Tencent Holdings (OTC:TCEHY) might not be a household name in the U.S., but the company is ubiquitous in its native China. Its WeChat social messaging platform is one of the most frequently used apps in the Middle Kingdom, and Tencent is the world's largest video game publisher.
The company reported its third-quarter earnings on Wednesday morning to lukewarm expectations. Investors have been waiting for a turnaround from Tencent, which took a hit when the Chinese government imposed a temporary moratorium on new video games over a period of nine months in 2018. Unfortunately, a slowing Chinese economy in 2019 has added insult to injury, and Tencent's turnaround has suffered a delay of game.
Hit by economic weakness
Tencent reported revenue of 97.24 billion yuan (about $13.75 billion), up 21% year over year. The results edged past analysts' consensus estimates of $13.65 billion but slowed from the 24% growth during the prior-year period. Things were even less rosy on the profit front, as net income of 20.38 billion yuan ($2.88 billion) produced basic earnings per share of 2.15 yuan ($0.30), far below expectations of $0.36. On an adjusted basis -- which excludes things like stock-based compensation and gains or losses from its portfolio of companies -- profit grew 24% compared to the prior-year quarter.
The results of the economic slowdown were evident across Tencent's major segments, which produced much more moderate growth than in prior years.
Segment results showed growth
Revenue from social networks, including WeChat, grew 21% year over year to 22 billion yuan ($3.1 billion), while the number of WeChat users increased 6% to 1.15 billion. The company is hoping to boost interest in its social networks with the expansion and enhancement of its mini-programs -- apps that work within the WeChat program.
Online gaming revenue continued its slow recovery, increasing to 28.6 billion yuan ($4 billion), up 11% compared to the prior-year quarter. Revenue from mobile games helped drive the results, increasing 25% year over year, in part due to key domestic titles -- like Honor of Kings and Peacekeeper Elite -- as well as licensed international favorites, like PlayerUnknown's Battlegrounds (PUBG) mobile, which doubled its monthly active user count year over year.
Social and other advertising revenue grew 32% to 14.7 billion yuan ($2.1 billion) and up 23% sequentially. The accelerating growth was primarily the result of increasing ad revenue associated with WeChat Moments, as well as increasing daily active users and growth of impressions.
Media advertising, including from its ad-supported Tencent Video service, suffered, falling to 3.7 billion yuan ($515 million), down 28% year over year and 17% sequentially. One of the biggest factors taking a toll on the results was a Chinese government-mandated media blackout of National Basketball Association (NBA) game broadcasts. Houston Rockets general manager Daryl Morey had voiced support for pro-democracy protests in Hong Kong, a position that was supported by NBA commissioner Adam Silver. Tencent paid a pricey $1.5 billion for rights to broadcast the games, which drew an audience of roughly 500 million Chinese viewers last year.
The fintech and business services category, which includes such growth areas as cloud computing, financial technology, and streaming video, grew 36% year over year to 26.7 billion yuan ($3.5 billion). One of the headliners was the growth in cloud computing, which grew 80% year over year to 4.7 billion yuan ($664 million).
Ma Huateng, Tencent's chairman and CEO, said, "Looking forward, we will continue investing in our products, technology, and services as we seek to provide value to our users and do good for society."
What the future could hold
Tencent may have an ace in the hole with Activision Blizzard's (NASDAQ:ATVI) smash hit Call of Duty (CoD). Tencent co-developed the mobile version of CoD, which debuted last month to massive demand, racking up a record-breaking 100 million downloads in the first month of release, making it "one of the biggest ever smartphone game launches," according to Tencent.
The company doesn't provide quarterly guidance, but analysts' consensus estimates for the fourth quarter are calling for revenue of $14.4 billion and earnings per share of $0.37.
Investing in stocks from China has its own set of risks, but if the country's flailing economy would just pick up, Tencent might be able to mount a meaningful recovery.