Tencent's second-quarter profit surges 41% despite missing revenue estimates

Revenue for the quarter rose 11%, short of estimates after sales fell in the company's major divisions

Boys playing 'Honour of Kings' by Tencent. The Chinese company posted revenue growth from PC and mobile games in the second quarter of 2023. Reuters

China's Tencent Holdings, the world's biggest gaming company, has reported an annual 41 per cent surge in its second-quarter net profit despite missing revenue estimates.

Net profit attributable to equity holders of the company in the three months to the end of June climbed to 26.2 billion yuan ($3.6 billion), Shenzhen-based Tencent said in a statement on its website on Wednesday.

Revenue for the quarter rose 11.3 per cent on an annual basis to 149.2 billion yuan, which was short of analyst estimates after sales fell in the company's major divisions, including gaming and cloud services.

The company posted revenue growth from PC and mobile games, while also receiving "positive contributions" from recently released titles, the company said.

A "modest growth" in cloud services added to the increase in business services revenue.

Operating profit climbed by more than a third year on year to 40.3 billion yuan.

“During the second quarter of 2023, we sustained a solid revenue growth rate, along with a gravitation toward high quality revenue streams with better margins," said Ma Huateng, chairman and chief executive of Tencent.

"This transition, combined with careful cost discipline developed in the previous year, resulted in profit growth exceeding revenue growth."

For the first half of 2023, net profit rose 24 per cent annually to 52 billion yuan, while operating profit grew by a fifth to 80.7 billion yuan.

Gaming has become big business globally, with new technology providing both an opportunity to reach a wider audience and develop new titles to cater to consumer demand.

Tencent has been able to tap into this potential, most notably in the mobile gaming segment, with its popular titles, including PUBG: Battlegrounds and League of Legends. It also has a 40 per cent stake in Fortnite publisher Epic Games.

It has also collaborated with established gaming companies to take popular franchises to mobile, which include Call of Duty, Pokemon and Contra.

Revenue in the global gaming market is projected to hit $212.4 billion by 2026, with mobile platforms continuing to lead the growth, market data platform Newzoo said in a report last week.

The revenue surge will be dominated by mobile games, which are expected to grow 0.8 per cent and account for $92.6 billion, or nearly half of all revenue, this year, the Amsterdam-based company said at the time.

Console games will be second with $56.1 billion, or 30 per cent of total revenue. The segment is also projected to log the biggest annual increase at 7.4 per cent.

Tencent is the biggest video gaming company by revenue with $7.56 billion, followed by Sony, Apple, Microsoft, NetEase, Google, Activision Blizzard, Electronic Arts, Nintendo and Take-Two Interactive, according to the Newzoo report.

Tencent is also delving into the generative artificial intelligence craze. Earlier this month, the company announced that its self-developed AI model, called Hunyuan, is now at the application stage, and being integrated in some of its products, including Tencent Cloud, Meeting and Docs.

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"We will continue to drive innovation, including through generative AI, where we are providing a library of models to our partners via our Tencent Cloud Model-as-a-Service offering, as well as refining our proprietary foundation model," Mr Ma said.

Tencent's online advertising revenue in the second quarter rose by more than a third to 25 billion yuan, as demand for video accounts advertisements grew and surpassed three billion yuan.

Revenue from its financial technology and business units increased 15 per cent annually to 48.6 billion yuan, with the former driven by offline and online commercial payment activities.

"We outpaced the overall industry’s growth rate, which we attribute to enhancements to machine learning systems powering our advertising platform and robust demand for video accounts advertisements," Tencent said.

"Our commercial payment revenue increased as consumption spending grew, and our wealth management business expanded its users and aggregated customer assets."