Tencent's Q3 net profit increased by 39% YoY, with a rebound in the gaming business and record-high advertising revenue. | Earnings Report

Benefiting from strong advertising business and a rebound in game revenue, Tencent's third-quarter profit exceeded expectations.

After the Hong Kong stock market closed on November 15th, Tencent released its third-quarter financial report. The report showed that Tencent achieved operating revenue of 154.6 billion yuan in the third quarter, a year-on-year increase of 10%, slightly lower than the market's expected 154.8 billion yuan, and a quarter-on-quarter increase of 4%.

Operating profit was 48.48 billion yuan, a year-on-year decrease of 6%, and a quarter-on-quarter increase of 20%, better than the market's estimated 43.4 billion yuan; net profit was 36.2 billion yuan, a year-on-year decrease of 9%, and a quarter-on-quarter increase of 38%, also better than the market's estimated 32.38 billion yuan.

In addition, Tencent's non-IFRS operating profit was 55.483 billion yuan, a year-on-year increase of 36%, and a quarter-on-quarter increase of 11%, with a net profit of 44.92 billion yuan, a year-on-year increase of 39%, and a quarter-on-quarter increase of 20%, better than the market's expected 39.98 billion yuan.

In terms of costs, Tencent's third-quarter revenue cost was 78.1 billion yuan, and the gross profit margin rose to 49.5%. Tencent stated that this was mainly due to the structural shift towards high-margin revenue sources (including small game platform service fees, as well as new services such as video ads and live-streaming e-commerce technology fees), and the shift away from low-margin revenue sources (especially music live-streaming and game live-streaming services).

The company's cost efficiency measures also contributed to the optimization of gross profit margin. Transaction costs and channel and distribution costs increased, while bandwidth and server costs, as well as content costs, decreased due to continued cost control.

In terms of research and development, Tencent's R&D expenses in the third quarter were 16.45 billion yuan, a year-on-year increase of 9%. Since 2018, Tencent has invested more than 253.2 billion yuan cumulatively. As of September 2023, Tencent has filed a total of more than 69,000 patent applications and has been granted more than 35,000 patents in major countries and regions around the world. Among internet companies, Tencent ranks first in China and second globally in terms of the number of patents granted.

Advertising revenue reaches a new high

In terms of business segments, Tencent's online advertising business revenue increased by 20% year-on-year to 25.7 billion yuan, reaching a historical high. Tencent stated in its earnings report that the growth in advertising revenue was driven by strong demand for advertisements on Video Accounts, Mobile Advertising Alliance, and WeChat Search, with significant growth seen in the local services and fast-moving consumer goods industries. The advertising revenue of Video Accounts saw a significant MoM growth, benefiting from increased video views and user engagement, while the ad loading rate remained stable.

According to the report, Tencent has significantly improved the recommendation efficiency of its advertising system through the use of large-scale model technology and provided creative generation capabilities for advertisers. The WeChat ecosystem has injected new vitality into Tencent's advertising business. For the first time in its earnings report, Tencent disclosed that its cross-platform advertising revenue (including advertising revenue from WeChat Mini Programs, Video Accounts, Official Accounts, and Enterprise WeChat landing pages) grew by 30% YoY and contributed to over half of WeChat's advertising revenue.

In addition, Tencent's financial technology and enterprise services revenue grew by 16% YoY to RMB 52 billion.

Tencent stated that its financial technology service revenue maintained double-digit YoY growth, driven by increased commercial payment activities and growth in wealth management service revenue. The QoQ growth of enterprise service revenue was faster, benefiting from the optimization of cloud service business structure in the previous period and an increase in service fees for Video Account live-streaming e-commerce technology.

Recovery in gaming business, stable social network revenue

Value-added services are divided into gaming and social network segments. Among them, the gaming business revenue showed significant growth, with Tencent's international market gaming revenue increasing by 14% to RMB 13.3 billion, or 7% excluding the impact of exchange rate fluctuations; domestic market gaming revenue increased by 5% to RMB 32.7 billion.

Tencent stated that for individual games in the international market, revenue rebounded for "PUBG Mobile," and "Goddess of Victory: Niki," "VALORANT," and "Triple Match 3D" also contributed to revenue growth, while revenue for "Huan Tower" declined compared to the same period last year.

Domestic market gaming revenue increased by 5% to RMB 32.7 billion, benefiting from the recent releases of "Arknights" and "Fearless Agreement," as well as increased revenue from evergreen games such as "Honor of Kings" and "Dungeon & Fighter."

Social network revenue remained stable at around RMB 29.7 billion, mainly driven by increased revenue from music subscription members, small game platform service fees, and sales of virtual items in mobile games, offset by a decline in revenue from music and game live-streaming services.

Over 50% YoY growth in Video Account views

Tencent stated in its earnings report that it achieved solid and high-quality revenue growth this quarter, with significant improvement in profit margins and structural operating leverage. Emerging businesses such as Video Accounts and mini-games contributed to high-profit-margin revenue sources.

As for WeChat, the combined monthly active accounts of WeChat and Weixin reached 1.336 billion, a YoY increase of 2% and a MoM increase of 0.7%. The total views of Video Accounts grew by over 50% YoY, benefiting from a thriving creator community and increasing user awareness. The growth in views of original content has been strong, accounting for the majority of total views on Video Accounts.

For QQ, the monthly active accounts reached 558 million, a YoY decrease of 3% and a MoM decrease of 2%. Tencent stated that it is enriching the functionality of QQ channels and using software tools such as voice chat and event management to support interest communities of users with common hobbies, activities, or membership status. In terms of paid members, the number of music paid members increased by 21% YoY to 103 million, while ARPU increased by 17% YoY. The number of video paid members decreased by 3% YoY, but increased by 1% MoM, reaching 117 million.

In addition, Tencent stated that it is increasing investment in the self-developed basic model Tencent Mix, an artificial intelligence model, and deploying it in internal products, while also opening it up for use by external enterprise customers.