Tencent Holdings (OTC:TCEHY) released first-quarter 2019 results a few weeks ago, showcasing record profits, even as its still-solid revenue growth decelerated to its lowest rate since the Chinese internet giant went public back in 2005. At least part of that deceleration can be blamed on deferred-revenue policies within Tencent's online games segment, where growth had proven elusive in recent quarters given a recently lifted nine-month freeze on approvals of new video game licenses in China.

Still, the more pressing concern among investors is that of an escalating trade war between China and the United States. The tariffs stemming from this spat may not directly impact Tencent but will threaten a broader economic slowdown that could dampen spending from Chinese consumers and advertisers alike.

Those tensions certainly haven't eased much in recent weeks, though Chinese news outlets reported earlier today that the two countries are looking to reopen constructive trade talks. Now that the dust has settled surrounding Tencent's quarterly release, let's take a closer look at how the company started the year.

Asian stock market data on an LED display.

IMAGE SOURCE: GETTY IMAGES.

Tencent results: The raw numbers

Metric

Q1 2019

Q1 2018

Year-Over-Year Growth

Revenue

85.465 billion yuan
($12.69 billion)

 73.528 billion yuan

16.2%

Net profit attributable to Tencent shareholders

27.856 billion yuan
($4.14 billion)

 23.290 billion yuan

19.6%

Earnings per diluted share

2.844 yuan
($0.41)

 2.435 yuan

16.8%

DATA SOURCE: TENCENT HOLDINGS.

What happened with Tencent this quarter?

  • Adjusted for one-time items, Tencent's (non-GAAP) profit attributable to shareholders rose 14% year over year, to 20.93 billion yuan, or 2.187 yuan (roughly $0.32) per share.
  • Tencent doesn't provide quarterly guidance. But these results were technically mixed relative to consensus estimates for roughly the same adjusted per-share earnings on revenue closer to $12.74 billion.
  • Combined monthly active users (MAUs) of WeChat and Weixin increased 6.9% year over year and 1.3% sequentially, to roughly 1.112 billion.
  • MAUs of instant-messaging platform QQ grew 2.2% year over year and 2% sequentially, to 823 million. QQ smart-device MAUs rose slightly, to 700.4 million, helped by double-digit growth from increasingly engaged young users on smart devices.
  • Smart-device MAUs on social-networking site Qzone grew 4% year over year and 7.4% sequentially from last quarter, to 571.9 million.
  • Fee-based value-added services (VAS) subscriptions increased 13% year over year, to 165.5 million (and rose 3.2%, from 160.3 million last quarter), driven by a 43% increase in Tencent Video subscriptions, to 89 million, as well as music subscriptions.
  • VAS revenue increased 4% year over year, to 48.794 billion yuan, including:
    • 28.513 billion yuan from online games, down slightly from last year's first quarter. Of note here, however, is that cash receipts from the games business climbed 10%, with the disparity driven by revenue-deferral accounting for popular games released late in the quarter, including Perfect World.
    • 20.461 billion yuan from social networks, up 13%, driven by live broadcast services and video streaming subscriptions
  • Online advertising revenue grew 25%, to 13.377 billion yuan, including:
    • 5% growth from media advertising, to 3.479 billion yuan, driven by Tencent News
    • 34% growth from social and other advertising, to 9.898 billion yuan, driven by Weixin Moments, Mini Programs, and news-feed platform QQ KanDian
  • FinTech and business services -- a newly broken-out segment previously categorized under the "other" line -- revenue grew 44%, to 21.789 billion yuan, thanks to commercial payment and cloud services.
  • Adjusted EBITDA grew 15% year over year, to 35.598 billion yuan.

What management had to say

Tencent CEO Ma Huateng stated:

In the first quarter of 2019, we sustained healthy user engagement across our key platforms, with notable growth in the number of short videos uploaded and shared by users on QQ and Weixin. We are invigorating our game business with popular releases such as Perfect World Mobile in China, while PUBG MOBILE is growing internationally. Our payment, other FinTech services and cloud business, while still at an early stage of expansion, are now generating substantial revenues, and we are consequently disclosing their results in our new FinTech and Business Services segment, demonstrating our success in organically incubating services with long-term growth potential. We believe that we are building solid foundations for future growth in both the Consumer and Industrial Internet domains.

Looking forward

As per usual, Tencent opted not to provide specific forward financial guidance. But it did tease that, within its gaming segment, it plans to launch several new mid- to hard-core game titles in the second quarter. Tencent also remains in the early stages of experimenting with its popular "Season Passes" for key games in China -- which have already bolstered engagement for titles like Fortnite and PUBG MOBILE overseas -- including Cross Fire Mobile, Honour of Kings, and QQ Speed Mobile. 

Tencent further pledged to continue growing its advertising and FinTech businesses at a "measured pace." Within the former, in particular, Tencent is favoring optimizing advertiser returns rather than "maximising short-term revenues."

In the end, some investors might be irked by Tencent's slowing consolidated revenue growth. But I suspect that growth will reaccelerate as deferred revenue slides into the reported revenue category, punctuating the underlying strength of Tencent's gaming businesses in the coming quarters. As Tencent continues to temper its many other growth irons in the fire, I think the company remains well-positioned to thrive over the long term.