Tencent Holdings Ltd. (OTC:TCEHY) reported its first-ever revenue fall after online advertising sales dropped by a record amount, highlighting the extent to which China’s deteriorating economy is affecting the country’s largest firms.
The most valued firm in the country eliminated 5,000 workers, or over 5% of its workforce — the first quarterly decline in headcount since 2014, when the WeChat operator was struck by the global tech sector’s layoffs. The June quarter saw a 3% decline in revenue to 134 billion yuan ($19.8 billion) and a 56% decline in net income, both below projections.
Tencent (OTC:TCEHY) is facing a worsening economic slowdown in the world’s second-largest economy as a result of a property slump and ad hoc coronavirus lockdowns from Shanghai to Shenzhen. The uncertainty is inflicting havoc on firms ranging from cloud computing and advertising to gaming. This month, Alibaba Group Holding Ltd. (NYSE:BABA) posted its first quarterly revenue decline on record, although the results were better than anticipated.
Despite the difficulties, investors applauded Tencent’s (OTC:TCEHY) cost-cutting initiatives and indications that the company may have performed better than expected. The decline in Tencent’s online advertising income of 18% exceeded projections. After excluding one-time profits or losses from associates such as JD.com Inc., the e-commerce company in which Tencent (OTC:TCEHY) is giving away its interests, the company’s adjusted net income of 28,1 billion yuan was almost 15% over forecasts. Tencent’s stock increased 4% in Hong Kong, but is still more than 25% lower for the year.
According to Analyst Willer Chen of Forsyth Barr Asia Ltd., Tencent (OTC:TCEHY) has tightened its belt as the Chinese tech industry experiences a slowdown.” “The company’s performance rests heavily on its development in cost control and operation optimization at this time.
Once reliant on a network of hundreds of investments to develop opportunities and new markets, the corporation has since last year hinted it will begin reducing its interests in key online investees such as JD. This may aid Beijing, which has sought to limit Tencent and Alibaba’s power over the Chinese internet economy by funding hundreds of startups and digital companies.
However, Chief Strategy Officer James Mitchell refuted a Reuters report that Tencent was in contact with financial advisors regarding the sale of all or a substantial portion of its $24 billion investment in food delivery firm Meituan. This report is “inaccurate,” he stated un answer to an analyst’s question during a conference call following the release of earnings. Thursday in Hong Kong, Meituan shares increased by almost 2%.
After a decade of unbridled expansion, China’s massive internet industry had already committed itself to a new age of subdued growth before to the macroeconomic turmoil. After a massive government crackdown erased more than $1 trillion from their total market value in 2021, companies such as Tencent (OTC:TCEHY) are prioritizing profitability above global expansion.
Beijing continues to be a problem for Tencent (OTC:TCEHY). Although regulators resumed approving games in April after a months-long pause meant to combat addiction, China’s leading developer has yet to receive approval for a single title in 2018. It is currently relying on aging cash cows such as Honor of Kings to drive its most profitable business, while competing with recent hits like as Genshin Impact and Diablo Immortal. Tencent (OTC:TCEHY) announced on Wednesday that its Chinese gaming business was suffering “transitional problems,” such as declining user spending.
Similar to Mark Zuckerberg’s Meta Platforms Inc. (NASDAQ:META), Tencent (OTC:TCEHY) is staking a claim on the potential future of the metaverse’s virtual realm. The Chinese corporation has upgraded its aging social software QQ with 3D avatar customization and Unreal Engine visuals, and is employing developers to create open-world games. However, such undertakings, together with a consistent rate of investment in overseas gaming companies, may put pressure on margins prior to their completion.
Pony Ma, co-founder of Tencent (OTC:TCEHY), stated in a statement, During the second quarter, we actively divested non-core businesses, tightened our marketing spending, and reduced our operating expenses.This should position us for revenue expansion as China’s economy grows.
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