relatively short-term investment, because these GPUs can quickly enhance the accuracy of advertising and increase click-through rates, driving up revenue and profit growth in the short term, the executive said. However, when GPUs are used for the Hunyuan large model, it is considered from a longer-term perspective, the person pointed out.

"At first, we provided free services and gradually generated revenue over time," the executive said. "In the AI field, it is necessary to seek 'high-value use cases' and not just focus on the number of daily active users."

The monetization is still in an early stage, and leading companies have not yet launched very mature monetization models, so it is necessary to take a long-term perspective and see what kind of supplements can be made beyond the subscription model, the executive added.

Tencent's value-added services revenue climbed 4 percent to CNY96.1 billion. Income from domestic games rose 6 percent to CNY45.4 billion, while that from international games jumped 13 percent to CNY18.8 billion, driven by Clash Royale, Wuthering Waves, and Valorant PC. Social networks revenue fell 2 percent to CNY31.9 billion.

Income from marketing services surged 20 percent to CNY38.2 billion, thanks to improved ad performance and pricing from AI-driven ad recommendation upgrades and expanded closed-loop capabilities within the Wexin ecosystem. FinTech and Business Services revenue grew 9 percent to CNY59.9 billion.

Shares of Tencent Holdings [HKG: 0700] closed 0.5 higher at HKD465 (USD59.37) apiece in Hong Kong today.

Editor: Martin Kadiev