HONG KONG–Tencent Holdings Ltd. said it is looking to expand in videogames overseas as woes at home contributed to a worst-ever 32% drop in quarterly profit for the Chinese tech giant.
Tencent’s fourth-quarter profit took a big hit from heavy investments the company is making in content and technology to diversify, as its core videogame business contributes less to overall revenue.
The Shenzhen-based company–which also operates WeChat, China’s dominant social messaging app–is still recovering from a nine-month regulatory freeze put on new game approvals last year.
Regulators started greenlighting titles in December, but Tencent has yet to receive approval for popular games, including two mobile versions of “PlayerUnknown’s Battlegrounds.” Without licenses, the company has been unable to monetize the game-playing.
At a press conference Thursday, Tencent executives said the pace of approvals in China, where it collects most of its games revenue, continues to be slower than in the past, prompting the company to look abroad.
“We are still confident in the industry, but in the short term we have to solve some regulatory problems and also social issues,” said Tencent President Martin Lau. “Going forward, we think games in the overseas market will have huge opportunities.”
Tencent reported a profit of 14.2 billion yuan ($2.1 billion) for 2018’s final quarter, falling short of the 18.5 billion yuan estimate from analysts polled by FactSet. Profit was 20.8 billion yuan in the year-earlier period. Revenue was 84.9 billion yuan, a 28% increase from a year earlier and slightly above analyst estimates.
The company took a 2.1 billion yuan hit from one-time charges tied to Tencent Music Entertainment and other companies in which it holds a stake.
Game-company executives and analysts expect a more stringent review process in China, raising questions about whether Tencent can continue to rely on videogames as its biggest source of revenue.
Game revenue fell to 36% of total revenue in the fourth quarter, compared with 45% a year earlier. Smartphone game revenue grew 12% to 19 billion yuan, but the higher-margin PC games business continued to shrink, with revenue falling 13% to 11.2 billion yuan.
Tencent said the number of monthly active users on WeChat hit 1.1 billion, but competition from upstart rivals such as Beijing Bytedance Technology Co. is picking up. Bytedance’s popular news aggregator Jenri Toutiao and the blockbuster short-video app TikTok have both included minigames on their platforms in recent months.
Tencent has been plowing more money into technology such as artificial intelligence and cloud computing, sending costs up 43%. It is also investing in video and music content.
In its first major restructuring in six years, Tencent said last year it was putting more emphasis on providing services to business clients. Those investments will position the company for growth in the long term but will take years to build up, analysts said. Tencent currently holds about 10% of the Chinese cloud market, while Alibaba Group Holding Ltd. dominates with about 45%.
Tencent plans to add a new revenue category when it reports first-quarter earnings, to better reflect its expanding businesses.
“In terms of revenue, we have to take the long view,” Mr. Lau said. “We are providing basic services in cloud, and in the future, cloud services will continue to move past basic services, which have very low margins.”
A slowing Chinese economy has prompted some tech companies to tighten their belts through trimming staff or cutting business expenses. Tencent is planning to demote or lay off about 10% of its middle managers, according to people familiar with the matter.
Tencent’s online ad revenue, which has been a bright spot, climbed 38% to 17 billion yuan in the fourth quarter. But China’s slowdown has hit ads for big-ticket items such as cars.
“We have seen some indicators of the slowdown of the Chinese economy,” Mr. Lau said. “Advertisers are more prudent in their advertising spending.”
Write to Shan Li at shan.li@wsj.com
