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Tencent (TCEHY) Q1 Earnings & Revenues Fall Shy of Estimates

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Tencent Holdings (TCEHY - Free Report) reported first-quarter 2019 non-GAAP earnings of 32 cents per share that missed the Zacks Consensus Estimate by a penny.

In local currency, non-GAAP earnings were RMB2.187 per share.

Also, revenues of $12.66 billion lagged the consensus mark of $13.19 billion.

In local currency, revenues of RMB85.47 billion increased 16.2% from the year-ago quarter, driven by a robust performance from commercial payment services and other FinTech services, social advertising and digital content services.

Top-Line Details

Value Added Services (VAS) revenues (57.3% of total revenues) rose 4.5% year over year to RMB48.97 billion. This growth was backed by a 25% jump in the Social networks revenues that totaled RMB20.46 billion.

Tencent Holding Ltd. Price, Consensus and EPS Surprise

Tencent Holding Ltd. Price, Consensus and EPS Surprise

Tencent Holding Ltd. price-consensus-eps-surprise-chart | Tencent Holding Ltd. Quote


Social networks benefited from growth in digital content revenues, owing to video streaming subscriptions and live broadcast services.

Moreover, online games revenues dipped 1% to RMB28.51 billion. However, cash receipts for the company’s games business improved 10% year over year.

Smart phone games revenues (including smart phone games revenues attributable to the company’s social networks business) were RMB21.2 billion, down 2% due to fewer new games releases.

PC client games revenues were RMB13.8 billion, slipping 2% from the year-ago quarter.

FinTech and Business Services revenues (25.5% of total revenues) surged 43.5% year over year to RMB21.79 billion. This upside was driven by robust revenues from commercial payment and cloud services.

Commercial payment volume expanded year over year, boosted by more transactions per user. Moreover, monthly active merchants accepting the company’s mobile payments services more than doubled on a year-over-year basis.

Tencent’s cloud revenues grew on a year-over-year basis, banking on stronger paying customer base.

Online advertising revenues (15.7% of total revenues) were up 25.1% to RMB13.38 billion. Social and other advertising revenues increased 34% year over year to RMB9.89 billion, courtesy of ad revenue growth from QQ KanDian, Weixin Moments and Mini Programs.

Additionally, media ad revenues climbed 5% year over year to RMB3.48 billion owing to growth from Tencent news service.

Others (1.6% of total revenues) jumped 69.9% year over year to RMB1.33 billion.

User Base Details

In first-quarter 2019, combined MAU of Weixin and WeChat increased 6.9% year over year to 1.112 billion.

Smart device MAU of QQ inched up 0.9% and exceeded 700 million. Young user MAU grew by a double-digit rate from the year-ago quarter.

During the quarter, Tencent launched the mobile QQ Version 8.0 with engaging features, such as QQ Mini Programs and KuoLie. The company also enhanced features of Weixin.

Fee-based VAS subscriptions increased 13% year over year to 165.5 million. Tencent Video subscriptions increased 43% to 89 million, driven by content strength.

Daily video views for Tencent Video grew rapidly on a year-over-year basis due to the popularity of short videos distributed through the Tencent Video app.

In Mainland China, total DAU of Tencent’s smart phone game portfolio increased year over year. Honour of Kings released a content update in January that enhanced user engagement, thereby driving year-over-year growth in paying users and revenues.

Last reported quarter, the company launched Perfect World Mobile that became one of the top-grossing smart phone games in China and increased total DAU for Tencent’s RPG portfolio. However, being a late release, the mobile game modestly contributed to quarterly revenues.

Internationally (excluding Mainland China), PUBG MOBILE has exceeded 100 million MAUs since February, according to App Annie. The company released the new Royale Pass in March, driving the game’s revenue growth.

Operating Details

Gross profit was up 7.5% year over year to RMB39.82 billion. However, gross margin contracted 380 basis points (bps) on a year-over-year basis to 46.6%.

Selling and marketing expenses declined 23.8% year over year to RMB4.24 billion. However, general and administrative expenses increased 20.2% year over year to RMB11.33 billion.

Adjusted EBITDA increased 15.4% year over year to RMB35.6 billion. However, adjusted EBITDA margin shrank 30 bps on a year-over-year basis to 41.7%.

Non-GAAP operating profit increased 12.7% year over year to RMB28.47 billion. However, operating margin contracted 110 bps to 33.3%.

Balance Sheet & Cash Flow

Tencent exited the quarter with cash and cash equivalents of RMB109.69 billion compared with RMB97.81 billion as of Dec 31, 2018.

As of Mar 31, 2019, net debt position totalled RMB9.59 billion. Free cash flow soared 72% year over year to RMB23.93 billion.

Zacks Rank & Stocks to Consider

Currently, Tencent carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader computer & technology sector are j2 Global (JCOM - Free Report) , Match Group (MTCH - Free Report) and The Trade Desk (TTD - Free Report) , all three sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for j2 Global, Match Group and The Trade Desk is 8%, 15.15% and 20%, respectively.

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