The Chinese tech giant posted its first ever revenue decline

Tencent faces several headwinds in 2022, including a Covid-induced slowdown in the Chinese economy and a tough market for gaming.

Bobby Yip | Reuters

Tencent Its first quarter reported a year-on-year revenue decline as strict regulations around gaming 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, against Refinitiv consensus estimates:

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

Tencent missed both revenue and profit forecasts. During the quarter, Tencent faced macroeconomic headwinds stemming from the resurgence of Covid in China and the lockdown of major cities. including the Shanghai Financial District. Officials have promised “Zero Covid” policy This has caused disruptions across the world’s second-largest economy.

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

Meanwhile, China’s domestic video games industry is also facing challenges due to strict regulations. Tencent derives a third of its total revenue from gaming.

Gaming Challenges

Last year, Chinese regulators introduced a rule limiting the maximum amount of time children under 18 can play online games. Three hours a week and only at certain times.

Regulators too Freezes approval of new games between July 2021 and April this year. In China, games must get the green light from regulators before they can be 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 relies on existing popular titles to generate revenue.

Tencent’s second-quarter domestic sports revenue fell 1% year-on-year to 31.8 billion yuan, while international sports revenue fell to 10.7 billion yuan.

The Chinese tech giant said the international sports market had “experienced a period of post-pandemic digestion”. During the peak 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 as countries reopen, people are spending less time playing games and year-over-year comparisons for companies are harder to live up to.

Tencent said the Chinese market is experiencing a similar period of digestion due to “relatively few big game releases, low user spending and transitional issues including the implementation of minor security measures.”

The company said revenue from its long-running hit games like PUBG Mobile and Honor of Kings fell in the second quarter.

China’s economic slowdown is taking its toll

The resurgence of Covid, lockdowns and economic slowdown in China have hurt key parts of Tencent’s business.

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

Tencent owns one of China’s largest mobile payment services, WeChat Pay, through its WeChat messaging app, which has more than 1 billion users. The company also has a new cloud computing business. It combines the revenues of both under the banner “FinTech and Business Services”. The segment’s revenue rose 1% year-on-year to 42.2 billion yuan, down from the previous quarter.

“FinTech services revenue growth slowed compared to previous quarters as the COVID-19 resurgence temporarily impacted merchant payment activity in April and May,” Tencent said.

Tencent’s CEO Ma Huateng 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 through fintech and business services and online advertising, which directly contribute to and benefit overall economic activity, which should position us for revenue growth as China’s economy expands,” Ma said.

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