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Tencent Earnings: Its Investments Are Paying Off

By Danny Vena – May 17, 2018 at 7:44AM

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Investors in the social media and gaming giant got a welcome surprise when quarterly results blasted past expectations.

Investors were apprehensive going into Chinese tech giant Tencent Holdings' (TCEHY -2.00%) financial report this week, given last quarter's slower growth and shrinking margins. The company telegraphed its plans to ramp up strategic investments in an effort to increase its market share and drive long-term growth.

Those fears were put to rest, though, when Tencent produced results that beat expectations, showing investors that the company's longer-term view was paying off.

3 young people looking at smartphones oblivious to each other.

Tencent obliterated expectations. Image source: Getty Images.

Tencent results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

73.5 billion RMB ($11.69 billion)

49.6 billion RMB ($7.9 billion)

48%

Operating profit

30.7 billion RMB ($4.88 billion)

19.3 billion RMB ($3 billion)

59%

Net profit

23.3 billion RMB ($3.7 billion)

14.5 billion RMB ($2.3 billion)

61%

Data source: Tencent First-Quarter 2018 Financial Release. Chart by author. Differences due to exchange rates. 

What happened at Tencent this quarter?

For the just completed first quarter, Tencent reported revenue of 73.5 billion RMB (about $11.7 billion), up 48% year over year, and an 11% acceleration from last quarter. This blew past analysts' consensus estimates of 71.04 billion RMB. Net income of 23.3 billion RMB soared 61% year over year, and 12% sequentially, also blasting past expectations of 17.5 billion RMB.

The company's online gaming and social media businesses are booming.

Revenue from online games grew 26% year over year to 28.8 billion RMB (about $4.6 billion) from strength in mobile games, like its blockbuster title Honour of Kings, which boasts an estimated 200 million players, and newer titles like QQ Speed Mobile, similar to Mario Kart

Tencent also said it achieved "global leadership" in the tactical tournament genre. The battle royale phenomenon, led by Fortnite and PlayerUnknown's Battlegrounds (PUBG), has taken the world by storm. Fortnite boasts 40 million monthly active users globally across PC and console, and adoption was boosted by its recent mobile release. Tencent owns a 40% stake in Fortnite developer Epic Games and is seeking government approval to introduce that successful battle royale game in China. Tencent also developed and recently launched two games for Chinese consumers based on licensed IP of PUBG, and the company said those games achieved "breakout popularity in China." 

Social media revenue jumped 47% year over year to 18.1 billion RMB (about $2.9 billion), from growth in its streaming video and music subscriptions, as well as sales of in-game virtual items. Tencent's WeChat (Weixin) social messaging app is ubiquitous in China, and the company said users topped 1 billion for the first time. Streaming video subscribers for Tencent Video (similar to Hulu) increased 85% compared to the prior-year quarter. 

Sales of online advertising climbed 55% year over year to 10.69 billion RMB (about $1.7 billion). Advertising on social media soared 68% on an increase in feed ads, while media advertising grew 31% driven by increased ads in streaming video.

The company announced that it has increased the "maximum ad load to two advertisements per user per day" on Weixin Moments beginning in late March, which bodes well for future advertising revenue growth. Much of that growth will be seen in the coming quarter, and Tencent said its sees a "long runway for continued growth" in advertising.

Revenue contributed by the company's "other" segment increased 111% to 15.9 billion RMB (about $2.5 billion), driven by a doubling of cloud-computing revenue and digital payments businesses.

Looking ahead

Tencent Chairman and CEO Ma Huateng (Pony Ma) had this to say about the results:

We drove adoption of our infrastructure services, seeing notable progress in areas such as mobile payment, cloud services, online financial services, and smart retail. We will continue to invest in improving our own products as well as enabling services for our partners, in order to fulfill our mission of enhancing the quality of life through Internet services.

The company doesn't provide formal guidance, but its plan to "continue to invest" has worked out thus far for investors, and I don't think that will change going forward.

Danny Vena has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool has a disclosure policy.

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