Tencent Q3 2009 Results

HONG KONG, Nov. 11 -- Tencent Holdings Limited ("Tencent" or the "Company", SEHK 00700), a leading provider of Internet and mobile & telecommunications value-added services in China, today announced the unaudited consolidated results for the third quarter of 2009 ended September 30, 2009.

Highlights of the Third Quarter of 2009:

-- Total revenues were RMB3,368.9 million (USD493.3 million), an increase
of 17.0% over the second quarter of 2009 ("QoQ") or an increase of
66.4% over the third quarter of 2008 ("YoY")
-- Revenues from Internet value-added services ("IVAS") were RMB2,622.6
million (USD384.0 million), an increase of 21.6% QoQ or an increase of
87.3% YoY
-- Revenues from mobile and telecommunications value-added services
("MVAS") were RMB446.2 million (USD65.3 million), a decrease of 5.1%
QoQ or an increase of 19.8% YoY
-- Revenues from online advertising were RMB293.6 million (USD43.0
million), an increase of 20.8% QoQ or an increase of 17.9% YoY
-- Gross profit was RMB2,344.8 million (USD343.4 million), an increase of
20.6% QoQ or an increase of 70.1% YoY. Gross margin increased to 69.6%
from 67.5% last quarter
-- Operating profit was RMB1,680.3 million (USD246.1 million), an increase
of 20.1% QoQ or an increase of 107.3% YoY. Operating margin increased
to 49.9% from 48.6% last quarter
-- Profit for the period was RMB1,433.2 million (USD209.9 million), an
increase of 19.3% QoQ or an increase of 92.3% YoY. Net margin
increased to 42.5% from 41.8% last quarter
-- Profit attributable to equity holders of the Company for the period was
RMB1,419.9 million (USD207.9 million), an increase of 19.1% QoQ or an
increase of 92.6% YoY
-- Key platform statistics:
- Total registered Instant Messaging ("IM") user accounts increased to
1,057.0 million, representing a 6.8% growth QoQ
- Active IM user accounts increased 8.2% QoQ to 484.9 million
- Peak simultaneous online user accounts for IM services recorded 75.5
million, a growth of 23.2% QoQ
- Peak simultaneous online user accounts of QQ Game portal (for mini
casual games only) was 5.7 million, representing a decrease of 8.1%
QoQ
- IVAS paying subscriptions were 47.9 million, an increase of 19.8% QoQ
- MVAS paying subscriptions were 17.7 million, an increase of 2.9% QoQ

Mr. Ma Huateng, Chairman and CEO of Tencent, said, "During the third quarter of 2009, we delivered solid growth in our operating and financial results. Our revenues benefited from the strong seasonality of the summer school holidays as well as the popularity our SNS applications, which also enhanced user activity and engagement of our IM and Qzone platforms. Looking ahead, the fourth quarter would present challenging seasonality for our IVAS and online advertising businesses. To sustain our position in the increasingly competitive market, we will continue to step up investments in our platforms, people and branding."

Financial Review for the Third Quarter of 2009

IVAS revenues increased 21.6% QoQ to RMB2,622.6 million and represented 77.8% of the total revenues in the third quarter of 2009. Revenue from online gaming business increased 23.2% QoQ to RMB1,528.7 million. The significant growth reflected the positive seasonal impact of the summer school holidays, which increased monetization of our major games, Cross Fire, Dungeon and Fighter, QQ Dancer and QQ speed. This was partially offset by the decline in revenues from more mature MMOGs, including QQ Huaxia, QQ Fantasy and QQ SanGuo. Revenues from QQ Game remained flat as it faced cannibalization from other SNS-based casual gaming applications.

Revenues from our community value-added services posted solid growth, on the back of the growth in Qzone, QQ Show and QQ Membership. Growth in revenues from Qzone was stimulated by the popularity of new SNS applications, which enhanced user activity and monetization. QQ Show grew with the ongoing enhancements in user experience and features. Revenues from QQ Membership increased, mainly attributable to growth in monthly subscription driven by cross promotions with other Internet value-added services during the summer season. Despite positive seasonality, revenues from QQ Pets declined with the decrease in usage and monetization, due to its maturity and competition from other SNS-based casual gaming applications.

MVAS revenues decreased 5.1% QoQ to RMB 446.2 million and represented 13.2% of the total revenues. This was mainly due to the decrease in realization rates and lower revenues from mobile voice value-added services, including the legacy color ringback tone business.

Online advertising revenues grew 20.8% QoQ to RMB293.6 million and represented 8.7% of total revenues. The growth primarily reflected better seasonality in the third quarter and a gradual improvement in the economic environment in China.

Other Key Financial Information for the Third Quarter of 2009

Share-based compensation was RMB117.8 million for the third quarter of 2009 as compared with RMB53.9 million for the previous quarter.

