Tencent’s Q4 net profit rose 105 percent year-over-year, gaming accounted for 37 percent

This is the lowest proportion of game business in total revenue.

On March 21, Tencent released its unaudited fourth-quarter comprehensive performance and audited annual comprehensive results as of Dec. 31, 2017.

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According to the financial data, Tencent‘s 2017 revenue was 237.76 billion yuan ($37.6 billion), up 56 percent from the previous year. The annual profit was 72.471 billion yuan ($11.4 billion), up 75 percent from the previous year, while net profit rate rose from 27 percent to 30 percent. Tencent equity holders earned 71.51 billion yuan ($11.3 billion), an increase of 74 percent over the same period the previous year.

Tencent‘s fourth-quarter gross income was 66.392 billion yuan ($10.5 billion), up 51 percent from the previous year. The profit in Q4 was 21.622 billion yuan ($3.4 billion), up 105 percent from the previous year, while net profit rate rose from 24 percent to 33 percent. Tencent‘s equity holders hold 20.797 billion yuan ($3.3 billion), an increase of 98 percent over the same period the previous year. The basic profit per share was 2.206 yuan ($0.35), and the diluted earnings per share was 2.177 yuan ($0.34).

From Tencent‘s revenue, net profit and net profit margin over the past few years, the most notable indicator in Q4 was the record high increase in net profit of 105 percent.

In response to the company’s performance, Pony Ma, the chairman and CEO of Tencent, said in the earnings reports that Tencent‘s position has been further consolidated by a number of important initiatives in the past year. He referred to Tencent Video, WeChat mini-programs and PlayerUnknown’s Battlegrounds.

He said,

Our video service has become the market leader in China, with the largest number of daily active mobile users and monthly subscriptions. The number of developers and users of WeChat mini-programs is growing rapidly. Our racing game QQ Flying Driver and shooting game PlayerUnknown’s Battlegrounds have become leaders in their respective categories.

As shown in the report, Tencent‘s Q4 revenue structure consisted of three major business. Value-added services accounted for 60 percent of total revenue, online advertising accounted for 19 percent of total revenue, and other businesses accounted for 21 percent of total revenue.

Game revenue rose 32 percent year-over-year, but its share of the total revenue fell to 37 percent.

Specifically, Tencent‘s value-added services in Q4 grew 37 percent year-over-year to 39.947 billion yuan ($6.3 billion). This business is mainly composed of online gaming revenue and advertisements, among which the former accounted for the bulk.

Online gaming revenue increased 32 percent to 24.367 billion yuan ($3.9 billion).

Online gaming revenue grew 32 percent to 24.367 billion yuan ($3.9 billion) in Q4, thanks to mobile and PC games.

In the earnings report, Tencent said that the growth came mainly from mobile games (including Arena Of Valor, Honor of Kings and the classic Dragon Nest), as well as PC games (such as Dungeons and Warriors and the League of Legends).

From Tencent‘s online game revenue growth in the past two years, the proportion of game in total revenue fell to 37 percent for the first time. This reflects Tencent‘s efforts to diversify its business model.

Tencent‘s games have consistently accounted for more than 50 percent of its total income, but the company also stressed diversifying its business. In Q2 2016, the proportion of game revenue to total revenue dropped to 48 percent for the first time, and has remained below 50 percent ever since.

Social network revenue increased by 45 percent to 15.58 billion yuan ($2.5 billion).

Social networking revenue rose by 45 percent to 15.58 billion yuan ($2.5 billion) in Q4. The growth was mainly due to the increase of digital content services such as video streaming and live broadcast, and in-game virtual item sales.

Social ads were up 68 percent, and WeChat contributed a lot.

Revenue from online advertising business rose 49 percent to 12.361 billion yuan ($1.95 billion) in the fourth quarter of 2017.

Specifically, media advertising revenue increased 22 percent to 4.121 billion yuan ($650 million), mainly due to Tencent Video streaming service revenue growth. The growth was partially offset by the reduction of advertising resources caused by the company’s improved news advertising system.

Social and other advertising revenue grew by 68 percent to 8.24 billion yuan ($1.3 billion), mainly due to growth in advertising revenue from WeChat (WeChat Moment and WeChat Official Account) and Tencent‘s advertising network.

The growth rate of online advertising revenue has slowed in the past two years. At the same time, advertising revenue has not exceeded 20 percent of total revenues.

In addition, revenue from other businesses in the quarter grew 121 percent year-over-year to 14.084 billion yuan ($2.2 billion). The growth was driven mainly by Tencent‘s payment-related services and cloud services.

Free cash flow was 24.17 billion yuan ($3.8 billion), up 41 percent from the previous year.

Tencent had been making multiple acquisitions in games, live broadcasts, and new retail sectors, as reflected in the earnings report. Tencent‘s capital expenditure in Q4 was 4.975 billion yuan ($785.6 million), an increase of 75 percent over the same period of the previous year.

On Dec. 31, 2017, Tencent‘s net cash amount was 16.332 billion yuan ($2.6 billion). On that day, the fair value of Tencent‘s equity in a listed investment company (including its affiliates and its interests in the sale of financial assets, but excluding the company’s subsidiaries) amounted to 210.8 billion yuan ($33.3 billion).

In addition, Tencent‘s free cash flow was 24.17 billion yuan ($3.8 billion), up 41 percent from the same period in the previous year. This will support Tencent‘s continued investment in the future.

In the earnings report, Ma said that Tencent will increase its future investment in video, payment, cloud, artificial intelligence and smart retail sales. “This will have some impact on our profitability in the short term, but we believe these investments will bring us long-term value and growth opportunities,” he said.

The number of monthly active WeChat users grew by 11.2 percent, and monthly active QQ users declined by 9.8 percent year-over-year.

Tencent offers two social products, WeChat and QQ.

In Q4, the number of monthly active WeChat users reached 989 million, up by 11.2 percent year-over-year. The growth rate was significantly lower than that of the previous year. Ma had previously stated after the Spring Festival that the number of monthly active WeChat users exceeded one billion.

In addition, the number of monthly active QQ accounts reached 783 million, down by 9.8 percent from the same period of the previous year. The number of monthly active QQ smart terminal accounts reached 683 million, up by 1.7 percent from the same period of the previous year.

The highest number of simultaneously online QQ accounts reached 271 million, an increase of 11.1 percent over the previous year. The number of monthly active QQ space accounts reached 563 million, down 11.7 percent from the same period of the previous year. The number of monthly active QQ space intelligent terminal accounts reached 554 million, down 9.1 percent from the same period of the previous year. The number of accounts registered for premium value-added services was 135 million, up 22.1 percent from the same period of the previous year.