Tencent Holdings Limited, China’s social media and gaming leader, has reported stronger-than-expected earnings for the third quarter of 2021. The company’s success can be attributed to the strong performance of its advertising sales and gaming divisions, which have defied China’s economic slowdown.
In the quarter ending on September 30, Tencent’s total revenue increased by 10% year-over-year (YoY) to RMB154.6 billion (approximately US$22.8 billion). Although the net income decreased by 9% YoY to RMB36.2 billion (US$5.0 billion), it saw a significant increase of 38% quarter-over-quarter (QoQ), surpassing Wall Street’s expectations. Additionally, the operating profit declined by 6% YoY to RMB48.48 billion (US$7.0 billion), but experienced a QoQ growth of 20%, exceeding the estimated RMB43.4 billion (US$6.3 billion). On a Non-IFRS basis, which excludes certain one-time and non-cash items, Tencent achieved a 39% YoY increase in net income to RMB44.92 billion (US$6.6 billion), surpassing analysts’ estimate of RMB39.98 billion (US$5.9 billion). The operating profit reached RMB55.48 billion (US$8.1 billion), reflecting a 6% YoY decline but a 20% QoQ increase.
Tencent’s impressive sales growth can be attributed to its advertising division, which experienced the fastest growth during the third quarter. Revenues from online advertising soared by 20% YoY to a record high of RMB25.7 billion (US$3.8 billion). This growth was fueled by strong demand for advertising in Video Accounts, the mobile ad network, and Weixin Search. Notably, the local services and FMCG categories contributed significantly to the advertising revenues.
For the first time, Tencent disclosed the performance of Weixin’s closed-loop advertising. This advertising model, which includes advertisements linked to the landing pages of Weixin Mini Programs, Video Accounts, Official Accounts, and WeCom, witnessed an over 30% YoY increase in revenue and accounted for more than half of Weixin’s advertising revenue. Video Accounts within Weixin also experienced impressive growth, with total video views rising by over 50% YoY. Original content video views, in particular, now constitute the majority of Video Accounts’ total views.
Tencent’s success in the advertising sector can be attributed to its strategic initiatives. The company began monetizing video accounts by incorporating in-feed ads in the third quarter of last year. It has also expanded its artificial intelligence (AI) models to enhance ad targeting and attribution accuracy. Furthermore, Tencent has provided generative AI tools to its advertiser partners, enabling them to create dynamic ad visuals based on text inputs and optimize ad sizes for different platforms.
Chairman and CEO Pony Ma expressed his optimism about Tencent’s video feature in WeChat, highlighting its significance within the company. He stated that relatively new services, such as Video Accounts and Mini Games, have contributed high-margin revenue streams. Tencent intends to invest further in AI models, enhance product features, and strengthen targeting capabilities for content and advertising.
Tencent’s mainstay business, value-added services, which include games, also witnessed growth, generating RMB75.7 billion (US$11.1 billion) with a 4% YoY increase in the third quarter. Total revenue from games rose by 7% YoY to RMB46 billion (US$6.8 billion), marking the third consecutive quarter of positive growth. Revenue from social networks remained stable at RMB29.7 billion (US$4.4 billion), supported by growth in music subscriptions, Mini Games platform service fees, and app-based game virtual item sales. However, there was a decline in revenue from music-related and games-related live streaming services.
Tencent’s domestic games contributed RMB32.7 billion (US$4.8 billion) in revenue, driven by the successful launches of Lost Ark and VALORANT. Revenues from evergreen titles like Honour of Kings and DnF also increased. The third quarter saw accelerated growth compared to the previous quarter, which had experienced slower growth.
The company’s international games segment maintained double-digit growth throughout the year, with revenue reaching RMB13.3 billion (US$2.0 billion), a 14% YoY increase and the highest revenue for the year. Tencent experienced a revenue recovery for PUBG Mobile and significant revenue contributions from games like Goddess of Victory: NIKKE, VALORANT, and Triple Match 3D. However, revenue from Tower of Fantasy decreased due to tough year-over-year comparisons following its launch in the same period last year.
During an earnings call, Tencent President Matin Lau highlighted the company’s strong pipeline of games, including titles like Honor of Kings World, Valorant Mobile, Monster Hunter Mobile, and Assassin’s Creed Mobile. Tencent has multiple new games in development, both expanding its own game IPs and utilizing popular licensed IPs. Lau emphasized that Tencent’s revenue growth model provides consistent earnings growth, regardless of whether new games are launched in a particular quarter or not.