Foreign exchange loss was RMB1.2 million for the third quarter of 2009 as compared with a loss of RMB0.7 million for the previous quarter.

Capital expenditure was RMB269.1 million for the third quarter of 2009 as compared with RMB191.3 million for the previous quarter.

Basic earnings per share for the quarter were RMB0.787, and diluted earnings per share were RMB0.767.

As at the end of September 30, 2009, cash position stood at RMB9,616.0 million. The total number of shares of the Company in issue was 1.816 billion.

Business Review and Outlook

In the third quarter of 2009, our IVAS benefited from the strong seasonality of the summer school holidays, which increased monetisation of our popular games, as well as contributed to the growth of our community value- added services. For our MVAS, revenues declined on a quarter-on-quarter basis, primarily due to the reduction in realisation rates and the decreasing business volume of mobile voice value-added services. Our online advertising business grew on the back of the positive seasonality and a gradual improvement in economic environment. Looking ahead, the fourth quarter would present challenging seasonality for our IVAS and online advertising businesses. Visibility of our MVAS business would remain low as the industry value chain is still evolving.

IM Platform

Our core IM platform continued to expand, with active users and peak concurrent users increasing to 484.9 million and 75.5 million respectively in the third quarter of 2009. The amount of time users spent on our IM services increased significantly during the quarter. This was driven by the popularity of our SNS applications, which enhanced user engagement and activity through cross-platform integration, as well as increased usage of our IM services through mobile devices.

QQ.com

QQ.com consolidated its position as the leading Internet media in China, with continued enhancements in the content and user experience of different channels, as well as the comprehensive coverage of the 60th anniversary of National Day. During the quarter, we stepped up our advertising and promotional activities to strengthen the brand recognition and media influence of QQ.com. We are planning a brand enhancement campaign, which will increase our marketing expenses significantly in the fourth quarter.

Internet value-added services

Our community value-added services delivered solid growth during the third quarter of 2009. QQ Membership grew as we carried out cross promotions with other IVAS during the summer season. However, continued growth of QQ Membership is becoming increasingly challenging because of its large base and already high penetration rate among the QQ users. We are intensifying our efforts to enhance the overall user value of the product by adding offline lifestyle services to the package. However, these efforts require a long time to organize and their actual results remain to be explored. Active user accounts of Qzone increased by 33.7% on a quarter-on-quarter basis to 305.3 million at the end of the third quarter. This was mainly driven by our new SNS applications, particularly SNS-based casual games, which were well received by our users. Xiaoyou, a real-name SNS service focused on students, continued to gain traction during the quarter as we benefited from the back-to-school season after summer vacation. QQ Show benefited from positive seasonality and our ongoing enrichment of content and user experience. For QQ Pets, usage and monetisation decreased during the quarter despite stronger seasonality due to its maturity and competition from other SNS-based casual gaming applications. We are working on a comprehensive upgrade of the product with more multiplayer functions and lower level of monetisation in order to revive the user base of the service.

In the third quarter, our online gaming business benefited from the strong seasonal impact of the summer holidays. Our advanced casual games, performances of which are particularly sensitive to holidays, registered robust growth. While the PCU of Cross Fire increased to 1.6 million, QQ Dancer achieved over 1 million PCU during the quarter, making it our third online game reaching this milestone. In MMOG, the PCU of DNF exceeded 2 million during the quarter. We also launched Silk Road Hero, a web-based MMOG, and Hero Island, a niche market MMOG, to cover the various market segments within the online gaming market. During the third quarter, the PCU of QQ Game declined to 5.7 million as the number for the previous quarter was stimulated by short-term boost due to special marketing activities and in-game promotions. Its revenue was stable compared to the previous quarter. Going forward, QQ Game may face additional cannibalisation impact from SNS-based casual gaming applications. For upcoming game titles, we are currently fine-tuning the closed beta of A.V.A., a first-person shooting game. We also plan to launch Feng Shen Ji and Fantasy World, both of which are in-house developed MMOGs, in 2010.

Mobile and telecommunications value-added services

In the third quarter, revenues from our MVAS business was dampened by lowered realisation rates and decline in mobile voice value-added services, including the legacy colour ringback tone business. Monthly subscription to our bundled SMS packages grew slightly as we enhanced functionalities and user experience. We also experienced strong increase in the traffic on our wireless portal, further strengthening its leading position in China. While the proliferation of 3G will present new business opportunities over the longer term, visibility of the industry remains low as the value chain is still evolving.

Online advertising

Amid positive seasonal impact of the summer holidays and gradual improvement in the overall economic environment, our advertising revenues increased during the quarter. However, sustainability of the recovery in the advertising market is still uncertain. Looking ahead, the fourth quarter would present weaker seasonality for the business. We also expect our search-based advertising revenues to reduce substantially due to amendments to service contract with our partner and the gradual transition into our self-developed search engine.

Source: Tencent