Tencent sales squeezed by slowdown in domestic gaming

Receive free Tencent Holdings Ltd updates

We’ll send you a myFT Daily Digest email rounding up the latest Tencent Holdings Ltd news every morning.

Tencent’s cost-cutting measures helped boost profit by a third but revenues missed estimates as anaemic domestic gaming sales and weak consumer confidence fed into the Chinese tech giant’s patchy performance.

Revenue increased a worse than expected 11 per cent to Rmb149.2bn ($20.4bn) in the quarter that ended in June, compared with a year earlier, the social media and gaming group reported on Wednesday, while net profit rose 33 per cent to Rmb37.5bn.

A combination of “careful cost discipline” and “gravitation towards high-quality revenue streams with better margins”, such as advertising, had contributed to profit growth exceeding revenue improvement, Tencent’s chair and chief executive Pony Ma said on Wednesday.

The group’s domestic gaming business, its most profitable unit, failed to grow in the second quarter, with revenues flat at Rmb31.8bn. Tencent management cited that it had released “less highly commercial content” in the second quarter and forecast that growth would resume in the next three-month period.

“Overall, Tencent had solid numbers, with strong profit driven by advertising strength and margin expansion in ads and fintech and business services,” said Robin Zhu, China internet analyst at Bernstein. “But the games revenue miss will prolong concerns that Tencent’s in-house development hasn’t been as productive as its peers recently.”

Last month, the Financial Times reported that Tencent’s leadership is concerned about its pipeline of new domestic mobile games, especially after its smaller rival NetEase achieved an unexpected breakout success with its casual game Eggy Party. 

Meanwhile, its international gaming revenues continued to post strong sales growth, increasing 19 per cent to Rmb12.7bn, buoyed by the popularity of its shooter game Valorant. 

One bright spot for Tencent’s domestic business was its advertising unit, which posted a 34 per cent revenue surge to Rmb25bn as it recovered from a pandemic-era trough and benefited from recent investment in its video accounts platform.

The group’s spending on its short video accounts platform has begun to pay dividends, with user time on video accounts doubling from the same period last year. It is seeking to take on ByteDance’s Douyin, the local sister version of the viral short-video app TikTok.

Tencent has remained relatively silent on its generative artificial intelligence plans in comparison with the country’s other big internet groups Baidu and Alibaba, which both rushed out ChatGPT-style services to capitalise on the hype around OpenAI.

Tencent said it was testing its generative AI models with its cloud services customers, but did not add any details about whether its self-developed “Hunyuan” model would be released into the market.

The FT this month reported that Tencent was one of the four large internet giants to make orders worth $5bn to acquire high-performance Nvidia chips. It is deploying in a new server cluster, on which customers can rent time to train large language models.