Tencent’s sales fall for the first time as China’s economy slumps

Tencent Holdings Ltd. recorded its first-ever drop in revenue after the record slump in online ad sales, underscoring how China’s deteriorating economy is hurting its biggest businesses.

The country’s most valuable company has cut 5,000 jobs, or nearly 5% of its workforce – the first quarterly drop in the workforce since 2014 after layoffs rippled through the global tech sector and finally hit the operator WeChat. Revenue fell 3% more than expected to 134 billion yuan ($19.8 billion) while net income also missed estimates, plunging 56% in the June quarter.

Tencent is grappling with a deepening slowdown in the world’s second-largest economy, the product of a housing slump and ad hoc coronavirus lockdowns from Shanghai to Shenzhen. Uncertainty is wreaking havoc on businesses, from advertising to cloud computing and gaming. Alibaba Group Holding Ltd. announced its first-ever quarterly revenue decline this month, although the results were better than expected.

“Tencent has been tightening its belt as China’s tech industry embraces a slowdown,” said Willer Chen, analyst at Forsyth Barr Asia Ltd. “The company’s performance now depends largely on its progress in controlling costs and optimizing operations.”

Prosus NV, one of Tencent’s biggest backers, lost more than 1% in Europe. Even before the macroeconomic turmoil, the Chinese internet giant had resigned itself to a new era of quiet growth after a decade of coasting expansion. Companies like Tencent are focused on profitability during the market grab of years past, after a sweeping government crackdown erased more than $1 trillion from their combined market value in 2021.

Despite the pressures, there were some positive indicators. Online ad revenue fell a record 18% in the quarter, but it was better than analysts feared. And adjusted net profit of 28.1 billion yuan was about 15% better than expected, after removing one-time gains or losses from associates including Inc., the e-commerce operator in which Tencent gradually sells its shares.

Beijing remains a headache for Tencent. Although regulators resumed game approvals in April after a months-long hiatus intended to curb addiction, China’s top developer has yet to win a nod for a single title this year. For now, it’s relying on aging cash cows like Honor of Kings to boost its most lucrative business, while battling new hits like Genshin Impact and Diablo Immortal. On Wednesday, Tencent said its gaming business in China faced “transitional challenges,” including declining user spending.

The company, which once relied on an investment network spanning hundreds of companies to create opportunities and new markets, also announced last year that it would begin selling stakes in China’s leading company. Internet investment company of e-commerce giant Inc. in Meituan. That could help appease Beijing, which has sought to curb the influence Tencent and Alibaba wield over China’s internet economy by backing hundreds of startups and tech companies.

Given the new realities, Tencent executives said international games, cloud software and WeChat video would be their top strategic priorities. The TikTok-style stream inside Tencent’s super app is the company’s last hope to counter ByteDance Ltd., which is attracting more and more users and marketing dollars.

“Tencent is achieving what management described as a ‘new industry paradigm’ two quarters ago – where growth is slowing but margins are improving,” said Union Bancaire Privée analyst Vey-Sern Ling. “A move away from reckless expansion and aggressive marketing should be viewed as positive for the industry as a whole.”

The fintech and business services segment, which includes cloud computing, is now Tencent’s fastest growing engine. But cloud revenue suffered a slight dip this year after the company ended onerous contracts and ventured into services beyond infrastructure.

Much like Mark Zuckerberg’s Meta Platforms Inc., Tencent claims a possible future for the virtual domain of the metaverse. The Chinese company has revamped its aging social app QQ with customizable 3D avatars and Unreal Engine graphics, and is hiring developers to create open-world titles. But such efforts, along with a steady pace of investment in overseas game studios, could put pressure on margins before they materialize.

“During the second quarter, we actively exited non-core businesses, tightened our marketing spend, and reduced our operating expenses, which allowed us to sequentially increase our non-IFRS earnings, despite revenue conditions. difficult,” Tencent co-founder Pony Ma said in a statement. statement. This “should position us for revenue growth as the Chinese economy expands.”

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