(Bloomberg) -- Tencent Holdings Ltd. logged its first-ever revenue decline after online advertising sales fell by a record, underscoring the extent to which China’s worsening economy is hurting its biggest corporations.
The country’s most valuable company slashed 5,000 jobs or nearly 5% of its workforce -- the first quarterly drop in staffing since 2014 after layoffs rippling through the global tech sector finally hit the WeChat operator. Revenue fell a deeper-than-projected 3% 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 downturn in the world’s No. 2 economy, the product of a property slump and ad-hoc coronavirus lockdowns from Shanghai to Shenzhen. The uncertainty is wreaking havoc on businesses from advertising to cloud computing and gaming. Alibaba Group Holding Ltd. this month also reported its first quarterly revenue drop on record, though the results were better than feared.
Despite the pressures, investors cheered Tencent’s cost-cutting efforts and signs that the business may have held up better than anticipated. Tencent’s online advertising revenue slid 18% but that surpassed estimates. And adjusted net income of 28.1 billion yuan was about 15% above expectations, after stripping out one-time gains or losses from associates including JD.com Inc., the e-commerce operator that Tencent is giving away its shares in. Tencent’s shares rose 4% in Hong Kong, but remains down more than 25% this year.
“Tencent has tightened its belt as the Chinese tech industry embraces a downturn,” said Willer Chen, an analyst at Forsyth Barr Asia Ltd. “The company’s performance now largely depends on its progress on cost control and operation optimization.”
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The company, which once relied on a network of investments spanning hundreds of firms to create opportunities and new markets, has since last year signaled it will begin paring stakes in major internet investees including JD. That may help appease Beijing, which has sought to curb the influence that Tencent and Alibaba wield over the Chinese internet economy through backing hundreds of startups and tech firms.
But Chief Strategy Officer James Mitchell dismissed a Reuters report that Tencent was in touch with financial advisors about selling all or much of its $24 billion stake in food delivery giant Meituan. That report “is not accurate,” he said in response to an analyst’s question on a post-earnings conference call. Shares in Meituan rose more than 2% in Hong Kong on Thursday.
Read more: Tencent Says Report on Meituan Stake Sale Is Not Accurate
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Read more: Tencent’s Workforce Shrinks for First Time in Near-Decade
Even before the macroeconomic turbulence, China’s giant internet industry had resigned itself to a new era of sedate growth after a decade of free-wheeling expansion. Companies like Tencent are focusing on profitability over the market-grab of years past, after a sweeping government crackdown wiped more than $1 trillion off their combined market value in 2021.
Beijing remains a headache for Tencent. Although regulators resumed approving games in April after a months-long hiatus intended to curb addiction, China’s premier developer has yet to win a nod for a single title this year. For now, it’s counting on aging cash cows like Honor of Kings to spur its most lucrative business, while fighting newer hits like Genshin Impact and Diablo Immortal. On Wednesday, Tencent said its Chinese gaming business was facing “transitional challenges” including dwindling user spending.
Given the new realities, Tencent executives have said that international games, cloud software and WeChat video will be their major strategic priorities. The TikTok-style feed inside Tencent’s super-app is the company’s latest hope of countering ByteDance Ltd., which is increasingly luring away users and marketing dollars.
“Tencent is delivering on what management described as a ‘new industry paradigm’ two quarters ago -- where growth slows but margins improve,” said Vey-Sern Ling, an analyst at Union Bancaire Privee. “Shifting away from reckless expansion and aggressive marketing should be taken positively for the industry as a whole.”
The fintech and business services segment -- which includes cloud computing -- is now Tencent’s fastest growth engine. But cloud revenue suffered a mild decline this year after the company cut loss-making contracts and ventured into services beyond infrastructure.
Just like Mark Zuckerberg’s Meta Platforms Inc., Tencent is staking its claim of a possible future of the virtual realm 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 make open-world titles. But such endeavors, along with a steady pace of investment in overseas game studios, could pressure margins before they come to fruition.
“During the second quarter, we actively exited non-core businesses, tightened our marketing spending, and trimmed operating expenses,” Tencent co-founder Pony Ma said in a statement. That “should position us for revenue growth as China’s economy expands.”
(Updates with share action from the fourth paragraph)
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