BEIJING Tencent Holdings Ltd (0700.HK), China's biggest listed tech firm, posted its second quarter of year-on-year profit gain of more than 50 percent as smartphone gaming revenue continued to grow at a breakneck pace.
Net income rose 59 percent to 5.84 billion yuan ($949 million) in the three months to end-June compared with a year earlier, Tencent said on Wednesday. That beats a mean estimate of 5.73 billion yuan based on a Thomson Reuters SmartEstimate poll of 10 analysts.
Tencent, with a market cap of more than $160 billion, has built its success on WeChat, known as Weixin in China.
Through the mobile messaging app, the arch-rival of Chinese e-commerce giant Alibaba Group Holding Ltd [IPO-BABA.N] has been raking in money since it introduced smartphone games in late 2013.
The Shenzhen-based company is also monetizing games on its other large mobile social network, Mobile QQ.
"Revenue growth in the online game business mainly reflected contributions from smartphone games integrated with Mobile QQ and Weixin, as well as growth in PC client games," Tencent said in its earnings release.
Overall revenue climbed 37 percent to 19.75 billion yuan in the second quarter. In the first quarter, Tencent's net profit rose 60 percent to a record 6.46 billion yuan.
FLAT MOBILE GAMING GROWTH
Revenue from online games made up 11.08 billion yuan, or 56 percent, of total revenue in the second quarter. That was up 46 percent from a year earlier.
The surge in this segment primarily reflected the revenue contribution of about 3 billion yuan from smartphone games integrated with Mobile QQ and Weixin, up from around 1.8 billion yuan reported in the first quarter.
But the company might see mobile game revenue remain stable in the second half of 2014, said James Mitchell, Tencent's chief strategy officer, on a conference call on Wednesday.
The slowdown in revenue could come as the company focuses on improving user experience and driving more traffic and providing more support to third party games, Mitchell said.
Average revenue per user for mobile games will be 100-110 yuan per quarter, the company said.
CHINA'S BIGGEST MOBILE APP
Tencent has spent more than $2 billion on building capabilities and services such as e-commerce, real estate and digital mapping into WeChat since the beginning of 2014.
It plans to make WeChat into a digital Swiss Army knife that can be used for needs as diverse as chatting, online shopping, paying for goods and getting deals on nearby restaurants.
This includes a 17.6 percent stake in JD.com Inc (JD.O), Alibaba's biggest challenger to its e-commerce business in China, whose online retail service is bolstered by an in-house logistics network with over 24,000 delivery workers.
"Although the near-term driver will still mainly be the WeChat/QQ games monetization ramp-ups, we see another year of robust online ad revenue growth in 2014 as well as for 2015 given the improved traction on the mobile news app and Tencent video," Alicia Yap, an analyst for Barclays in Hong Kong, said.
Between April and June, global monthly active users of Tencent's WeChat, China's biggest mobile app by user numbers, rose 10.7 percent from the previous quarter to 438.2 million.
But the company's flagship messaging app has been facing strong competition overseas, executives said on Wednesday's earnings call, particularly from WhatsApp, which Facebook Inc (FB.O) agreed to buy in February for $19 billion.
Executives brushed off the financial impact of new regulations in China that restrict the spread of political news via instant messaging tools like WeChat.
The impact is relatively minor, partly because the new rules are aimed at special accounts that can send out single messages to much larger numbers of followers than individual users and are commonly used by media organizations and companies.
Rules like requiring real name registration would also have little effect, Tencent said, as people must sign up with their mobile telephone numbers anyway. China's government stipulates that mobile phones are supposed to be registered to users' real names.
Tencent's shares have surged 34 percent year-to-date in Hong Kong trading. They closed 0.08 percent lower on Wednesday, before the earnings announcement. That compares with a 0.81 percent rise in the benchmark Hang Seng Index .HSI.
(1 US dollar = 6.1531 Chinese yuan)
(Editing by Ryan Woo and Shadia Nasralla)