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pww.comTencent Holdings Limited, Q1 2018 Earnings Call, May 16, 2018 - SEHK:700

SEHK:700

** Executive Summaries**

Huateng Ma (Chairman and CEO)

  • Overview:
    • Tencent launched several significant products and deepened user engagement across social, gaming, and media platforms.
    • Invested in strategic areas like video, payment, cloud, AI, and Smart Retail to enhance the quality of life through internet services.
    • Reported total revenue of RMB 73.5 billion, up 48% year-on-year and 11% quarter-on-quarter.
    • Non-GAAP operating profit was RMB 25.3 billion, up 36% year-on-year and 16% quarter-on-quarter.
    • Non-GAAP net profit attributable to shareholders was RMB 18.3 billion, up 29% year-on-year and 5% quarter-on-quarter.
    • Weixin and WeChat combined MAU increased 11% year-on-year to 1.04 billion, with Mini Programs gaining wider adoption.
    • QQ MAU was 805 million, and smart devices MAU was 694 million, up 2% year-on-year.
    • Maintained leadership in mobile and PC games, with notable success in QQ Speed Mobile and tactical tournament games.
    • Expanded Mini Games within Weixin.
    • Continued leadership in online video, music services, and literature.
    • Mobile payment service led by MAU and DAU, with rapid growth in offline commercial transactions.
    • Maintained leading positions in mobile security, mobile browser, and Android app store.

Chi Ping Lau (President)

  • Value-Added Services (VAS):
    • VAS segment represented 64% of total revenue, with online games contributing 39% and social networks 25%.
    • VAS revenue was RMB 46.9 billion, up 34% year-on-year and 17% quarter-on-quarter.
    • Social networks revenue was RMB 18.1 billion, up 47% year-on-year and 16% quarter-on-quarter, driven by video subscriptions, music live broadcasts, and game item sales.
    • Video subscription revenue grew 85% year-on-year.
    • Total VAS subscriptions increased 24% year-on-year to 147 million.
    • Online games revenue was RMB 28.8 billion, up 26% year-on-year and 18% quarter-on-quarter, driven by smartphone games like Honour of Kings and QQ Speed Mobile.
    • Mini Games on Weixin achieved significant success, with over 500 Mini Games on the platform.
    • Mini Games expanded the game audience, with over 1/3 of players not previously using Tencent mobile game apps.
    • Introduced Scan-to-Buy solution, integrating Mini Programs with Weixin Pay, increasing checkout efficiency for retailers.
    • QQ's newsfeed service, KanDian, achieved over 80 million DAU and grew video views 3x year-on-year.
    • Relaunched mini video app, WeiShi, offering high-quality PUGC content and distributing content to feed verticals.

James Mitchell (Chief Strategy Officer)

  • Online Games:
    • Tactical tournament games became popular internationally and in China across PC, console, and mobile devices.
    • Developed 2 titles based on PUBG IP, achieving combined DAU exceeding 50 million users in China and over 10 million users outside China.
    • Investee studio, Epic Games, developed Fortnite, achieving over 40 million MAU and becoming the most-watched game on Twitch.
    • Licensor, PUBG Corporation, sold over 45 million copies of PlayerUnknown Battlegrounds globally.
    • Smartphone games revenue was RMB 21.7 billion, up 68% year-on-year and 28% quarter-on-quarter, driven by key titles and seasonal promotions.
    • PC client games revenue was RMB 14.1 billion, flat year-on-year and up 10% quarter-on-quarter, with core user engagement remaining firm.
    • Deepening cooperation with streaming platforms to promote games and e-sports.
    • Advertising revenue was RMB 10.7 billion, up 55% year-on-year and down 14% quarter-on-quarter.
    • Media advertising revenue was RMB 3.3 billion, up 31% year-on-year, with video advertising revenue up 64% year-on-year.
    • Social and other advertising revenue was RMB 7.4 billion, up 69% year-on-year, with increased ad load in Weixin Moments.
    • Video business sustained rapid growth, with mobile DAU and subscriptions increasing strongly.
    • Original content initiatives enjoyed success across multiple verticals, including Produce 101 and Land of Warriors.

Shek Hon Lo (Chief Financial Officer)

  • Financials:

    • Total revenue was RMB 73.5 billion, up 48% year-on-year or 11% quarter-on-quarter.

    • Cost of sales increased by 51% to RMB 36.5 billion, primarily due to channel costs, payment-related services, and content costs.

    • Gross profit was RMB 37 billion, up 46% year-on-year or 18% quarter-on-quarter.

    • Net other gains were RMB 7.6 billion, primarily from fair value gains of investments.

    • Income tax expense was RMB 5.7 billion, up 57% year-on-year or 84% quarter-on-quarter.

    • Non-GAAP operating profit was RMB 25.3 billion, up 36% year-on-year or 16% quarter-on-quarter.

    • Non-GAAP net profit to shareholders was RMB 18.3 billion, up 29% year-on-year or 5% quarter-on-quarter.

    • Gross margin for VAS was 63.3%, up 2.4 percentage points year-on-year or 4 percentage points quarter-on-quarter.

    • Gross margin for online advertising was 31.2%, down 3.6 percentage points year-on-year or 6 percentage points quarter-on-quarter.

    • Gross margin for others was 25.4%, up 3.5 percentage points year-on-year and 2.6 percentage points sequentially.

    • Selling and marketing expenses were RMB 5.6 billion, up 76% year-on-year or down 8% quarter-on-quarter.

    • G&A expenses, including R&D, were RMB 4.4 billion, up 30% year-on-year or up 10% quarter-on-quarter.

    • Total CapEx was RMB 6.3 billion, up 200% year-on-year or 27% quarter-on-quarter.

    • Free cash flow was RMB 13 billion, down 46% year-on-year and quarter-on-quarter.

    • Net debt position was RMB 14.5 billion at the end of March, compared to net cash of RMB 16.3 billion at the end of 2017.

    • Fair value of listed companies, excluding subsidiaries, was RMB 213 billion, up slightly from RMB 211 billion at the end of 2017.