Author | Chen Chen
Editor | Zheng Xuan
Just two days before the release of the first quarter financial report, Tencent first gave a “Sustainable Social Value Report”.
At the beginning of the report, two important messages are given, one is “the growth rate of revenue and profit is slowing down”, and the other is “to change gears to create higher quality development”.
Such an obvious signal paved the way for the next earnings report.
Tencent’s net profit in the first two quarters continued to decline, and the situation did not improve this time. In the first quarter of 2022, Tencent’s total revenue was 135.5 billion yuan, basically the same as the same period last year, and its net profit (Non-IFRS) was 25.5 billion yuan, a year-on-year decrease of 23%. The volatility of the stock price will also continue from 2021 to 2022.
Regulation, the epidemic, the sluggish market environment… Tencent listed many influencing factors in its financial report. Tencent is undergoing “challenges” and “tests”, and once again, it has verified that this is a “comprehensive and long-term” struggle.
01. The epidemic has repeatedly slowed down the progress of “self-healing”
The repeated outbreak of the epidemic has caught Tencent off guard, which is also directly reflected in the business of advertising and financial technology.
Even though the advertising business was reported last quarter to be likely to continue to decline in the first three quarters of the year, it still underperformed core investment bank expectations and was worse than expected.
In the first quarter, online advertising revenue fell by 17.6% to 18 billion yuan. Compared with the previous quarter, the decline accelerated. Among them, social and other advertising revenue fell by 15%. Media advertising revenue such as Tencent News and Tencent Video continued to decline, with a drop of 30%.
In addition to the shrinking of the advertising market caused by industry changes, the encroachment of short video advertising on market share and the tightening of supervision, the epidemic in the first quarter was also a very big headwind for the advertising business.
Tencent management said at the earnings conference call that many major international customers with heavy marketing are headquartered in Shanghai, and the blockade of the epidemic has reduced the willingness of advertisers to put in. As Beijing has also joined the blocked team, more businesses have deteriorated and their marketing budgets have been reduced.
Now, it may be a question mark whether ad revenue can recover in the fourth quarter of this year, as expected last quarter.
Shanghai epidemic store stores closed
Jinke Enterprise Service also failed to surpass the game business again. In the first quarter, it increased by 10% year-on-year, and the revenue growth slowed down again, far below the market expectation of 15-20%.
Among them, the growth rate of fintech service revenue has slowed down significantly. According to the financial report, since mid-March, commercial payment transaction activities have continued to weaken due to the repeated epidemics in some cities. Enterprise services revenue declined slightly year-over-year, but the gap was also stark compared to the previous rapid growth.
At the same time, the cost of revenue of Jinke Enterprise Services increased by 11% year-on-year, and the cost growth rate was higher than the revenue for two consecutive quarters. Last quarter, Tencent responded to the problem of high costs, explaining that the main reason was to acquire customers with low prices and customized services.
The financial report also proposed that Tencent took the initiative to shrink its loss-making business in the first quarter and concentrated its resources on PaaS solutions in the fields of video cloud and network security. However, the underlying problems plaguing the industry are still unsolved, that is, how to differentiate cloud computing products and how to sell products in a standardized way.
According to the financial report, Tencent has controlled the cost of this business and actively reduced loss-making contracts. The financial report also shows that the cost of revenue in the first quarter has narrowed from the previous quarter.
At the beginning of this year, there were rumors that CSIG had made a large proportion of layoffs. I don’t know if this contributed to their cost control, but this part of the optimization of profits may not be reflected until the second quarter or later.
02. The version number is released, but the game market is difficult to open
In the first quarter, game revenue was basically the same as last year, which was lower than market expectations. Among them, game revenue in the local market decreased by 1%, and game revenue in the international market increased by 4%.
In the financial report, Tencent separates mobile and computer game revenue, showing that computer revenue increased slightly year-on-year, but mobile games performed poorly, down 3% year-on-year. Tencent launched 5 new games in 2022, and the newly launched games did not perform as well as expected.
League of Legends Mobile and Golden Shovel brought some revenue gains, but that was mostly offset by declines in other games. The download volume of “Honor of Kings” and “Peace Elite” on iOS channels increased month-on-month, but the growth rate of net income decreased month-on-month. The overseas game market has also declined due to the fading home economy after the global unblocking.
Since the second quarter, a major change in the game field has been the reopening of version numbers.
In April this year, after 263 days, the distribution of domestic game version numbers was resumed. For the game industry, this undoubtedly sends a positive signal, even if none of the first 45 games approved belong to Tencent.
