By Wayne Ma
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 17, 2018).
BEIJING -- Internet giant Tencent Holdings Ltd. blew past expectations on Wednesday, reporting a 61% increase in net profit in the first three months of the year on the strength of mobile games and other digital content, and its fast-growing mobile payments business.
Tencent's earnings for the quarter offer a window into the forces shaping China's consumers, who are increasingly relying on their smartphones for entertainment content and making purchases.
Tencent's core business remains online games, with consumers continuing a rapid migration from PC to mobile. Revenue from PC games was flat on year, while mobile-game revenues were up 68% on year.
The company -- known for its WeChat social-messaging app that recently topped 1 billion users -- said its mobile games continue to dominate download charts, particularly QQ Speed Mobile, a racing game similar to Nintendo's Mario Kart released for smartphones in December.
Tencent's fastest-growing businesses are payments, cloud services and digital-content subscriptions. Video subscriptions were up 85% on year, while cloud-services revenue doubled on year.
Revenue in the segment containing those ancillary businesses more than doubled in the first quarter, comprising 22% of overall revenue, up from a 15% share in the same period last year.
Tencent's costs, however, are rising as it spends heavily to buy content to keep users glued to its products. The company, based in Shenzhen, China, said cost of revenues, which include content costs, rose by 51% in the quarter when compared with the same period last year.
Tencent reported a net profit of 23.29 billion yuan ($3.65 billion) in the first quarter ended March 31, beating the 17.1 billion yuan estimate of analysts polled by S&P Global Market Intelligence. Revenue rose 48% to 73.53 billion yuan on year.
Tencent briefly surpassed Facebook last year in market capitalization after the company's shares more than doubled over 2017. However, the company's shares have lost about 14% of their value since late March, after weaker-than-expected earnings in the previous quarter -- coupled with a stake sale from its biggest shareholder, South African media and Internet firm Naspers Ltd. -- spooked investors.
Tencent, which has a market capitalization of HK$3.75 trillion (US$478 billion), ended 0.4% lower at HK$397.60 in Hong Kong before the earnings release.
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