Tencent’s digital ad sales are falling for the first time as China’s economy falters

Tencent Holdings saw its first-ever revenue decline after online ad sales fell by a record amount — underscoring the extent to which China’s deteriorating economy is hurting its biggest companies.

The country’s most valuable company has shed 5,000 jobs, or almost 5 percent of its workforce. It’s the first quarterly job cut since 2014 and came after layoffs in the global tech sector finally hit the WeChat operator. Revenue fell 3 percentage points more than forecast to 134 billion yuan, while net profit also missed estimates, falling 56 percentage points in the June quarter.

The move away from reckless expansion should be good for the industry

Tencent is grappling with a deepening downturn in the world’s second-largest economy — the result of a housing slump and ad hoc coronavirus lockdowns from Shanghai to Shenzhen. The uncertainty is wreaking havoc on businesses across all industries – from advertising to cloud computing to gaming.

Alibaba Group also reported its first quarterly sales decline on record this month, although results were better than feared.


An employee at a Tencent booth at the China Internet Conference

“Tencent has tightened its belt as the Chinese tech industry takes a downturn,” said Willer Chen, analyst at Forsyth Barr Asia. “The company’s performance now depends largely on its progress in controlling costs and optimizing operations.”

Even before the macroeconomic turmoil began, China’s internet industry had settled into a new era of leisurely growth after a decade of unabated expansion. Companies like Tencent have focused on profitability in recent years after a sweeping government crackdown wiped out more than $1 trillion of their combined market value in 2021.

Despite the pressure, there were some positive indicators. Online advertising revenue fell a record 18 percent in the quarter, but that was better than analysts feared. And adjusted net income of 28.1 billion yuan was about 15 percent above expectations after excluding one-time gains or losses from associates such as (the e-commerce operator in which Tencent is gradually divesting its stake). .


People at the food supplier Meituan’s booth at the China International Fair for Trade in Services

Prosus NV, one of Tencent’s biggest supporters, remained largely unchanged in Europe.

The company, which once relied on a network of investments that spanned hundreds of firms to create opportunities and new markets, has signaled since last year that it will begin reducing stakes in big internet investors, including JD. That could help appease the Beijing government, which has been trying to curb Tencent’s and Alibaba’s grip on the Chinese economy by supporting hundreds of startups and tech companies.

Tencent lays claim to the virtual realm of the metaverse

However, James Mitchell, Tencent’s chief strategy officer, dismissed a Reuters report that Tencent had been in touch with financial advisers to sell all or most of its $24 billion stake in grocery delivery service Meituan. That report “is not accurate,” he said in response to a question from an analyst on a conference call about the earnings.

Beijing continues to give Tencent a headache. Although regulators resumed approving games in April after a month-long hiatus to curb addiction, China’s top developer has yet to win a single title this year.

On Wednesday, Tencent said its Chinese gaming business faces “transition challenges,” including dwindling user spending.

Faced with the new realities, Tencent executives have said international gaming, cloud software and WeChat video will be their top strategic priorities. The TikTok-style feed in Tencent’s super app is the company’s latest hope to counter ByteDance, which is increasingly luring users and marketing dollars to TikTok.


The logo of the Chinese Tencent Music Entertainment Group

“Tencent is delivering what management dubbed a ‘new industry paradigm’ two quarters ago — where growth is slowing but margins are rising,” said an analyst at Union Bancaire Privée. “The move away from reckless expansion and aggressive marketing should be positive for the industry as a whole.”

The fintech and business services segment — which includes the cloud — is now Tencent’s fastest growth engine. But cloud revenue suffered a slight decline this year after the company canceled loss-making contracts and ventured into services beyond infrastructure.

ByteDance is increasingly attracting users and marketing dollars to TikTok

Just like Mark Zuckerberg’s meta, Tencent lays claim to the virtual world of the metaverse. Tencent has overhauled its aging social app QQ with customizable 3D avatars and improved graphics, and is hiring developers to create open-world titles.

But such a push, coupled with steady investment in overseas game studios, could put pressure on margins before they materialize.

“In the second quarter, we actively exited non-core businesses, streamlined our marketing spend and cut operating expenses,” Pony Ma, co-founder of Tencent, said in a statement. That “should position us for revenue growth as China’s economy expands.” Tencent’s digital ad sales are falling for the first time as China’s economy falters

Fry Electronics Team

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