By Josh Ye
HONG KONG (Reuters) -China’s Tencent Holdings posted a 6% rise in first-quarter revenue on Tuesday, beating analyst expectations, as business services and advertising sales delivered strong revenue growth.
However, a recovery in its games business, which generates nearly half of its groupwide profit, remained weak, pointing to challenges it faces as the world’s largest video game company seeks to revamp its gaming pipeline. China’s biggest internet company and operator of the WeChat messaging platform said revenue reached 159.5 billion yuan ($22.04 billion) for the three months ended March 31. That compared with the 158.44 billion yuan average of 19 analyst estimates compiled by LSEG.
That marks the fifth straight quarter where Tencent has experienced quarterly revenue growth as it comes out of Beijing’s regulatory crackdown in 2022. While the company’s business services and advertising revenue continue to grow, its core gaming business is facing a notable slowdown as popularity for its existing hits plateaus and fades.
For the first quarter, domestic gaming revenue declined 2% to 34.5 billion yuan. Honor of Kings and Peacekeeper Elite, Tencent’s two leading titles, have both suffered notable revenue decline. However, international gaming revenue returned to growth this quarter, up 3% year-over-year to 13.6 billion yuan.
Revenue from online ads jumped 26% to 26.5 billion yuan as Tencent upgraded its ad infrastructure and further commercialised its short video platform WeChat Video Accounts, a rival to ByteDance’ TikTok-like app Douyin in China.
“We upgraded our advertising technology platform to help advertisers establish advertising campaigns more effectively, and made generative AI-powered advertising creation tools available to all advertisers,” Tencent said in an exchange filing.
Revenue from fintech and business services grew 7% to 52.3 billion yuan as the firm’s suite of payment, ecommerce and productivity software and services continued to gain traction in China.
Net profit rose 62% to 41.8 billion yuan, versus the 43.03 billion yuan average analyst estimate.
Reuters reported last month that Tencent is seeing a major shift of its gaming strategy where it is now focusing more on developing homegrown games than adapting old foreign hits for smartphones as it cancelled multiple expensive projects based on foreign franchises.
Pony Ma, Tencent’s founder and chief executive, has been blunt that the company’s video game division – which last year generated 180 billion yuan in sales or around 30% of overall revenue – needs to do better.
That said, analysts believe that upcoming games including the “Dungeon and Fighter” mobile game, which has taken Tencent seven years to develop and secure regulatory approval, will be able to provide a boost in Tencent’s gaming revenue for the coming quarters.
Shawn Yang, a senior research analyst at Arete Research, said he expected gaming revenue to be weak in the first quarter, but added it would likely improve from March and the second quarter.
“They are having a new game from Supercell and the new Dungeon and Fighter game is coming,” he said, “Revenue from Honor of Kings and Peacekeeper Elite may also stabilise then.”
He said the increased ad revenue is the highlight this quarter for Tencent, which has exceeded expectations.
“Tencent even specifically mentioned ads shown by WeChat’s search engine, which was rarely talked about in the past,” he said, adding that such search-based ads could be a potential point for growth for the company in the future.
($1 = 7.2378 Chinese yuan)
(Reporting by Josh Ye; Editing by Jacqueline Wong)