The Chinese technology giant shows for the first time any revenue decline

Tencent posted its first-ever quarterly year-on-year revenue decline as tighter 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, versus Refinitiv consensus estimates:

• Income: 134.03 billion Chinese yuan ($19.78 billion) versus an expected 134.6 billion yuan, down 3% year-over-year.
• Profit allocated to shareholders in the company: 18.62 billion yuan versus an expected 25.28 billion yuan, down 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 shutdowns of major cities, including the financial metropolis of Shanghai. The authorities have committed to 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, missing analysts’ expectations. It 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 regulation. Tencent earns about a third of its total revenue from games.

Last year, Chinese regulators introduced a rule limiting the amount of 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 get the green light from regulators before they can be released and make money.

Analysts at China Renaissance said in a note published last month that Tencent launched only 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% 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 was “experiencing a post-pandemic digestion period.” During the height of the Covid pandemic and shutdowns globally, people turned to games for entertainment, and companies such as Tencent and rival NetEase saw a huge boom. But since countries have reopened, people are spending less time playing games, and year-over-year comparisons for companies are hard to live up to.

Tencent also said that the Chinese market experienced “a similar period of digestion due to transition issues including relatively fewer major game releases, lower user spending and the implementation of less protection measures.”

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

The resurgence of Covid in China, shutdowns and subsequent economic downturn has trickled through to large parts 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 the largest mobile payment 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 aggregates revenue from these two under the banner of “Fintech and Business Services.” Revenue from this segment rose 1% year-on-year to 42.2 billion yuan, down from the previous quarter.

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

Ma Huateng, CEO of Tencent, said in the company’s earnings call that business should pick up 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 contributes to, and benefits from, overall economic activity, which should position us for revenue growth as China’s economy expands,” Ma said.