Tencent Holdings Ltd., Q2 2014 Earnings Call, Aug 13, 2014 - SEHK:700

SEHK:700

** Summary of Executive Speeches**

Pony Ma (Chairman and CEO)

• Overview:
  • Tencent deepened user engagement on mobile platforms in Q2 2014.
  • Strategic investments in category leaders like NavInfo (mapping service) and 58.com (local listing platform) enriched the top line.
  • Significant growth in smartphone games and online advertising revenue.
• Financial Highlights:
  • Total revenue: RMB 19.7 billion, up 37% year-on-year.
  • Value-added services (VAS): RMB 15.7 billion, up 46% year-on-year.
    • Social networks revenue: RMB 4.6 billion, up 47% year-on-year.
    • Online games revenue: RMB 11.1 billion, up 46% year-on-year.
  • Online advertising revenue: RMB 2.1 billion, up 59% year-on-year.
  • eCommerce transactions revenue: RMB 1.3 billion, down 40% year-on-year.
  • Non-GAAP operating profit: RMB 7.7 billion, up 53% year-on-year.
  • Non-GAAP net profit: RMB 5.9 billion, up 42% year-on-year.
• Key Platforms:
  • QQ: Total MAU 829 million, smart devices MAU 521 million (up 45% year-on-year).
  • Weixin and WeChat: Combined MAU 438 million, up 57% year-on-year.
  • Qzone: Total MAU 645 million, smart devices MAU 497 million (up 37% year-on-year).

Martin Lau (President)

• Strategic Highlights:
  • Leveraging mobile franchise to develop the advertising business.
  • News Platform:
    • Mobile news services achieved 180 million daily active users, double the PC DAUs.
    • Total daily page views increased over 100% year-on-year.
    • Initial recognition from brand advertisers; revenue more than doubled quarter-on-quarter.
  • Video Platform:
    • Mobile video traffic reached approximately half of total video views.
    • Mobile video ads straightforward due to Wi-Fi and download usage.
    • Low-teen percentage of video ad revenue from mobile; significant growth potential.
  • Social Platform:
    • Performance advertising on mobile contributed to 30% of total performance advertising revenue.
    • Strong demand for ads on Qzone and Weixin.
    • Beta-testing text link ads for O2O merchants on Weixin; positive feedback.
    • Early stage of mobile performance ads; focus on user experience and ecosystem buildout.

James Mitchell (Chief Strategy Officer)

• Business Review:
  • Total revenue growth of 37% year-on-year (51% excluding eCommerce transactions).
  • VAS generated 80% of revenue, with online games contributing 56% and social networks 24%.
  • Online advertising increased to 10% of revenue, breaking into double digits.
  • eCommerce transactions represented 7% of revenue.
• Value-Added Services:
  • Segment revenue: RMB 15.7 billion, up 46% year-on-year and 9% sequentially.
  • Social network revenue: RMB 4.6 billion, up 47% year-on-year and 15% sequentially.
  • Online game revenue: RMB 11.1 billion, up 46% year-on-year and 7% sequentially.
  • PC client games: Stable sequentially, increased year-on-year.
• Social Network Products:
  • Mobile QQ: Reinforced community features, upgraded wallet for O2O services.
  • Mobile Qzone: Added customization features, helped subscription revenue.
  • Weixin: Increased group chat size, added cash balance feature, integrated with partners.
• PC Client Games:
  • Advanced casual games: Average concurrent users up 20% year-on-year.
  • Massively multiplayer online games: Average concurrent users down 9% year-on-year.
  • Action and role-playing games: Launched expansion packs and new games.
• Smartphone Games:
  • Operated 21 games integrated with Mobile QQ and Weixin.
  • Mid-core games achieved higher ARPU with smaller user bases.
  • Ranked #1 smartphone game publisher in China by downloads and revenue.
  • Focus on user experience, expanding game portfolio, and platform enhancement.
• Online Advertising:
  • Segment revenue: RMB 2.1 billion, up 59% year-on-year and 75% quarter-on-quarter.
  • Brand advertising: RMB 1.4 billion, up 72% year-on-year and 88% quarter-on-quarter.
  • Performance advertising: RMB 700 million, up 79% year-on-year and 55% quarter-on-quarter.
  • Top 5 advertiser industries: food and beverage, automobile, online services, personal care, real estate.
• eCommerce Transactions:
  • Revenue: RMB 1.3 billion, down 40% year-on-year and 48% quarter-on-quarter.
  • Decline due to traffic to JD.com and consolidation of marketplace businesses.
  • Expect rapid decline in revenue and costs in coming quarters due to JD.com partnership.

John Lo (Chief Financial Officer)

• Financial Overview:
  • Total revenue: RMB 19.7 billion, up 37% year-on-year and 7% quarter-on-quarter.
  • Net other gains: RMB 691 million (down from RMB 1.6 billion last quarter).
  • Operating profit: RMB 7.8 billion, up 72% year-on-year and 1% quarter-on-quarter.
  • GAAP net profit: RMB 5.8 billion, up 59% year-on-year (sequential decrease of 10% due to high base in Q1).
  • Non-GAAP net profit: RMB 5.9 billion, up 42% year-on-year and 13% quarter-on-quarter.
• Segment Gross Margins:
  • VAS: 70%, up 6 percentage points year-on-year and quarter-on-quarter.
  • Online advertising: 45%, down 9 percentage points year-on-year but up 10 percentage points quarter-on-quarter.
  • eCommerce transactions: -7%, down 13 percentage points year-on-year and 11 percentage points quarter-on-quarter.
• Operating Expenses:
  • Selling and marketing: RMB 2 billion, up 60% year-on-year and 6% quarter-on-quarter.
  • G&A: RMB 3.4 billion, up 44% year-on-year and 18% quarter-on-quarter.
  • R&D: RMB 1.9 billion, up 52% year-on-year and 24% quarter-on-quarter.
• Margin Ratios:
  • Gross margin: 61.6%, up 4 percentage points from Q1.
  • Non-GAAP operating margin: 38.9%, up 3.7 percentage points from Q1.
  • Non-GAAP net margin: 29.8%, up 1.5 percentage points from Q1.
• CapEx and Cash Flow:

  • Total CapEx: RMB 917 million, down 37% year-on-year and 19% quarter-on-quarter.

  • Free cash flow: RMB 6.3 billion, up 59% year-on-year and 15% quarter-on-quarter.

  • Net cash position: RMB 22.5 billion, down 33% year-on-year and 34% quarter-on-quarter.

  • Fair market value of listed associates and available-for-sale investments: RMB 65 billion.