Tencent reports first-quarter profit slump, no growth in revenue

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China’s Tencent reported on Wednesday its quarterly profit halved from a year ago and revenues stagnated, blaming cuts in advertising spending by consumer, e-commerce and travel businesses for its worst performance since it went public in 2004.

The operator of the WeChat messaging platform and the world’s largest video game company said ad sales slumped 18 per cent in the first quarter ended March 31, following a 13 per cent drop in the October-December period.

COVID-19 lockdowns in China have hurt advertiser sentiment, while Tencent’s ad business has also taken a knock from competition from rivals, including TikTok owner ByteDance.

The Shenzhen-based company has lost more than half its market value since it peaked in February, 2021, following Beijing’s regulatory crackdown to rein in the influence of large internet firms, though it remains China’s most valuable company.

In a call with analysts, Tencent president Martin Lau said that Beijing has begun to voice support for tech companies in recent weeks as COVID-19 outbreaks have sapped China’s economic growth momentum. He cited a meeting on Tuesday where Chinese Vice Premier Liu He assured tech firms of the authorities’ support for the sector.

“So you can see that from the senior-most level, there is a pretty clear supportive signal released,” he said, adding it would take time before it will translate into a real impact on the company’s business.

Mr. Lau also added that while stricter regulations could become “normal practices,” COVID-19 outbreaks had emerged as a bigger challenge.

James Mitchell, Tencent’s chief strategy officer, said that the prolonged COVID-19 lockdown in Shanghai, in particular, had significantly hampered multinational corporations’ advertising budgets as many tended to make their advertising decisions outside of the city.

Still, regulatory curbs have hurt many of Tencent’s revenue engines, including video games. After freezing new game licenses for eight months, Beijing resumed issuing licenses in April, but the latest batch of new licenses did not include games from Tencent, which makes much of its money by developing games, such as Honour of Kings and Call of Duty Mobile.

China has yet to issue more game licenses this month.

Mr. Mitchell said he expected big firms like Tencent to receive game licenses in the future, but that China will approve fewer games overall going forward. To account for that, Tencent has pivoted to focus on fewer but higher-quality games and plans to introduce more big-budget games in 2023, he added.

Tencent’s domestic game revenue dropped 1 per cent in the first quarter while international game revenue rose 4 per cent. With Chinese regulators imposing draconian measures to keep minors from playing video games and curbing aggressive monetization features, Tencent has turned to overseas markets for growth.

Revenue growth in its fintech and business services segment slowed to 10 per cent in the first quarter, from 47 per cent a year earlier.

Total revenue was 135.5-billion yuan (US$20-billion) in the quarter, roughly the same as a year earlier, and below analysts’ average 141-billion yuan estimate, according to Refinitiv.

Shawn Yang, Shenzhen-based managing director of Blue Lotus Capital Advisors, said the 51 per cent plunge in quarterly profit was particularly concerning.

“I estimated a 17 per cent or 18 per cent decrease because I had learned that they had executed many cost-cutting measures,” Mr. Yang said. “I couldn’t guess that its profit has gotten this bad.”

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