By CAO Li, LU Keyan
For the first time in 18 years, Tencent didn’t grow. Q1 earnings released on May 18 show profits halved from a year ago, and revenue flat. Gaming and advertising, its two major sources of revenue, have been hit by regulations, and pandemic control means an uncertain future.
Q1 revenue this year was 135.5 billion yuan (US$20 billion), last year it was 135.3 billion yuan. Net profit (GAAP) was 23.4 billion. Last year was close to 50 billion.
Games still to recover from last year’s crackdown
Domestic game revenue dropped because a large proportion of Tencent’s games targeted teenagers. Since last year, rules to protect minors have reduced their game time significantly. The good news is that the government started issuing game licenses again last month after an 8-month freeze, although Tencent’s games were not included in the first batch.
President of Tencent Martin Lau said it was right to give licenses to startups first because large companies can easier weather lean times. He expects Tencent to receive licenses this year.
But it wasn’t just the domestic market. International game revenue increased by only 4 percent, a significant slowdown from 31 percent in Q4.
Advertisers have tightened their belts
Income from advertising continued to shrink, down 18 percent year on year. Revenue from social media ads decreased for the first time, by 15 percent. Tencent attributed this to lower demand from tutoring schools, e-commerce companies and other mobile internet businesses, who were severely affected by crackdowns last year. Tighter regulations in the advertising industry also played a part.
The impact of pandemic lockdowns will be “particularly notable” on advertising, said Chief Strategy Officer James Mitchell. This is partly because of the overall pressure on GDP, and partly because many large advertisers run their marketing out of Shanghai. He said Tencent will continue to upgrade its algorithms.
Fintech suffered low payments. Cloud brightened
Fintech and Business Services, which have grown at an annual rate of 33 percent for three years, also showed signs of slowing. Revenue was up 10 percent in Q1, lower than Q4’s 34 percent. Commercial payments dropped significantly due to closures during lockdowns.
Although revenue from Tencent Cloud dropped, bringing rapid expansion to a halt, margins improved as the company cut losses on unprofitable projects. Mitchell said Tencent Cloud has shifted focus from expansion to quality of growth.
Video priority, investment less
Video embedded in WeChat is the highest priority. But Tencent is still to figure out how to monetize viewership, most likely through ads but wants to balance the user experience with profit maximization.
Investment income dropped 6.4 billion yuan due to lower valuations of investments, as well as divestment in a few companies including JD. Mitchell defended Tencent’s strategy, which he called “very selective” and “very disciplined.”
Cost ballooned despite controls
Tencent has implemented cost control measures but only to a limited extent. Spending on sales and marketing decreased by 6 percent in Q1, but administrative costs shot up by 41 percent, due to higher R&D expenses, higher staff costs in key areas, and expenses overseas. Q1 headcount increased by 3,442, about half of the increases in the two previous quarters.
