Tencent Announces 2013 Second Quarter and Interim Results

HONG KONG, August 14, 2013 /PRNewswire/ -- Tencent Holdings Limited ("Tencent" or the "Company", SEHK 00700), a leading provider of comprehensive Internet services in China, today announced the unaudited consolidated results for the second quarter and the first half year of 2013 ended June 30, 2013.

Highlights of the First Half of 2013:

• Total revenues were RMB27,932.1 million (USD4,520.7 million[1]), an increase of 38.4% over the first half of year ended June 30, 2012 ("YoY").
• Revenues from value-added services ("VAS") were RMB21,418.2 million (USD3,466.5 million), an increase of 25.9% YoY.
• Revenues from online advertising were RMB2,146.8 million (USD347.5 million), an increase of 51.2% YoY.
• Revenues from eCommerce transactions were RMB4,112.8 million (USD665.6 million), an increase of 155.4% YoY.
• Gross profit was RMB15,388.0 million (USD2,490.5 million), an increase of 27.9% YoY. Gross margin decreased to 55.1% from 59.6% for the first half of 2012.
• Operating profit was RMB9,627.6 million (USD1,558.2 million), an increase of 26.2% YoY. Operating margin decreased to 34.5% from 37.8% for the first half of 2012.
  Non-GAAP operating profit[2] was RMB10,111.4 million (USD1,636.5 million), an increase of 22.0% YoY. Non-GAAP operating margin decreased to 36.2% from 41.1% for the first half of 2012.
• Profit for the period was RMB7,755,4 million (USD1,255.2 million), an increase of 27.7% YoY. Net margin decreased to 27.8% from 30.1% for the first half of 2012.
  Non-GAAP profit for the period[2] was RMB8,278.8 million (USD1,339.9 million), an increase of 23.2% YoY. Non-GAAP net margin decreased to 29.6% from 33.3% for the first half of 2012.
• Profit attributable to equity holders of the Company for the period was RMB7,724.2 million (USD1,250.1 million), an increase of 27.7% YoY.
  Non-GAAP profit attributable to equity holders of the Company[2] for the period was RMB8,189.7 million (USD1,325.5 million), an increase of 22.8% YoY.
• Basic earnings per share were RMB4.213. Diluted earnings per share were RMB4.141.

Highlights of the Second Quarter of 2013:

• Total revenues were RMB14,384.5 million (USD2,328.1 million), an increase of 6.2% over the first quarter of 2013 ("QoQ") or an increase of 36.6% over the second quarter of 2012 ("YoY").
• Revenues from VAS were RMB10,752.1 million (USD1,740.2 million), an increase of 0.8% QoQ or an increase of 23.4% YoY.
• Revenues from online advertising were RMB1,297.3 million (USD210.0 million), an increase of 52.7% QoQ or an increase of 47.5% YoY.
• Revenues from eCommerce transactions were RMB2,199.4 million (USD356.0 million), an increase of 15.0% QoQ or an increase of 156.5% YoY.
• Gross profit was RMB7,794.2 million (USD1,261.5 million), an increase of 2.6% QoQ or an increase of 25.4% YoY. Gross margin decreased to 54.2% from 56.1% last quarter.
• Operating profit was RMB4,565.1 million (USD738.8 million), a decrease of 9.8% QoQ or an increase of 15.9% YoY. Operating margin decreased to 31.7% from 37.4% last quarter.
  Non-GAAP operating profit[2] was RMB5,050.5 million (USD817.4 million), a decrease of 0.2% QoQ or an increase of 19.6% YoY. Non-GAAP operating margin decreased to 35.1% from 37.4% last quarter.
• Profit for the quarter was RMB3,684.3 million (USD596.3 million), a decrease of 9.5% QoQ or an increase of 18.4% YoY. Net margin decreased to 25.6% from 30.1% last quarter.
  Non-GAAP profit for the quarter[2] was RMB4,189.5 million (USD678.1 million), an increase of 2.4% QoQ or an increase of 22.8% YoY. Non-GAAP net margin decreased to 29.1% from 30.2% last quarter.
• Profit attributable to equity holders of the Company for the quarter was RMB3,680.4 million (USD595.7 million), a decrease of 9.0% QoQ or an increase of 18.7% YoY.
  Non-GAAP profit attributable to equity holders of the Company for the quarter[2] was RMB4,152.0 million (USD672.0 million), an increase of 2.8% QoQ or an increase of 22.6% YoY.
• Basic earnings per share were RMB2.009. Diluted earnings per share were RMB1.976.
• Key platform statistics:
  • Monthly active Instant Messaging ("IM") user accounts were 818.5 million, a decrease of 0.8% QoQ or an increase of 4.5% YoY.
  • Peak simultaneous online IM user accounts were 173.2 million, an increase of 0.1% QoQ or an increase of 4.0% YoY.
  • Combined MAU of Weixin and WeChat were 235.8 million, an increase of 21.3% QoQ or an increase of 176.8% YoY.
  • Monthly active Qzone user accounts were 626.4 million, an increase of 2.5% QoQ or an increase of 4.8% YoY.
  • Peak simultaneous online QQ Game Platform user accounts were 8.4 million, a decrease of 8.7% QoQ or a decrease of 4.5% YoY.
  • Fee-based VAS registered subscriptions were 98.7 million, a decrease of 5.6% QoQ or a decrease of 9.7% YoY.

