Games and Advertising Lift Tencent to Record First Quarter Profit

Frost & Sullivan’s Ajay Sunder weighs in on Tencent’s record quarterly profit

That marks a 68 percent increase year-over-year and a 28 increase over last quarter, something that Tencent attributes to its games Honour of Kings and new release QQ Speed Mobile, as well as engagement boosts from seasonal in-game promotions.

Value added services businesses expanded their revenues by 34%, games by 26% and advertising by 55%, year-on-year, the company said. Their parent company Tencent first became China's largest tech company in terms of market capitalization in 2016, and is now going back and forth with e-commerce behemoth Alibaba in the race for this title.

Tencent still looks to expand its PC game presence in the future, however, partially through releasing a version of the battle royale PlayerUnknown's Battlegrounds in China, a game that is now pending government approval. Revenue reached 73.52 billion yuan equal to $11.5 billion compared to expectations on Wall Street of 72.04 billion yuan.

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

Games and Advertising Lift Tencent to Record First Quarter Profit
Games and Advertising Lift Tencent to Record First Quarter Profit

The game has gone viral and has over 40 million monthly active users across PC and consoles. Developed by Tencent's own studio, the mobile title resembles the popular desktop title League of Legends, whose developer was acquired by Tencent in 2015. It is also on mobile too. (Fortnite is due to launch in China imminently).

Tencent surged after delivering record profit that topped analyst estimates, calming investors who'd braced for a big hit to margins. That's still not cheap: But investors can now expect a return to the good old days of Tencent's shares heading ever higher.

The gross profit margin in the quarter was more than 50 percent, higher than the 47 percent expected by analysts. But in the three months ended March 31, Tencent manage to raise its operating margin by 8 percent quarter-on-quarter. Capex jumped 200 percent to CNY 6.318 billion. 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. The Chinese giant said that mobile daily video views were up over 60 percent year-on-year in the first quarter. While WeChat has just passed the billion-user mark and is trailing the world's largest social network by more than a billion users, the company's financial results are almost on par with Facebook's.

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