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Tencent Holdings’ Results for Q2 2018

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Aug. 16 2018, Published 7:25 a.m. ET

Diversified revenue stream

Tencent Holdings (TCEHY) declared its earnings results for the second quarter of 2018 on August 15. Its revenue grew 30% YoY (year-over-year) to 73.7 billion yuan in the second quarter of 2018.

VAS (value-added services), online advertising, and others contributed 40%, 63%, and 78%, respectively, to revenue in 2017 and drove growth. The others category refers to payment services and cloud services. Double-digit growth in social networks’ live broadcast and subscription video streaming services mainly drove VAS revenue. Smartphone games were another significant revenue driver for the VAS segment. Media and social and others posted double-digit growth for online advertising.

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What led to the EPS miss?

Content costs rose significantly for live broadcast and subscription video streaming services. The cost of revenue for online advertising and other business also picked up. As a result, gross profit grew 22% YoY (year-over-year). Operating expenses rose 37% YoY, leading to an 11% increase in operating profit for the quarter.

Its gross margin decreased 3%. The decline in gross margin coupled with higher operating costs negatively affected operating margins and net margins.

Other gains decreased during the period, and finance costs rose significantly, offset by a higher share of profit from associates and joint ventures. All that translated to a 2% decrease in EPS at 1.87 yuan.

Tencent and its competitors

Tencent stock has fallen 7%, and Alibaba Group Holding (BABA) and Baidu (BIDU) have each fallen 3%. The S&P 500 technology sector responded with a 1% decline. Facebook (FB), JD.com (JD), and Apple (AAPL) were other stocks that lost value.

What impacted sequential EPS growth?

Tencent’s revenue remained flat on a sequential basis in the second quarter. VAS saw a double-digit decline, offset by online advertising and others. Smartphone revenue decreased 19% sequentially due to non-monetization of its favorite games as users opted for non-monetized games.

Gross profit declined 7% sequentially, impacted by flat revenue growth and rising costs. An 8% increase in operating expenses translated to a 17% sequential decline in operating profits. Other gains reduced while finance costs increased, notably offset by an increased share of profit from associates and joint ventures. As a result, EPS declined 23% sequentially.

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