Tencent profit drops on higher spending

HONG KONG • Tencent Holdings Ltd posted a slump in fourth-quarter (4Q) earnings on increased spending as its prized games business showed signs of recovery after a brutal 2018.

Net income fell 32% to 14.2 billion yuan (RM8.5 billion), missing the 17.55 billion-yuan average of estimates, on investments in content, cloud computing and financial technology. The result also included the costs of share issues and impairments for companies it’s invested in as revenue surpassed projections.

China’s social media leader is emerging from one of its darkest periods, as game approvals slowly resume and the country’s economic slowdown cools demand for advertising. That’s seen the owner of WeChat spend billions to sustain growth with investments in everything from cloud and entertainment to retail, locking horns with Alibaba Group Holding Ltd.

“As it turns out the market was probably worried about the wrong thing,” Bloomberg Intelligence (BI) analyst VeySern Ling said in an email. “The unexpected bit is how much cost of revenues and operating expenses have expanded. This is driven by video, payments, cloud, film and television production.”

The spending spree is diversifying Tencent’s revenue make-up, pushing the contribution from gaming to just over a third in 4Q.

Tencent’s European traded shares fell 4% after the results were announced. The company’s Hong Kong-traded stock fell 1.9% ahead of the release, trimming this year’s advance to 16%, compared to a 32% rise for New York-listed Alibaba.

While approvals in China have started to resume, Tencent has yet to get a green light to monetise Fortnite or the mobile version of PlayerUnknown’s Battlegrounds (PUBG), the most popular smartphone game on the planet. The company was able to release nine games in 4Q, but wasn’t able to provide an update on when that could happen for PUBG.

“Games of the same genre like PUBG were able to get licences in China, we are working actively to communicate on it” with regulators, president Martin Lau told reporters yesterday.

After making investments in a number of overseas games firms, including Netmarble Corp and Ubisoft Entertainment SA, Tencent has built up its own capabilities in mobile titles. It plans to use those skills to jointly develop and promote new games overseas with partners rather than just distributing content their content in China, Lau said.

“Given that China has now restarted the game approval process we should expect to see accelerating growth for smartphone games going forward,” Neil Campling, an analyst at Mirabaud Securities, said in a report.

Revenue for the quarter was 84.9 billion yuan compared to estimates for 83.4 billion yuan, while adjusted earnings-per-share were also above expectations. But costs surged 43% from a year earlier, as content and financial technology bills pile up.

Tencent plans to introduce a new category of revenue when it reports 1Q earnings to reflect its more diversified sales. The company will break down specific categories in the “others” revenue section in its financial statement, Lau said.

The company’s 4Q revenue from the Value Added Services unit, which includes online games and messaging, climbed 9% to 43.7 billion yuan. “Mobile game revenues at

19 billion yuan was actually decent because last quarter was 19.5 and typically 4Q is seasonally slow,” BI’s Ling said. “Given they have new games in 1Q, I think the 19 billion number bodes well for a mobile game recovery into 2019.”

Cloud sales more than doubled to 9.1 billion yuan as Tencent’s heavy investment in the sector opens up yet another front in its battle with Alibaba, the leader in China.

WeChat, China’s dominant messaging and social network app, saw monthly active users rise to 1.1 billion, while the mobile version of QQ had 699.8 million users at the end of the quarter.

Tencent is also shaking up its management ranks with Lau confirming the company has put 10% of its executives on notice with poor performers to be weeded out to bring in new blood. — Bloomberg