Tencent posts impressive first quarter profit growth

Irene MckinneyMay 17, 2018

Thanks largely to a thriving games business, Chinese tech giant Tencent just posted impressive first-quarter earnings.

Tencent has historically done well in the games space with the PC its cash cow, but a year ago its smartphone games business overtook that of PC based on revenue.

Shares in the second most valuable Asian public company has come under heavy pressure leading up to the earnings report, as investors feared the potential for lower margins along with higher costs. Another title - Honour of Kings - was the world's highest-grossing mobile game past year thanks to its China-based users and Tencent has been pushing it to worldwide audiences.

Revenues totaled 73.53 billion yuan ($11.5 billion) versus a Thomson Reuters estimate of 71.04 billion yuan. Net profit was up 61 percent year-on-year, while revenue increased 48 percent over the same period.

The overall online games business was boosted by two major games.

Jefferies analysts wrote in an accompanying note that Tencent's gross profit margin was higher than expected with its " strong mobile game rebound", but added a structural business mix change might continue to weigh on the firm's margins.

Tencent has rights to operate that game across China but has said as not yet been monetized, highlighting the potential the title has for the future.

Tencent's PC games reported flat revenue of 14.1 billion yuan.

Stripping out interest and others, core operating margin slipped below 30 percent from 31 percent a year prior. "Fortnite" was developed by Epic Games, a company that Tencent has a large stake in.

Monthly active user accounts (MAU) declined to 805.5 million, down 6.4 percent from the year before and from 783 million in the previous quarter. Now unavailable in China, it will be launched in the country within the next few months. Company president Martin Lau Chi-ping had warned in March during its 2017 earnings call that this year Tencent would aggressively step up its investments in long- and short-form video content, digital payments, cloud services, artificial intelligence and smart retail, even though it could harm the company's profitability in the short term.

Due to the fact that social media services such as Facebook, Twitter, Instagram and Snapchat are inaccessible in China, there exists a whole ecosystem of social networking and messaging platforms that are immensely popular in and around China but hardly known anywhere else in the world.

Social networks revenues increased by 47% to RMB18.1 billion as WeChat user numbers passed 1.06 billion.

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