Tencent Holdings Limited
Q3 2021 Earnings Call Transcript

Published: 10 Nov 2021

[Operator:]

Good day and thank you for standing by. Welcome to Tencent Holdings Limited Third Quarter 2021 Results Announcement Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. To ask a question during the session Please be advised that today's conference is being recorded. If you require any further assistance, please press. And now, like to turn the conference over to Ms. Jane Yip from

[Jane Yip:]

Tencent IR team. Thank you. Please go ahead. Thank you. Good afternoon -- evening, everyone. Welcome to our 2021 first quarter results conference call. Before we start the presentation, we would like to remind you that these forward-looking statements, which are underlying by a number of risks and uncertainties and may not be real life in the future for various reasons. Information about general market conditions is coming from at Tencent. This presentation also contains some audited non-IFRS financial measures that should be considered in addition to the -- as a substitute for measures of financial performance, prepared in accordance with IFRS. For a detailed discussion of risk factors and non IFRS measures, please refer to our disclosure’s documents on the IR section of our website. Let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma who will kick off with a of the wheel. President Martin Lau, and Chief Strategy Officer James Mitchell, who will provide a business review. Chief Financial Officer, John Lo, will conclude with financial discussion. Before we open the floor for questions. I will now turn the call over to Pony.

[Pony Ma:]

Good evening. Thanks, everyone for joining us. During the third quarter, the Internet industry, including the dramatic industries, and certain advertiser categories, adapted to new macro-economic developments. We are proactively embracing the new regulatory environment, which we believe should contribute to a more sustainable development path for the industry. In the domestic gain market, our industry is leading efforts in fully compiling with new regulations significantly reduced minus gain time and spending for clean, healthier game play involvement. We also invest actively in key strategic areas, as well as in frontiers of technologies, along with making new commitment in common prosperity initiatives. Looking forward, we are committed to delivering superior experiences to users assisting enterprises to digitalize their operations and contributing to this society at large. Starting from this quarter, we closed revenue from Domestic and International Games as a new sub-segment under VOS, reflecting the increasing scale of our international games business. Now let me go through the headline number -- financial number for the quarter. Total revenue was $142 billion R&D, up 13 % year-on-year and 3 % quarter-on-quarter. Gross profit was RMB 63 billion, up 11 % year-on-year and stable quarter-on-quarter. Non - IFRS operating profit was RMB 41 billion up 7 % year-on-year, or down 5 % quarter-on-quarter. Now on our IFRS net profit attributable to equity holders were $32 billion, 2 % year-on-year in 7 % quarter-on-quarter. Moving to our key services. We focus on upgrading technologies and product innovation. Maintaining our first offsite market positions across key businesses, including social, gained, digital content, payment, and public Cloud Services. Combined, MAU of wheezing and WeChat was $1.26 billion. Mobile devices MAU off QC was $574 million. Now, I will hand over to Martin and James for the review.

[Martin Lau:]