Mr. Ma Huateng, Chairman and CEO of Tencent, said, "The second-quarter performance was driven by our online games and advertising businesses, resulting in a solid financial performance, including healthy profits and free cash flow growth on year-on-year basis. Our mobile and platform investments have enabled us to achieve deep mobile engagement, as demonstrated by rapidly increasing usage of our apps such as Mobile QQ, Mobile Qzone, Weixin, and WeChat on smart phones. Our recent launch of the first mobile game integrated with Mobile QQ and Weixin generated widespread user excitement, exhibiting our platform strength, highly engaged social community and game execution capability. We will continue to increase our investment in mobile apps in order to reinforce our position in China, and to extend our presence to international markets through WeChat."

Financial Review for the Second Quarter of 2013

VAS revenues increased 0.8% QoQ to RMB10,752.1 million and represented 74.7% of our total revenues for the second quarter of 2013. Online games revenues increased 1.6% QoQ to RMB7,594.5 million, despite weaker seasonality in China as a result of school examinations. This mainly reflected revenue growth from our major titles, such as DnF and LoL, in China as well as higher contribution from international markets. Social networks revenues decreased 1.1% QoQ to RMB3,157.6 million. This primarily reflected a decrease in subscription revenues, partly offset by an increase in item-based sales within applications on our open platforms[3].

Online advertising revenues increased 52.7% QoQ to RMB1,297.3 million and represented 9.0% of our total revenues. This was primarily driven by more favourable seasonality in the second quarter. It also reflected the continued growth in performance-based social advertising and video advertising.

eCommerce transactions revenues increased 15.0% QoQ to RMB2,199.4 million and represented 15.3% of our total revenues. This was primarily driven by seasonal promotional activities, regional expansion, and category expansion.

Other Key Financial Information for the Second Quarter of 2013

Share-based compensation was RMB446.6 million for the second quarter of 2013 as compared with RMB397.7 million for the previous quarter.

Capital expenditure was RMB1,464.0 million for the second quarter of 2013 as compared with RMB1,034.6 million for the previous quarter.

The Company repurchased 4,585,700 shares on the Stock Exchange for an aggregate consideration of approximately HKD1,125.5 million in the second quarter of 2013 as compared with 2,057,300 shares repurchased for an aggregate consideration of approximately HKD508.8 million in the previous quarter.

