iQiyi 1Q19 Earnings Notes

Disclaimer: These notes are shared for informational and educational purposes only. THIS IS NOT INVESTMENT ADVICE.

Key takeaways:

  • Almost at 100M subscribers (grew 58% yoy in 1Q)
  • iQiyi’s advert business slowing (cyclical or secular?)
  • Some content releases are delayed (impacts advert business)
  • There were some disclosure changes in IQ’s 20-F (Grrr!)

Content Delays

English: Over the Sea I Come to See You

A show, called 带着爸爸去留学, had its broadcast date delayed. There was some speculation online that the delay was due to the US-China trade dispute. The show is about a dad and his kid going to the US to study abroad with about 90% of the show filmed in the US. Along with many others, iQiyi was supposed to broadcast in May 2019, but its release date was pushed to June 13th.

Revenues & Weak Guidance

iQiyi offered (historically) very modest guidance for 2q19. The mid-point of the range is RMB 7.1B (yellow dot in chart above) is only 15% YoY and 2% sequentially. Compared to the prior two second quarters that is a significantly low estimate. The reason given on the earnings call is content delays and continued deceleration in online advertising. Note this guidance was given halfway through 2Q.

I do not think they are aiming for an easy beat. First off, their prior estimates were fairly close. Second, their revenues have flattened in last three quarters. And finally, content delays and declining online advertising revenues could make 2Q tough for iQiyi. 

The reasons given for the declining advertising revenues make sense and are all cyclical in my opinion. The reasons given are: content delays, in-feed clean up, soft macro environment, certain verticals cutting ad budgets because of weak macro or regulations (online gaming), and higher ad inventories overall for the industry.

I believe higher ad inventories (supply) will prove to be cyclical when ad demand growth recovers. The main reason is I have a hard time imagining scenarios where demand for ad inventory does not recover, besides a long drawn-out recession.

With the content delays, one of the fears is that the delays will last a long time, or worse, be permanent.

Wang Xiaodong (CFO) responded to a question on the earnings call, saying iQiyi never had a case where content was delayed then never released. “We don’t expect that to happen.”

For this very reason, I wanted to see if 带着爸爸去留学 was released on schedule (June 13th). It was. As this free show is specifically about the US and 90% of it is filmed there, it is important sign that it got released during a time of tense US-China relations. 

(I noted one of the ads in the show was a reminder to stay safe when in the United States and to call the Chinese consulate/embassy if you experience any problems. I guess that was part of the bargain to get it released.)

As of today (17-Jun-2019), I believe fears of permanent content delays are over blown.

Segments: Gaining Subscribers, Slowing Online Advertising

Revenue is getting a boost from Member services which are up 64% YoY (8% seq), with subscribers up 58% YoY (see below). Yu Gong (CEO) attributes the rise to their quality premium content and targeted marketing campaigns. 

But… Online Advertising has been suffering since 2q18, which was the first full quarter after online games approvals were halted in March 2018. The pain in online advertising is being felt by many companies, as Elliot and I have discussed on China Tech Investor podcast.

Some may be quick to claim the growth divergence between Member Services and Online Advertising is representative of a change in iQiyi’s strategy. It is not.

Yu Gong (CEO) speaks frequently about the need for more monetization channels for online content. It is clear to me he really believes in this. He wants iQiyi to offer free content, as well as high quality original content.

Disclosure Changes

Readers will know from my Pinduoduo post that I find disclosure changes are usually a red flag (cause for concern). I usually trim positions if I’m long when I see this, or even reverse the position entirely.

What changed?

  • Changed quarterly average active users to annual average active users without providing historical comps.
  • Changed user time spent disclosure without providing historical comps.
These are not apples-to-apples…

My guess is (1) the Yanxi Palace drama released in 3Q18 was such a hit that they wanted to spread those active user figures out and (2) 4Q18 active user figures were either flat or, most likely, below 3Q18 levels.

Because this new number does not compare to prior active user disclosure, they also dropped the below table from the recent Form 20-F:

Source: Form F-1 filings

Changes like these are annoying for analysts and investors, especially when they don’t provide comparative figures.