Thank you, and good evening -- good morning, everybody. For the third quarter of 2021, our total revenue grew 13 % year-on-year. VAS represented 53 % of our total revenue within which domestic game subsegment revenue was 24 %, international game subsegment was 8 %, and social networks subsegment revenue was 21 %. Online advertising accounted for 16 % of our total revenue. And FinTech and business services was 30 % of total revenue. For value added services, segment revenue was $75 billion RMB for the third quarter, up 8 % year-on-year. Social networks SAP segment revenue increased 7 % year-on-year to RMB 30 billion, reflecting relatively rapid growth from video and music subscriptions and moderate growth from live-streaming and in-game item sales. Total VAS subscriptions grew 10 % year-on-year to RMB 235 million. Video subscriptions increased 8 % year-on-year to an RMB 129 million driven by popular dramas series. For example, our self-commissioned TV drama, crime crackdown, as well as Honor of King's tie in You are Mike glory ranked number 1 and number 2 by video views across all online platforms in China for the quarter, broadening our user mix in terms of gender and age. The success of this series demonstrated our progress in content production and cross-media IP extension. Music subscriptions increased 838 % year-on-year to 71 million as more users are attracted by TAM and enhanced streaming experience. Looking at our games business, for domestic games, revenue grew 5 % year-on-year to $34 billion RMB, primarily driven by on of King's, caught up duty mobile, and Moonlight blade mobile. Revenue grew sequentially due to seasonal activities in Peacekeeper Elite and Dungeon and Fighter. For international games, the revenue increased 20 % year-on-year to 11 billion RMB, a 28 % in constant currency terms, benefiting from robust performance of diluent and classic plans. Moving to Weixin, we continue to strengthen its content and commerce ecosystems. In video accounts, we're fostering rich and diverse content. An increasing number of content creators from official accounts now express their ideas in video format, contributing to a differentiated set of content in video accounts. Our strength in sports coverage, music, and games also enriched and diversified our content offering. Video consumption grew healthily as we proactively enhanced content and recommendation technology. For mini programs, we're deepening penetration across industries, including restaurants, retailing, and transportation. The number of active mini programs increased by over 40 % year-on-year. Testifying to the vibrancy of the commerce ecosystem. By integrating WeCom's enterprise communication tool with mini programs, we're unable to direct interactions between individual sales person and customers in retailer’s private domain environment. As a result, retailers can foster their own customer relationships, and drive sales efficiently. For QQ, in our last upgrade for QQ, we have been stepping up our efforts and technology on the interactive side. We enhance video and AI technology is to facilitate creative and efficient content production driving more UGC activities on our platform. We customized with festivals and national landmarks, adding more engaging experiences for users to interact with the physical world. We also provided cross-screen interacted effects in video call, upping more entertaining, shared experiences. Through these upgrades, we make users interaction in QC more exciting and immersive. Turning to games, 1. First on Domestic Games, who believe fostering a healthy game-play environment for domestic market is of paramount importance. Since September 1st, we have implemented new measures to fully comply with the latest regulations on restricting minor's game time in China. Subsequently, users under 18 years old accounted for 0.7% of our domestic games time spent in September, reduced significantly from 6.4% in the same period last year. In addition, these users accounted for 1.1% of our domestic game’s gross receipts in September down from 4.8% in the same period last year. We continue to lead the industry in compacting minor's usage of adult accounts. For example, we upgrade our screening systems to identify misused adult accounts around the clock. We also proactively assist authorities in cracking down on illegal account transactions. Looking at the highlights of our Games business. For A-N-A-B kings, we're bringing to life Chinese culture with a series of popular skins which successfully transmitted provincial arts, and traditions to a wider audience. We made significant progress in expanding successful PC franchise to mobile. While dripped successfully reactivated an enlarged League of Legends user base by extending the authentic PC experience to mobile devices. In October 2021, it ranked second by DAU among all mobile games in China. We also invigorated to auto genre by introducing PBB and core gameplay in fight of the Golden Spatula. It is the second most popular new game launch in China year-to-date by DAU. Only behind For international games, we have been developing our business for more than a decade now and its scale relative to our domestic business has been increasing over the last few years. We do expect exciting opportunities ahead in the Global Games industry. As we discussed in our investment strategy with you earlier this year. In order to further develop this high-growth business, firstly, we enhance our upstream game development capabilities. We're increasing investment in talent and leading studios. Our China base d studio groups, especially TIMI and Lightspeed are scaling up with new talent hires not only in China but also globally. which have developed multiple hit games, are also ramping up their development teams. In the meantime, we are acquiring and nurturing specialist genre-leading studios, such as , Grinding Gear Games, and flat shock, to name a few. And we nurture them with our know-how technology and funding. Secondly, we are strengthening our global IP portfolio with multiple strategies. Internally, we extend our globally recognized IP, such as Live Legends, Clash of Clans, as well as Honor of Kings to mobile and to additional genres. Expanding our addressable market. We're also creating games with the potential to become new global IPS, such as Diluent and Brastars. Externally, we partner with renowned IP owners to develop mobile games with global appeal, such as Pop T-Mobile, Call of Duty Mobile, and Pokémon Unite, and there are more to come. Thirdly, to support our expansion in multiple regions, we're building up localized publishing and operational capabilities. We're also stepping up our marketing efforts in eSports operations to foster player communities. We'll continue to step up our investment in our international games business. Now with that, I'll pass to James to discuss other businesses.

