Chinese tech giant posts first ever revenue decline

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

Here’s how Tencent did in the second quarter, versus Refinitiv consensus estimates:

• Revenue: 134.03 billion Chinese yuan ($19.78 billion) vs. 134.6 billion yuan expected, a decline of 3% year-on-year.
• Profit attributable to equity holders of the company: 18.62 billion yuan vs. 25.28 billion yuan expected, a decline of 56% year-on-year.

Tencent missed both revenue and profit forecasts. During the quarter, Tencent faced macroeconomic headwinds stemming from a 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 disruptions across the world’s second-largest economy.

China’s economy grew just 0.4% in the second quarter, missing analyst expectations. That had an impact on the company’s fintech, cloud and advertising revenue.

Meanwhile, China’s domestic video games industry has also faced challenges due to stricter regulation. Tencent makes about a third of its total revenue from gaming.

Last year, Chinese regulators introduced a rule limiting the amount of time children under 18-years-old could spend playing online games to a maximum of three hours a week and only during specific times.

Regulators also froze the approval of new games between July 2021 and April this year. In China, games need to get the green light from regulators before being released and monetized.

Analysts at China Renaissance said in a note published last month that Tencent launched 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 games revenue fell 1% year-on-year to 31.8 billion yuan, while international games revenue fell the same percentage amount to 10.7 billion yuan.

The Chinese technology giant said the international games market “experienced a post-pandemic digestion period.” During the height of the Covid pandemic and lockdowns globally, people turned to gaming for entertainment and companies like Tencent and rival NetEase saw a big boom. But since countries have re-opened, people are spending less time playing games and the year-on-year comparisons for companies are tough to live up to.

Tencent also said the Chinese market was experiencing “a similar digestion period due to transitional issues including relatively fewer big game releases, lower user spending, and the implementation of Minor protection measures.”

The company said it saw decreased revenue in the second quarter from some of its long-established hit games like PUBG Mobile and Honor of Kings.

Martin Lau, president at Tencent, said during an earnings call with analysts on Wednesday that the regulatory environment in China is “progressing from rectification to normalization,” which should “bode well for the industry over time.” He said in the gaming sector, regulation is trending in a “more positive” direction.

Lau added that he expects Tencent to receive game licenses from regulators in the “near future” which will help the company’s domestic games business over time.

The resurgence of Covid in China, lockdowns and subsequent economic slowdown has trickled through to major areas of Tencent’s business.

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

Tencent also runs one of the biggest mobile payments services in China called WeChat Pay via its WeChat messaging app which has over 1 billion users. The company also has a nascent cloud computing business. It wraps 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 prior quarters as COVID-19 resurgence temporarily impacted commercial payment activities in April and May,” Tencent said.

Ma Huateng, the 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 revenues from FinTech and Business 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 expands,” Ma said.

On the earnings call, Tencent management spoke at length about the company’s “cost control” strategy to reduce spending in the business. Lau said that Tencent has shuttered some businesses related to areas like online education and “scaled back” loss making cloud activities.

James Mitchell, chief strategy officer at Tencent, said that with these cost control initiatives, year-on-year earnings growth will return in the “coming quarters even if our revenue remains as it does now.”