Tencent Holdings Ltd posted a quarterly profit that exceeded estimates, bolstered by mobile game blockbusters like PlayerUnknown’s Battlegrounds as users on China’s most popular social network surpassed a billion for the first time.
Tencent posted a 61% jump in net income to 23.3 billion yuan ($3.7 billion) in the three months ended March, outstripping the 17.4 billion-yuan average projection. That was buoyed by a one-time gain of almost 7.6 billion yuan as the value of investments in arenas from video streaming to news content rose.
China’s largest social network and gaming company defied fears that outsized spending would hammer margins. The owner of the giant WeChat messaging platform opened its wallet to sustain growth as PC gaming slows, investing in cloud computing, entertainment and physical retail to lock horns with Alibaba Group Holding Ltd.
It’s also secured Chinese distribution rights to some of the world’s hottest games, including shooters PUBG and Fortnite, adapting some into mobile titles to draw in users on smartphones.
“Mobile game growth was very strong, as the first quarter is usually a good season when users spend more time on their devices during the holidays,” said Benjamin Wu, a Shanghai-based analyst with Pacific Epoch. “Honour of Kings was a major contributor for mobile gaming revenue.”
Revenue rose 48% to 73.5 billion yuan, also surpassing estimates for 70.8 billion yuan. But adjusted earnings-per-share, which strips out one-time items, came to 1.92 yuan, missing the 1.94 yuan average estimate.
Shares of Tencent were largely unchanged in Hong Kong before earnings were announced. The stock has fallen 2.4% this year, compared with a 14% rise for New York-listed Alibaba. Shares in Naspers Ltd, which as Tencent’s top shareholder is often regarded as a proxy for the Chinese firm, rose 2.6% in early Wednesday trade.
Tencent continues to draw the lion’s share of its business from gaming, while counting on advertising and finance via WeChat to drive future growth. Revenue from Value Added Services, which includes online games and messaging, rose 34% to 46.9 billion yuan.
The company has however been leery of barraging its users with ads — on Wednesday, it declared that it had raised the maximum number of ads that customers see on WeChat Moments, a function similar to Facebook’s newsfeed, to just two a day, from one previously.
Honour of Kings continues to be a core source of earnings. Developed by Tencent’s own studio, the mobile title resembles the world’s most popular desktop title League of Legends, whose developer was acquired by Tencent in 2015. Anchored by its marquee title, the smartphone games business yielded 68% growth in the quarter.
But overall costs surged 51%. Tencent executives have signaled a willingness to sacrifice margins in favor of longer term growth in new businesses, though that would depend on growing and engaging a massive user base now primarily confined to China. WeChat had 1.04 billion monthly active users while the mobile version of QQ — the older of its two social networks — saw users drop 6.4% to 805.5 million at the end of the quarter.
“We expect Tencent to consolidate both the PC and mobile games markets,” Alex Yao, a Hong Kong-based analyst at JPMorgan Chase & Co., said in a report. “Tencent’s strength in mobile games market also comes from its equity relationship with leading global developers.”