As at June 30, 2013, net cash position totaled RMB33,556.5 million which excluded borrowings of RMB2,840.4 million and long-term notes payable of RMB7,396.6 million.

As at June 30, 2013, the total number of shares of the Company in issue was 1.852 billion.

Business Review and Outlook

Overall Financial Performance

In the second quarter of 2013, we registered solid year-on-year growth in revenues and profits, and continued to invest in new opportunities such as mobile platforms, eCommerce and international expansion. Our GAAP operating profit and net profit reduced sequentially mainly due to absence of the special dividend income from our investee company Mail.ru recognised in the previous quarter as well as a significant step up in marketing activities for WeChat in international markets during the second quarter, while our non-GAAP net profit increased sequentially primarily due to revenue growth.

• VAS. Our online games business benefited from the growth of our major titles and new self-developed titles in China as well as increased contribution from international markets. Our social networks revenues increased compared to the same period last year, thanks to the growth in item-based sales on our open platforms.
• Online advertising. Our online advertising business registered a significant year-on-year revenue increase, driven by growth across brand display and performance display categories. In particular, performance-based social advertising and video advertising continued to enjoy strong growth during the quarter.
• eCommerce transactions. The second quarter of 2013 saw the continued expansion of our eCommerce transactions business under a more competitive market environment. Revenues from principal transactions increased significantly compared to the same period last year, as a result of growth in transaction volume and revenue per transaction. Fees generated from transactions on our marketplaces also increased.

Financial Highlights

In June 2013, S&P raised its long-term corporate credit rating on Tencent to 'A-' from 'BBB+' with stable outlook, the highest rating it had assigned to a non-state-owned enterprise in China. It also raised the issue rating on our senior unsecured notes to 'A-' from 'BBB+' and its Greater China regional scale ratings on Tencent and the notes to 'cnAA' from 'cnA+'. According to S&P, the improved ratings reflected our stronger competitive position, underpinned by robust growth in business scale, an expanding user base, and improving service diversity, as well as our enhanced financial strength.

Divisional and Product Highlights

Communications Platforms

In the second quarter of 2013, QQ enjoyed a significant year-on-year growth in its smart phone user base as the mobile Internet proliferated further. Its MAU reached 818.5 million at the end of the quarter, representing a growth rate of 4.5% compared to the same period last year. Smart phone MAU[4] increased to 477.6 million at the end of the quarter, representing a year-on-year growth of over 200%. PCU for the quarter increased by 4.0% year-on-year to 173.2 million. As fewer mobile users than PC users employ multiple accounts, QQ experienced a slowdown in the year-on-year growth rates of MAU and PCU, both measured in terms of number of accounts.

At the end of the second quarter of 2013, the combined MAU of Weixin and WeChat reached 235.8 million, representing a year-on-year growth rate of 176.8%. Weixin continued to enjoy rapid user growth thanks to its innovative features and compelling user experience, extending its position as the leading smart-phone-only community in China. We stepped up our marketing activities for WeChat in international markets and, as a result, WeChat's user growth accelerated during the quarter. In August 2013, we introduced new versions of Weixin and WeChat which integrate with services such as online games, stickers and payment, allowing us to broaden our service offering to users and explore new business opportunities.

Social Platforms

Qzone registered solid growth in user base, supported by an increasing number of mobile users. Its MAU increased by 4.8% year-on-year to 626.4 million at the end of the second quarter of 2013. Smartphone MAU[5] reached 357.0 million at the end of the quarter, representing 57.0% of total MAU. Activity of mobile users continued to grow, mainly reflected an expanded smart phone user base as well as enhanced features in areas such as photo and video sharing. Weixin Moments continued to gain popularity among smart phone users.