Recently, I was asked if all disclosure changes are red flags. Short answer: no… but I’m not happy with the changes iQiyi made here.

Earnings Call Highlights

YG (CEO): “Looking ahead, we maintain a cautious outlook on advertising due to the soft macroeconomic environment in China and slower-than-expected recovery of our in-feed advertising.”

YG: “In particular, our original drama series, The Thunder, has not only been well received by all users but also highly acknowledged by government officials. And it become the first original series aired during prime time on drama channel of CCTV. Furthermore, it is expected to hit international market through RED BY HBO, which acquired the Southeast Asia licensing rights of the show.”

Note: The Thunder is 破冰行动 in Chinese and it looks particularly good.

Q&A on Advertising

Question – Content costs down sequentially almost 20% (actual -18%), trend or one-off? How do you see content costs in coming quarters?

YG: [interpreted] Major reason this quarter is delay of some of our content. Delay due to policy changes and regulatory censorship. Also related to process of content production. On regulation, I think level this year will be relatively stable compared to last year, but there are some anniversaries of political events in Q2/Q3 so will be stricter than before.

Question – Strong total subscriber growth. How do you see competitive landscape going forward? 

YG: Yes, outperformed peers in subscriber growth. Thinks attributable to very strong original content offered in the first quarter. But there’s also something related to the scheduling of the content, how to balance mix of content to be aired and bench-marking to what other companies are offering.

WXD (CFO): “But however, as I just said, we’ll remain very cautious on the forecast of the entire advertising business in the next few quarters or even next 2 years because of the relatively weak macro environment.”

Question – Can you dissect the advertising business performance, what’s driving bearish view on advertising business in 2Q?

YG: Three revenue drivers: one Subscriptions, two is advertising. Two factors impacting advertising revenue. (1) is the content delay as mentioned. (2) is, as everybody knows, the softer macro environment. As a result, certain verticals have lowered their ad budget. In advertising iQiyi has in-feed advertising, we did some cleanup later half of last year, that’s another drag. “In addition, because of the in-feed ad inventory side, the overall inventory is coming up from all of the industry, but on the other hand demand, is not so upbeat. As a result, the CPM is returning trend to a normal level.”

Third revenue driver is other business, which “contain a lot of IP derivative revenues including game and other IP-related revenues, which can be potentially a long-term driver for us.

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CTI27 Notes – Alibaba 4Q19

Disclaimer: These notes are shared for informational and educational purposes only. THIS IS NOT INVESTMENT ADVICE.

This post covers Alibaba’s considered Hong Kong listing, BABA’s May share price decline, declining EBITA margins, “margin drag” segments, and concludes with thoughts on the growing “wallet share” strategy of ecosystem apps.

These notes were prepared for episode 27 of China Tech Investor podcast, recorded on June 6, 2019. These notes were prepared before Alibaba released their 20-F on June 6, 2019.

Listen to China Tech Investor podcast on iTunes, or your favorite podcast app.

Recent News & Share Price Decline

  • Alibaba’s HK listing looking even smarter right now, with Marco Rubio’s proposed law [1] to have companies listed in the US adhere to US accounting standards & oversight or be de-listed.
    • Comment: This will likely lead to a de-listing spree of the quality US-listed Chinese companies because the accounting oversight is a regulator-to-regulator matter. The quality Chinese companies would likely relist in either Hong Kong or possibly the New Tech Board being launched in the mainland if it goes well.
  • 4Q19 earnings release [2] filed on May 15th 2019, discussed below
  • 2019 Form 20-F [3] filed with the SEC on June 6th 2019

Alibaba’s share price has seen a 24.2% decline since the Trump Tariff Tweet.

Source: Bloomberg, Hullx annotations

Share price decline likely impacted by:

  1. Trump’s tweet [3]: “325 Billion Dollars of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%… The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!”
  2. Declining margins

What’s going on at Alibaba?

So their revenue has been growing like gangbusters. The past 12 quarters had YoY revenue growth of 41% or higher. The lowest was 41% in Q3’19 (Dec’2018 quarter). The average has been 56%. The highest was 61%, which happened 3 times in the last 12 quarters. Nothing short of amazing.