[James Mitchell:]

Thank you, Martin. Moving to online advertising. Other revenue was 2.5 billion revenue in the third quarter. Revenue growth slowed to 5 % year-on-year due to weakness from the education, insurance, and games sectors, while consumer staples, internet services, and automobile sectors remained resilient, overall bidding density reduced. We expect advertising pricing industry-wide may remain soft for several quarters due to macro challenges, and regulations affecting certain key advertising section. Beneath the advertising industry should adjust, and re-base during 2022, then resume growth -- the secular growth drivers reserve themselves. Searching and others advertising revenue increased 7 % year-on-year to $19 billion renminbi, primarily driven by Weixin mini programs and official accounts, although slowed by weaker networks. We're enabling enterprises to connects users with salespeople via embedding WeCom sales person functionality within their advertisements, which is especially effective from need-driven advertisers such as automobile DDOS. An increasing non-prop, transaction-driven advertisers such as grocery e-commerce merchants, use many programs is there outs landing pages, which helps them better convert traffic into transactions. media advertising revenue declined 4 % year-on-year due to less revenue from the Tencent news app. On the positive side, we streamed top-tier drama series, variety shows, and the Tokyo 2020 Olympic Games, generating in previous sponsorship revenue on Tencent video app. Looking at FinTech and Business Services, segment revenue was RMB 43 up 30 % year-on-year and up 3 % quarter-on-quarter, with purposes year-on-year revenue growth was mainly driven by increased commercial payment volume with healthy growth in categories such as groceries, and powered on transportation. Commercial payment daily active users, and per-user transactions both increased. Compared to the second quarter of 2021, offline commercial payment volume growth moderated on a year-on-year basis due to control measures against COVID-19 resurgence in certain provinces. We deepened our cooperation with UnionPay to develop new payments and service interconnection scenarios. Users can now scan Weixin Pay QR codes via the UnionPay cloud quick costs app to make offline payments and Cloud Quick parts also supports top-up purchases for QQ points, QQ music and Tencent video subscription services. The business services revenue grew at a healthy rate year-on-year benefiting from continued digitalization, traditional industries such as Financial Services, and Transportation, as well as videolization of the internet industry. We see substantial potential in China's under penetrated customer relationship management market. Our CRM Software-as-a-Service solution, $0.10. has helped more than a million enterprises to enhance cost efficiency and customer service, and is increasingly adopted by medium and large-scale enterprises including Dell, SF Express, and Siemens. Clients can automate 80 % to 90 % of their customer service workloads via the virtual assistance leveraging our AI -powered solutions across chat, voice, and other communications channels. Our Tencent database Structured Query Language platform as a service solution will TDSQL database has served more than 3000 clients from verticals, including financial services, public services, and telecom. Within the financial vertical, we see increasing demand for upgrading database architecture with enhanced security protection. TDS-SQL server 6 out of the top 10 banks in China, and increase its penetration within financial institution's core systems, due to their trust and our data security, reliability, and consistency. I'll now pass to John to discussed the financial review

[John Lo:]

