Tencent Holdings Ltd.’s 50% profit growth in the fourth quarter showed its continued dependence on online games. A big challenge for the Chinese Internet giant is how to build new sources of revenue through its messaging and social-networking services.
Investors and analysts see a potential gold mine in Tencent’s WeChat and QQ messaging and social-networking services, which have hundreds of millions of active users in China, where major U.S. services such as Facebook and Twitter are blocked. So far, Tencent has been generating some of its revenue by offering mobile games through WeChat and QQ, and has added new advertising features to those social platforms.
Still, Tencent’s profit for the three months through December, which came a little below analyst expectations, was a reminder that the company still has a long way to go to cash in on the popularity of WeChat and QQ. The company, based in Shenzhen, China said Wednesday its net profit rose 50% to 5.86 billion yuan ($937 million) from 3.91 billion yuan a year earlier. Its revenue rose 24% to 20.98 billion yuan from 16.97 billion yuan a year earlier.
In the same quarter, the number of users for Tencent’s social platforms continued to grow. QQ’s active users on smartphones and tablets increased to 576 million in December from 542 million in September, the company said, while active users of WeChat, which is called Weixin in mainland China, grew to 500 million from 468 million over the same period.
Tencent’s revenue from online games, including those played on personal computers as well as smartphones and tablets, rose 41% to 11.96 billion yuan in the quarter. Mobile games offered through WeChat and QQ generated 2.9 billion yuan in revenue in the fourth quarter, rising from 2.6 billion yuan in the third quarter but at a slower rate of growth than some analysts had projected. Other than the social platforms, Tencent also distributes mobile games through app stores.
At a news conference Wednesday, Tencent executives said China’s mobile games market is still developing.
“If you look at the number of players for mobile games, it’s actually much higher than players of PC games…but the percentage of people who pay is actually still quite small compared to PCs,” Tencent President Martin Lau said. “There’s still quite a bit of head room to grow.”
In addition to typical mobile games that are basic and easy to play, Tencent is offering more sophisticated, engaging titles such as shooting games that could get more people to spend money while playing, Chief Strategy Officer James Mitchell said.
investors are hoping that Tencent will keep developing new sources of revenue on top of mobile games.
“Mobile games’ growth is already priced in. The upside (for Tencent shares) will likely depend on advertising revenue,” Jefferies analyst Cynthia Meng said earlier this week.
In the fourth quarter, 82% of Tencent’s revenue came from online games, while advertising revenue accounted for only 13%.
Tencent has been gradually adding more advertising features to WeChat and QQ. In January, in mainland China, the company added sponsored posts to WeChat’s “moments” section, a Facebook-like section where users share photos and other status updates. Last year, Tencent launched a service in China in which companies that have WeChat accounts can pay fees to place ads on other corporate WeChat pages.
“Facebook has been able to build a very large advertising business on a social network,” Mr. Lau said, adding that the factors that make Facebook’s advertising successful also apply to Tencent’s social networks in China. “Advertising will be a major contributor to our revenue.”
Mr. Lau said that the company will have to find the right balance to grow its ad revenue without sacrificing user experience.
Carine Chu, a 28-year-old consultant in Beijing who uses WeChat to talk to friends, colleagues and clients, said she started noticing sponsored feeds on WeChat about a month ago. “I don’t really find them annoying. I just ignore them,” she said.
In a note to clients last week, Barclays analyst Alicia Yap projected that revenue from WeChat’s sponsored feeds would reach about 1.89 billion yuan this year and increase sharply next year to 10.2 billion to account for 42% of Tencent’s total advertising revenue.
Another challenge for Tencent is intensifying competition from other Internet giants in China. Tencent, e-commerce company Alibaba Group Holding Ltd. and search provider Baidu Inc. are expanding their businesses through acquisitions and stepping into each other’s turf.
Still, Tencent recently shook hands with Alibaba when rival Chinese taxi-hailing companies Didi Dache and Kuaidi Dache, separately backed by Tencent and Alibaba, agreed last month to merge in a rare deal that brought together the two Internet giants.
“We are competitors, and at the same time, we can be partners,” Tencent Chief Executive Pony Ma said Wednesday. In some areas Tencent can work with its competitors, and “there are many such areas,” he said.
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