Tencent Announces 2016 Third Quarter Results

HONG KONG, Nov 16, 2016 /PRNewswire/ -- Tencent Holdings Limited ("Tencent" or the "Company", SEHK 00700), a leading provider of Internet value added services in China, today announced the unaudited consolidated results for the third quarter ("3Q2016") ended September 30, 2016.

3Q2016 Key Highlights:

• Total revenues were RMB40,388 million (USD6,048 million¹), an increase of 52% over the third quarter of 2015 ("YoY").
• Operating profit was RMB14,460 million (USD2,165 million), an increase of 40% YoY. Operating margin decreased to 36% from 39% last year.
• Profit for the period was RMB10,776 million (USD1,614 million), an increase of 42% YoY. Net margin decreased to 27% from 29% last year.
• Profit attributable to equity holders of the Company for the period was RMB10,646 million (USD1,594 million), an increase of 43% YoY.
• Basic earnings per share were RMB1.134. Diluted earnings per share were RMB1.121.
• On a non-GAAP basis, excluding share-based compensation, net (gains)/losses from investee companies, amortization of intangible assets and impairment provision:
  

- Operating profit was RMB15,037 million (USD2,252 million), an increase of 43% YoY. Operating margin decreased to 37% from 40% last year.

- Profit for the period was RMB11,929 million (USD1,786 million), an increase of 41% YoY. Net margin decreased to 30% from 32% last year.

- Profit attributable to equity holders of the Company for the period was RMB11,737 million (USD1,758 million), an increase of 42% YoY.

- Basic earnings per share were RMB1.251. Diluted earnings per share were RMB1.236.

"During the third quarter of 2016, we delivered strong financial performance for our core businesses. In particular, our smart phone games and social performance advertising businesses reported above-industry YoY revenue growth rates and continued to generate healthy margins. Meanwhile, our ecosystem infrastructure services such as online payment and cloud-based services saw significant progress in adoption and usage," said Ma Huateng, Chairman and CEO of Tencent.

"In addition, this month marks a significant milestone for Tencent as we celebrated the 18^th anniversary of our company founding on November 11. Looking back eighteen years, Tencent began by connecting people via its first messaging platform. Since then, we have sought to enrich the lives of our users through technology, prompting us to expand from communications to social networking, digital media, digital entertainment, and a world-leading technology and payments infrastructure. This journey was made possible by the support of our users, our business partners, and in particular, our colleagues. Tencent is profoundly grateful to them for turning our vision into the company we are today, and consequently has just announced a new programme granting stock to all Tencent employees so they can more directly share in the benefits of their contributions. We look forward to continue enhancing our user experiences, improving our ecosystem, and investing in our employees."

3Q2016 Financial Review

Value Added Services ("VAS"). Revenues from our VAS business increased by 36% YoY to RMB27,975 million for 3Q2016. Online games revenues increased by 27% YoY to RMB18,166 million. The increase primarily reflected contributions from our major player versus player ("PvP") and RPG genre smart phone games, as well as revenue growth from our major PC titles. Social networks revenues grew by 58% YoY to RMB9,809 million. The increase was mainly driven by higher revenues from digital content subscription services and from virtual item sales.

Online advertising. Revenues from our online advertising business increased by 51% YoY to RMB7,449 million for 3Q2016. Performance-based advertising revenues increased by 83% YoY to RMB4,368 million, primarily due to higher contributions from advertising revenues derived from Weixin Moments, our mobile news app, and Weixin Official Accounts. Brand display advertising revenues grew by 21% YoY to RMB3,081 million, mainly reflecting growth in revenues from our mobile platforms such as Tencent News, and the positive impact of the Rio Olympic Games, partly offset by our re-allocating some news feed inventory from brand to performance formats.

Others. Revenues from our others businesses increased by 348% YoY to RMB4,964 million for 3Q2016. The increase primarily reflected revenue growth from our payment related and cloud services.

Other Key Financial Information for 3Q2016

Share-based compensation was RMB1,132 million, up 45% YoY.

EBITDA was RMB15,865 million, up 47% YoY. Adjusted EBITDA was RMB16,963 million, up 47% YoY.

Capital expenditure was RMB3,651 million, up 121% YoY.

Free cash flow was RMB14,121 million, up 113% YoY.

