Tencent's (TCEHY) shares have fallen about 35% this year, stung by currency pressures, a selloff in Chinese tech stocks and worries about a gaming crackdown by local regulators.
That spells low expectations ahead of the Chinese tech giant's Q3 report. On average, analysts polled by FactSet expect revenue of RMB80.93 billion (up 24% annually and equal to $11.66 billion) and non-GAAP EPS of RMB1.91 ($0.27). The revenue estimate has fallen by $2.5 billion since June, and the EPS estimate by $0.08.
Here are a few things for investors to keep an eye on as Tencent reports on Wednesday morning and hosts an earnings call at 7 a.m. EST.
1. Gaming Trends and Commentary
A recent Chinese government freeze on game approvals -- pending the rollout of a new approval process -- has naturally taken a heavy toll on Tencent, easily China's biggest game publisher. In Q2, the company's online games revenue (over a third of total revenue) grew just 6% annually, a marked slowdown from Q1's 26% growth. The company's Internet valued-added service (VAS) revenue, which also covers other digital content businesses, grew 14%, a slowdown from Q1's 34%.
Thanks to the gaming slowdown, the consensus is for VAS revenue to be just 9% annually in Q3 to RMB45.8 billion ($6.6 billion). Any commentary that Tencent provides about the game-approval halt and its expected lifting will be closely watched.
2. User Growth
Monthly active users (MAUs) for Tencent's WeChat mobile platform (all but ubiquitous in China), rose 9.9% annually in Q3 to 1.06 billion. On the flip side, MAUs for Tencent's older QQ and Qzone social platforms fell by 5.5% an 9.5%, respectively, to 803 million and 548 million.
Expect Tencent to report another quarter of WeChat growth and QQ/Qzone declines. The company might also -- as it does from time to time -- share some stats about individual WeChat services, such as WeChat Moments or its fast-growing Mini Programs platform.
3. "Social Networks" and Advertising Growth
While gaming revenue grew just 6% in Q2, Tencent's "social networks" revenue, which covers content businesses such as video subscriptions and live-streaming services and is also part of its VAS revenue, grew 30% to RMB16.9 billion. Video subscriptions more than doubled annually, and total subscriptions rose 30%.
Likewise, Tencent's ad businesses collectively grew 39% to RMB14.1 billion, thanks in part to the strong growth seen in WeChat Moments and Mini Programs ad sales. For Q3, the consensus is for ad revenue to grow 41% to RMB15.6 billion ($2.25 billion).
4. WeChat Pay and Cloud Revenue Growth
Tencent's "Other" revenue, which is believe to stem in large part from its WeChat Pay and cloud services platforms, grew 81% in Q2 to RMB17.5 billion. The Q3 consensus is for Other revenue to grow 61% to RMB19.4 billion ($2.79 billion).
Though its growth has slowed a bit, WeChat Pay still has quite a lot of momentum. On its Q2 call, Tencent reported having over 800 million mobile payments MAUs at the end of June, and said its average daily transaction volume grew over 40% annually. Offline payment volume is said to have grown 280%.
5. Spending and Margin Trends
Much like archrival Alibaba (BABA) , Tencent isn't shy about investing aggressively. Sales and marketing spend rose 74% annually on an RMB basis in Q2, while R&D spend rose 35%. In addition, capital spending, which impacts gross margin as depreciation expenses are recorded on capex, rose 135%.
For Q3, the consensus is for sales/marketing and R&D spend to rise 44% and 26%, respectively. Gross margin, impacted both by capex and a revenue mix shift towards digital content businesses that carry relatively low margins, is expected to be down by 3 percentage points annually to 48.6%.