On May 16, China's second-largest internet company, Tencent released its first quarter of 2019 financial report. In this quarter, Tencent’s revenue reached CNY 85.47 billion (USD 12.43 million), with a growth rate of 16.2% year-on-year. Its gross revenue was CNY 39.82 billion (USD 5.79 billion), with a growth rate of 7.5% year-on-year.

Behind these spectacular numbers, Tencent has to face an undeniable fact that most of its businesses have endured weak growth. For instance, its core business online game has suffered minus 0.9% year-on-year growth in the past three months.

It is worthwhile to note that Tencent set a new business section “Fintech & Enterprise Service” separated from “Others” in its revenue. This section is composed with payment, financial management, other fintech services, cloud computing and other services for corporate.

The revenue of fintech & enterprise service was CNY 21.80 billion (USD 3.17 billion) in the first quarter, with a growth rate of 43.5% year-on-year.

Tencent revenue and business structure

It seems optimistic at first glance that Tencent’s revenue has grown from CNY 49.55 billion (USD 7.20 billion) in Q1 2017 to CNY 85.46 billion (USD 12.42 billion) in Q1 2019, however, its growth rate year-on-year plunged from 54.9% in Q1 2017 to 16.2% in Q1 2019.

Tencent divides its business into four sections: value added service, Internet advertisements, fintech & enterprise service and others. Among them, value added service contains two parts: online game and social network.

In Q1 2019, Tencent’s 55% of revenue comes from value added service business. Specifically, Online game accounts for 33% of total revenue, and social network contributes for the other 24%.

Fintech & enterprise service, a new business section separated from “others”, accounts for 25%. Internet ads accounts for 16%.

The “others” business has consecutively increased from 15.2% of total revenue in Q1 2017 to 28.5% in Q4 2018, while other businesses have decreased or remained in this period. After Tencent separated “fintech & enterprise service” from “others”, the proportion of “others” was only 1.6%. Thus the “fintech & enterprise service” business was obviously the core driver for revenue growth.

To assess the profitability of each business, we adopt ROI (Return on Investion) calculated by "profit divided by cost". Higher number suggests the business is much profitable.

Based on this model, Tencent’s most profitable business is value added service, which generate a 1.36 ROI. The second profitable business is internet ads followed by fintech & enterprise service.

Social network business: growth potential is disappearing

Tencent’s social network business section consists of two parts: QQ and WeChat.

In the first quarter, QQ’s monthly active users (MAU) was 0.82 billion with a growth rate of 2.2% year-on-year. WeChat’s MAU reached 1.11 billion with a growth rate of 6.9% year-on-year, which composed with both domestic users and overseas users.

According to App Annie, a market research company, WeChat ranked fouth following by Facebook, WhatsApp Messenger and Facebook Messenger by MAU among all the global applications in 2018. QQ ranked sixth and is followed by Instagram.

It seems like both these two applications develop optimistically, but their growth rates do not.

QQ’s MAU amount was 8.78 billion in 2016 Q1, but it dropped to 7.84 billion in 2017 Q4. QQ’s MAU kept a negative growth from 2017 Q1 to 2018 Q3, and it started to increase in the last two quarters. According to the financial report, QQ launched some interesting functions supported by artificial intelligence algorithm, such as face changing and filters for video calls. These functions may attract more users to use QQ.

WeChat’s MAU amount has been rising from WeChat was released, but its growth rate was dropped from 23.0% in 2017 Q1 to 6.9% in 2019 Q1. Because WeChat’s MAU has reached 1.11 billion, which is around 80% of China’s population, as well as more than three times of American population.

After reaching current mature stage, it’s difficult for WeChat to gain more domestic users. Expanding overseas market has become another target of WeChat. Thanks to WeChat Pay, WeChat gains more overseas users, which is benefited from Chinese tourists in fact. WeChat Pay has entered 25 overseas countries by the middle of 2018.

Besides, there are another two functions that contributed to WeChat’s users growing: mini program and weishi.

WeChat launched mini programs in Jan 2017, a “sub-application” in the WeChat ecosystem. It enables to provide advanced features to users such as e-commerce, task management, coupons and so on. Some mini games were released in Dec. 2017, which became very popular rapidly, contributed a lot for WeChat’s users MAU.

Tencent has 58 mini programs now, and its daily active users (DAU) was over 1,700 million by 2018 Q1.

Weishi is a short video platform developed by Tencent in 2013. At beginning, users could only use weishi in its application. But there are already several famous short video platforms like, among others, Douyin, Kuaishou, Huoshan and Xigua.

To squeeze into this competitive market, Tencent built entrances in QQ and WeChat in last September, which means users can use weishi in QQ and WeChat, as well as its application. Based on large number of users in QQ and WeChat, the users amount of weishi increased fast.

Online game: productivity of new games declines

Online game revenue was CNY 28.51 billion (USD 4.12 billion) in 2019 Q1, with a growth rate of -0.9% year-on-year. In the financial report, Tencent stated that the running revenue of online game increased by 10% year-on-year.

