Tencent Earnings Fall as Rivals Cut Into Ad Revenue — WSJ – Morningstar.com

By Shan Li 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 14, 2019).

Tencent Holdings Ltd.’s profit slid in the third quarter as the Chinese tech giant looked to expand its gaming business abroad while grappling with upstart tech rivals and slowing economic growth at home.

The world’s largest videogame company by revenue, which also operates social-networking app WeChat, reported a 13% drop in third-quarter profit from a year earlier, to 20.4 billion yuan ($2.9 billion) — short of the consensus forecast of 24.4 billion yuan by analysts polled by FactSet.

Revenue climbed 21% to 97.2 billion yuan, just missing analysts’ forecast of 97.9 billion yuan.

Tencent is navigating political minefields, many arising from tensions between the U.S. and China, after a rocky 2018.

On Saturday, Tencent halted the live stream of a game between the Los Angeles Lakers and the Miami Heat after a front-row fan was spotted wearing a shirt depicting the flag of the self-governed but Beijing-claimed island of Taiwan, according to state media.

That follows a temporary suspension last month of its live streams of National Basketball Association games — Tencent has the exclusive rights in China, having agreed in June to pay $1.5 billion for a five-year extension of its deal — after the general manager of the Houston Rockets inflamed Chinese sensibilities by tweeting in support of Hong Kong protesters.

Martin Lau, president of Tencent, said the company is relying on its strong relationship with the basketball franchise and the NBA’s Chinese fan base to weather the current controversy.

“What we are trying to do is work through this difficult period,” he said during a Wednesday analyst call. “Over time, [we] hope the problem will solve itself.”

The Shenzhen-based company is also facing challenges at home. Younger tech companies like Bytedance Inc., whose short-video apps TikTok and Douyin have won a global audience, are cutting into advertising on WeChat at a time when companies are more cautious with ad budgets. Tencent plans to back its own flagship short video app, Weishi, with ” a lot of marketing and content dollars,” Mr. Lau said.

A broad clampdown on content in the first part of the year — part of a crackdown ahead of the 70th anniversary of the founding of the People’s Republic of China — also limited Tencent’s ability to air several historical costume dramas. The lost sponsorship deals sent media advertising revenue for Tencent down 28% to 3.7 billion yuan from a year earlier.

Some of those shows have finally made it to air, said James Mitchell, Tencent’s chief strategy officer, during the call. “We believe the worst is behind us.”

One upside is its gaming business, which was battered last year after a nine-month regulatory freeze on new-game approvals. “Peacekeeper Elite,” a game introduced in May that glorifies China’s military, has become a smash hit. Tencent’s mobile version of the popular videogame “Call of Duty” was downloaded 148 million times in its first month, the second most successful mobile game launch of all time, according to research firm Sensor Tower.

On Wednesday, Tencent executives said the company plans to aggressively go after international markets by creating its own games and joining with other gaming companies with prized intellectual property.

“We have proven that we ourselves can develop games that achieve global success,” Mr. Mitchell said.

But Tencent will struggle to expand internationally at a pace that will make up for the slowdown in China’s gaming market, said Benjamin Wu, a senior analyst of the game sector at research firm Pacific Epoch. Only about 10% of Tencent’s gaming revenue comes from outside China, he said.

Tencent and other gaming companies also have to deal with Chinese regulators, which are increasingly stringent about reviewing games after halting approvals for most of last year. That is why Tencent has yet to see “Call of Duty Mobile” approved in China, Mr. Wu said.

“Tencent will suffer more than the general market,” Mr. Wu said.

Write to Shan Li at shan.li@wsj.com


(END) Dow Jones Newswires

November 14, 2019 02:47 ET (07:47 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.


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