Tencent gets a 1-up on estimates with smartphone gaming boost

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Tencent's dominance of smartphones in China, especially in mobile gaming, helped the social network and online entertainment behemoth rack up a 47 percent jump in second-quarter profit, comfortably beating analysts' estimates.

Net income for the quarter ended June rose to 10.9 billion yuan ($1.64 billion), outpacing estimates of 9.8 billion yuan, according to a Thomson Reuters poll of nine analysts.

That was driven by a 52 percent leap in revenue, the fastest pace since the fourth quarter of 2012, to 35.7 billion yuan ($5.38 billion), trumping an average forecast of 33.2 billion yuan, based on a Thomson Reuters poll of 11 analysts.

For Tencent, the biggest driver of its revenue growth in the quarter came from smartphone gaming. The company has for many years been strong in gaming, its main cash cow. Marrying that with its position as the dominant social network operator in China — via mobile messaging app WeChat and QQ — for both computers and mobile is paying off.

However, the company's efforts to grow are also taking a toll, as the cost of revenues rose 69 percent to 15.24 billion yuan. Tencent did not break these costs down in its results announcement.

The costs contributed to a dip in operating margins from 44 percent to 41 percent.

A marquee purchase for the Chinese tech stalwart was its $8.6 billion acquisition in June of Supercell, the maker of mobile gaming megahit 'Clash of Clans'.

The purchase will expand Tencent's interests overseas, as the Chinese video game and social network group still relies mainly on its home market even though it has stakes in various foreign studios like Epic Games and Riot Games.

The firm also bolstered in July its position in online entertainment, taking a majority stake in a new venture with leading music-streaming company China Music Corp., which combines the two firms' digital music businesses.

In the second quarter, Tencent's online advertising business, which investors hope can grow to become as important a source of revenues as Facebook's, grew 60 percent from the previous year to 6.53 billion yuan.

Overall online games revenues rose 32 percent year-on-year to 17.12 billion yuan, and social network revenues climbed 57 percent to 8.56 billion yuan.

The number of monthly active users of WeChat, China's biggest mobile messaging app, rose 34 percent to 806 million, Tencent said.