Tencent blows past estimates as WeChat, games drive growth

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Chinese social media and gaming giant Tencent Holdings clocked a better-than-expected 61 per cent jump in quarterly net profit and its first sequential gross margin rise in almost 3 years, driven by a jump in mobile gaming revenue and investment gains. Profit was up 61% over the same period one year ago.

Operating margin rose to 42 percent from 39 percent in the first quarter of a year ago. "Smartphone games revenues alone were up 68 percent year-on-year to 21.7 billion yuan, thanks to titles such as 'Honour of Kings'".

The gaming business boosted Tencent's revenues in the quarter.

In a statement accompanying the earnings report, Tencent Chairman and CEO Ma Huateng said, "In the first quarter of 2018, we launched the popular tactical tournament mobile games and enhanced the capabilities of widely-used services such as our Weixin Mini Programs, deepening engagement across our social, games and media platforms".

China's largest social network and gaming company defied fears that outsized spending would hammer profitability.

But overall costs surged 51 per cent. Tencent executives have signaled a willingness to sacrifice margins in favor of longer term growth in new businesses, though that would depend on growing and engaging a massive user base now primarily confined to China. Tencent has exclusive release rights for PUBG in China but says the game is "yet to be monetized", implying future additional revenue stream from the title. Since late March, the shares have seen a sharp reversal, losing about $87 billion in value to leave Tencent with a market capitalisation of about $480 billion. Now unavailable in China, it will be launched in the country within the next few months. PC-based games, meanwhile, took in sales of 14.1 billion RMB ($2.2 billion) to remain flat over the past 12 months. That's still not cheap: But investors can now expect a return to the good old days of Tencent's shares heading ever higher.

In the end, investors have a choice: Operating margin rose or operating margin fell.

Other earnings drivers for Tencent included a video subscription service that is similar to that of Netflix.

The drop was partly triggered by the company's warning in March that margins may be hurt by its plan to invest "aggressively" this year into areas including video content acquisition and payment subsidy.

In comparison, WhatsApp has 1.5bn monthly active users while 1.3bn people use Facebook Messenger.

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