Source: Company filings, Hullx calculations

Moving down to EBITA (no Depreciation in there). It’s also amazing, but the range of YoY growth is larger, from 1% to 71% in past 12 quarters. Average is 32%.

Source: Company filings, Hullx calculations

What’s more important is the EBITA Margin. In the most recent quarter, we are looking at 22% EBITA margin, or 28% on FY basis. That compares to a year ago 27% quarterly, and 39% FY basis. So we’re seeing declining EBITA margins.

Now the question is why?

EBITA has components, and Alibaba breaks them out (thank you). And we can look there. And we see what I’ll call “Margin Drag” in the Cloud, Digital media, and Innovation Initiatives segments. That’s negative EBITA Margin. 

  • Cloud has been improving (getting less negative), from -41% in March 3 years ago, to -5% in most recent FY period.
  • Digital media has been worsening.
  • Innovation initiatives is a bit all over, but usually worse than -100% margin

We also see a declining trend in Core Commerce EBITA margin from above 60% in FY2016-2017 to 42% in FY2019. 

This is most recently driven by consolidation of Local Consumer Services, New Retail, Direct import, and Cainiao Network. (BTW, this consolidation helps revenue growth, but because these are loss-making business segments, it hurts EBITA). We’re looking at a negative EBITA of RMB 25.4B for these businesses for FY2019. We don’t have much historical disclosure around these, but that’s compared to negative RMB 8.8B a year ago.
In order to remove these impacts, Alibaba presents a special adjusted EBITA called “Marketplace-based core commerce adjusted EBITA” (MbccaEBITA). This figure has grown 31% YoY.

While that growth is great, the MbccaEBITA margin has declined from 49% to 43%. So the margin decline is also impacted by something else. 

What that is exactly, is difficult to determine. It’s probably related to international expansion & Lazada switching from 1P to 3P. Though, it could also be mixture of macro, competition (Pinduoduo), traffic costs, or something else. Welcome any feedback here.

Earnings Call Highlights

Joe Tsai chimed in on general macro concerns in China. Saying Alibaba benefits from long-term secular trends. He sees a long-term shift to service-oriented economy (last 5 years losing manufacturing jobs) that is driving disposable income growth and continuous consumption. The “domestic consumption driven economy”. 

Competition with Pinduoduo was an unspoken theme on the call.

  • Expansion into T3 and lower cities. 70% of new users were from T3 or lower. But will be conservative on monetizing the traffic from these new users.
  • Daniel Zhang: Taobao is positioned as a consumer community, value prop is in-depth selections and discovery – and the *fun* of discovery. While Tmall is very high-quality product and services with high degree of certainty.

Daniel Zhang: is an important on-demand delivery network, serves not only but also other businesses, like recent Starbucks collaboration. // Hmm, Starbucks is food, like, hard to see how that’s really a *new* area. More that it can form the basis of a business relationship with a company like Starbucks.

Maggie Wu: Less focused on margins, more focused on profit growth. // Getting bigger, making more RMB as opposed to operating more profitably. 

Concluding Thoughts

There’s a general trend in e-commerce in China to gain consumers “wallet share”. This is the goal driving the ‘ecosystem e-commerce apps’. I think the idea is to get a larger piece of consumers consumption onto their platform/ecosystem, where it can be collected and analyzed. The final goal being to sell marketing services with better efficiency (ROI). It is yet to be seen whether this works and I don’t see anywhere on the planet that has figured out a profitable business model for 3rd party delivery, ride hailing, etc. I hope these companies have (1) analyzed the incremental unit economics and (2) are seeing incremental improvement or even better, profitability. 

What’s obvious is the margin destruction will continue for the foreseeable future for Alibaba. How far will Ali go? How far will their competitors go? How much capital will be deployed in the fight? And what will be the treasure for the winner(s)? 


CTI26 Notes – Pinduoduo 1Q19 – Disclosure changes, coupons, and take rates

Disclaimer: These notes are shared for informational and educational purposes only. THIS IS NOT INVESTMENT ADVICE.

