Tencent Sees Profits Dwindle Despite Impressive Digital Ad Growth

The company’s decline was largely due to the Chinese government’s embargo on new mobile game approvals, which ended in December after nine months. Since Tencent could not benefit from new mobile games over the second half of 2018, it relied primarily on revenues from already-existing titles and other sources.

Tencent noted it increased revenue by adding services to popular games and said it was optimistic for new game approvals this year. It has also sought to offset the regulations in China by partnering with foreign game developers to grow its games globally. Despite the state-sanctioned freeze, the company saw mobile game revenue rise by 24% year-on-year in 2018, although Q4 witnessed a mere 12% increase.

On a more positive note, Tencent increased its online advertising revenue by 38% year-on-year in Q418, that’s a whopping rise of 44% from the previous year (including social media advertising and other ad revenue). The rise was mostly driven by WeChat Moments ads, mini-programs, and QQ KanDian, and continued the trend from the previous quarter. The company also saw media advertising revenue rise due to the popularity of Tencent Video and News.

The company added in its earnings release, “On average, over 750 million Weixin [WeChat] users read friends’ posts on Moments per day.” This clearly signals a growing opportunity for brands to advertise within WeChat Moments. Since Tencent began running their second Moments ad, only half of its daily users have been reached, so there’s still room to grow this segment. Meanwhile, daily active users of mini-programs grew 54% year-on-year in 2018.

Tencent has also made significant strides with WeChat Pay and transactions through its ecosystem, including services such as the ability to purchase flights through its mobile payment system for Chinese tourists travelling overseas.

Revenue jumped 32% year-on-year to almost US$45.6b in 2018, with net profit up 19% to almost US$11.5b. However, the company’s profit margin decreased to 26% from 30% a year earlier.

For the fourth quarter, Tencent reported revenue of almost US$12.4b, a rise of 28% from the same period in 2017. This revenue was just below consensus estimates for the quarter. Net profit in the quarter missed analysts’ expectations, falling 32% year-on-year to US$2.07b.  The decline was attributed to higher investment costs for both content and technology during the quarter. However, these expenses are likely to be pivotal in the tech giant’s diversification strategy to diversify and may protect it from potential future harmful government regulations.