Thanks, James Hi, everybody. For the third quarter of 2021, total revenue was RMB 142.4 billion, up 13 % year-on-year or 15 % quarter-on-quarter. Gross profit was 62 blood sets a bit in renminbi up 11 % year-on-year or broadly stable quarter-on-quarter. Net other gains were RMB 23 billion, up 99 % year-on-year, or 11 % quarter-on-quarter. This mainly comprised adjustment relating to our investing companies, including, 1. Number one, Team disposal and disposal gains of our investee companies. I sector such as Gins, Internet Utility, and Local Services. 2. Number two, revaluation gains of certain investee companies in verticals such as E-commerce. 3. Number free, impairment provisions for investing companies in verticals such as FinTech and social entertainment. Operating profit was RMB 53.1 billion, up 21 % year-on-year and 1 % quarter-on-quarter. Net finance costs were RMB 1.9 billion, largely stable both year-on-year and quarter-on-quarter. Share of losses of associates and joint ventures with RMB 5.7 billion compared to share profit of RMB 2.6 billion last year. The movement reflected the impact on non-IO VAS, adjustment of certain associates. Increased investment in community grew by initiative by certain associates, as well as losses recognized from certain associates in the social media factor, partially offset by enhanced performance of certain associates in the e-commerce sector. On a non-IFRS basis, we record ed shared losses of RMB 282 million this quarter for associates and joint ventures compared to share profit of RMB 3.2 billion a year ago. Income tax expense was RMB 5.5 billion this quarter. Effective tax rate for the quarter was 12 IFRS net profit attributable to equity holders was RMB 39.5 billion, up 3 % year-on-year, or down 7 % quarter-on-quarter. Diluted EPS was RMB renminbi, up 3 % year-on-year or down 7 % quarter-on-quarter. Now, I'll share with you our non-IFRS financial figures. Operating profit was 40.8% in renminbi, up 7 % year-on-year, or down 5 % quarter-on-quarter. Net process up the NCI was RMB 31.8 billion, down 2 % year-on-year and 7 % quarter-on-quarter. Diluted EPS was RMB 3.269, down 1 % year-on-year, and 7 % Q-on-Q. Moving on to gross margin, the overall gross margin was 44.1% down 1.1% points year-on-year and 1.3% points quarter-on-quarter. Breaking into segments, gross margin for value-added services was 53 % up 0.4% for year-on-year for lastly, stable Q-on-Q. Rough margin for online advertising was 46.4% down 4.5% on year-on-year or 2.4% points quarter-on-quarter. Both year-on-year and quarter-on-quarter decrease reflected increased bandwidth and server costs including those associated with our video accountants. Gross margin for FinTech and business services was 28.5% up 0.6% on year-on-year, or down 3.5% points quarter-over-quarter. The year-on-year increase was driven by mix shift. We've been since acceptances, partially offset by revenue contribution from lower margin businesses. This sequential decline mainly reflected our continued investment in cloud computing, including and operations. On operating expenses, selling and marketing were RMB 10.4 billion, up 17 % year-on-year, or 4 % quarter-on-quarter. The 11 increase was really recent. Marketing spending on gains, as well as consolidation of bit up-sold. As a percentage of revenues, selling and marketing expenses were 7 % of revenues broadly stable compared to the first quarter of 2020. R&D expenses were RMB 13.7 billion, up 39 % year-on-year, or 7 % Q-on-Q. R&D expenses represented maybe 10 % of revenues. G&A census including R&D were RMB 10.2 billion up 39 % year-on-year, or 3 % quarter-in-quarter. Both year-in-year and quarter-in-quarter increase reflected force, excluding share-based compensation, G&A expenses increased by 23 % year-on-year and 7 % quarter-on-quarter. As the quarter end, we had approximately the 107,000 employee, 38 % year-on-year or 14 % quarter-on-quarter, primarily due to our increased resources allocated to our strategic growth initiatives. Let's take a look at the operating and net margin ratios. For freak 2021 non-IFRS operating margin was 20.7% down 1.7% points Y-on-Y points Q/Q. Non IFRS, net margin was 22.83%, 0.8% points year-on-year, or 2.6% points quarter imperfect. Finally, I will share with you some key financial metrics for the quarter. Total Capex was RMB 7.1 billion, down 19 % year-on-year or up 2 % quarter-on-quarter Within total Capex, operating handbags was RMB 5.6 billion down 28 % year-on-year. Though an operating Capex increased 62 % year-on-year to RMB 1.5 billion, reflecting highest spending on , yielding constructed. Free cash flow for the quarter was RMB 24.1 billion down 14 % year-on-year, or up 40 % quarter-on-quarter. Net debt position was RMB 26.1 billion. compared to RMB 21 billion last quarter, mainly reflecting cash flow for M&A activities and payments for repurchase of shares, partly offset by free cash flow generations and on market subsidiary this to securities. The Share market value of our shareholdings in listed invested companies excluding subsidiaries, was approximately $1.2 trillion, Renminbi or $185 billion U.S. dollars as at the end of the quarter. We repurchased approximately 5.6 million shares with an aggregate cost of RMB 2.2 billion or $334 million for the third quarter 2021. Thank you. We shall open for questions.

[Jane Yip:]

Operator please invites for the question.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question and answer session.

[Operator:]

. If you wish to withdraw your request, . Please stand by while we compile the question and answer roster.