Tencent’s quarterly earnings missed estimates after China’s economic slowdown eroded its core gaming business and the cost of fending off ByteDance and other rivals rose.
Net income came in at 21.6-billion yuan (US$3.1-billion) in the three months ended December, compared to the average analysts’ estimate of 22.8-billion yuan. Revenue rose a slightly stronger than expected 25% to 105.8-billion yuan. While online gaming sales grew 25% — the first double-digit growth of that metric that China’s leading gaming company has managed since the first quarter of 2018 — overall costs swelled almost 20%.
Tencent’s worse-than-anticipated profit reinforces concerns about the extent to which the Covid-19 pandemic will hurt its home market, at a time the social media titan is spending heavily to acquire content and fend off ByteDance. The company picked up millions of new gamers during the coronavirus pandemic, but in-game purchases for marquee titles like Honour of Kings dwindled in recent weeks after China began to go back to work.
Beijing released data on Monday that suggests the world’s second largest economy may contract this quarter for the first time since 1989, denting the consumer and marketing spending Tencent relies on for revenue growth. On Wednesday, Tencent also warned the outbreak was hurting its fast-growing cloud computing business, one of its brightest areas over the past year.
“The Covid-19 pandemic is delaying customers’ implementation of cloud-related initiatives and will thus negatively impact our near-term cloud services revenues,” the company said in a statement. “But we believe enterprises will be increasingly keen to adopt cloud-based solutions over the longer term, in order to facilitate remote working and remote interactions with their customers.”
Shares in Prosus, the European entity controlled by Naspers that serves as a proxy for the Chinese company, dived more than 7% to an intraday low in Amsterdam.
Tencent is also wrestling with industry-specific issues. It must count on ageing cash cows Honour of Kings and Peacekeeper Elite to sustain its pace of growth while it awaits Chinese government approval — a process that’s become much stricter and slower — for the commercial launch of potential smash hits like Call of Duty Mobile domestically. This week, the company finally kicked off sales of two popular Mario games for the Nintendo Switch console in China after getting the green light. Tencent’s also testing a Twitter-style video and content feed on its ubiquitous WeChat app to win back users from ByteDance.
Shares of Tencent fell 4.5% in Hong Kong before earnings were announced. While they’d outperformed arch-foe Alibaba Group till as recently as 12 March, Tencent’s now shed about 8% since Monday. — Reported by Zheping Huang, with assistance from Lulu Yilun Chen and Kari Lindberg, (c) 2020 Bloomberg LP