These notes are for China Tech Investor podcast episode 26, listen on overcast or

Pinduoduo announced earnings on May 20th 2019. But, before we jump in, let’s look at some excerpts from their SEC filings.

Disclosure changes

“Furthermore, we offer coupons from time to time to stimulate buyer engagement on our platform.” (page 58, Form 20-F filed 24 April 2019)

Sales and marketing expenses. Sales and marketing expenses consist primarily of online and offline advertising, promotion and coupon expenses, as well as payroll, employee benefits and other related expenses associated with sales and marketing. We expect our sales and marketing expenses to increase in absolute amounts in the foreseeable future as we seek to increase our brand awareness.” (page 78, Form 20-F filed 24 April 2019)

New Disclosure

Form 20-F filed 24 April 2019:

  • Page 81: “Sales and marketing expenses. Our sales and marketing expenses increased substantially from RMB1,344.6 million in 2017 to RMB13,441.8 million (US$1,955.0 million) in 2018, primarily attributable to increases of RMB11,608.2 million in advertising expenses and promotion and coupon expenses. The increase in advertising expenses and promotion and coupon expenses were focused on building our brand awareness and driving user growth and engagement on our platform.”
  • Page F-26: “Advertising expenditures are expensed when incurred. Total amount of advertising expenditures and incentive programs recognized in sales and marketing expenses were RMB113,691, RMB1,259,610 and RMB12,867,833 (US$1,871,549) for the years ended December 31, 2016, 2017 and 2018, respectively.”

Old Disclosure

Form 20-F filed 26 July 2018:

  • “In order to promote its online marketplace and attract more registered consumers, the Group at its own discretion issues coupons to consumers. These coupons can be used in future purchases of eligible merchandise offered on the Group’s marketplace to reduce purchase price that are not specific to any merchant. As the consumers are required to make future purchases of the merchants’ merchandise to redeem the coupons, the Group recognizes the amounts of redeemed coupons as marketing expenses when future purchases are made. During the years ended December 31, 2016 and 2017, the Group recorded marketing expenses related to the coupons of RMB76,679 and RMB321,531 (US$51,260), respectively.”
  • “Advertising expenditures are expensed when incurred and are included in sales and marketing expenses, which amounted to RMB32,867 and RMB907,250 (US$144,636) for the years ended December 31, 2016 and 2017, respectively.”

Did you see that? They changed (or removed) their disclosure of “promotion and coupon expenses” by combining it with “advertising expenses”. Here’s a table that tracks the numbers across three separate filings.

Source: Company filings, Hullx calculations


I previously mentioned how you could find the amount of coupons & promotions (a.k.a. ‘incentive programs’) in their sales & marketing expenses. You had to dig, but it was there. Pinduoduo has obfuscated that away. It is now grouped with “advertising expenses” and is called “advertising expenditures and incentive programs”, which is 96% of sales and marketing total expense. So, why even disclose this?

To me, this is a Red Flag, these changes are carefully considered, they are not accidental. Increasing obfuscation shows, at the very least, a lack of respect for shareholders. Previous disclosure indicated (see table above) the amount related to “coupons and credits” was 32% of revenues for first 9 months of 2018, up from 18% of revenues for full year 2017. In my opinion, 32% is significant and deserves to be disclosed separately.

I can only speculate, but I believe coupons [and credits] as a percent of revenue will continue its increasing trend to above 40% for full-year 2019.

In Q1’2019 Pinduoduo had a revenues of RMB 4.5 B, which was up 228% YoY but down 20% sequentially. Their first sequential drop in revenues. But, this is the same seq decline (20%) for Alibaba and quite normal in the March quarter for e-commerce in China because that is when Chinese New Year occurs.

Source: Company filings

On the Earnings Call, Colin Huang said their marketing expenses should be viewed as investments rather than expenses. The idea being that they get a return on investment in their marketing spend. I presume he means over-time they’ll get a return on marketing spend. Like all things in the future, there is uncertainty.

I note that no analyst asked about incentive programs, promotions or coupons on the earnings call.

Take Rates

Trailing 12 month take rate was 2.92%, up from 1.56% a year ago and up from 2.78% in Q4 2018.

