Tencent Announces 2020 Second Quarter and Interim Results

Tencent Holdings Limited (“Tencent” or the “Company”, 00700.HK), a leading provider of Internet value added services in China, today announced the unaudited consolidated results for the second quarter (“2Q2020”) and first half year of 2020 (“1H2020”) ended June 30, 2020.

1H2020 Key Highlights  

Revenues: +28% YoY; Non-IFRS^[1] profit attributable to equity holders of the Company: +29% YoY

• Total revenues were RMB222,948 million (USD31,492 million^[2]), an increase of 28% over the first half of 2019 (“YoY”).
• On a non-IFRS basis, which is intended to reflect core earnings by excluding certain one-time and/or non-cash items:

–  Operating profit was RMB73,204 million (USD10,340 million), an increase of 31% YoY. Operating margin increased to 33% from 32% last year.
–  Profit for the period was RMB59,204 million (USD8,363 million), an increase of 29% YoY. Net margin increased to 27% from 26% last year.
–  Profit attributable to equity holders of the Company for the period was RMB57,232 million (USD8,084 million), an increase of 29% YoY.
–  Basic earnings per share were RMB6.038. Diluted earnings per share were RMB5.945.

• On an IFRS basis:

–  Operating profit was RMB76,571 million (USD10,816 million), an increase of 19% YoY. Operating margin decreased to 34% from 37% last year.
–  Profit for the period was RMB61,857 million (USD8,737 million), an increase of 18% YoY. Net margin decreased to 28% from 30% last year. 
–  Profit attributable to equity holders of the Company for the period was RMB62,003 million (USD8,758 million), an increase of 21% YoY.
–  Basic earnings per share were RMB6.541. Diluted earnings per share were RMB6.440.

• Total cash were RMB281,086 million (USD39,704 million) at the end of the period.

2Q2020 Key Highlights  

Revenues: +29% YoY; Non-IFRS profit attributable to equity holders of the Company: +28% YoY

• Total revenues were RMB114,883 million (USD16,228 million), an increase of 29% over the second quarter of 2019 (“YoY”).
• On a non-IFRS basis, which is intended to reflect core earnings by excluding certain one-time and/or non-cash items:

–  Operating profit was RMB37,629 million (USD5,315 million), an increase of 38% YoY. Operating margin increased to 33% from 31% last year.
–  Profit for the period was RMB31,220 million (USD4,410 million), an increase of 29% YoY. Net margin remained stable at 27%.
–  Profit attributable to equity holders of the Company for the quarter was RMB30,153 million (USD4,259 million), an increase of 28% YoY.
–  Basic earnings per share were RMB3.180. Diluted earnings per share were RMB3.130.

• On an IFRS basis:

–  Operating profit was RMB39,311 million (USD5,553 million), an increase of 43% YoY. Operating margin increased to 34% from 31% last year.
–  Profit for the period was RMB32,454 million (USD4,584 million), an increase of 31% YoY. Net margin remained stable at 28%. 
–  Profit attributable to equity holders of the Company for the quarter was RMB33,107 million (USD4,676 million), an increase of 37% YoY.
–  Basic earnings per share were RMB3.491. Diluted earnings per share were RMB3.437.

Mr. Ma Huateng, Chairman and CEO of Tencent, said, “Since the beginning of this year, the COVID-19 pandemic has swept the world, disrupting our daily work and life routines. During this challenging time, we utilised our platforms and technologies to help users adapt to the new normal via online tools, to support enterprises in conducting digital upgrades, and to broadly contribute to economic recovery. We achieved generally robust operating and financial results in the second quarter, testifying to the diligence of our teams and resilience of our business model. We are committed to investing in talents, technology and platforms in a disciplined manner to embrace the emerging structural opportunities and challenges ahead.”

2Q2020 Financial Review

Revenue from VAS increased by 35% to RMB65,002 million for the second quarter of 2020 on a year-on-year basis. Online games revenues grew by 40% to RMB38,288 million. The increase was primarily driven by higher revenues from smart phone games in both domestic and overseas markets, including titles such as Peacekeeper Elite and Honour of Kings, partly offset by the decrease in revenues from PC client games such as DnF and CrossFire. Total smart phone games revenues (including smart phone games revenues attributable to our social networks business) were RMB35,988 million and PC client games revenues were RMB10,912 million for the second quarter of 2020. Social networks revenues increased by 29% to RMB26,714 million. The increase was mainly due to revenue contributions from digital content services including the live broadcast services of HUYA Inc. (“HUYA”, which we consolidated as a subsidiary from April 2020), and music subscriptions growth, as well as revenue growth from in-game virtual item sales.