As at September 30, 2016, the Company had net cash of RMB8,368 million. Fair value of our stakes in listed investee companies (both associates and available-for-sale financial assets) totalled RMB94 billion as at September 30, 2016.

Company Strategic Highlights

In 3Q2016, we continued to execute our "Connection" strategy by strengthening our social platforms and leveraging our social traffic to grow our key business models.

• Online games: For smart phone games, we sought to expand our game portfolio, particularly into both high-user game types such as board games and PvP games, and high-revenue game types such as role playing games. For PC games, given the increased popularity of PvP titles in which users alternate high-engagement competitive sessions with low-intensity practice and review sessions, we are shifting our engagement focus away from maximising user time spent in-game and toward broadening overall user engagement via game-related activities such as eSports, game video streams, and game interest tribes. Partially reflecting this shift, our PC game revenue increased despite our PC game average concurrent user metrics (which quantify time spent inside game client software) declining. We believe this broader engagement model will result in healthier and more sustainable gamer relationships with key titles.
• Advertising: For social and performance advertising, we added more interactive advertising formats to drive user engagement; sharpened advertiser tools to provide better advertising performance measurement and to deliver deeper data insight; and improved our targeting technology to enable regional and long-tail advertisers to enhance click-through rates and results.
• Digital content: We integrated the management teams of QQ Music and CMC, in order to improve the digital music industry's structure and sustainability. We invested aggressively in content for our video platform, where we saw substantial growth in subscriptions. Due partly to a healthier copyright control environment, more users paid for content on our digital literature platform.
• Payment related services: We made significant progress in driving merchant adoption and usage. Our Weixin Pay promotion "Cash-Free Day" on August 8, 2016 was well received by merchants and users, with almost 700,000 merchants participating, up over seven times YoY. We introduced a Weixin Checkout feature that allows merchants to speed up adoption of Weixin Pay by simplifying the onboarding procedures and minimising payment integration work.
• Cloud services: We strengthened our cloud services technical capabilities, enhanced industry-specific solutions, and supported our customers in fulfilling their "Internet-Plus" related initiatives. Our cloud services revenue more than tripled YoY as the number of enterprise accounts and usage by key accounts increased, particularly in sectors such as online games, online video and O2O services.

Our improving security capabilities escorted our "Connection" strategy by safeguarding our users, extending protection shields to our business partners, and providing a secure environment for our key business engines:

• For users: Our security applications provide robust protection to user accounts, passwords, personal information and virtual property, and boost performance of PC and mobile devices. We provide users with a safe environment for payment transactions and wealth management products. We protect users from fraudulent and harassing incoming calls or messages by maintaining a comprehensive and dynamic anti-fraudulent phone number library.
• For partners: Our security scanning service is widely adopted by most smart phone manufacturers and android application stores in China through pre-installation of our security applications or integration of our security modules. Our Android application store helps developers strengthen their application package against potential hijacking and counterfeiting threats. Tencent Cloud provides a rich portfolio of security functionalities to safeguard the IT systems of our enterprise clients.

During 2016, we strengthened our mobile security leadership in areas such as virus scanning, phony base-station detection, anti-fraudulent phone number library, phone memory optimisation, and speed boosting. QuestMobile and TalkingData, two well-regarded industry monitoring organisations, ranked our mobile security application first in the China mobile security industry in terms of monthly active users.

Business Review and Outlook

Operating information

• Monthly active user accounts ("MAU") of QQ was 877 million, an increase of 2% YoY.
• Smart device MAU of QQ was 647 million, an increase of 1% YoY.
• Peak concurrent user accounts of QQ (for the quarter) was 250 million, an increase of 5% YoY.
• Combined MAU of Weixin and WeChat were 846 million, an increase of 30% YoY.
• MAU of Qzone was 632 million, a decrease of 3% YoY.
• Smart device MAU of Qzone was 584 million, an increase of 1% YoY.
• Fee-based VAS registered subscriptions were 105 million, an increase of 19% YoY.