“The previous policy hurts startups the most.” When asked about the version number, Liu Chiping said that it is reasonable to first issue the version number to the startup game company. The company of this game doesn’t hurt that much.”
The first batch of game version numbers released in April 2022
Although the game version number is open, the game approval will be stricter in the future.
According to the information revealed in the conference call, Tencent has long been aware of this. Tencent said that in the past two years, both upstream and downstream of the game business have focused on the development of high-quality games, concentrating resources on a smaller number of games. For them, who will take over “Honor of Kings” may have been a problem.
Tencent also continued its commitment to “cultivating key IP” in the previous quarter. According to the financial report, subsidiary Funcom released the real-time strategy PC game “Dune: Spice War” adapted from the sci-fi IP “Dune”. The version of the mode was launched. The hero shooting tactical competitive game “Apex Legends Mobile” jointly developed by Tencent and Electronic Arts was also launched on May 17, and more than 16 million players had pre-registered on the official website.
Dune: Spice Wars game interface
For Tencent, it is an indisputable fact that only a few games can enter the market in the future. They also said that even without changes in the regulatory environment, users will have higher requirements for the quality of games. Compared with other competitors in the industry, Tencent owns and invests more manpower and resources. In their words, Tencent is “ready to ‘lead’ in the industry.”
They also appear more willing to remain positive as the regulatory environment stabilizes, arguing that “the gaming industry revenue and growth situation will improve in the coming months.”
03. When will the video account be commercialized?
In the financial report, Ma Huateng listed video accounts, enterprise software, and international game markets as “strategic growth areas for continued investment.” Whether in the financial report or in the subsequent conference call, the video account is classified as a “good” business.
Thanks to the improvement of recommendation technology, news, general knowledge and entertainment content are increasingly enriched, and the number of users, playback volume and usage time of video accounts have grown significantly. However, it is clear that the business has not yet entered a good commercialization stage.
In the first quarter, Tencent’s cost of revenue from value-added services increased by 11% year-on-year to 36.1 billion yuan, and the cost of revenue from live video services was a major part of it. The earnings report also mentioned that revenue from live streaming services increased in the quarter, but this was mostly offset by lower revenue from live music and game streaming.
Regarding the question of how to realize the video account, the financial report did not show a good way. In the part of the conference call answering analysts’ questions, Tencent gave a less clear answer – “The final monetization model is similar to the way similar products in the current market are.”
Advertising on WeChat Moments and Official Accounts
For the video account, their current focus is still on improving the user experience. “Raise first” shows that Tencent attaches great importance to this business, but also reveals the hidden concern that commercialization may damage the original ecology, as they said when answering the analyst’s question, “With WeChat friends Like the advertisements in the circle, the video account advertisement should not affect the user experience.”
As for the future of the video account, Tencent may not have no plans. In the conference call, they said that the video account may have a higher CPM (cost per thousand) in the future, which also means that Tencent will aim to improve the conversion rate of advertisements. Find the balance of commercialization without destroying the ecology.
Tencent also revealed their idea of opening up various modules and building a WeChat ecosystem: “IM, applet, video account, official account, when all modules are connected, the time users spend on the platform will be longer, and we will have more opportunities to consider monetization. “
When the circulation of information between the private domain and the public domain is successfully transferred, it is likely to improve the conversion efficiency of advertisements, and this is a condition that is difficult for other short video and long video platforms currently fighting alone.
CITIC Securities had previously predicted that they expected that the WeChat video account will start to realize the realization of information flow advertising by the end of 2022. If you refer to the situation of the advertisements in the circle of friends, the video account advertisements are expected to achieve an increase of 37 billion yuan in 2023, which may be the biggest attraction of Tencent in the future.
The more “veteran-level” long videos do not have the growth potential of video numbers. If you want to sum it up in one word, it can only be “balance of payments”.
Tencent also hopes that the video can take the “high-quality” route, by controlling the quality and value of the video content, and temporarily abandoning some content to optimize the cost. Of course, as a super group in the entertainment industry, Tencent has the advantages and the courage to make “boutiques”. Their next plan is to vertically integrate upstream IPs. In their opinion, classic IPs in the fields of online novels, mobile games, and comics can all be well combined with video content.
Considering the massive losses of Station B and iQiyi, as well as the recent price increase of Tencent Video members, even if Tencent wants to solve the problem of large investment and poor returns for long videos, it may not be so easy.
*Source of the header image: Visual China
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