Tencent (TCEHY 1.32%) recently posted first-quarter numbers that soundly beat analysts' estimates. The Chinese tech giant's revenue rose 26% annually to 108.1 billion yuan ($15.3 billion), clearing expectations by about 7 billion yuan.
Its net profit grew 6% to 28.9 billion yuan ($4.1 billion), topping expectations by over 5 billion yuan. On a non-GAAP basis, which excludes acquisitions, divestments, and other variable gains and losses, its net profit rose 29% to 27.1 billion yuan ($3.8 billion).
Tencent's growth remained robust during the quarter, which ended on March 31 and bore the full impact of China's COVID-19 lockdown measures in February. However, its gaming business did most of the heavy lifting and offset the softer growth of its fintech and cloud businesses.
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The pandemic strengthens its gaming business
Tencent's online gaming revenue rose 31% annually, accelerating from its 25% growth in the fourth quarter, and accounted for 35% of its top line. Its growth was driven by mobile games like Peacekeeper Elite and Honor of Kings in China, as well as PUBG Mobile and Clash of Clans in overseas markets.
Tencent's smartphone gaming revenue rose 64% annually during the quarter, but its PC gaming revenue fell 15% due to the weakness of DnF and the closures of internet cafes during the pandemic.
However, Tencent's overall gaming business remained strong throughout the crisis, as stay-at-home measures boosted its growth in active and paid users. Tencent also refreshed its older games with graphical upgrades, in-game events, and social features, which helped gamers find other players in the same city.
It expanded its League of Legends franchise with a new card game on PCs and mobile devices, and it continues to launch fresh overseas games like Code: D-Blood. In short, Tencent continues to expand and evolve its gaming business to widen its moat against resilient rivals like NetEase (NTES 1.02%).
Lockdown measures boosted its ad revenue (for now)
Many investors likely expected Tencent's ad growth to decelerate as the pandemic paralyzed the Chinese economy. Yet Tencent's online ad revenue rose 32% annually, accelerating from 19% growth in the fourth quarter and accounting for 16% of its top line.
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Tencent attributed that growth to a 47% jump in its "social and others" ad revenue -- which mainly came from its mobile ad network, which places ads in other apps, and WeChat Moments, which let its WeChat users share photos, status updates, and websites within a close circle of friends. That growth easily offset a 10% revenue decline in its media advertising business, which sells ads for its video and news platforms.
Tencent noted that consumers spent more time using mobile apps as they stayed home, which convinced advertisers -- especially in the gaming, internet services, and online education industries -- to buy more ads. Stronger demand across those industries offset its lower ad revenue from the fast-moving consumer goods, auto, and travel industries.
That growth spurt is encouraging, but Tencent expects its ad revenue to "normalize" over the next few quarters as lockdown-focused businesses buy fewer ads. Therefore, this business could still face tougher headwinds throughout the rest of the year.
The fintech and business services unit loses momentum
Tencent's fintech and business services unit, which generates most of its revenue from WeChat Pay and Tencent Cloud, experienced a significant slowdown during the quarter.
Its revenue rose 22% annually, down from 39% growth in the fourth quarter, and accounted for 24% of Tencent's top line. That slowdown was disappointing, since Tencent specifically restructured its businesses in late 2018 to expand those divisions and reduce its overall dependence on video games.
Its fintech business, which competes against Alibaba (BABA 0.67%)-backed AliPay, struggled with lower commercial payments, especially off-line payments and cash withdrawals, throughout the lockdown period. That decline was partly offset by the stable growth of its wealth management and lending services. However, Tencent's commercial transactions had largely rebounded by late April.
Tencent Cloud, China's second-largest cloud platform after Alibaba Cloud, was hampered by delayed deployments and fewer client acquisitions during the crisis. Those blows were partially cushioned by its expansion of remote collaboration services like WeChat Work and Tencent Meeting. Tencent believes its cloud business will eventually recover, but it could remain a weak link until the economy stabilizes.
A successful balancing act
Tencent's strengths are clearly outweighing the weaknesses. Looking ahead, the growth of Tencent's gaming business should offset the slowdown at its fintech and cloud businesses, and buy it more time to restart stalled out projects.
Tencent's growth could be lumpy over the next few quarters, and it still faces intense competition from rivals like ByteDance, NetEase, and Alibaba. However, its well-diversified portfolio of gaming, advertising, and business services still makes it one of the safest and strongest long-term investments in China's crowded tech sector.
