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Tencent (TCEHY) Q2 Earnings Beat Estimates, Revenues Up Y/Y

Zacks Equity Research

Tencent Holdings TCEHY reported second-quarter 2019 non-GAAP earnings of 36 cents per share that beat the Zacks Consensus Estimate by a penny.

However, revenues of $12.92 billion lagged the consensus mark of $13.28 billion.

In local currency, non-GAAP earnings were RMB2.456 per share. Revenues of RMB88.82 billion increased 20.6% from the year-ago quarter, driven by a robust performance from FinTech and Business services, online advertising, and digital content services.

Shares closed at $41.78 on Aug 15, up 0.72%. Notably, Tencent has returned 5.9% year to date against the industry’s decline of 1.1%.

Year-to-date Performance



Top-Line Details

Value Added Services (VAS) revenues (54.1% of total revenues) rose 14.3% year over year to RMB48.08 billion. The growth was backed by a 23% rise in the Social networks revenues that totaled RMB20.77 billion.

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

Moreover, online games revenues grew 8% to RMB27.31 billion. Smartphone games revenues (including smartphone games revenues attributable to the company’s social networks business) were RMB22.2 billion, up 26% year over year.

During the reported quarter, Tencent released 10 games compared with only one game in first-quarter 2019.

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

Notably, Peacekeeper Elite exceeded 50 million DAU since its launch in May and begun monetization with a successful season pass offering.

In July, Tencent released three smartphone games, including racing game KartRider Rush , strategy game Game of Thrones: Winter is Coming and RPG Dragon Raja .

Internationally, user base expanded, courtesy of PUBG MOBILE (which has exceeded 50 million DAU) and new games such as Speed Drifter (the international version of QQ Speed) and Chess Rush .

PC client games revenues were RMB11.7 billion, declining 9% from the year-ago quarter.

FinTech and Business Services revenues (25.8% of total revenues) surged 37.3% year over year to RMB21.79 billion. This upside was driven by robust revenues from commercial payment and cloud services.

Tencent’s wealth management platform, LiCaiTong, grew its aggregated customer assets to more than RMB800 billion as of the end of the second quarter.

Online advertising revenues (18.5% of total revenues) were up 16.3% to RMB16.41 billion. Social and other advertising revenues grew 28% year over year to RMB12 billion, courtesy of ad revenue growth from QQ KanDian and Weixin Moments.

However, media ad revenues decreased 7% year over year to RMB4.40 billion, primarily due to lower contributions from Tencent’s media platforms. Delay in airing of certain top-tier drama series and the absence of the FIFA World Cup this year resulted in less sponsorship advertising revenues.

Others revenues (1.6% of total revenues) jumped 74% year over year to RMB1.44 billion.

User Base Details

In second-quarter 2019, combined MAU of Weixin and WeChat increased 7.1% year over year to 1.13 billion. Smart device MAU of QQ declined 0.3% to 706.7 million.

During the quarter, Tencent launched the mobile QQ Version 9.0 with engaging features. The company also introduced QQ Mini Programs.

Fee-based VAS subscriptions grew 9.7% year over year to 168.9 million. Tencent Video subscriptions were 96.9 million, up 30% year over year, benefiting from joint membership promotions with partners and popular self-commissioned Chinese anime series, The Land of Warriors Season 2 .

Recently, Tencent announced a five-year partnership extension with the NBA that involves developing basketball-related smartphone games and eSports events.

Operating Details

Gross profit was up 13.6% year over year to RMB39.13 billion. However, gross margin contracted 270 basis points (bps) on a year-over-year basis to 44.1%.

Selling and marketing expenses declined 25.8% year over year to RMB4.72 billion. However, general and administrative expenses increased 27.6% year over year to RMB12.58 billion.

Adjusted EBITDA increased 24.7% year over year to RMB35.10 billion. Moreover, adjusted EBITDA margin expanded 130 bps on a year-over-year basis to 39.5%.

Non-GAAP operating profit grew 22.6% year over year to RMB27.28 billion. Additionally, operating margin expanded 50 bps to 30.7%.

Balance Sheet & Cash Flow

As of Jun 30, 2019, cash and cash equivalents of the company were RMB122.84 billion compared with RMB109.69 billion as of Mar 31, 2019.

As of Jun 30, 2019, net debt was RMB15.77 billion compared with RMB9.59 billion as of Mar 31, 2019.

Free cash flow increased 27% year over year to RMB20.70 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 Alphabet GOOGL, Agilent A and Microsoft MSFT, all three carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .

Long-term earnings growth rate for Alphabet, Agilent and Microsoft is 17.5%, 11.8% and 11%, respectively.

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