Chinese social media giant Tencent's earnings for the second quarter missed market forecasts, dropping for the first time since 2005, as Beijing regulators withheld approval for the group to cash in on its most successful video game.
Net profit for the three months ended in June fell 2% on the year to 17.86 billion yuan ($2.59 billion), the world's biggest video game company announced on Wednesday. This marked Tencent's first decline in quarterly profit in nearly 13 years.
The Hong Kong-listed company reported revenue of 73.68 billion yuan for the quarter, up 30% on the year but well below the consensus forecast of 77.3 billion yuan based on analysts surveyed by Reuters.
The MSCI Emerging Markets Index, which counts Tencent among its top 10 holdings by weight, was down about 2% after the earnings announcement, which came after the Hong Kong market closed. Tencent shares ended Wednesday's session down 3.61%.
The results led to a slide in technology stocks on the S&P 500 and the Nasdaq. The S&P 500 technology index was down 1.1%.
"The gaming fundamental is actually as strong as it has been," Tencent President Martin Lau told analysts in an earnings call. "The only problem we have is that our biggest game, 'PUBG Mobile,' is not monetizing."
Lau described this challenge as "a little bit out of our control," but added that "I think we will be able to solve it."
"PUBG Mobile," short for "PlayerUnknown's Battlegrounds Mobile," is a multiplayer online survival game introduced by Tencent in May that has earned tens of millions of dollars from players abroad. Tencent produced the mobile version, which is based on a franchise developed by unit of South Korean game company Bluehole.
The game is free to download and play, but some features cost money. Tencent has not been allowed to charge players in China for in-game purchases.
"Revenue growth will return once it is monetized" in China, Lau told analysts.
Online gaming accounts for roughly 40% of Tencent's revenue. Mobile game revenue in the second quarter declined 19% to 17.6 billion yuan, while the personal computer game segment dropped 8% quarter-on-quarter to 12.9 billion yuan.
Tencent -- the operator of WeChat, a huge Chinese social network -- declined to speculate on whether Beijing has tightened control over the game industry. The company instead attributed the delays in new licenses to a longer-than-expected overhual of the Chinese government watchdog.
China's State Administration of Radio and Television, which monitors entertainment content in the country, has licensed no new video games since late March.
"We do believe it's not a matter of whether this game will be approved for monetization; it is a matter of when exactly we can actually do that," Lau said.
Separately, Tencent was forced to pull "Monster Hunter: World" -- a popular action role-playing game developed by Japanese studio Capcom -- from its WeGame platform in China on Monday, five days after the game's launch.
Tencent told analysts that "some content provided by game developers didn't comply with regulations. We are now adjusting the content for future approval."
The company did not elaborate on what content crossed the line, but many believe the bloody scenes of monster killing upset Chinese censors, who have long red-flagged violent content.
Tencent said it still has 15 approved games in the pipeline that can be released and monetized. The company also has bet on overseas markets to offset its sluggish growth at home.
"PUBG Mobile" grossed over $20 million from international players in July, Tencent said. Fellow Tencent hit "Arena of Valor" generated more than $30 million in monthly gross revenue outside China during the first half of the year.
Yet analysts say the domestic impact may not be shrugged off easily. Industry statistics show China remains the biggest gaming market, with revenue of 105 billion yuan in the first half and an army of 600 million gamers.
Despite the growing importance of attracting foreign players, "revenue from overseas markets has yet to make a meaningful difference to most Chinese gaming companies," said Kern Zhang, an analyst with App Annie, a market research company specializing in online games.