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Tencent's 2018 online games revenue growth hit by regulations

China's IT giant Tencent Holdings Ltd. saw online game revenue growth drop to 6% in 2018, compared to 38% in 2017.

Online game revenues were 104 billion yuan in 2018, according to Tencent's March 21 earnings release, up from 97.88 billion yuan in 2017. Mobile game revenues, including those attributable to mini-games on Tencent's social networks, were 77.8 billion yuan in 2018, up 24% year over year, with the growth rate more than halved from 59% in 2017. Computer game revenues dropped 8% year over year to nearly 50.6 billion yuan in 2018.

Tencent said the computer game revenue drop was mainly due to a shift in usage from computer to mobile. Online game revenues were affected by China's regulation of the game industry in 2018 due to concerns about online addiction and health issues among children. A suspension of the approval process for game licenses had an impact on revenues, said James Mitchell, chief strategy officer at Tencent, during an earnings conference call.

The Chinese government resumed the approval process after a nine-month suspension, but now has a backlog of licenses to review. Tencent said seven mobile games and one computer game had so far received licenses.

"The fact that there is this backlog for approval will likely have some impact on the industry growth and our growth within the industry in the next few months," Mitchell said. "But we're pleased that the situation is clear now and the backlog is being worked through at a fairly rapid pace."

"We have several dozen more games in the approval pipeline," Mitchell said.

Tencent's online game revenues growth outperformed analysts' estimates by about 1% to 2%, due to better-than-expected mobile game revenue performance, according to Karen Chan, equity analyst at Jefferies Hong Kong Limited.

The company is also looking to develop its cloud gaming offering, which allows players to take part in the game via video or livestreaming, powered by cloud servers. Tencent has an advantage in having a network of servers in close proximity to users, according to Mitchell.

"We have distributed server infrastructure across China. We have the game expertise," Mitchell said.

"[Cloud gaming is] something that we're looking into closely. But it's also something that I think will take a few years to fully materialize. In the initial stage, there may be more about supporting single player games where the latency [is] an issue, and then gradually upgrade to multiplayer games, which is obviously the bigger revenue opportunity over the course of a number of years," he said.

The IT company's total revenues grew 28% year over year to 84.90 billion yuan in the fourth quarter of 2018, ended Dec. 31, compared to 66.39 billion yuan in the same period in 2017. Gross profit in the fourth quarter of 2018 was 35.15 billion yuan, up 12% year over year from 31.50 billion yuan in the fourth quarter of 2017.

Tencent recorded revenues of 312.69 billion yuan in 2018, up 32% year over year from 237.76 billion yuan in 2017. Its gross profit in 2018 was 142.12 billion yuan, a 22% growth from 116.93 billion yuan in 2017.

GAAP EPS for 2018 was 8.23 yuan per share. The S&P Global Market Intelligence EPS consensus for 2018 was 8.65 yuan per share on a GAAP basis.

As of March 21, US$1 was the equivalent of 6.70 Chinese yuan renminbi.