Tencent posted total revenue of RMB 80.6billion ($11.7million) for the third quarter with a yearly growth of 24%. Advertising, cloud service and video subscriptions have become Tencent’s main revenue growth driver while its games business suffered revenue loss under stricter regulations by authorities in mainland China to limit negative impact on children.
Tencent announced a strategic re-organisation in October to better capture emerging growth opportunities in the new Internet era. The Q3 financial result reflects this change, with it realising ad revenue from WeChat Moments and Mini Programs as well as cloud service revenue for the first three quarters of 2018. With a continuous freeze on the Chinese government’s approval process for monetizing new games, we believe other businesses beyond games are likely to become the new growth driver.
PC games business suffers
Revenue for client-based PC games was down by 15% year-on-year and down by 4% quarter on quarter to RMB 12.4billion in this usually peak season. But, as the management stated, the quarterly decline was due to the deferred revenue, cash sales increased benefiting from content updates for CrossFire, Dungeon & Fighter and some sports titles. We believe Dungeon & Fighter achieved 30% growth of gross revenue due to strong item sales associated with Summer Update and National Day Update from July to September.
Tencent is still not able to launch PC version of PUBG nor monetize Fortnite in mainland China, which has increased pressure on the company’s profit margin. FIFA Online 4 enjoyed soaring active users and ARPPU during the FIFA World Cup, but its revenue is likely to be booked in Q4. Also, due to the release failure of Monster Hunter: World this title was unable to generate revenue as expected. As such, DNF itself cannot bolster the whole PC games portfolio in Q3. League of Legends achieved viewership records for its S8 season while its performance in Q3 was flat.
Even with clampdown, mobile games revenue continues to grow
Compared to stagnant PC games business, smartphone games revenue grew 7% year-on-year and 11% sequentially to RMB 19.5billion. The management suggested that new games contribute to the growth. The gaming-approval halt casts shadow on Tencent’s business in the near term but the 15 games in the pipeline with approval seem to become silver lining for the company’s future performance. We expect PUBG Mobile in international markets to contirbute although not majorly as Tencent struggles to build its consumer facing business in international markets. Tencent introduced Elite Upgrade Plus in June to offer more decoration and skin items, which is similar to seasonal VIP. As no update for the re-issue of publication number in domestic Chinese market, Tencent is expected to better promote and monetise its flagship titles in international markets.