Tencent Quarterly Profit Misses Estimates as Growth Slows

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Tencent Holdings Ltd. reported third-quarter profit that missed analyst estimates after the Chinese Internet company’s revenue gained at the slowest pace since 2007 and development and staff costs increased.

Net income rose 46 percent to 5.66 billion yuan ($923 million), the Hong Kong-listed company said in a statement yesterday. Profit trailed the 6.1 billion-yuan average of 10 analysts’ estimates compiled by Bloomberg.

Tencent is seeking to capture the consumer shift to mobile devices as it adds new games and offerings to its WeChat and QQ messaging services to draw revenue from the free application’s users. Mobile-gaming income dropped to 2.6 billion yuan in the third quarter from 3 billion yuan in the previous three months as the Shenzhen-based company shifted focus to improve the quality of the games.

“Revenue growth wasn’t as high as people were expecting,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP. “Also, administrative costs for hiring have gone up as the company expands.”

Shares of Tencent rose 0.2 percent to HK$129.50 at the close of trade in Hong Kong, after earlier dropping as much as 3.5 percent.

Revenue rose 28 percent, the slowest quarterly pace in more than seven years, to 19.8 billion yuan, partly due to the sale of its e-commerce business.

Revenue from China’s online gaming market is projected to expand to 225 billion yuan by 2017, from an estimated 115 billion yuan this year, according to IResearch, a Shanghai-based Internet consultant.

‘Little Cheaper’

“At the current price, 80 percent of Tencent’s value is predicated on economic profit that it has yet to earn,” said Andrew Zamfotis, an analyst at Eva Dimensions in New York who has an underweight rating on Tencent. “We just would prefer it to be a little cheaper given how much outperformance there has been over the past two years.”

Tencent’s 28 percent revenue growth compares with an average of 55 percent growth between the second quarter of 2007 and last quarter, according to data compiled by Bloomberg.

The slowdown in was partly due to Tencent’s sale of its e-commerce business to JD.com Inc., with online shopping revenue dropping 81 percent to 459 million yuan, according to the filing.

The disposal was part of Tencent’s efforts to exit low-margin operations, Chief Financial Officer John Lo said on an earnings conference call.

WeChat Setback

Tencent had setbacks in some Western markets in the international expansion of instant messaging app WeChat, and so it reduced marketing and sales expenses, Chief Strategy Officer James Mitchell said on the call.

“There were certain markets proving hospitable to our international expansion, particularly via our WeChat application, we would continue to focus on those markets,” Mitchell said. “There’s other markets, especially the Western world markets, where advertising is more expensive and less effective, where it was proving hard to make headway.”

Monthly users of WeChat, known as Weixin in China, rose 6.8 percent from the previous quarter to 468.1 million, the slowest gain on record. Mobile QQ’s monthly active users rose 4.1 percent to 542.2 million.

The drop in mobile game revenue was partly attributable to delays in upgrades due to compliance with Apple Inc.’s mobile operating system guidelines, Mitchell said, adding that the company expects improvements in the next quarter.

“It took us an extended period to figure out how to comply with those guidelines,” Mitchell said.

Costs Increase

General and administrative costs surged 45 percent to 3.79 billion yuan primarily driven by “increases in research and development expenses and staff costs,” the company said. Finance costs jumped to 317 million yuan from 22 million yuan.

Tencent is trying to generate revenue from traffic generated by WeChat and QQ by introducing an open platform strategy, allowing merchants including Lenovo Group Ltd. and third party developers and marketing agencies to use the platforms to sell their goods and services.

The company’s applications including QQ, WeChat and its app store, have attracted 2.4 million third-party programs, Chief Operating Officer Mark Ren said in October.

The company is also trying to connect hardware and household appliances including ovens and air conditioners to its messaging apps.

Tencent lost its position as the largest Internet company in Asia by market value after Alibaba Group Holding Ltd.’s $25 billion record initial public offering in September.