Tencent posts first revenue decline since going public, cut 5,500 jobs in second quarter

• The Shenzhen-based giant posted revenue of US$19.8 billion in the June quarter, down 3 per cent from a year ago
• The company also downsized its workforce for the first time since 2014, slashing the number of employees by nearly 5,500 during the period

Tencent Holdings, China‘s largest video gaming and social media company, reported its first revenue decline since its 2004 listing and missed earnings expectations, as the company trimmed nearly 5,500 employees from its payroll in the second quarter amid a slowing economy.

The Shenzhen-based giant posted a revenue of 134 billion yuan (US$19.8 billion) in the June quarter, down 3 per cent from a year ago. That was worse than the consensus estimates of 135.6 billion yuan, according to 28 analysts polled by Bloomberg.

Net income reached 18 billion yuan in the period, down 56 per cent from a year ago, missing analysts’ estimates of 25 billion yuan.

Tencent has downsized its workforce for the first time since 2014, slashing the number of employees to 110,715 by the end of June, down from 116,213 in March, according to the company. Its remuneration cost for the second quarter was 27.55 billion yuan, down from 29.2 billion yuan in the first three months of 2022.

“During the second quarter, we actively exited non-core businesses, tightened our marketing spending, and trimmed operating expenses, enabling us to sequentially increase our non-IFRS earnings, despite difficult revenue conditions,” said Pony Ma Huateng, founder and chief executive of Tencent.

“Looking forward, we will focus on enhancing the efficiency of our businesses and launching new revenue initiatives, including in-feed advertisements in our popular Video Accounts, while continuing to drive innovation through R&D.”

Tencent shares in Hong Kong rose less than 0.1 per cent to HK$303.2 on Wednesday, before the earnings results were announced.

Tencent, which runs the world’s largest video gaming business by revenue and China’s biggest social media platform via multipurpose super app WeChat, has initiated multiple rounds of lay-offs in the past few months as part of its efforts to control expenditure.

Starting Tuesday, it no longer offers free fruits and takeaway boxes at the company canteen, adding to a range of other cost-cutting moves, including cancelling free breakfast and dinner for contract workers, adjusting its salary policy to slow the pace of pay rises and rolling out a new performance review system for employees.

The second-quarter financial results come after Reuters reported on Tuesday that Tencent was considering selling some or all of its 17 per cent stake in Meituan, sending shares of the online delivery service giant sliding as much as 10 per cent, before rebounding 3.3 per cent to HK$170 on Wednesday.

When asked about the news during the earnings call on Wednesday, Tencent chief strategy officer James Mitchell said the report was not accurate but that the company is “very focused on … returning capital to shareholders” and stock buybacks.

Tencent’s domestic business is grappling with China’s cooling economy, which has suffered under the country’s worst Covid-19 outbreak in two years. During the last quarter, gross domestic product grew only 0.4 per cent – the slowest since the country’s economy shrank by 6.8 per cent in the first quarter of 2020.

Revenue from Tencent’s value-added services, comprising the company’s video gaming and social network businesses, came in at 71.7 billion yuan in the second quarter of 2022, flat from a year ago.

Video gaming sales at home and abroad, traditionally Tencent’s strongest revenue driver, both declined 1 per cent, reaching 31.8 billion yuan and 10.7 billion yuan, respectively.

Tencent attributed the weak performance in the domestic market to “fewer big game releases, lower user spending, and the implementation of minor protection measures”.

The slowing economy has reduced the money that internet users are willing to spend on video games, which affects Tencent’s video gaming business, Soochow Securities analysts Zhang Liangwei and Zhang Jiaqi wrote in a research note earlier this month.

While Chinese regulators have resumed their approval process for new games since April after ending an eight-month freeze, Tencent has not been granted any new licence in 14 months.

New rules that came into effect last September also limit the playtime of online gamers under 18 to three hours a week.

Tencent’s revenue from online advertising dropped by 18 per cent year on year to 18.6 billion yuan in the June quarter – the steepest decline on record. The company said the decrease was due to weaker demand from the internet service, education and finance sectors.

Revenue from fintech and business services grew 1 per cent to 42.2 billion yuan. The company said the Covid-19 resurgence temporarily dampened commercial payment activities during the quarter. Commercial payment volume registered low-single-digit growth in April, but resumed to above 15 per cent in June, the company said.

As of June 30, combined monthly active users of Tencent’s WeChat and its domestic version Weixin reached about 1.3 billion people, up from 1.25 billion a year ago.

Tencent’s short video platform Video Accounts, known as Channels in WeChat, was a bright spot in the second quarter. Total video views rose 200 per cent year on year, while video views based on algorithm recommendations jumped 400 per cent, the company said.

The weakening economy has also hurt the earnings of other Chinese Big Tech firms. Alibaba Group Holding, which owns the South China Morning Post, posted flat revenue growth for the June quarter.

Authors: Iris Deng, Tracy Qu, SCMP