Tencent Holdings (OTC:TCEHY) announced mixed second-quarter results on Wednesday morning, detailing continued strong top-line growth but also worrisome regulatory headwinds preventing it from monetizing some of its most popular gaming titles. 

With shares down more than 6% in response as of this writing, let's dig deeper to see how the Chinese internet services giant ended the first half.

Asian students smiling while using smartphones

Image source: Getty Images.

Tencent results: The raw numbers


Q2 2018

Q2 2017

Year-Over-Year Growth


73.675 billion yuan

56.606 billion yuan


Net profit attributable to Tencent shareholders

17.867 billion yuan

18.231 billion yuan


Earnings per diluted share

1.868 yuan

1.914 yuan


Data source: Tencent Holdings.  

What happened with Tencent this quarter?

  • Adjusted for one-time items, Tencent's (non-GAAP) profit attributable to shareholders increased 20% year over year to 19.716 billion yuan ($2.98 billion), or 2.062 yuan per diluted share.
  • Tencent doesn't provide specific financial guidance. But these results were technically mixed relative to consensus estimates, which predicted higher adjusted earnings of $0.32 per share on lower revenue of $10.8 billion.
  • Combined WeChat and Weixin monthly active users (MAUs) grew 9.9% year over year to 1.0577 billion, up from 1.04 billion last quarter. Growth was driven by mini programs and Weixin Pay.
  • MAUs for the instant-messaging platform QQ declined 5.5% year over year to 803.2 million, down from 805.5 million last quarter. Still, QQ smart-device MAUs grew 7% year over year to 708.6 million, driven by new entertainment features and content appealing to younger users.
  • MAUs for the social networking site Qzone declined 9.5% year over year to 548.3 million.
  • Fee-based value-added services (VAS) subscriptions grew 30.3% year over year to 153.9 million, up from 147.1 million last quarter.
  • VAS revenue grew 14% year over year to 42.069 million yuan (a steep deceleration from 34% growth last quarter), including:
    • 6% growth in online games revenue to 25.202 million yuan, driven by smartphone games like Honour of Kings and QQ Speed mobile.
    • 30% growth in social networks revenue to 16.867 billion yuan, driven by digital content services like video streaming subscriptions and live broadcast.
  • Online advertising revenue rose 39% to 14.11 billion yuan, including:
    • 16% growth in media advertising to 4.73 billion yuan, driven by Tencent Video.
    • 55% growth in social and other advertising revenue to 9.38 billion yuan, driven by a combination of Weixin Moments and mini programs, Tencent's mobile advertising network, and the news feed QQ KanDian.
  • Revenue from other businesses climbed 81% year over year to 17.496 billion yuan, driven by payment and cloud services.
  • Adjusted EBITDA increased 18% year over year to 28.139 billion yuan.

What management had to say

Tencent CEO Ma Huateng stated:

During the second quarter of 2018, we deepened user engagement with increased daily active users and time spent across our social, games, and media platforms. On our Mini Program platform, which we view as complementary to native Apps, we have built up a sizable developer ecosystem, a substantial user base, and a wide range of use cases, which increasingly contribute to our payment, advertising, and cloud services. While our mobile game revenue was impacted by transient factors, we saw healthy growth in the number of people playing our mobile games each day in China and overseas. Our video subscription counts more than doubled year-on-year, maintaining our industry-leading position in China.

On the mobile game front, note that China's government recently implemented a temporary suspension in approvals for new game licenses during a regulatory department shake-up. The freeze is also preventing Tencent from monetizing blockbuster gaming titles like Fortnite and PlayerUnknown's Battlegrounds

During the subsequent earnings conference call, Tencent president Martin Lau elaborated:

From a revenue growth perspective, gaming is a key area of weakness -- our biggest game is not monetizable. This is something that's a little out of our control, but over time we'll solve it. ... At this point in time, we don't have visibility on when exactly the official approval will start yet. We do believe it's not a matter of whether these games will be approved for monetization, but a matter of when.

Looking forward

Huateng added that Tencent remains "committed to investing in new technologies and creating innovative products to make our users' lives simpler and better."

All things considered, this was technically a decent quarter from Tencent given the factors it can control, and the company is obviously optimistic that the government shake-up impacting its gaming division will pass. But until investors receive more clarity to that end, I suspect Tencent shares will remain under pressure.