I’ve been trying to estimate their quarterly numbers to see if there are any indicators there, but it’s not easy (and probably overkill). PDD makes this a bit difficult because they only announce certain metrics on a trailing 12 month basis. These metrics are “GMV”, Active buyers, and Spend per buyer.

So I’ve played around with my assumptions and got something I’m somewhat satisfied with. It’s not perfect, I’d prefer actual numbers of course. I have two sets of assumptions, and I’m not sure if either is correct:

  1. Where the Quarterly “GMV” sequential percent change roughly matches up with the revenue sequential percent change, and
  2. Where the quarterly Active Buyers sequential percent change roughly matches up with sequential percent change in Average MAU for that quarter.

I played around with a lot of other assumptions, and the majority of them show that the quarterly take rate peaked in Q2’18. (Take rate is revenues divided by “GMV”.) That is (or could be) significant because, if it is true, unless Q2’19’s take rate matches or is better, we should see a sequential decline in trailing 12 month take rate. That would be a first for Pinduoduo.

While doing this analysis I was curious what Alibaba’s take rates were like when they were growing. So I went back to Alibaba’s filings and they averaged around 2.44% per quarter in the 16 quarters from Jun-2011 to Mar-2015 with a high of 3.05% in Dec-13 quarter. For 12M ended Mar-2019 Alibaba’s take rate was 4.5%. [Note: I said 5.65% on the podcast, but that was wrong!]

For comparison, Alibaba’s annual active customers is 654 million for Mar-2019 versus 443.3 million for Pinduoduo in the same period. Also, Alibaba’s mobile MAUs were 721 million in Mar-2019 quarter versus 289.7 million for Pinduoduo.

Interestingly, Alibaba’s annual active customers is BELOW MAUs, which Pinduoduo’s is ABOVE (and always has been). But that wasn’t always the case:

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CTI26 Notes – Baidu 1Q19 – Building a flywheel

Disclaimer: These notes are shared for informational and educational purposes only. THIS IS NOT INVESTMENT ADVICE.

These notes are for China Tech Investor podcast episode 26, listen on overcast or

Quick note about format. We covered two companies in this episode. I’ve decided to separately post the notes for each company, so they will be searchable by tag. — That’s all.

Baidu announced Q4’2018 results on May 16 2019 [1] and sharply traded down. It was their first loss since 2005 and their search executive resigned. They’ve been trending down since their high of 284 literally 1 year ago, May 16 2018. A 60% drop!

Baidu – BIDU

It traded around $114 yesterday. The last time it was in this range was the flash crash of Aug 24 2015. Before that it was July 2013, almost 6 years ago!
And, you know what’s funny? Back in 2013 between 7/24 and 7/25, there was a gap from $113.88 to $120.26, more than $4 gap. In trading, there’s a saying, “Gaps eventually get filled” or “Gaps get tested”. Well, here it is, almost 6 years later, the gap is getting filled.

Baidu 6Y chart

What happened back then? It was their Q2 2013 earnings which had revenues up 38.6% YoY.

“Our market-leading technology, innovative new products and unrivaled customer value proposition will keep us at the heart of the Internet in China.”

Robin Li quoted in Baidu’s 2Q13 ER

Hard to argue that Baidu is at the heart of the internet in China. The “internet” moved to mobile and Baidu didn’t get the message much later.

Anyway, they’ve been trending down since their high of 284 literally 1 year before this recent earnings, May 16 2018.

You might ask, what is going on?

Let’s start with a look at some changes Baidu has been making. They are (1) building an ecosystem in Baidu App (2) with a focus on two buzz-words: “feed” and “mini programs“. A “feed” needs a constant source of content (preferably organic), so they have Baijiahao for text and Haokan for video.

My guess is they are trying to build a “flywheel” here. Where content pulls people in, gives them time-killer videos, answers their questions, and those interactions then feed their recommendation engine and maybe tells them what users are searching for, they then provide those results or build structured data portals around those areas, bringing more people in and so on.

But, there are headwinds.

  • “Content” is being heavily scrutinized in China.
  • Online gaming has come under regulatory pressure in the last 12+ months.
  • VCs are cutting back, which impacts marketing spend by startups.

