Tencent: Tencent's 1Q20 financial report shows that social, gaming and enterprise services are in full swing during the pandemic

According to Tencent's 1Q20 financial report, the company's total revenue increased by 26% year-on-year and 2% month-on-month to 108 billion yuan, and its gross profit was 53 billion yuan, a year-on-year increase of 33% and a month-on-month increase of 15%. Non-IFRS operating profit was 36 billion yuan, a year-on-year increase of 25% and a month-on-month increase of 17%. Non-IFRS net profit was 27 billion yuan, a year-on-year increase of 39%.

Social and content platforms played a significant role during the epidemic, with the combined MAU of WeChat and Wechat increasing by 8% year-on-year to 1.2 billion. Users spent more time playing games, which further consolidated Tencent's leading position in games, while Tencent's games continued to make progress in international market expansion.

In terms of media business, with the broadcast of top content, video playback volume and membership number continued to increase. Benefiting from the content paywall strategy, music paid membership grew rapidly.

In terms of financial technology, the company is already the number one mobile payment platform in terms of daily active users and number of transactions.

In the field of cloud computing, the company is the second largest cloud service provider, with its market share increasing. In terms of tool products, the company maintains an industry-leading position in mobile security, mobile browsers and Android app stores.

The company's total revenue increased by 26% year-on-year, with value-added service revenue (VAS) accounting for 58%, of which games accounted for 35%, social networks accounted for 23%; financial technology and enterprise services accounted for 25%; and online advertising accounted for 16%.

The revenue from value-added services was RMB 2.4 billion, a year-on-year increase of 27% and a month-on-month increase of 19%.

• The year-on-year growth in social network revenue was mainly due to the growth in per-item revenue from sports and games; the total number of paid subscribers increased by 19% year-on-year to 197 million, mainly reflecting the rapid growth of video and music subscription members. The number of video subscription members increased by 26% year-on-year to 112 million, mainly benefiting from the popularity of self-produced dramas and the popularity of Chinese comics. The expansion of the music content library drove the year-on-year growth of paid subscription members to 43 million by 50%.
• Online game revenue increased by 31% year-on-year and 23% month-on-month to 43 billion yuan, benefiting from the increase in the number of paying users and the average amount of payment per person during the quarantine period. As users return to work, consumption will return to normal.
• Mobile game revenue increased by 64% year-on-year to 34.8 billion yuan, driven by Honor of Kings, Peace Elite and PUBG, as well as the merger of Supercell. PC client game revenue decreased by 15% year-on-year to 11.8 billion yuan due to the temporary closure of Internet cafes and the weak performance of DNF.

During the quarantine period, users increased their use of WeChat and QQ, with daily message volume and duration increasing by double digits year-on-year . The company has enhanced the functions of WeChat and QQ to facilitate use in specific scenarios, such as education and medical health.

WeChat’s penetration into offline scenarios has been further strengthened, with WeChat mini-programs exceeding 400 million daily active users.

Tencent Games played an important role in relieving users' worries and boredom and keeping them company, especially during the quarantine period. In terms of mobile games, Tencent launched attractive game content and the publishing team also held exciting in-game activities, which increased the number of daily active accounts.

Online advertising revenue was 17.7 billion yuan, up 32% year-on-year, mainly reflecting the growth of user traffic during the epidemic and the platform's ability to deliver good ROI to advertisers. By industry, games, online services and online education have increased year-on-year spending, but advertisers in the fast-moving consumer goods, automotive and tourism industries have reduced their spending due to the epidemic. Looking ahead, the company expects that China's overall online advertising will be affected by industry headwinds. The reasons include the return to normal user network time, budget adjustments by online service advertisers, and reduced spending by multinational brands.

Social and other advertising revenue increased by 47% year-on-year, benefiting from the increase in ad impressions, especially WeChat Moments. Mobile advertising alliances achieved double growth in traffic and CPM, and currently one-third of ad impressions are video ads.

