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Tencent Leans on Renewed Gaming Growth

By Steve Symington - Aug 15, 2019 at 9:00AM

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This time, it's slower advertising growth that has the market worried.

Tencent Holdings (TCEHY 4.27%) announced second-quarter 2019 results on Wednesday. The Chinese tech titan detailed a long-awaited return to growth for its online games business, but also a notable deceleration in the momentum of its lucrative advertising operations. 

With shares down around 4% on the heels of its report -- a move almost certainly amplified by the broader market's steep decline -- let's dig deeper to see what Tencent accomplished over the past few months.

Young Asian people sitting on colorful bean bags and using their smartphones.


Tencent results: The raw numbers

Metric Q2 2019 Q2 2018 Growth


 88.821 billion yuan 
($12.92 billion)

 73.675 billion yuan


Net profit attributable to Tencent shareholders

 23.136 billion yuan 
($3.511 billion)

 17.867 billion yuan


Earnings per diluted share

 2.52 yuan 

 1.868 yuan



What happened with Tencent this quarter?

  • On an adjusted (non-GAAP) basis, which excludes items like stock-based compensation and acquisition costs, Tencent's profit attributable to shareholders was 23.525 billion yuan, or 2.456 yuan per share (roughly $0.35 per share).
  • Tencent doesn't provide specific quarterly revenue or earnings guidance. So, for perspective -- and though we don't normally pay too close attention to Wall Street's demands -- analysts' consensus predictions called for roughly the same earnings, but on revenue closer to $13.2 billion.
  • Combined monthly active users (MAUs) of WeChat and Weixin grew 7.1% year over year and 1.9% sequentially from last quarter to approximately 1.133 billion.
  • MAUs of instant-messaging platform QQ went up 0.6% year over year, but also fell 1.8% sequentially from last quarter to 807.9 million. QQ's smart-device MAU declined 0.3% year over year and rose 1.9% sequentially to 706.7 million.
  • Smart-device MAUs of social networking site Qzone jumped 2% year over year and fell 3.2% sequentially to 553.5 million.
  • Fee-based value-added services (VAS) subscriptions rose 9.7% year over year to 168.9 million.
  • VAS revenue got a 14% boost year over year to 48.08 billion yuan, including an 8% increase in online games revenue (to 27.307 billion yuan) -- swinging from a slight decline last quarter and led by growth in both new and existing smartphone game titles -- as well as 12% growth from social networks revenue (to 20.773 billion yuan), driven by digital content services like live broadcast and video streaming.
  • Online advertising revenue rose 16% year over year to 16.409 billion yuan, including:
    • a 7% decline in media advertising, largely given the absence of contributions from the FIFA World Cup tournament this year, and
    • 28% growth in social and other ad revenue, to 12.009 billion yuan, driven by Weixin Moments and news-feed platform QQ Kan Dian.
  • Fintech and business services revenue soared 37% to 22.888 billion yuan, led by commercial payment and cloud services. This segment's growth would have been closer to 57% had it not been for the impact of shifting custodian cash balances to the People's Bank of China.
  • Adjusted EBITDA increased 25% year over year to 35.102 billion yuan.

What management had to say

Tencent CEO Ma Huateng stated:

During the second quarter, we sustained solid user, revenue and profit growth, and executed on key initiatives amid the challenging business environment. In recent months, we have accelerated our rate of innovation in games, releasing successful new titles in several different genres, introducing new play modes, and extending our popular season passes. In the meantime, we continue to strengthen the Healthy Gameplay System for promoting balanced gameplay for young users. We have widened merchant adoption for our mobile payment services, contributing to rapid growth in average transaction and total payment volume. We have extended and deepened our exclusive relationship with the NBA, the most-watched professional sports league in China, reinforcing our position as a leading digital entertainment platform. Amid the evolving macro-economic and competitive challenges, we continue to invest in enhancing our platforms, services and technologies, for better supporting our users and enterprise customers.

Looking forward

Tencent once again declined to provide specific forward guidance. But the company reiterated its early-stage efforts in rolling out "season passes" for several of its key game titles -- a move that has significantly bolstered "paying propensity" within its existing season-pass game base. Tencent also noted it's seeing the fruit of its accelerated pace of innovation in gaming, noting that it launched 10 new smartphone games in the second quarter (compared to just one game in Q1). Within those new launches, all three of the smartphone games Tencent introduced in July -- KartRider Rush, Game of Thrones: Winter is Coming, and RPG Dragon Raja -- achieved top-10 positions in the iOS-grossing chart for games in China. If Tencent can sustain this innovative pace, it should mean continued good tidings for its gaming segment in the coming quarters.

That said, Tencent also cited today's "challenging macro environment" and an industrywide glut of short-video advertising inventories for its decelerated advertising growth, with particular weakness in the e-commerce and online education sectors. While the company can lean on its healthier social media advertising business -- where revenue climbed 28% -- its broader advertising operation remains largely at the mercy of macro trends.

All told, investors can be happy that Tencent's diversified operations can serve to offset this weakness. But until the company is truly firing on all cylinders, I suspect the stock will remain under pressure.

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