Tencent's Profits Jump 22%, Boosted by Soaring Ad Sales

Asia's Biggest Internet Company Has Been Expanding Its Ad Services

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Tencent's all-in-one all, WeChat
Tencent's all-in-one all, WeChat Credit: Brent Lewin/Bloomberg

Tencent Holdings, Asia's biggest internet company, posted a 22% jump in fourth-quarter profit as it increased spending on content to draw users to its new smartphone games and drive ads on social networks.

Net income was $1.1 billion in the three months ended December, the Shenzhen, China-based company said Thursday. While profit was below expectations after Tencent boosted spending on videos, sales climbed to $4.7 billion, beating analyst estimates.

Tencent is building its content to attract users while also investing in more on-demand services such as food delivery, areas that it's competing on with rivals Alibaba and Baidu. It is buying video as well as the rights for anime, comics and novels to convert into mobile games that it promotes through its QQ instant message system and all-in-one app WeChat.

Tencent has been expanding its advertising service, trying to keep mobile users engaged within its social network and content platforms without flooding them with ads.

Fourth-quarter revenue from online ads grew 118% to $884 million. Revenue from a unit that includes online games and messaging rose 35% to $3.6 billion.

"The strong revenue growth was driven by much higher than expected mobile game revenue, as well as the advertising revenue. That will make investors positive about the company's growth potential," said Li Muzhi, a Hong Kong-based analyst at Arete Research Services. "Their margins exhibited some pressure."

Cost of revenue increased by 52% in the quarter, outpacing the 45% increase in sales, as the company paid more for content.

"We've been spending money to acquire high quality content," President Martin Lau told reporters. "We really are focusing on building a healthy ecosystem for third-party content providers."

WeChat had 697 million monthly active users, and the mobile version of QQ had 641.5 million users at the end of the quarter.

-- Bloomberg News, with Ad Age staff