Media advertising revenue was 3.1 billion yuan, down 10% year-on-year, due to advertiser budget cuts, delayed TV series broadcasts and the suspension of NBA basketball games. Information flow advertising revenue increased year-on-year and month-on-month, mainly due to the popularity of top TV series and the growing demand for credible news and information during the epidemic. The company expects media advertising revenue to be more challenging in the second quarter because international brands will reduce their budgets. Currently, international brands account for about half of video advertising. They are still affected by the epidemic globally and will reconsider their budgets, but domestic brand advertisers have returned to normal.

Fintech and enterprise service revenue was 26.5 billion yuan, up 22% year-on-year and down 12% month-on-month. The month-on-month decline in fintech revenue was mainly due to the reduction in commercial payments, especially offline payments during the epidemic and the Spring Festival. Fintech profits remained stable as high-margin wealth management and lending businesses continued to increase, coupled with a decrease in marketing and subsidy costs. The wealth management business achieved growth both year-on-year and month-on-month in the first quarter. Weilidai loan projects remain at a healthy level. Looking ahead, offline payments will rebound, and the average daily commercial transaction volume in April has now returned to the level at the end of 2019.

In terms of enterprise services , the epidemic delayed project deployment and new customer expansion, resulting in a month-on-month revenue decline. However, Tencent Meeting achieved outstanding results and became the most popular video conferencing application in China during the epidemic. WeChat for Business has enhanced its integration with WeChat, and its DAU has increased significantly. In the short term, enterprise services will be challenged, but in the long term, remote work will further accelerate digitalization.

Total revenue was RMB108,065 million, an increase of 26% from the first quarter of 2019 (“year-on-year”). According to IFRS:

– Operating profit was RMB37.26 billion (US$5.259 billion), up 1% year-on-year; operating profit margin decreased to 34% from 43% in the same period last year.

– Profits for the period were RMB 29.403 billion (US$4.150 billion), up 6% year-on-year; net profit margin decreased to 27% from 33% in the same period last year.

– Profit attributable to equity holders of the Company for the period was RMB28,896 million (US$4,078 million), up 6% year-on-year.

– Basic earnings per share were RMB3.049 and diluted earnings per share were RMB2.999.

On a non-IFRS basis , excluding the impact of certain one-off and non-cash items, the results of the core business are as follows:

– Operating profit was RMB35,575 million (US$5,021 million), up 25% year-on-year; operating profit margin was 33%, flat year-on-year.

– Profits for the period were RMB 27.984 billion (US$3.950 billion), up 29% year-on-year; net profit margin increased to 26% from 25% in the same period last year.

– Profit attributable to equity holders of the Company for the period was RMB27,079 million (US$3,822 million), up 29% year-on-year.

– Basic earnings per share were RMB2.858 and diluted earnings per share were RMB2.817.

Vas' gross profit margin was 59%, up 1.4 percentage points year-on-year and 8.9 percentage points month-on-month. The year-on-year increase was mainly due to the increase in the proportion of self-developed games with higher profits, and the month-on-month increase was mainly due to the increase in self-developed games, the increase in video paid members due to the epidemic and the increase in video business gross profit due to the decrease in content costs, as well as the decrease in e-sports events.

The gross profit margin of online advertising was 49.2%, up 7.3 percentage points year-on-year and down 5.1 percentage points month-on-month. The year-on-year growth reflects the lower content costs and improved operational efficiency of video advertising, while the month-on-month decline is mainly due to seasonal factors.

The gross profit margin of financial technology and enterprise services was 27.9%, basically stable both year-on-year and month-on-month.

Sales and marketing expenses were 7 billion yuan, up 66% year-on-year and 5% month-on-month. The year-on-year increase in marketing expenses was mainly due to the increase in marketing expenses of content platforms including WeChat during the Spring Festival.

The year-on-year increase in R&D was mainly due to the increase in employee expenses required to support business development, and the month-on-month decrease was mainly due to the reduction in outsourced R&D activities and travel and entertainment expenses during the epidemic.

Total cash at the end of the period was RMB 220.584 billion (US$ 31.134 billion)