Media Platforms

In the second quarter of 2013, QQ.com, Tencent Microblog and Tencent Video continued to deliver new content experiences to our users. As users' behavior changes with growing usage of mobile devices and increasing fragmentation of time spent online, we are enhancing the mobilisation and personalisation of our media platforms, while continuing to upgrade our content. For instance, QQ.com has established a solid footing which addresses the content needs of smart phone users through a widely distributed news plugin linked to Weixin, an increasingly popular full-function news application on smart phones, and a market leading WAP portal which is becoming increasingly smart-phone-enabled.

VAS

Our open platforms registered a robust year-on-year growth in paying users. Cumulative revenues distributed to third-party developers reached RMB3 billion within less than two years, following our launch in June 2011. With strong commitment and consistent efforts in developing a healthy ecosystem, we have become a cradle for innovative developers in China. 26 third-party applications on our platforms have achieved monthly revenues of over RMB10 million and the most successful third-party application has recorded monthly revenues of over RMB30 million. To broaden our user base and diversity of applications, we are enhancing our support offered to developers, particularly for those with large user bases but relatively lower revenue generation or non-game applications.

The second quarter of 2013 saw a year-on-year decline in our VAS subscription count. Some of our users who migrated to smart phones, while continuing to use our basic services such as QQ and Qzone, reduced their consumption of our paid subscriptions, due to fewer smart phone (versus PC or feature phone) privileges within such subscriptions. After initially focusing purely on the free, basic service smart phone experience, we have only recently begun extending our subscriber privileges to smart phone users, adding value to the paid subscriptions. In addition, we tightened our measures to clean up certain user accounts acquired through mobile channels with low possibility of fee collection. Towards the end of the second quarter, we launched a 'Super VIP' package, which bundles privileges on PCs and smart phones and offers new features, to provide more value to people using QQ on both PCs and smart phones.

Our online games business registered a healthy year-on-year growth in revenues. This mainly reflected growth of our existing major titles, contribution from new self-developed titles and increased revenues from international markets. Mobile games registered revenue growth as we continued to expand our game portfolio. QQ Game Platform experienced a decline in PCU compared to the same period last year as increasing mobile usage made user activity pattern more dispersed, and as open platforms impacted user activity.

Online Advertising

Our online advertising business registered a significant revenue growth, primarily driven by performance-based social advertising, which benefited from greater impression volume. While traditional brand display advertising continued to deliver growth, video advertising revenue approximately doubled compared to the same period last year, thanks to inventory expansion and higher sell-through rates. Growth of search advertising slowed as we reduced traffic from search distribution partnerships.

eCommerce Transactions

In the second quarter of 2013, price competition in the B2C market intensified. Our principal eCommerce transactions business continued to experience a strong year-on-year revenue growth rate as we enhanced user experience, broadened product range and expanded geographic coverage. Our marketplaces also registered significant revenue growth compared to the same period last year as we improved product selection and customer service.

About Tencent

Tencent uses technology to enrich the lives of Internet users. Every day, hundreds of millions of people communicate, share experiences, consume information, seek entertainment, and shop online through our integrated platforms. Our diversified services include QQ, Weixin and WeChat for communications; Qzone for social networking; QQ Game Platform for online games; QQ.com for information; as well as our eCommerce open platform. Our company was founded in Shenzhen in 1998 and went public on the Hong Kong Stock Exchange in 2004. We seek to evolve with the Internet by investing in innovation, providing a hospitable environment for our partners, and staying close to our users.

For more information, please visit www.tencent.com/ir.

For enquiries, please contact:

Catherine Chan Tel: (86) 755 86013388 ext 88369 or (852) 31485100 Email: cchan#tencent.com
Jane Yip Tel: (86) 755 86013388 ext 81374 or (852) 31485100 Email: janeyip#tencent.com

Non-GAAP Financial Measures

To supplement the consolidated results of the Company 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 and non-GAAP profit attributable to equity holders of the Company, have been presented in this press release. These unaudited non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of the Company'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 Company's core operations by excluding certain non-cash items and certain impact of acquisitions.

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.