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Tencent Profits Hit $1 Billion per Month as Company Loses Fizz

Growing regulatory encroachments into its games business, a smaller than expected spin-off for its music division, and a fourth quarter profits drop, pointed to a troubling year for Chinese tech giant Tencent.

Its financial results for the full 2018 period, while delivering profits of nearly $1 billion a month, appeared to bear out that thesis. The numbers also contributed to the more worrisome impression that the company is now too large and utility-like to be exciting.

Revenues for the financial and calendar year of 2018 increased by 32% to RMB312 billion. Net profits grew by 10% to $11.6 billion (RMB78 billion) as margins thinned, due to increased investment and higher borrowings.

The company is now the largest social media group in China (its WeChat platform boasts 1.1 billion users worldwide), the largest music company in the Middle Kingdom, and a massive influence in the global games market.

Internationally, its subsidiary Riot Games operates the highest-MAU PC game,“League of Legends,” and it operates the highest-MAU smart phone game, “PUBG MOBILE.” Through its partnerships with and investments in global leaders such as Epic Games (creator of “Fortnite”) and Supercell (creator of “Clash of Clans”). But within China, regulators have deliberately slowed down new games releases, and steered games firms to consumer protection measures such as limiting young players’ daily amount of game usage. PC games revenue dropped 8% in the year, a blow softened by switching to mobile platforms.

Value added services (live broadcast services, video streaming subscriptions, and in-game virtual item sales) grew by 15% to $26.4 billion (RMB177 billion). But these were outstripped by growth in the advertising revenues, which were up 44% to $8.35 billion (RMB 56 billion). Tencent claims now to be China’s largest video streaming platform with 89 million recurring paying subscribers for Tencent Video, and to have over 160 million recurring subscribers across all its VAS businesses.

On a post-announcement conference call with analysts, chief strategic officer James Mitchell acknowledged that film and TV production industry woes have caused the delayed delivery of certain drama programming, costume drama shows in particular. He said that costume dramas have short term impact on advertising revenue, and longer term impact on subscriptions. On the games front, Mitchell said: “the backlog of games (approvals) is being worked through at a fairly rapid pace.”

The company ended last year by spending money to buy its own shares, and by increasing net debt, and increasing its dividend to HK$1 per share. Its message for 2019 is similarly underwhelming, forecasting continuing investment in technology, video content, and organic growth. And it was recently rumored that the company will take an ax to its workforce, chopping out the lowest performing 10% of its staff.

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