Revenues from FinTech and Business Services increased by 30% to RMB29,862 million for the second quarter of 2020 on a year-on-year basis. The increase mainly reflected revenue growth from commercial payment due to increased average daily transactions and value per transaction, from wealth management, as well as from cloud services as a result of greater consumption of our public cloud, particularly by the Internet services and municipal services sectors.

Revenues from Online Advertising increased by 13% to RMB18,552 million for the second quarter of 2020 on a year-on-year basis. Social and others advertising revenues grew by 27% to RMB15,262 million. The increase was primarily due to revenue growth from our mobile advertising network, benefitting from increased traffic and a greater mix of video advertising with higher pricing, as well as increased revenues derived from Weixin Moments due to more inventories and impressions. Media advertising revenues decreased by 25% to RMB3,290 million. The decrease was primarily driven by lower advertising revenues from Tencent Video as a result of weak brand advertising demand amid the challenging macro environment, as well as delayed content production and releases.

Other Key Financial Information for 2Q2020

EBITDA was RMB40,525 million, up 24% YoY. Adjusted EBITDA was RMB43,742 million, up 25% YoY.
Capital expenditures were RMB9,466 million, up 117% YoY.
Free cash flow* was RMB28,451 million, up 127% YoY.

As at June 30, 2020, net cash position totalled RMB7,212 million. Fair value of our stakes in listed investee companies (excluding subsidiaries) totalled RMB726,244 million.

* Starting from 2020, free cash flow was adjusted by subtracting payments for media content and lease liabilities, in addition to subtracting payments for capital expenditure from the operating cash flow. Restated free cash flow was RMB16.8 billion in 1Q2019, RMB12.6 billion in 2Q2019, RMB28.1 billion in 3Q2019, and RMB31.3 billion in 4Q2019, respectively.

Operating Metrics

Business Review and Outlook

Since the beginning of this year, the COVID-19 pandemic has swept the world, disrupting our daily work and life routines. During this challenging time, we utilised our platforms and technologies to help users adapt to the new normal via online tools, to support enterprises in conducting digital upgrades, and to broadly contribute to economic recovery. Here are some highlights for our key products and business lines:

Communication and Social

For Weixin, we released update to enhance functionalities for communication, content and services. For communication, the new Tickle function has enabled many creative expressions, and the addition of live broadcast function to Weixin school-plus-home groups facilitated online education within Weixin. MAUs and daily messages sent both increased year-on-year. For content, we upgraded the video content publishing functionalities in Official Accounts, enhanced content discovery with strengthened recommendation algorithm and launched content aggregation tools. These initiatives revitalised content consumption in Official Accounts, resulting in year-on-year increase in page views. As for services, we assisted traditional retailers to migrate online and support their business resumption via Mini Programs. Transactions value generated via Mini Programs increased sequentially as economic activities recovered. We launched a free and easy-to-use toolkit, Mini Stores, to help long-tail merchants build and operate digital storefronts, empowering them with various functions such as order management, after-sales services and live broadcast.

In QQ, we enriched features to enable users to better interact with their friends and families while they are physically apart. Users can initiate online parties and play AI-empowered social games together with their friends in video chats. To engage the expanding fan base for Anime, Comics, Games and Novels (“ACGN”) content, we offered customisable comic stickers within QQ chats, and enriched content for ACGN-related Mini Programs, which gained popularity among young users.

Online Games

In China, user time spent on our smart phone games increased year-on-year but decreased quarter-on-quarter due to seasonality and back-to-office behavior. Honour of Kings deepened its user engagement with the release of more top-tier skins during its annual Give Me Five festival. Peacekeeper Elite celebrated its first anniversary with new content and game modes to enhance the competitive game experience, and we partnered with Tesla to introduce in-game Tesla-branded car skins in July, which proved highly popular. In the second quarter, we launched a strategy game, Chess Rush; an action game based on a popular anime IP, The Outcast; and Supercell’s Brawl Stars. Brawl Stars ranked first in the iOS China Download Chart in June this year, extending its global leadership in the fast-paced 3v3 MOBA genre.

