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Beyond the numbers: What Tencent’s Q3 results tell you about its transformation

Tencent reported a 13% slide in its profit and missed analysts’ expectations.

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Chinese gaming and social media powerhouse Tencent has reported a 13% slide in its profit during the third quarter, partly caused by a decrease in media advertising revenues under a slowing macroeconomy environment, and by lower revenues from PC client games, the company announced on Wednesday.

The Shenzhen-headquartered company posted a net profit of RMB 20.38 billion (USD 2.88 billion), missing the RMB 23.45 billion expected by analysts, according to Reuters. The firm’s total revenues were RMB 97.24 billion (USD 13.75 billion) in the period ended in September, up 21% year on year but lower-than-expected.

Tencent stock fell 3.5% on the stock market on Wednesday.

The third-quarter financial report comes one year after the 21-year-old tech conglomerate started its “strategic organizational upgrade.” Tencent also recently announced a new corporate philosophy and vision, defined as “Value for Users, Tech for Good”.

Tencent is indeed transforming itself, but how?

Mini Program is thriving while QQ is aging

During the third quarter, Tencent’s super app WeChat reported 1.15 billion monthly active users (MAUs), posting a 6% year-on-year increase.

The company’s second major messaging application QQ —a legacy from the PC era— booked 653.4 million MAUs, with a 6% year-on-year drop, despite several new features introduced recently to retain its users, including a function which recommends ice-breaking topics in 5-minute chatrooms.

Thanks to the current huge user pool of WeChat, mini programs are proliferating. Its daily active users (DAUs) hit 300 million. These scaled-down apps that can run instantly inside WeChat have covered almost every sector for its users, such as healthcare, takeout order, mobility, and smart retail services.

The rising technology, introduced by WeChat in 2016, has become a fad among major Chinese smartphone makers, third-party developers, and merchants. Newcomers including Alipay, Meituan Dianping, and ByteDance’s Jinritoutiao, among others, are also developing their own mini apps, hoping to challenge Tencent’s dominance.

Online games in overseas markets drive revenues up, but PC games revenues tumble 

As Tencent’s cash cow, online games generated RMB 28.6 billion (USD 4.07 billion) in revenues during this quarter, up 11% from last year’s level. This contributed 29% of the company’s overall revenues. Last year, online games accounted for more than 40% of Tencent’s yearlong revenues.

The increase was mainly supported by the sustainable growth from smartphone games—grew 25% year-on-year to RMB 24.3 million—in both home and overseas markets, including key titles like Honour of Kings, PUBG MOBILE and Peacekeeper Elite. This trend was partially offset by the tumbling PC client games, whose revenues decreased 7% year-on-year and 2% quarter-on-quarter to RMB 11.5 billion (USD 1.64 billion).

In response to Beijing’s recent stricter regulations on the nation’s online gaming arena that pose a time limit on minors’ gameplay, Tencent claimed that the policy “will have limited additional impact” to its business.

FinTech and Business Services shed lights on the future road 

Fintech and business services, which are considered to be a critical part of Tencent’s future development, reported revenues of RMB 26.8 billion (USD 3.82 million) in the third quarter, with a year-on-year increase of 36%—the fastest among Tencent’s all businesses.

Tencent Cloud is playing catch-up with china’s front-runner Alibaba’s cloud computing arm. With an enlarged customer base in the education field, financial sector, municipal services, and retail market, Cloud revenues grew 80% year-on-year to RMB 4.7 billion (USD 670 million), the company revealed for the first time. The number was roughly half of rival Alibaba’s cloud sales for the same period.

Chinese e-commerce giant Alibaba’s secondary listing is likely to take place in Hong Kong Exchange as early as the second half of November, according to multiple media.

These two archrivals will probably have a new battleground.