Chinese tech giant registers first drop in revenue

Tencent posted its first-ever quarterly decline in year-over-year revenue as tougher gaming regulations in China and a resurgence of Covid-19 in the world’s second-largest economy hit the tech giant .

Here’s how Tencent fared in the second quarter, compared to consensus estimates from Refinitiv:

  • Revenue: 134.03 billion Chinese yuan (19.78 billion dollars) against 134.6 billion yuan expected, a decrease of 3% year on year.
  • Profit attributable to shareholders of the company: 18.62 billion yuan against 25.28 billion yuan expected, a decline of 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 shutdowns of major cities, including the financial metropolis of Shanghai. The authorities have embarked on a “Zero Covid” policy which has caused disruption in the world’s second largest economy.

China’s economy grew just 0.4% in the second quarter, below analysts’ expectations. This has impacted the company’s fintech, cloud and advertising revenue.

Meanwhile, China’s video game industry has also faced challenges due to tighter regulations. Tencent derives about a third of its total revenue from games.

Game Challenges

Last year, Chinese regulators introduced a rule limiting the time children under 18 could spend playing online games to a maximum of three hours a week and only at specified times.

Regulators also froze new game approvals between July 2021 and April this year. In China, games must get the green light from regulators before being released and monetized.

China Renaissance analysts said in a note released last month that Tencent only launched three mobile games in the second quarter. So the company relied on its existing popular titles to generate revenue.

Tencent faced a number of headwinds in 2022, including a Covid-induced slowdown in China’s economy and a tougher market for games.

Bobby Yip | Reuters

Tencent said domestic gaming revenue in the second quarter fell 1% year-on-year to 31.8 billion yuan, while international gaming revenue fell by the same percentage to 10.7 billion yuan.

The Chinese tech giant said the international games market “has been going through a period of post-pandemic digestion.” At the height of the Covid pandemic and lockdowns around the world, people turned to games for entertainment and companies like Tencent and rival NetEase experienced a big boom. But since countries have reopened, people are spending less time playing games and year-on-year comparisons for businesses are hard to stick to.

Tencent also said the Chinese market is experiencing “a similar digestion period due to transition issues including relatively fewer big game releases, lower user spending, and the implementation of minor protective measures.”

The company said it saw lower second-quarter revenue from some of its long-running hit games like PUBG Mobile and Honor of Kings.

China’s economic slowdown is taking its toll

The resurgence of Covid in China, lockdowns and the ensuing economic downturn impacted Tencent’s core business areas.

Online ad revenue in the second quarter totaled 18.6 billion yuan, down 18% year-on-year.

Tencent also runs one of the largest mobile payment services in China called WeChat Pay through its messaging app WeChat which has over 1 billion users. The company also has a fledgling cloud computing business. It aggregates the revenue of these two under the banner “Fintech and Business Services”. Revenue from this segment increased 1% year-on-year to 42.2 billion yuan, a slowdown from the previous quarter.

“FinTech services revenue growth was slower compared to previous quarters as the resurgence of COVID-19 temporarily affected commercial payment business in April and May,” Tencent said.

Ma Huateng, CEO of Tencent, said in the company’s earnings release that business is expected to pick up as China’s economy begins to recover.

“We generate approximately half of our revenue from FinTech and enterprise services as well as online advertising that directly contribute to and benefit from overall economic activity, which should position us for revenue growth as China’s economy is growing,” Ma said.

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