Chinese Internet juggernaut Tencent issued a disappointing third-quarter earnings report today, missing profit estimates. This was due in large part to slowing revenue from mobile gaming, which generates more than half of its sales. The company also disclosed that it had spent less money advertising its messaging app WeChat in the West because of sluggish adoption in those markets.
Tencent’s third-quarter net income increased 46 percent year-on-year to 5.66 billion RMB ($924 million), behind the 6.1 billion yuan analysts surveyed by Bloomberg had predicted. Meanwhile, revenue climbed 28 percent annually to 19.8 billion RMB ($3.2 billion), but that was the slowest quarterly growth the company has seen in over seven years.
Revenue from its mobile-gaming business declined to 2.6 billion RMB, compared 3 billion RMB in the previous quarter. Furthermore, WeChat’s monthly active users rose just 6.8 percent during the quarter to 468 million monthly active users, its most sluggish growth since Tencent first started releasing user numbers.
Tencent had warned investors back in August that it expected its mobile gaming revenue growth to level out temporarily as it works on adding more titles and integrating e-commerce services. During its earnings call today, Tencent said that titles on its games portal QQ are better at making money than games on WeChat, but it didn’t break out whether WeChat or QQ makes more on game revenue.
At stake is the rivalry between Tencent and Alibaba for mobile users. Alibaba has launched its own messaging app, called Laiwang. In turn, Tencent is trying to grab a share of China’s e-commerce market, which is currently dominated by Alibaba. In March, Tencent took a 15 percent stake in Alibaba rival JD.com. As part of the agreement, JD.com acquired Tencent’s QQ Wangguo B2C and PaiPai C2C marketplace businesses, while Tencent agreed to support JD’s e-commerce growth by offering access to users on WeChat, Mobile QQ, and other platforms. Both companies are also working on an online payment service that may become a competitor to Alibaba affiliate Alipay.
Tough messaging war
WeChat may be China’s dominant messaging service, and one that has largely step into the void that Facebook could have filled were it accessible in China, but things are less rosy outside of China. Tencent revealed that WeChat now has 468 million users — while that represents a 6.8 percent growth on the previous quarter, it is the lowest increase the service has seen since Tencent began breaking out figures for it.
The company doesn’t specific how many of its users are based in China — it is likely the overwhelming majority — but Tencent has always been thought to believe that WeChat could make inroads in overseas markets. The company has pumped resources into promoting the app in large, chat app-centric markets like India and Indonesia, running TV ads and other promotions, but it is coming up against strong incumbent opposition in these countries.
Facebook-owned WhatsApp, for example, leads the field with 70 million active users in India, while Facebook Messenger and local service Hike are particularly strong there. Tencent has never provided WeChat figures for individual markets so it’s impossible to know exactly how it has performed in India and other countries with growth potential.
For Tencent to admit that it is scaling back its promotion of WeChat in some markets is certainly evidence that the mobile messaging war is a tough business to be in. Facebook, on the other hand, makes it look easy, with over 600 million monthly active users for WhatsApp and 500 million monthly active users for Messenger.
Tencent remains a giant
Tencent’s revenue slowed significantly this quarter, but the company remains in a good position all-round. WeChat is still the single most dominant mobile application in China — where mobile is a growing force, as this year’s Singles’ Day sales showed — and, as mentioned, the company is working to introduce a new set of mobile games that it believes will unlock greater engagement and increased revenue from its userbase.
Clearly growing outside of China, where Tencent trades off of its status and legacy in internet services, was always going to be tricky, and it is likely that the company will return to the drawing board to consider what it can do overseas. Tencent quietly launched VoIP apps that sync with WeChat earlier today, as it begins to explore what kind of services will resonate with mobile users.