The largest segment of Baidu’s revenues is Online Marketing Services. They sell advertising. It will be vital for Baidu to build this flywheel and get it turning at high speed–no easy task.

Baidu sees weakness in online gaming, financial services, real estate and autos.

Mentioned they are looking into reducing costs, the previously announced RMB 1B of additional Opex will be reduced.

Guidance is lower, to flat, taking out iQiyi. Q2 guiding revenue of RMB 25.1B to 26.6B.


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CTI20 Notes – Xiaomi 4Q18 earnings

Disclaimer: These notes are shared for informational and educational purposes only. THIS IS NOT INVESTMENT ADVICE.

These notes were composed on April 7, 2019 for the China Tech Investor podcast episode 20, listen on Xiaomi is traded under 1810 in Hong Kong and ADRs under XIACY.

Revenue growth

Source: Xiaomi Q4’2018 investor presentation
** IoT and lifestyle includes laptops and TVs

International revenue reached RMB 70 billion, YoY growth of 118.1%, about 40% of total revenues.

Xiaomi (and Huawei) is growing in an industry that is shrinking. That means they are gaining market share.

Source: Xiaomi investor presentation, IDC

They have increased their AI patent applications in the 3 year period ’16-’18 significantly from ’13-’15.

Source: Xiaomi investor presentation,

Some new products launched in 2018, IoT and Lifestyle segment:

  • Air conditioner (July 2018)
  • Washing machine (Dec 2018)

Key IoT products, excluding TVs and laptops:

  • Wearable watch
  • Electric scooter
  • Floor sweeping robot

IoT platform has 151 million connected devices as of Dec 2018, YoY growth of 193.2%

Teaming up with IKEA

All IKEA smart lighting products can be connected to Xiaomi IoT platform and controlled by Xiaomi AI Assistant and Mi Home App

Interesting note: 50%+ Mi Home App users are non-xiaomi phone users

Internet Services

Source: Xiaomi investor presentation

International Market Share

  • #1 in India for six quarters, Canalys estimates just south of 30% market share
  • #2 in Indonesia, 21% market share, after Samsung with 24.5% market share
  • By shipment growth, #4 in Western Europe. BUT market share still low (3.2%) compared to Samsung (32%), Apple (26%) and Huawei (20%)


Lei Jun’s April 25, 2018 blog post: “At the Mi 6X launch event in Wuhan earlier today, we promised our users that our hardware business, including smartphones, IoT and lifestyle products, will have an overall net profit margin that will never exceed 5%.”


And the same pledge from Xiaomi Chairman’s letter to shareholders:


Some financials here:

Source: company filings, Hullx calculations

Inventories saw a spike upward. An increase in inventories, especially finished goods could mean three things: (1) products are not selling as fast as in prior periods, (2) management decided to boost inventories for expected future sales, or (3) a bit of both.

Management addressed this on the call and in their annual filing. It seems they are trying to “get ahead” of the negative implications of increasing inventories.

“…an increase in inventories of RMB4.9 billion. The increase in inventories was due to the decline in sales of our smartphones in the fourth quarter of 2018 and our procurement in preparation for the new product launches. Our inventories as of January 31, 2019 declined 12% comparing to that as of December 31, 2018, according to management accounts, primarily attributed to the increase in sales of our smartphones post the launch of new smartphone models. Our inventory turnover days was 55 days in January 2019, excluding the inventories related to real estate business, according to management accounts.”

Free Cash Flow:

  • Cash used in operations: RMB 6.2 billion
  • Less Capex of RMB 2.3 billion
  • Gives, free cash flow of Negative RMB 8.5 billion
  • Cash and Cash equivalents was RMB 30.2 billion, ST bank deposits were RMB 1.3 billion

Earnings Call notes

Lei Jun started off talking about revenue growth, IDC rankings, design awards, quality improvements…

Multi-brand strategy: Redmi and Xiaomi

  • Redmi will pursue the highest price-performance ratio with the best quality in the market.
  • Xiaomi will be used to penetrate the mid to high-end market.

— Are they that different?

