Tencent smashes analyst expectations with 61 pc YoY increase in profit in Q1 2018

In late 2017, Tencent Holdings Ltd. became Asia’s most highly-valued tech company and the region’s second-most valuable public company (behind Alibaba) as the first firm to cross the $500 billion mark. In the following months, however, the company’s shares came under pressure with increasing costs driving investor fear of lower margins. However, in its earnings report for Q1 2018 released earlier today, Tencent laid all those fears to rest, smashing analyst expectations to post some of its highest ever revenue and profit increases, buoyed by a skyrocketing mobile games market.

Tencent reported net revenue of 73.5 billion yuan (about US$11.6 billion) and a net profit of 23.3 billion yuan (almost US$3.7 billion). The company’s revenue rose by 48 percent year-on-year while net profit was up by 61 percent for the same period. In a statement accompanying the earnings report, Tencent Chairman and CEO Ma Huateng said, “In the first quarter of 2018, we launched the popular tactical tournament mobile games and enhanced the capabilities of widely-used services such as our Weixin Mini Programs, deepening engagement across our social, games and media platforms. We drove adoption of our infrastructure services, seeing notable progress in areas such as mobile payment, cloud services, online financial services, and smart retail. We will continue to invest in improving our own products as well as enabling services for our partners, in order to fulfil our mission of enhancing the quality of life through Internet services.”

Tencent’s gaming business has historically done well, with the PC games segment being the company’s cash cow for a long time. However, the mobile gaming market has exploded in recent years, especially in China, and Tencent has ridden the growth to the bank. The company has stakes in two of the biggest smartphone games in the world today, PlayerUnknown’s Battlegrounds (PUBG) and Fortnite. Tencent has exclusive release rights for PUBG in China but says the game is “yet to be monetized”, implying future additional revenue stream from the title. Fortnite has been developed by video game developer Epic Games who Tencent has a stake in – the game is currently unavailable in China, but there are plans to launch the game in the region in the coming months.

Tencent said mobile game revenue hit 21.7 billion yuan (about US$3.4 billion) during Q1 2018, up 68 percent year-on-year, while PC-based games saw sales of 14.1 billion yuan (over US$2.2 billion), roughly the same figures as Q1 2017.

Separately, Tencent revealed that its WeChat messaging service crossed one billion Monthly Active Users (MAUs), an increase of 10.9 percent year-on-year. The company recently expanded its Mini Programs feature, that allows developers to build apps for the WeChat ecosystem, by introducing Mini Games and merging its payment service WeChat Pay with Mini Programs. The firm said that fee-based value-added service (VAS) subscriptions increased to 147.1 million, a 23.6 percent year-on-year increase.

Since the start of 2018, Tencent has gone on an investment spree, pumping money to acquire stakes in companies all over the world including India’s Gaana, France’s Ubisoft, and China’s Pinduoduo and Ubtech Robotics. The company’s splurge raised questions about its profitability, but the Q1 2018 results should silence the critics. Speaking to investors about the earnings report, Ma Huateng said, “On behalf of the Board, I would like to express our gratitude to all our staff and the management team for their commitment to excellence, strong teamwork and valuable contribution...I would also like to thank all our shareholders and stakeholders for their complete confidence in and support to our Group.”