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Tencent Holding Ltd. (OTCMKTS:TCEHY) recorded a strong revenue beat in 3Q2016 while earnings slipped forecasts. The strong revenue can be accredited to remarkable performance in social network arena, performance-based advertisement revenue and also growth of 348% in other revenue. Updated report reflected that shift to growing performance-based news and video subscription revs feed ads should offset dependency on video ads.

The highlights

Tencent Holdings revenue in 3Q2016 grew 52% YoY and 13% QoQ to RMB40.4 billion, 3-5% above forecast, on 58% YoY growth in social networking and 87% YoY revenue growth in mobile game industry. Gross profit margin dropped to 54% in 3Q2016 from 57.3% in 2Q2016 as cloud/ payment of a lower margin comprised for a higher part of revenue, i.e. 12% in 3Q2016 versus 10% in 2Q2016 and video content investment surged. Resulting adjusted profit recorded growth of 42% YoY and 4% QoQ to RMb11.7 billion, missing consensus forecasts.

Outperformance in social network revenue together with improvement in performance-based ad revenue and other revenue mainly from payment resulted in strong top line numbers. Performance ads jumped 83% YoY, mainly due to revenue coming from Weixin Moments and re-assigning of some news feed inventory to performance-based ads from brand. WeChat-based advertisers improved notably QoQ in 3Q2016. On the video side, competition and seasonality has increased content spending in 2H2016 as more top-tier content is expected to be announced.

The big growth advancement came from payment with YoY growth of 348% in the “Other” revenue on rapid merchant adoption. Seeing in terms of transaction volume, a big part of contribution came from social payments, followed by B2C deals through Meituan, JD, Didi and online game in-game purchases and finally offline merchants like supermarkets, convenient stores, other local SMEs and restaurants.

Cloud services revenue tripled YoY based on higher usages and larger enterprise accounts by key accounts, mainly in online video, O2O services and online games within its ecosystem.

In the last trading session, the stock price of Tencent declined over 1% to close the day at $24.29.

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Steve Kanaval: Portfolio Manager/Writer/ Market Analyst Steve began his career in the Trading Pits in Chicago making markets at the Chicago Mercantile Exchange (NYSE:CME) the Chicago Board of Trade and the CBOE in the early 80’s. He ran the Morgan Stanley Derivative Prop Trading for the firm specializing in Index Arbitrage. He continued his career as a Trader/Portfolio Manager for multiple Hedge Funds during the Internet Boom of the 90’s managing large portfolios. Steve is known as an expert in MicroCap Technology Stocks and the emerging Digital Currency markets as a Portfolio Manager for his Family Office. Steve has managed portfolio’s in volatile asset classes for 3 decades as a commodity trader, hedge fund manager and digital currency trader and miner. Steve publishes his views on the asset classes in a public forum and has published more than 10,000 articles simplifying these complex and volatile assets for readers. His work is published on multiple sites including Bloomberg, Equities.com, Hacked.com, CryptoCurrencyNews as a paid contributor. His work includes research, journalism and archived video on important market volatility related to stocks, digital currency and other volatile misunderstood asset classes. He offers a humorous, unique insight and the related back stories and drivers for readers interested in volatility and emerging market assets. Full disclosure Steve is long 25 digital currencies and sits on the board of multiple public companies involved in digital currencies, and owns shares in these companies from time to time.

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