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Tencent Q3 profit misses forecasts, expenses offset revenue surge

Brent Lewin | Bloomberg | Getty Images

Tencent, China's biggest social network and online entertainment firm, posted a lower-than-expected rise in its quarterly profit as expenses for media content and advertising took a bite out of its strong revenue growth.

Net income for the three months ended September was 10.6 billion yuan ($1.54 billion), up 43 percent from 7.4 billion yuan a year go, helped by strong growth in Tencent's smartphone gaming business, the company reported on Wednesday.

The market had been expecting a 55 percent jump in profits to 11.5 billion yuan, a Thomson Reuters poll of nine analysts shows, but a 69 percent spike in Tencent's cost of revenues to 18.56 billion yuan dragged results lower.

Tencent, which has a market capitalization of $236 billion, has long depended on online gaming for its revenues. However, now it is investing heavily in less mature and currently less profitable ventures like advertising and online entertainment, racking up costs in the process.

For advertising, costs surged 88 percent to 4.75 billion yuan, undermining strong revenue growth for Tencent.

The firm reported a total quarterly revenue of 40.39 billion yuan, up 52 percent from a year ago and beating forecasts of 39.03 billion yuan from 13 analysts polled by Thomson Reuters.

Smartphone games were crucial to that jump, posting an 87 percent year-on-year growth to hit roughly 9.9 billion yuan of revenues in the quarter.

Underscoring a continued focus on the lucrative business, Tencent agreed in June to buy one of smartphone gaming's champions, Supercell, the Finnish maker of hit game "Clash of Clans" for $8.6 billion.

The company is looking to capitalize on its dominance of smartphones with its WeChat social network in China and wring cash from the app much like Facebook does.

The Chinese and overseas versions of WeChat together have 846 million monthly active users, up 30 percent from a year ago, Tencent said on Wednesday.

Shares of the company have gained about 30 percent so far this year, versus the wider Hang Seng Index that has added about 2 percent over the period.