Tencent profit falls for the first time in nearly 13 years, sending stock down more than 6 percent

Key Points
  • Tencent reports second-quarter earnings Wednesday.
  • Analysts expect a slowdown in revenue growth.
  • The online gaming business is a concern after Chinese regulators have clamped down on the industry and even ordered Tencent to stop selling a popular game called "Monster Hunter: World."
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Tencent reported second-quarter earnings that missed analyst expectations on Wednesday with increased Chinese regulatory scrutiny of its huge gaming business impacting revenue.

Shares of the Chinese internet giant were down more than 6 percent Wednesday.

Here's how the company did in the three months to the end of June:

  • Revenues of 73.7 billion yuan ($10.6 billion) versus 77.3 billion yuan expected by analysts surveyed by Reuters. This is a 30 percent year-on-year rise. This is the slowest revenue growth since the second quarter of 2015.
  • Net profit of 17.9 billion yuan versus 19.6 billion yuan expected, representing a 2 percent year-on-year decline and a 23 percent fall from the previous quarter. It's the first decline since the third quarter of 2005.
  • Earnings per share of 1.89 yuan versus 1.98 yuan expected.

Gaming worries

Tencent has a number of different business areas, including advertising and gaming, and is the owner of China's largest messaging app, WeChat. One of the biggest is its online games unite which accounts for nearly 40 percent of the company's revenues. Online gaming in China has come under intense scrutiny from regulators and that has impacted Tencent's crucial division.

Smartphone games revenue grew 19 percent year-on-year but declined 19 percent from the previous quarter to 17.6 billion yuan. While daily active users (DAU) increased, the money it makes per user did not.

"In China, DAU for our smart phone games grew at a double-digit rate year-on-year, but monetization per user declined as users shifted time to non-monetized tactical tournament games," Tencent said in its earnings release.

The monetization problem Tencent is talking about refers to the crackdown from Chinese regulators. cEarlier this week, authorities stopped Tencent from selling "Monster Hunter: World," a very popular online game created by Japanese gaming firm Capcom. Tencent has the license to sell it in China.

There are also other headwinds for Tencent's gaming business. The first involves another mega-hit known as "PlayerUnknown's Battlegrounds," or PUBG, a massive multiplayer online game that Tencent has the rights to run in China. Regulators have still not approved the monetization of the game. Last year, Tencent had to alter PUBG to fit in with the regulator's view.

Another major Tencent title called "Honor of Kings," which is one of the highest-grossing mobile games in China, has also faced scrutiny. Last year, Tencent put a limit on the amount of time kids could spend on the game after complaints from the authorities that children were getting addicted.

Meanwhile, Bloomberg reported Wednesday, citing sources, that China's regulators have frozen game approvals, which could weigh on Tencent's business.

PC client games revenues were down by 5 percent year-on-year and down by 8 percent quarter-on-quarter to 12.9 billion yuan. In total, online games revenues, which includes both smartphones and PC, increased by 6 percent year-on-year to 25.2 billion yuan.

Tencent is trying to reinvigorate growth in its key division by trying to monetize tactical tournament games, boost engagement with existing titles, and also introduce new games that have a high average revenue per user metric.

Streaming, payments growth

There were some bright spots in Tencent's earnings report. One of its other big revenue drivers is its video subscription service, which is similar to Netflix. It produces digital content across this and many of its social apps too. Tencent also has a number of other services like music streaming and a live streaming app. Subscriptions to these services were up by 30 percent year-on-year to 154 million users. Revenues from these offerings were up 14 percent from the same period last year, but this was slower growth than than the 34 percent recorded in the first quarter of 2018.

Revenues from online advertising across Tencent's various websites and services rose 39 percent year-on-year, again at a slower rate than the previous quarter.

Tencent is also well-known for WeChat, China's most popular messaging app. The tech giant said monthly active users rose to nearly 1.06 billion, a 9.9 percent year-on-year growth. It has introduced new features like Mini Programs, which are small apps within WeChat and a payment service known as Weixin Pay.

"DAU grew at a faster pace than MAU, reflecting greater user engagement and stickiness," Tencent said.

Revenues from Tencent's "other" businesses which include cloud and payment services rose by 81 percent to 17.5 billion yuan.