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Tencent (TCEHY) Q1 Earnings Top Estimates, Revenues Rise Y/Y

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Tencent Holdings (TCEHY - Free Report) reported first-quarter 2020 non-GAAP earnings of 40 cents per share that beat the Zacks Consensus Estimate by 14.3%.

Also, revenues of $15.25 billion beat the consensus mark by 7.5%.

In local currency, non-IFRS (formerly referred to as non-GAAP) earnings were RMB2.817 per share, up 28.8% year over year.

Revenues of RMB108.06 billion increased 26% from the year-ago quarter, driven by steady performance of wealth management and other FinTech services, smart phone games, as well as social and others advertising.

Top-Line Details

Value Added Services (“VAS”) revenues (57.8% of total revenues) rose 27.5% year over year to RMB62.42 billion.

The increase primarily reflected revenue contributions from domestic smart phone games such as Peacekeeper Elite and Honour of Kings, as well as increased contributions from overseas titles including PUBG Mobile and Clash of Clans, partly offset by lower revenues from PC client games such as DnF.

The growth was backed by a 23% rise in Social networks revenues that totaled RMB25.13 billion. Social networks benefited from greater contributions from in-game virtual item sales as well as digital content services including music streaming and video streaming subscriptions.

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

Online games revenues grew 30.8% from the prior-year quarter to RMB37.3 billion. Total smart phone games revenues (including smart phone games revenues attributable to our social networks business) grew 64% year over year to RMB34.75 million driven by more playing time in the company’s franchises.

The company’s upgraded game engine for Honor of Kings enhanced audio and visual quality for in-game items, and a new location-based teamplay system encouraged more user interactions.

Peacekeeper Elite ran a successful collaboration with Rocket Girls 101 (an idol girl group managed by Tencent, which emerged from our popular variety show), driving user engagement to a new high and demonstrating cross-IP synergy within Tencent.

Internationally, user base expanded, courtesy of PUBG MOBILE. Brawl Stars’ optimized player-matching algorithm, which enhanced user experience.

Moreover, Riot Games released a Teamfight Tactics mobile app, contributing to higher user retention and extended playing time for the League of Legends franchise.

PC client games revenues were RMB11.8 billion, declining 15% from the year-ago quarter due to temporary closure of Internet cafes and soft DnF performance.

FinTech and Business Services revenues (24.5% of total revenues) grew 21.5% year over year to RMB26.5 billion. This upside was driven by robust revenues from wealth management and lending services.

Online advertising revenues (16.4% of total revenues) were up 32.4% from the year-ago quarter to RMB17.7 billion. Social and other advertising revenues grew 46.4% year over year to RMB14.6 billion, driven by increases in advertisement impressions, particularly for Moments.

Mobile advertising network revenues expanded on more traffic and higher eCPMs as video advertisements represented over one-third of advertisement impressions.

However, media ad revenues decreased 10.3% year over year to RMB3.1 billion, as sponsorship advertising revenues declined year-on-year due to budget cuts, delays in variety shows and suspension of NBA games as a result of coronavirus outbreak.

Others revenues (1.3% of total revenues) increased 9.3% year over year to RMB1.4 billion. Project deployment and new accounts acquisition for cloud business were delayed due to the pandemic. However, Tencent Meeting achieved breakout success and became a leading video conference app in China.

Moreover, WeChat Work enhanced its industry solutions and deepened integration with Weixin, helping the company to sign up more key accounts, especially in the retail, education and public sectors, and driving its daily average users (DAUs).

User Base Details

In first-quarter 2020, combined MAU of Weixin and WeChat increased 8.2% year over year to 1.2 billion. Smart device MAU of QQ declined 1% to 693.5 million.

Fee-based VAS subscriptions grew 19.3% year over year to 197.4 million. Tencent Video subscriptions were 112 million, up 26% year over year, benefiting from joint membership promotions with partners. Music subscriptions increased 50% year over year to 43 million, driven by expanded paid content library.

Tencent Video DAU and traffic grew with the release of popular self-commissioned Chinese anime and drama series, such as The Land of Warriors Season 3 and Sansheng Sanshi Pillow.

Operating Details

Gross profit was up 32.6% year over year to RMB52.8 billion. Gross margin expanded 230 basis points (bps) on a year-over-year basis to 48.9%.

Selling and marketing expenses increased 66.1% year over year to RMB7 billion. Meanwhile, general and administrative expenses increased 24.9% year over year to RMB14.2 billion.

Adjusted EBITDA increased 26.9% year over year to RMB45.2 billion. Moreover, adjusted EBITDA margin expanded 20 bps on a year-over-year basis to 41.8%.

Non-GAAP operating profit grew 34% year over year to RMB35.57 billion. Additionally, operating margin remained flat year over year at 33%.

Balance Sheet & Cash Flow

As of Mar 31, 2020, cash and cash equivalents of the company were RMB135.27 billion compared with RMB132.99 billion on Dec 31, 2019.

As of Mar 31, 2020, net debt was RMB5.71 billion compared with RMB15.55 billion on Dec 31, 2019.

Free cash flow increased 133% year over year to RMB39.2 billion.

Zacks Rank and Stocks to Consider

Currently, Tencent has a Zacks Rank #3 (Hold).

NVIDIA Corporation (NVDA - Free Report) , Workday Inc. (WDAY - Free Report) and Okta Inc. (OKTA - Free Report) are some better-ranked stocks in the broader computer and technology sector. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NVIDIA, Workday and Okta are set to report quarterly results on May 21, 26 and 28, respectively.

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