Chinese internet giant Tencent registered a drop in profit in Q1, as gaming revenue was flat year-on-year and online advertising dropped by nearly a fifth due to concerns over Covid-19 (coronavirus) and supply chain disruptions.

In an earnings call, chairman and CEO Pony Ma called the opening quarter challenging, noting Tencent pushed cost-control initiatives and rationalised certain non-core businesses.

Those efforts aimed to enable Tencent to “achieve a more optimised cost structure going forward”, Ma said.

CSO James Mitchell explained clients across a number of consumer advertising categories scaled back spending for a second consecutive quarter.

He said the impact of lockdowns will depend on how the pandemic develops in different cities across the country, adding Covid-19 continued to negatively influence “most people in China, particularly in the affected cities. And we’re not exempt from that”.

Mitchell said Tencent is investing in advertising systems and upgrading its infrastructure to process data more efficiently and so “enhance our targeting and conversion rates for advertisers”.

Net profit declined 23 per cent year-on-year to CNY25.5 billion ($3.8 billion) on flat revenue of CNY135.5 billion.

Value-added services revenue was flat at CNY72.7 billion with subscriptions up 6 per cent to 239 million.

Gaming and social networks sales were flat at CNY43.6 billion and CNY29.1 billion, respectively.

Domestic games sales fell 1 per cent to CNY33 billion, attributed to “direct and indirect effects” of government-sanctioned protections for children and a related impact on active and paying user numbers.

International games sales rose 4 per cent to CNY10.6 billion.

Online advertising revenue fell 18 per cent to CNY18 billion with fintech and business services up 10 per cent to CNY42.8 billion.

Combined monthly active users (MAUs) of messaging service WeChat and Chinese version Weixin increased 1.6 per cent to 1.29 billion.

MAUs on its QQ mobile messaging platform fell 7 per cent to 563.8 million.

Capex dropped 10 per cent to CNY7 billion.

R&D expenses were up 36 per cent to CNY15.5 billion.