Tencent posted its first quarterly year-on-year revenue decline as tighter regulations on gaming in China and the resurgence of Covid-19 in the world’s second-largest economy hit the tech giant.
Here’s how Tencent did in the second quarter, compared to Refinitiv’s consensus estimates:
income: 134.03 billion Chinese yuan ($19.78 billion) vs. 134.6 billion yuan expected, down 3% year-on-year.Profit attributable to the company’s shareholders: 18.62 billion yuan versus the expected 25.28 billion yuan, down 56% year-on-year.
Tencent missed revenue and profit forecasts. During the quarter, Tencent faced macroeconomic headwinds stemming from a resurgence of Covid in China and subsequent lockdowns in major cities, including the financial metropolis of Shanghai. Authorities have committed to a “Zero Covid” policy that has caused disruption to the world’s second-largest economy.
China’s economy grew just 0.4% in the second quarter, missing analysts’ expectations. This had an impact on the company’s fintech, cloud and advertising revenues.
Meanwhile, China’s domestic video game industry has also faced challenges due to tighter regulation. Tencent makes about a third of its total revenue from games.
Last year, Chinese regulators introduced a rule that limited the amount of time children under 18 could spend playing online games to a maximum of three hours a week and only at specific times.
Regulators also froze the approval of new games between July 2021 and April this year. In China, games must receive the green light from regulators before they can be released and monetized.
China Renaissance analysts said in a note published last month that Tencent launched just three mobile games in the second quarter. Thus, the company has relied on its existing popular titles to generate revenue.
Tencent has faced a number of headwinds in 2022, including a Covid-induced slowdown in the Chinese economy and a tougher market for games.
Bobby Yip | Reuters
Tencent said second-quarter domestic game revenue fell 1 percent year-on-year to 31.8 billion yuan, while international game revenue fell by the same percentage to 10.7 billion yuan.
The Chinese tech giant said the international gaming market “experienced a period of post-pandemic digestion”. During the height of the Covid pandemic and global lockdowns, people turned to games for entertainment and companies like Tencent and rival NetEase saw a huge boom. But as countries have reopened, people are spending less time gaming and year-over-year comparisons of companies are difficult to meet.
Tencent also said the Chinese market was experiencing “a similar period of digestion due to transition issues, such as relatively fewer big game releases, lower user spending, and the implementation of minor protection measures.”
The company said it saw revenue decline in the second quarter for some of its long-established hit games like PUBG Mobile and Honor of Kings.
Martin Lau, president of Tencent, said on an earnings call with analysts on Wednesday that the regulatory environment in China is “moving from rectification to normalization,” which should “bode well for the industry with the weather”. He said that in the gaming sector, regulation is moving in a “more positive” direction.
Lau added that he expects Tencent to receive gaming licenses from regulators in the “near future” that will help the company’s domestic gaming business over time.
The Chinese economic slowdown is taking its toll
The resurgence of Covid in China, lockdowns and the subsequent economic slowdown have drained major areas of Tencent’s business.
Online advertising revenue in the second quarter totaled 18.6 billion yuan, down 18% year-on-year.
Tencent also operates one of China’s largest mobile payment services called WeChat Pay through its messaging app WeChat, which has more than 1 billion users. The company also has a nascent cloud computing business. It includes revenue from these two under the banner of “Fintech and Business Services”. Revenue from this segment grew 1% year-on-year to 42.2 billion yuan, a slowdown from the previous quarter.
“FinTech Services revenue growth was slower relative to previous quarters as the resurgence of COVID-19 temporarily affected merchant payment activities in April and May,” Tencent said.
Ma Huateng, CEO of Tencent, said in the company’s earnings release that business should pick up as the Chinese economy begins to recover.
“We generate approximately half of our revenue from FinTech and business services as well as online advertising which directly contribute to and benefit from overall economic activity, which should position us for revenue growth as the “China’s economy is expanding,” said Ma.
On the earnings call, Tencent’s management spoke at length about the company’s “cost control” strategy to reduce spending in the business. Lau said Tencent has closed some businesses related to areas such as online education and “reduced” losses from cloud activities.
James Mitchell, Tencent’s chief strategy officer, said that with these cost control initiatives, year-on-year profit growth will return in the “coming quarters, even if our revenue remains as it is now.”