Key Platforms

• For QQ, smart device MAU increased by 1% YoY to 647 million. User activity benefited from new features such as cmShow, a mobile QQ product that provides users with animated personal avatars, with which users can interact with friends inside chat or collect items from friends to unlock new features. During the Rio Olympic Games, we attracted over 100 million QQ users to participate in the virtual torch relay campaign by building augmented reality into the phone-to-phone interactions.
• For Qzone, smart device MAU increased by 1% YoY to 584 million. User activity benefited from upgraded functionalities such as an immersive display that enables users to streamline autoplay videos and discover more personalised recommendations.
• For Weixin and WeChat together, MAU reached 846 million, representing YoY growth of 30%. We are beta-testing "mini programs" in Weixin that will provide native app-like experiences without leaving the Weixin interface, enhancing user convenience for low frequency interactions, freeing up memory space on smart phones, and enabling convenient social sharing.

VAS

In the third quarter of 2016, our social networks business sustained strong revenue growth as we generated more game-related virtual item sales and digital content sales.

• For PC client games, we generated 10% YoY revenue growth, with increased contributions from existing titles in genres such as MOBA, action, RPG, music, and sports. ARPU in key titles increased as new content and seasonal promotions were well received by our core users.
• For smart phone games, we achieved approximately RMB9.9 billion revenue² in 3Q2016, representing 87% YoY revenue growth, mainly driven by portfolio expansion and strong operating performance of our major PvP and RPG titles. At the end of September 2016, Honour of Kings surpassed 40 million daily active users, a new record among non-casual smart phone games on our platforms.
• For digital content services, we sustained healthy growth as users became increasingly willing to pay for digital content, and as we escalated efforts in combatting piracy.

Online Advertising

During 3Q2016, our advertising business delivered robust expansion, with Weixin and mobile news app being the key contributors to YoY growth.

Our initiatives featuring the Rio Olympic Games attracted about 700 million unique visitors across our news and video platforms, reinforcing our position as the online sports media leader by traffic and revenue. Neighbourhood LBS advertising in Weixin Moments is gaining popularity among local advertisers from industries such as real estate, wedding services, and auto dealerships. During the quarter, we introduced Weixin Moments canvas, a full-screen and instantaneous loading advertisement format that enables creative storytelling with flexible combinations of images and videos.

For other detailed disclosure, please refer to our website www.tencent.com/ir, or follow us via Weixin Official Account (Weixin ID: Tencent_IR).

About Tencent

Tencent uses technology to enrich the lives of Internet users. Every day, hundreds of millions of people communicate, share experiences, consume information and seek entertainment through our integrated platforms. Tencent's diversified services include QQ, Weixin/ WeChat for communications; Qzone for social networking; QQ Game Platform for online games; QQ.com and Tencent News for information and Tencent Video for video content.

Tencent was founded in Shenzhen in 1998 and went public on the Main Board of the Hong Kong Stock Exchange in 2004. The Company is one of the constituent stocks of the Hang Seng Index. Tencent seeks to evolve with the Internet by investing in innovation, providing a mutually beneficial environment for partners, and staying close to users.

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Non-GAAP Financial Measures

To supplement the consolidated results of the Group prepared in accordance with IFRS, certain non-GAAP financial measures, including non-GAAP operating profit, non-GAAP operating margin, non-GAAP profit for the period, non-GAAP net margin, non-GAAP profit attributable to equity holders of the Company, non-GAAP basic EPS and non-GAAP diluted EPS, have been presented in this announcement. These unaudited non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of the Group's financial performance prepared in accordance with IFRS. In addition, these non-GAAP financial measures may be defined differently from similar terms used by other companies.

The Company's management believes that the non-GAAP financial measures provide investors with useful supplementary information to assess the performance of the Group's core operations by excluding certain non-cash items and certain impact of M&A transactions. In addition, non-GAAP adjustments include relevant non-GAAP adjustments for the Group's material associates based on available published financials of the relevant material associates, or estimates made by the Company's management based on available information, certain expectations, assumptions and premises.

Forward-Looking Statements

This press release contains forward-looking statements relating to the business outlook, forecast business plans and growth strategies of the Company. These forward-looking statements are based on information currently available to the Company and are stated herein on the basis of the outlook at the time of this press release. They are based on certain expectations, assumptions and premises, some of which are subjective or beyond our control. These forward-looking statements may prove to be incorrect and may not be realized in future. Underlying the forward-looking statements is a large number of risks and uncertainties. Further information regarding these risks and uncertainties is included in our other public disclosure documents on our corporate website.

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