Lei Jun spent some time talking about demand for Xiaomi 9 outstripping demand. He addressed a rumor that the company is purposefully withholding supply, announcing Xiaomi 9 supply is likely to exceed 1.5 million units by end of this month (March). — Comment: Kind of odd addressing customers on a quarterly earnings call.

Question: ARPU trend. Q4 sequential quarter decline in advertising revenue and ARPU

“Revenue from our internet services segment decreased by 14.6% from RMB4.7 billion for the third quarter of 2018 to RMB4.0 billion for the fourth quarter of 2018, primarily due to decreased advertising revenue.” (company filing excerpt)

Answer: (1) international internet services is lower, but international has added MAU (the denominator in ARPU) and (2) China domestic advertising market, gaming in particular affected them.

Question: 2018 smartphone gross margins took a dip. Should we expect margins to revert back to 2017 or continue in line with 2018?

Answer: Because we promised we will make no more than 5% income margin on hardware, before we went public, our goal internal actually is to make 2% to 3% in the future, so the number that we focus on is hardware net income margin.

Lei Jun: 我们的目标就是两三个点所以我不是特别关心毛利。My translation: Our goal is 2% to 3% so that’s why I don’t care about the gross profit.

Lei Jun (CEO and Founder) has three main focuses:

  1. Net promoter score, a reflection of customer satisfaction
  2. Smartphone shipments
  3. Deepen internet services offering

CTI19 Notes – Tencent 4Q18 Earnings

Disclaimer: These notes are shared for informational and educational purposes only. THIS IS NOT INVESTMENT ADVICE.

These notes were composed on March 31, 2019 for the China Tech Investor podcast episode 19, listen on Tencent is traded under 0700 in Hong Kong and ADRs under TCEHY.

Here is Tencent’s Q4 2018 investor presentation

Mini Programs

  • working well, but need developers. Working with over 100 universities to include MPs in their curriculums. Students make up 24% of MP developers in China


  • Revenues doubled to RMB 9.1 B
  • Paying customers more than doubled for Q4
  • “Clear market leader for online games and video customers”

Retail → Digital transformation

  • customer engagement with CRM & data analytics
  • lot of buzzwords: marketing ROI, customer targeting, AI, LBS, and Big Data, Smart Solutions

Strategic Upgrade:

Shek Hon Lo (CFO & Senior VP): “I would like to let you know that following our strategy — strategic upgrade from the consumer Internet to the industrial Internet, we will add a new revenue segment to better reflect our evolving business mix in this quarter. “

What is the new segment going to be?
My two guesses: financial or cloud services.

Earnings Call Q&A notes:

Online video:

  • Delay in online video content launches
  • “costume drama series” relatively important to drive advertising and subscription revenue.

Games pipeline:

  • 7 new smartphone approved, 1 PC game, since resumption of BanHao
  • several dozen more in pipeline
  • Backlog of approval will likely have some impact on industry growth

Advertising margin:

  • High margin: weixin moments
  • Middle: Official Accounts
  • Low: video entertainment content

2019 Gross Margin, puts and takes:

  • WeChat pay:
    1. Take revenue from merchants and customers
    2. Big chunk goes to bank charges
    3. No interest income from reserve cash
    4. Trying to compensate with fintech products
    5. – *IF* bank charges get reformed, it’d be a big upside for Tencent
  • Pony Ma showing some real integrity here, pouring some cool water on WeChat’s payment platform. After talking about Gross Margins:
    • “But below the gross margin, there’s actually a marketing cost, which is actually also very high, because despite the fact that we have positive gross margin on the growth side, we are actually engaged in a lot of marketing activities, including consumer subsidies, including some merchant rebates in order for us to continue to build market share and also make our payment mechanism — I mean our payment platform more popular with merchants.”
    • Tencent will run payment platform as an infrastructure service, meaning lower margins
  • Content costs rising.
    • Should be recurring. Their business is a content business. Games is content. Video is content. Music is content.
    • Tencent already is a digital services business.

Free Cash Flow is growing

  • Q4’18 up 18% yoy to RMB 28.6 B
  • FY18 up 11% yoy to RMB 83.4 B