Although online game business still contributes the most among others, its revenue in 2019 Q1was slightly declined, compared with 2018Q1. And its proportion in total revenue was dropped from 53.4% in 2016 Q1 to 33.36% in 2019 Q1.

This is a good signal to reflects that Tencent’s some other businesses grow fast. Actually, it is the fintech & enterprise service business develops rapidly. We will discuss this part at below.

Tencent’s online game business makes up with smartphone game and PC game. The revenue of smartphone game was CNY 21.2 billion (USD 3.06 billion), while PC game’s was CNY 13.8 billion (USD 1.99 billion). Both these two parts was with a negative growth of 2% year-on-year.

In this quarter, Tencent didn’t launch many new games as usual, which was a reason for the poor performance of revenue.

In the end of this quarter, Tencent launched a new game namely Perfect World Smartphone Game (完美世界手游), which is developed by Perfect World, one of China’s famous game company, and released by Tencent. Since this new game published, it has became one of high profitable smartphone games in China. It may contribute to the revenue in the next quarters.

Tencent’s online game business surged in 2016 and 2017, because of the game Honor of Kings (王者荣耀). It was released in 2015, and it became the most popular smartphone game in China in 2017, whose DAU ranked the first among other smartphone games.

But in 2018, the revenue of online game business fluctuated because of some policy measures. In March 2018, Chinese government stopped issuing the commercial license, which is qualification for every published game. And some games’ commercial license was withdrawn, including one of Tencent’s new game.

These policy measures caused great trouble for Tencent’s online game revenue. In 2018 Q2, the revenue of online game declined 12.43%, compared with 2018 Q1.

Internet advertisement: injured by slack season and poor economic environment

Tencent’s internet ads business revenue was CNY 13.38 billion (USD 1.93 billion) in 2019 Q1, with a growth rate of 25.1% year-on-year. However, compared with 2018 Q4, the growth rate of internet ads business revenue in 2019 Q1 was -21.46%.

Even the first quarter in every year is slack season for internet ads, the growth rate in 2019 Q1 is much negative. From 2018, China’s economic environment started to become tightened, and advertisers supposed to cut their budget.

Specifically, the internet ads revenue of social network and other content platform increased by 34% year-on-year, while the internet ads revenue of media raised by 5% year-on-year. QQ.COM (腾讯新闻), the Tencent’s media, contributed more than usual.

In addition to expand more advertising spaces in original or new products, Tencent leveraged artificial intelligence and data mining to improve the precision of advertisement recommendation. It is such a MUST DO to compete with Tencent’s great peer, ByteDance, which has grew really fast in the past five years because of its ads precise recommendation algorithm.

Fintech & enterprise service: an unexpectable contributor for revenue

Tencent is well known mainly by its QQ, WeChat and many online games. But this company has grown to be a giant in fintech and enterprise service today.

It was the first time Tencent divided this business section from “others” as mentioned above. The revenue of fintech & enterprise service was CNY 21.79 billion (USD 3.15 million), which surpassed the social network’s and ranked second in total revenue. The growth rate of this business revenue was as high as 43.52% year-on-year.

The main contributors include WeChat Pay, fintech services like micro-finance, and cloud. The volume of single user by WeChat Pay has been growing, as well as the total amount of volume. The cloud business gained more paying users, because the cloud service based on IaaS, PaaS and SaaS increased in variety.

Tencent started to develop its finance business from 2005, when the company launched Tenpay (财付通), a online payment function based on WeChat. Since that, Tencent has built an internet finance empire, where the business covers banks, loan, security, fund, money management, credit investigation and other fintech services.

Now, Tencent has acquired 12 financial licenses by subsidiaries and holding companies. According to Tencent, it has cooperated with over 200 financial institutions like banks, funds, insurances, securities and so on.

In cloud business, the revenue was CNY 9.1 billion (USD 1.32 billion) in 2018, with a growth rate of over 100%. Compared with Ali Cloud, Tencent’s cloud business still has long way to go. In the 2019 fiscal year, Ali Cloud’s revenue was CNY 24.7 billion (USD 3.59 billion), which is almost three times of Tencent’s.

Facing with this strong competitor, Tencent has to develop different and useful cloud services, as well as gain more clients in some sensible marketing strategy.

Where does Tencent go in next decade?

In the 2018 financial report, Tencent released its expectation in 2019. It is worth to note that Tencent will pay more attention to overseas market and provide more games globally.

The company also plan to explore more payment scenarios and develop more fintech solutions.

In terms of cloud business, Tencent is to integrate cloud computing, data analysis, artificial intelligence and other techs to develop various solutions for specific industries, such as, among others, retail, finance, transportation, healthcare and education.

In December 2018, Tencent declared that its strategy is embracing industrial internet and originating consumer internet. Alibaba also announced that it would help more China’s enterprises to grow up. We can feel the things changes nowadays.

For a long time, Tencent mainly focused on serving individual consumers by its social network products and online games. But the development bottleneck is available to see now, because this market has almost fully developed.