Chinese online giant Tencent Holdings reported first-quarter earnings on Wednesday. The results came in better than analyst expectations, thanks to a strong performance in gaming and the resilience of its advertising business.
For the first quarter of 2020, Tencent (ticker: 0700.Hong Kong) grew its revenue by 26% year over year to 108 billion Chinese yuan ($15.3 billion), better than the 101 billion yuan expected by analysts polled by FactSet. Earnings attributable to stockholders hit 28.9 billion yuan, up 6% from the year-ago period. Diluted earnings came in at 2.99 yuan per share, beating analysts’ consensus expectations for 2.35 yuan.
Tencent Chairman and CEO Ma Huateng noted that the company’s businesses have so far proved “resilient and cash flow-generative” amid the Covid-19 pandemic, which has enabled the company to increase its investments in technology and donate money to pandemic relief initiatives in China and abroad.
Gaming was a bright spot for the March quarter, as the coronavirus-induced lockdown allowed users more free time at home. Online games revenue grew 31% year over year to 37.3 billion yuan, while smartphone game revenue expanded 64% from a year ago to 34.8 billion yuan.
Still, PC gaming revenue fell around 17% to 11.8 billion yuan, partially due to the temporary closure of internet cafes amid the pandemic. Social-network revenue rose 23% to reach 25.1 billion yuan, primarily driven by in-game virtual-item sales as well as digital content services, including music-streaming and video-streaming subscriptions.
“Games serve important roles in keeping players entertained and connected, especially during the stay-at-home period,” the company said in a statement, “For mobile games, our studios released attractive content and our publishing teams ran compelling in-game events and activities, resulting in higher DAU [daily active users].”
Analysts were expecting slowing growth in the advertising business amid the weak backdrop of Chinese economy and Covid-19 disruptions such as suspension of events and reduced marketing budgets. Still, Tencent reported 32% year-over-year growth in ad revenue, which hit 17.7 billion yuan in the first quarter, much stronger than the 19% growth seen in the fourth quarter of 2019.
While media advertising revenue from video and news platforms decreased by 10%, social-advertising revenue grew by a whopping 47% to 14.6 billion yuan, mainly driven by Tencent’s mobile advertising network and the social media part of its WeChat messaging app called Moments.
“Our online advertising revenue grew year-over-year, reflecting increased consumer time spent on our key apps during the stay-at-home period and the attractive ROIs [return on investments] we delivered to advertisers,” the company said.
Revenue from Tencent’s fintech and business-services division, which includes wealth management, cloud computing, and payment products such as WeChat Pay, also increased by 22% year over year, to 26.5 billion yuan.
Revenue of fintech services decreased from the previous quarter as “payment activities, especially offline transactions, and cash withdrawals reduced during the Chinese New Year and stay-at-home period,” Tencent noted. Still, the company managed to keep margins stable as the higher-margin revenue streams such as wealth management and lending continued to grow while marketing and subsidy expenses were cut.
For the cloud business, project deployment and new-accounts acquisition were delayed due to the pandemic, causing a sequential decline in revenue. But Tencent reported that its videoconference app Tencent Meeting has grasped this opportunity to become an industry leader in China.
Looking forward, Tencent expects game playing time and in-game consumption activities to largely normalize as people return to work, but sees some headwinds for the online advertising industry, noting that consumers might spend less time online, while advertisers and global brands might sharply reduce their customer acquisition efforts and marketing budgets.
Tencent’s American depositary receipts (TCEHY) rose 5.4% in recent trading, to $58.35, and are up 21% year to date. The S&P 500 is down 12% in 2020.
Write to Evie Liu at evie.liu@barrons.com
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