Tencent Reports Historic Profit Slip Despite WeChat Ad Revenue Growth

Tencent Holdings released its fourth quarter 2018 and full-year 2018 financial results in the early morning of March 21 and attempted to calm investors after its largest quarterly profit drop in 13 years. The company was significantly affected by the Chinese government’s freeze on new mobile game approvals, which ended in December after nine months. Since the company could not benefit from new mobile games over the second half of 2018, it relied primarily on revenues from already-existing games and other sources. Tencent noted that it increased revenue by adding services to popular games, and said it has a positive outlook for new game approvals over 2019. It has also sought to offset the regulations in China by partnering with overseas game developers to grow its games globally. Despite the regulatory freeze, the company saw mobile game revenue increase of 24 percent year-on-year in 2018, although only by 12 percent in Q4. But the good news is that Tencent increased its online advertising revenue by 38 percent year-on-year in the fourth quarter, that’s an increase of 44 percent from the previous year (including social media advertising and other ad revenue). The rise was mostly driven by WeChat Moments ads, mini-programs, and QQ KanDian, and continued the trend from the previous quarter. The company also saw media advertising revenue rise due to the popularity of Tencent Video and News. The company said in its earnings release, “On average, over 750 million Weixin [WeChat] users read friends’ posts on Moments per day.” This indicates that there’s now a growing opportunity for brands to advertise within WeChat Moments. Since Tencent began running their second Moments ad, only 50 percent of daily users have been reached, so there’s still room to grow this segment. Meanwhile, daily active users of mini-programs grew 54 percent year-on-year in 2018. Tencent also made significant strides with WeChat Pay and transactions through its ecosystem. In particular, it has expanded services for travelers abroad, including the ability to purchase flights through its mobile payment system. Revenue jumped 32 percent year-on-year to 45.56 billion (RMB 312.7 billion) in 2018, with net profit up 19 percent 11.47 billion (RMB 78.7 billion). However, the company’s profit margin decreased to 26 percent from 30 percent a year earlier. For the fourth quarter, Tencent reported revenue of 12.37 billion (RMB 84.9 billion), an increase of 28 percent from the same period in 2017. The revenue was just below consensus estimates for the quarter. Net profit in the quarter missed analysts’ expectations, falling 32 percent year-on-year to 2.07 billion (RMB 14.23 billion). The decline was attributed to higher investment costs for both content and technology during the quarter. But it’s those expenses that helped to diversify the tech giant and may protect it from future potentially harmful government regulations.

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Tencent Reports Historic Profit Slip Despite WeChat Ad Revenue Growth