Bobby Yip | Reuters Tencent posted its first quarterly year-over-year revenue decline as tighter regulations on gambling in China and a resurgence of Covid-19 in the world’s second-largest economy hit the tech giant. Here’s how Tencent did in the second quarter, versus Refinitiv’s consensus estimates:
Revenue: 134.03 billion Chinese yuan ($19.78 billion) versus an expected 134.6 billion yuan, down 3% year-over-year. Profit attributable to the company’s shareholders: 18.62 billion yuan versus 25.28 billion yuan expected, down 56% year-on-year.
Tencent missed both revenue and profit forecasts. During the quarter, Tencent faced macroeconomic headwinds stemming from the resurgence of Covid in China and subsequent lockdowns of major cities, including the financial metropolis of Shanghai. Authorities have committed to a “Zero Covid” policy, which has caused turmoil in the world’s second-largest economy. China’s economy grew just 0.4 percent 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 stricter regulations. Tencent makes about a third of its total revenue from games.
Game Challenges
Last year, Chinese regulators introduced a rule limiting the time children under 18 can spend playing online games to a maximum of three hours a week and only at certain 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 released just three mobile games in the second quarter. So the company has relied on its existing popular titles to generate revenue. Tencent said second-quarter domestic game revenue fell 1 percent year-on-year to 31.8 billion yuan, while international game revenue fell the same amount to 10.7 billion yuan. The Chinese tech giant said the international gaming market “experienced a period of digestion after the pandemic”. During the height of the Covid pandemic and lockdowns worldwide, people turned to gaming for entertainment and companies like Tencent and rival NetEase saw a big boom. But since countries have reopened, people are spending less time playing games and year-over-year comparisons for companies are hard to come by. Tencent also said the Chinese market is experiencing “a similar period of digestion due to transitional issues, including relatively fewer releases of major games, lower user spending and the implementation of minor security measures.” The company said it saw lower revenue in the second quarter from some of its long-running hit games, such as PUBG Mobile and Honor of Kings.
The Chinese economic slowdown is having a negative impact
The resurgence of Covid in China, lockdowns and the subsequent economic slowdown have affected large areas of Tencent’s business. Online advertising revenue in the second quarter was 18.6 billion yuan, down 18% year-on-year. Tencent also operates 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 nascent cloud computing business. It wraps revenue from these two under the “Fintech and Business Services” banner. Revenue from that segment rose 1 percent year-on-year to 42.2 billion yuan, a slowdown from the previous quarter. “Revenue growth from FinTech services was slower than in 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 call that business should recover as the Chinese economy begins to recover. “We generate about 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 China’s economy expands,” Ma said. .
