Tencent profit misses estimates amid surging operating costs

Bloomberg

Tencent Holdings Ltd. posted fourth-quarter profit that missed analysts’ estimates amid a surge in costs and rising competition in the mobile gaming market. Net income rose 47 percent to 10.5 billion yuan ($1.5 billion) in the three months ended December, the Shenzhen-based company said on Wednesday. That compares with the 11 billion-yuan average of analyst estimates compiled by Bloomberg.
Tencent is competing with companies including Netease Inc. for users as more people shift toward mobile games, which generate lower margins and have shorter lifespans than desktop titles. As its home market gets saturated, the Shenzhen, China-based company needs to find new sources of growth by delivering more hits, especially with its WeChat messaging service having a tough time expanding overseas.
“Mobile gaming revenue likely softened in the fourth quarter,” Shi Jialong, a Hong Kong-based analyst at Nomura International HK Ltd., said before the earnings. Shi attributed the weakening to the company’s “intentional slowdown in mobile game monetization.”
Cost of revenues increased by 60 percent to 20.2 billion yuan from a year earlier. Tencent is revving up its battle with Alibaba Group Holding Ltd. in advertising as well, adding more space to lure brands onto WeChat. Revenue rose 44 percent to 43.9 billion yuan, compared with estimates for 44 billion yuan.
Shares of Tencent fell 1.6 percent to HK$225.20 in Hong Kong before its earnings were announced. The stock has gained 19 percent this year, compared with a 20 percent gain for New York-listed rival Alibaba. Revenue from the Value Added Services unit, which includes online games and messaging, jumped 27 percent to 29.2 billion yuan in the fourth quarter, while online advertising sales climbed 45% to 8.3 billion yuan.
WeChat had 889.3 million monthly active users at the end of the quarter, while the smart-device version of QQ had 652.5 million. To diversify its revenue, the company is buying content from anime and comics to novels to convert into movies and mobile games.
While games have underpinned Tencent’s rise, it risks getting drawn into a political spat between China and South Korea. The company hosts games from South Korean developers and could run afoul of a Chinese boycott of goods from its Asian neighbor, retaliation for hosting a controversial US missile-defense system. The approval process for new games could now take much longer, said Nomura’s Shi.