Internationally, our MAU increased significantly year-on-year and quarter-on-quarter due to new game launches and more user time spent during the stay-at-home period. We released an immersive team-based action game for PC, Valorant; a card game supporting cross-platform play on PC and smart phones, Legends of Runeterra; and a licensed mobile RPG, CODE:D Blood. Valorant was the most watched game globally on Twitch during the second quarter, reflecting the game’s instant appeal to immersive action game players.

Digital Content

Our fee-based VAS subscriptions increased 20% year-on-year to 203 million, primarily due to growth in video and music content subscriptions. Video subscriptions increased 18% year-on-year to 114 million, driven by self-commissioned Chinese anime and drama series, such as The Land of Warriors Season 3, Candle in the Tomb: The Lost  and The Romance of Tiger and Rose. Sequentially, traffic for long-form video sites in China, including Tencent Video, declined due to work-from-office behavior and delayed releases of certain high-profile variety shows and drama series. However, Tencent Video’s traffic has increased subsequent to the quarter end, driven by popular drama series such as Nothing But Thirty, which we believe reflects the underlying resilience of our video platform. Music subscriptions rose 52% year-on-year to 47 million as Tencent Music increased the scope of the paid music library.

Online Advertising

Continued strength in social and others advertising contributed to the year-on-year revenue growth for our online advertising business. Sequentially, our online advertising revenue grew at a slower-than-seasonal rate as the games and Internet services sectors, which had ramped up advertising aggressively during the first quarter of 2020 due to work-from-home behavior, reduced their spending to more normal levels. However, our advertiser industry breadth diversified in the second quarter of 2020 as categories such as eCommerce and education spent heavily for the 618 promotional campaigns and summer courses, while categories such as automobile and consumer electronics brands increased their spending as consumption recovered.

To reinforce our long-term competitiveness in performance advertising, we launched an integrated advertising platform in July, where advertisers can more efficiently place advertisements across all of our inventories, including our mobile advertising network. This new platform will also enhance bidding efficiency and provide smarter targeting for advertisers.

For social and others advertising, Weixin properties, particularly Moments, saw rapid advertising impressions growth, while our mobile advertising network experienced higher eCPMs as video advertisements’ revenue contribution increased from a single digit percentage in the second quarter of 2019 to over 40% in the second quarter this year. We believe the Weixin ecosystem is redefining China’s online advertising by enabling advertisers to sustain relationships with their users in their own private domains, such as Official Accounts and Mini Programs, with the result that our advertisers are effectively investing in long-term and loyal customer relationships, rather than just purchasing one-time transactions.

As for media advertising, revenue declined sharply year-on-year due to weak demand from brand advertisers and the delayed production and release of certain variety shows and drama series, some of which we expect to release in the second half of 2020.

FinTech

Our commercial payment and wealth management businesses grew their users and business scale, driving FinTech revenue up year-on-year and quarter-on-quarter. Offline merchants, especially SMEs increasingly adopted our payment services and business management tools, as they sought to digitally upgrade their businesses to access customers and settle transactions via mobile phones. During the quarter, merchant demand for our payment solutions stepped up, especially from categories such as retail and restaurants. As a result, the number of average daily transactions and value per transaction for our commercial payments both grew year-on-year.

For our wealth management business, the aggregated customer assets and the number of active customers increased rapidly year-on-year as more customers appreciated the convenience of managing their cash through our secure and carefully-curated platform.

Cloud and Other Business Services

Increased cloud services usage by Internet companies and the public sector contributed to the year-on-year and sequential revenue growth of our cloud and other business services. Due to the lingering impact from COVID-19, offline project deployment has not fully resumed in the second quarter, but we signed major contracts in the financial and public sectors, while expanding our presence in emerging verticals such as medical, education, and meetings and exhibitions, to help customers in their digital transformation. On technology and infrastructure, we are adopting custom-made equipment, as well as building and expanding our own hyperscale data centres to enhance the performance and optimise the cost of our cloud services for the long run.