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Tencent (TCEHY) Q3 Earnings Miss Estimates, Revenues Up Y/Y

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Tencent Holdings (TCEHY - Free Report) reported third-quarter 2019 non-GAAP earnings of 36 cents per share, which lagged the Zacks Consensus Estimate by a couple of cents.

Also, revenues of $13.75 billion lagged the consensus mark of $13.86 billion.

In local currency, non-IFRS (formerly referred to as non-GAAP) earnings were RMB2.548 per share, up 24% year over year. Revenues of RMB97.24 billion also increased 21% from the year-ago quarter, driven by robust performance of commercial payment and other FinTech services, smart phone games, as well as social and others advertising.

Following third-quarter results, its shares were down 3.47%. Notably, Tencent has returned 3.2% year to date compared with the industry’s growth of 7.3%.

Top-Line Details

Value Added Services (“VAS”) revenues (52% of total revenues) rose 15% year over year to RMB50.63 billion. The growth was backed by a 21% rise in Social networks revenues that totaled RMB22.03 billion.

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

Online games revenues grew 11% from the prior-year quarter to RMB28.6 billion. Smartphone games revenues (including those attributable to the company’s social networks business) were RMB24.3 billion, up 25% year over year.

Revenues from Honour of Kings also increased year over year. Perfect World Mobile, a licensed RPG launched in March, contributed substantially to the top line.

Notably, Peacekeeper Elite — launched in May — contributed to cash receipts in the third quarter. However, it is still in the early stage of deferred revenue recognition.

Internationally, user base expanded, courtesy of PUBG MOBILE (which doubled its MAU year over year) and the Call of Duty Mobile game that exceeded 100 million downloads within a month of its launch.

PC client games revenues were RMB11.5 billion, declining 7% from the year-ago quarter.

FinTech and Business Services revenues (27.5% of total revenues) surged 36% year over year to RMB26.76 billion. This upside was driven by robust revenues from commercial payment and cloud services.

Online advertising revenues (18.8% of total revenues) were up 13% from the year-ago quarter to RMB18.4 billion. Social and other advertising revenues grew 32% year over year to RMB14.7billion, courtesy of strong advertiser demand from the games, education, and eCommerce verticals.

However, media ad revenues decreased 28% year over year to RMB3.7 billion, primarily due to uncertain content scheduling and lower sponsorship advertising revenues.

Others revenues (1.7% of total revenues) jumped 144.7% year over year to RMB1.48 billion.

User Base Details

In third-quarter 2019, combined MAU of Weixin and WeChat increased 6% year over year to 1.15 billion. Smart device MAU of QQ declined 6% to 653.4 million.

Fee-based VAS subscriptions grew 11% year over year to 170.6 million. Tencent Video subscriptions were 100.2 million, up 22% year over year, benefiting from joint membership promotions with partners. Music subscriptions also increased 42% year over year to 35.4 million, driven by expanded paid content library.

Tencent Holding Ltd. Price, Consensus and EPS Surprise

 

Operating Details

Gross profit was up 19.7% year over year to RMB42.48 billion. However, gross margin remained flat on a year-over-year basis to 44%.

Selling and marketing expenses declined 12.9% year over year to RMB5.72 billion. However, general and administrative expenses increased 24.3% year over year to RMB13.54 billion.

Adjusted EBITDA increased 28.9% year over year to RMB38.12 billion. Moreover, adjusted EBITDA margin expanded 200 bps on a year-over-year basis to 39%.

Non-GAAP operating profit grew 27% year over year to RMB28.54 billion. Additionally, operating margin expanded 100 bps to 29%.

Balance Sheet & Cash Flow

As of Sep 30, 2019, cash and cash equivalents of the company were RMB145.61 billion compared with RMB122.84 billion on Jun 30, 2019.

As of Sep 30, 2019, net debt was RMB7.17 billion compared with RMB15.77 billion on Jun 30, 2019.

Free cash flow increased 36% year over year to RMB37.73 billion.

Zacks Rank and Stocks to Consider

Currently, Tencent has a Zacks Rank #4 (Sell). Some better-ranked stocks in the broader technology sector include Stamps.com Inc. (STMP - Free Report) , Advantest Corp. (ATEYY - Free Report) and AMETEK, Inc. (AME - Free Report) . While Stamps.com and Advantest sport a Zacks Rank #1 (Strong Buy), AMETEK carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Stamps.com, Advantest and AMETEK is currently projected at 15%, 15.5% and 10.91%, respectively.

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