When a company gets hit with a dose of bad news that's constantly flooding the airwaves, it's important not to lose sight of the things that are still going well for it.
That's one notable takeaway from Tencent's (TCEHY) Q3 report, which has led the Chinese tech giant's beaten-up shares to rise over 5% in Wednesday afternoon trading. While neither the report nor Tencent's earnings call did much to calm worries about the regulatory pressures weighing on its huge gaming business, they did signal that the company's ad, payments and cloud momentum remains quite strong.
On Wednesday morning, Tencent reported Q3 revenue of RMB80.6 billion (up 24% annually and equal to $11.72 billion) and non-GAAP EPS of RMB2.06 (up 15% and equal to $0.30). Revenue slightly missed an RMB80.92 billion consensus -- with pre-earnings expectations pretty low, Tencent is getting a pass for this -- while EPS, benefiting from a slight slowdown in Tencent's high spending growth, topped an RMB1.96 consensus.
Gaming Woes Continue
With a freeze in the Chinese government's approval process for publishing and monetizing new games weighing heavily, Tencent's "online games" revenue fell 4% annually to RMB25.81 billion ($3.75 billion), after having grown 6% in Q2 and 26% in Q1. Smartphone gaming revenue managed to rise 7%, but PC gaming revenue fell 15%.
Thanks to the gaming decline, Tencent's total Internet value-added service (VAS) revenue, which also covers some other digital content businesses, grew just 5% to RMB44.05 billion ($6.38 billion), missing an RMB45.8 billion consensus.
The fact that Tencent still isn't able to monetize PUBG and Fortnite in China, where it has publishing rights for both franchises, is clearly taking a toll. However, the company is still benefiting from PUBG and Fortnite's international success: It has global publishing rights for PUBG on mobile devices -- the company disclosed PUBG Mobile's revenue tripled sequentially -- and a roughly 40% stake in Fortnite developer Epic Games.
On the earnings call, strategy chief James Mitchell noted that Tencent still has 15 games in its pipeline that are pending monetization approval. And notably, when asked about whether Tencent can provide an update about China's game-approval process, President Martin Lau (perhaps wary of upsetting Beijing) suggested there isn't much to share for now.
"[I]n terms of regulatory approval I think at this point in time there is not a lot of update," he said. "We are waiting for the government to start the approval process for our games. And when that's announced then we'll have the update for the market."
"Other" Businesses Are Doing Better -- Literally and Figuratively
While Tencent's gaming operations stumbled, its online ad sales grew an impressive 47% to RMB16.25 billion ($2.36 billion), topping an RMB15.59 billion consensus. This was fueled in large part by a 61% increase in Tencent's "social and others" ad revenue, which in turn has much to do with Tencent's success at monetizing its Mini Programs and WeChat Moments platforms within its WeChat app, which now has 1.08 billion monthly active users (MAUs). Meanwhile, growing ad sales for the Tencent Video platform drove a 23% increase in "media" ad revenue.
Tencent's "Other" revenue, which is driven in large part by its WeChat Pay and Tencent Cloud Platforms, grew 69% to RMB20.3 billion ($2.94 billion), topping an RMB19.4 billion consensus. On the call, Mitchell disclosed Tencent's average daily payment transaction volume rose over 50% annually -- that's better than Q2's 40%-plus growth -- and that its offline daily payment transactions grew 200%.
Lau disclosed that Tencent's cloud services revenue more than doubled to over RMB6 billion ($870 million) during the first three quarters of 2018. While Alibaba (BABA) - Get Report , whose cloud revenue rose 90% in the September quarter to RMB5.7 billion ($825 million), remains the Chinese cloud infrastructure market's top player, Tencent isn't doing badly for itself.
Tencent's "social networks" division, which covers businesses such as live-streaming services and video subscriptions and is included in VAS revenue, posted sales of RMB18.2 billion ($1.26 billion). Growth slowed to 19% from Q2's 30%, but Tencent did add that its video subscriptions grew 11% sequentially and 82% annually to 82 million. Tencent Music, which Tencent owns a 58% stake in, filed for an IPO earlier this year, but has put its plans on hold for now due to rough market conditions.
The Big Picture
Over two-thirds of Tencent's Q3 revenue came from businesses other than gaming. And overall, those businesses looked pretty strong. Moreover, several of them, including WeChat Pay, Tencent Cloud, Tencent Video and WeChat's ad businesses, still appear to have a lot of headroom to grow over the next few years.
The game-approval halt certainly remains a cloud hanging over Tencent's story in the near term. So do, to some extent, trade and macro worries. And from the perspective of American investors, the dollar's recent strengthening against the Chinese renminbi is also a worry, since (as is the case for other tech firms collecting the lion's share of their revenue within China) it means that Tencent's dollar-based revenue and profit growth is lower than its RMB-based growth.
At the same time, it's hard to believe that Beijing's game-approval halt will remain in place long-term -- the crackdown that Baidu's (BIDU) - Get Report healthcare ad business saw in 2016, and which lifted in 2017, might be a good precedent here. And Tencent's stock has certainly priced in its share of bad news over the last few months.
Should the approval halt lift within the next few months and worst-case macro fears prove unrealized, there's a good chance that the many positives that still exist for Tencent's story will be better appreciated than they are right now.