Confined consumers boost Tencent earnings as gaming, social media units profit

Tencent, the world's largest game developer and owner of China's No. 1 social media outfit, has benefited from and been buffeted by the COVID-19 pandemic. In the quarter-ended March 31, its gaming and social media businesses grew thanks to hundreds of millions of confined consumers, but its media advertising unit took a knock from deep cuts in marketing budgets made by organisations looking to weather this virus-induced slowdown.

The owner of WeChat and popular games such as PubG and Honor of Kings reported a net profit of 28.9 billion yuan (US$4.07 billion) in March, compared to 27.2 billion yuan ($3.83 billion) in the corresponding quarter a year ago. This growth, the company said, was mainly due to revenue for its value-added services (VAS)—online and mobile games—which grew 27% to 62.4 billion yuan ($8.79 billion). Overall revenue increased 26% year-on-year from 85.5 billion yuan ($12.05 billion) to 108.1 billion yuan ($15.23 billion).

"Our businesses have proved resilient and cash flow generative," Pony Ma, chairman and CEO of Tencent, told analysts on a post-results conference call. "Our platforms and short ads have never been more relevant for users based at home." 

Tencent’s online advertising business stayed strong, with revenue increasing 32% to 17.7 billion yuan ($2.49 billion). Social and other advertising revenue grew 47% to 14.6 billion yuan ($2.06 billion), driven by mobile advertising network and Weixin Moments, with combined monthly active users on WeChat and Weixin up over 8% to 1.2 billion.

However, despite these gains, this quarter's earnings also showed that Tencent wasn't entirely immune to the vagaries of the ongoing epidemic. Its media advertising business declined 10% to 3.1 billion yuan ($436.8 million), due to shrinking revenue from its video and news platforms, with multinational brands cutting their adspend. 

According to company executives, VAS represented 58% of total revenue within which online games was 35% and social networks was 23%. FinTech and business services represented 25% of total revenue and online advertising represented 16% of total revenue.

"We expect the overall China online advertising industry to experience industry wide headwinds, including first, consumers normalising down the time spent online, second online services advertisers adjusting their customer acquisition budgets as they reflect revised customer lifetime value assumptions, and third, multinational brands reducing their spending significantly as they face the pandemic in their own markets," James Mitchell, senior executive vice president and chief strategy officer, Tencent, told analysts.