Tencent's Retro Roots Juice Its Pandemic Profits
(Bloomberg Opinion) -- For all the fame and attention Tencent Holdings Ltd. receives because of its ubiquitous WeChat messaging app — which has 1.2 billion users and counting — the Chinese internet giant’s old-school roots as a games company are what pulled it through the darkest days of the pandemic.
A 40% increase in online games revenue, including a 62% jump in the smartphone subcategory, helped quarterly sales beat estimates by the most in four years, according to results reported by Tencent on Wednesday. Advertising, on the other hand, was lackluster. Media advertising — placed on its content platforms — remained particularly weak, posting a fifth straight decline.
With China pulling out of the Covid-19 outbreak earlier than most countries, the hope was that consumer spending had returned to normal and the economy was close to stabilizing. That thesis may need to be rethought.
What Tencent’s June-quarter numbers tell us is that even China remains in a kind of economic limbo. Nesting habits — such as gaming and video-streaming — remained hot, while consumer-goods expenditure looks anemic. At the very least, advertisers themselves lacked the confidence to boost marketing budgets to lure whatever consumption may be available.
There’s also the elephant in the room: the U.S. administration’s plan to ban American companies from working with Tencent and WeChat. Such a move could at the least interrupt how the Chinese company distributes its app and sell ads, but the impact on revenue is likely to be limited given its solid domestic focus.
Thankfully for Tencent, games are here to act as a savior. Advertising has never been a major revenue driver, peaking at 20% of sales in the third quarter of 2018. Still, it has provided icing on top of Tencent’s games, fintech, and media businesses. The division is profitable, with gross margins hovering around 50%.
Games are solid, though, accounting for a third of revenue in the quarter. Tencent’s social networks business — which includes live broadcast service Huya — also did well, posting a 29% rise that was the most in two years. Its fintech and business services unit — mostly cloud and financial products— climbed a solid 30%.
It’s a bonus that games and social combined — under the label value-added services — have the fattest margins of all Tencent’s businesses, at 53.7%.
This should serve as a warning to other Chinese internet companies, especially those that rely inordinately on advertising. Alibaba Group Holding Ltd. has remained an investor favorite throughout the turmoil in the belief that its size gives it an advantage. That company was hit particularly hard in the first quarter, eking out growth in enterprise businesses such as cloud computing. It’s likely that second-quarter figures will look better when it reports earnings Aug. 20, but investors will need to dig into the data to see the true source of growth.
Tencent, however, already knows where it strength lies, and that’s in the old-school games business.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.
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