Tencent profit up 61 percent as booming games business drives first quarter earnings

Key Points
  • Tencent first quarter net profit came in at 23.29 billion yuan versus an estimate of 17.5 billion yuan.
  • Revenues totaled 73.53 billion yuan, a 48 percent year-on-year rise.
  • "Fortnite" and "PlayerUnknown's Battlegrounds" helped boost revenues at its gaming business.
  • WeChat monthly active users hit over 1 billion for the first time.
Tencent's headquarters in Shenzhen, China, pictured in August 2016.
Bloomberg | Getty Images

Tencent reported first quarter earnings on Wednesday that beat market expectations, fueled by its booming gaming business.

Shares in Asia's second-most valuable public company were under pressure coming into the earnings report, with investors fearing potentially lower margins and increasing costs.

But the Chinese technology giant dispelled those fears. Here's how it did:

  • Revenues totaled 73.53 billion yuan ($11.5 billion) versus a Thomson Reuters estimate of 71.04 billion yuan. Revenues were up 48 percent year-on-year.
  • Net profit came in at 23.29 billion yuan versus an estimate of 17.5 billion yuan. That represented a 61 percent year-on-year rise.
  • Operating margin rose to 42 percent from 39 percent in the first quarter of last year.

Tencent has a number of different business areas, including advertising and gaming, and is the owner of China's largest messaging app, WeChat.

The gaming business boosted Tencent's revenues in the quarter. Smartphone games revenues alone were up 68 percent year-on-year to 21.7 billion yuan, thanks to titles such as "Honour of Kings." Tencent said that there was "double digit growth" in terms of daily active users for the game.

What is Tencent?
What is Tencent?

PC games revenues were flat year-on-year, but analysts said that there were tough comparisons with the first quarter of 2017, and overall the games business was in good shape.

"The most important thing is the halo effect coming through in gaming," Neil Campling, co-head of the global thematic group at Mirabaud Securities, told CNBC by phone on Wednesday.

The broader online game business was driven by two major hit games. The first is called "PlayerUnknown's Battlegrounds" or PUBG, which is a massive multiplayer online game. Tencent has the rights to run the game in China but said that it is "yet to be monetized," highlighting the potential future of the title.

"Fortnite" is the second game driving Tencent's strong quarter. It's a tournament-style game that is popular in e-sports, which is competitive video gaming. "Fortnite" was developed by Epic Games, a company that Tencent has a large stake in.

The game has gone viral and has over 40 million monthly active users across PC and consoles. It is also on mobile too. Currently unavailable in China, it will be launched in the country within the next few months.

"What you are seeing is the 'Fortnite' effect, bringing lots of new gamers into e-gaming arena," Campling said.

Margin improvement

Tencent shares have been under pressure and are down around 17 percent from the record high seen in January. Earnings reported in the fourth quarter of 2017 underwhelmed investors and concerns were rising that spending increases could hit margins.

In the fourth quarter of 2017, the operating margin actually fell. But in the three months ended March 31, Tencent manage to raise its operating margin by 8 percent quarter-on-quarter. That's despite the company reporting that capital expenditure in the quarter was up 200 percent to 6.3 billion yuan.

Video streaming, advertising growth

Tencent's other earnings drivers included its video subscription service, which is similar to Netflix. The Chinese giant said that mobile daily video views were up over 60 percent year-on-year in the first quarter. Total video revenues were 75 percent higher. The company's investment in original content helped drive paid video subscriptions up 85 percent on the year.

Online advertising was up 55 percent year-on-year in terms of revenues, which was helped by video ads.

Tencent also runs two messaging services. One is an instant messanger known as QQ and the other is called WeChat, similar to WhatsApp but with payments, games and other services integrated.

For the first time, WeChat's monthly active users passed 1 billion.