Image source @Visual China
Text | Alphabet List, Author | Wang Jing, Editor | Tan Xiaohan
Tencent, which has always been a top student in financial reports, also lost its chain in the first quarter.
In the first quarter of this year, Tencent’s revenue was 135.5 billion yuan, compared with 135.3 billion yuan in the same period last year; under non-IFRS, its net profit was 25.5 billion yuan, a year-on-year decrease of 23%.
In the first and second quarters of last year, Tencent’s revenue still maintained a year-on-year growth of more than 20%. Why is it suddenly stalled now? 
Tencent’s revenue is mainly composed of three parts: the value-added service revenue was 72.7 billion yuan, compared with 72.4 billion yuan in the same period last year; the online advertising revenue was 18 billion yuan, down 18% year-on-year; the financial technology and enterprise service revenue was 42.8 billion yuan, a year-on-year increase. 10%.
Compared with the same period last year – value-added services increased by 16% year-on-year, online advertising increased by 23% year-on-year, and financial technology and enterprise services increased by 47% year-on-year, it can be seen that Tencent’s stagnant revenue growth this quarter was not caused by the drag of a certain business, but The joint force of the three businesses, of course, the most conspicuous is the advertising business.
In the first quarter, Tencent’s online advertising fell by 18% year-on-year, of which social and other advertising revenue fell by 15%, and media advertising revenue including Tencent News and Tencent Video fell by 30%.
The advertising winter didn’t come suddenly. In recent quarters, the advertising-related businesses of Tencent and Alibaba have shown signs of slowing growth. The revenue of companies that rely heavily on advertising, such as Baidu and video sites, has undoubtedly exposed this point. Even the big advertising giant Byte has not been spared. According to a report by the Shanghai Securities News in November last year, the domestic advertising revenue of Byte has stopped growing in the previous six months, which is the first time since its commercialization in 2013.
By the fourth quarter of last year, the advertising market had dropped to freezing point. Take Tencent, for example, in the third quarter, its online advertising revenue still increased by 5% year-on-year, and in the fourth quarter, it turned sharply down, down 13% year-on-year.
Compared with the entire industry, Tencent’s advertising business has been affected more widely and deeply. In March, Tencent’s management explained that this was related to “the composition of Tencent’s advertisers”. A year ago, online education accounted for 10%-15% of Tencent’s advertising revenue, and only 1%-3% in the fourth quarter.
“Our advertisers include many industries that are greatly affected by regulation, and their advertising bidding has been affected, and their contribution to advertising revenue has also declined.” The industries mentioned by management, in addition to education, also include games, insurance, etc. .
The advertising business crisis that Tencent encountered in the first quarter can be said to be a continuation of this storm. There is another turmoil that has caused Tencent’s revenue to decline.
In the fourth quarter of last year, Tencent’s financial technology and enterprise service segment revenue accounted for 33% of total revenue, surpassing the gaming segment for the first time. In other words, due to policy regulation, the slowdown in game revenue growth is expected, and financial technology and enterprise services should have taken over the baton of growth.
However, this quarter, the business increased by 10% year-on-year, corporate service revenue declined slightly year-on-year, and fintech service revenue slowed year-on-year growth – the epidemic since March has affected the amount of commercial payment transactions, Tencent’s growth baton in the first quarter slide.
In public perception, offline commerce and online e-commerce are businesses that have been severely affected by the epidemic. The fact is that related businesses cannot escape the impact of the epidemic. In the second quarter, I am afraid that the financial reports of large companies will still not look good.
01
Tencent’s advertising business continues to decline. In addition to the inertia of the decline, there are also factors of the epidemic.
In the first quarter of this year, Focus Media’s revenue was 2.94 billion, down 18.19% year-on-year, and its net profit fell 32.12% year-on-year. For both revenue and net profit to decline, the management of Focus has had expectations – the macro demand boom has declined year-on-year, and Q1 in 22 years will lack the more than 200 million revenue contributed by education advertisers in 21Q1, “but we did not predict at the beginning of the year. The outbreak has occurred since March.”
At the performance meeting of Focus Media at the end of April, Jiang Nanchun pointed out that the current problem in the advertising industry is that after the epidemic, the demand of advertisers is declining, and they have turned to live broadcasts, which can be converted into sales on the spot. , content marketing will be affected by the epidemic, “This is a less urgent delivery demand.”
According to the analysis of Longqiao Dolphin Investment Research, the high sensitivity of advertising demand to the macro has also created the high Beta attribute of Internet advertising after periodicization. When the economic situation is not good, advertising revenue will slow down faster. At present, the advertising demand of advertisers is passively or actively shrinking, and there is still the possibility of further release of advertising inventory in the industry (such as the realization of video accounts, Kuaishou, Bilibili to increase the advertising loading rate), both volume and price are bleeding, advertising is currently at the bottom of the cycle lingering state.
Tencent’s advertising business is in such a dilemma. The financial report pointed out that the online advertising business fell by 18% year-on-year in the first quarter, mainly due to weak advertising demand in education, Internet services, e-commerce and other industries and the impact of regulatory changes in the advertising industry itself.
In July last year, the Ministry of Industry and Information Technology launched a professional rectification campaign for the Internet industry, focusing on mobile software open-screen advertisements, pop-up advertisements, and mandatory personalized services. APP open-screen advertisements gradually disappeared from the public eye.
Affected by the regulation, Tencent’s mobile advertising alliance’s advertising business revenue has dropped significantly. Tencent’s advertising revenue, social and other advertising revenue, fell 15% to 15.7 billion yuan.
Tencent News and Tencent Video were more severely affected by the macro, and media advertising revenue including these two businesses fell by 30% to 2.3 billion yuan.
The hard days of Tencent advertising may not end in a short time. Another advertising industry signal put forward at the Focus Media performance meeting is that factors such as logistics obstruction have affected advertisers’ operations and advertising rhythm. Tencent, facing the same group of advertisers, will also be dragged down by this.
At the end of March, Tencent management had expected that the advertising business would pick up by the end of this year. It should be noted that Tencent’s advertising revenue in these two quarters also includes advertising revenue from the acquisition of Sogou. In other words, when the positive impact of the Sogou merger disappears, the year-on-year growth rate of the online advertising business may further decline.
In addition to the merger of Sogou’s financial report, another positive impact on advertising revenue mentioned in Tencent’s financial report is the stable demand in the fast-moving consumer goods industry. In the second quarter, this positive blessing will also be affected. “From the second quarter of 2022 to the present, the advertising market has continued to slump, and advertisers in fast-moving consumer goods, e-commerce, and tourism industries have significantly reduced their advertising expenditures,” Tencent said in its earnings report. So explained.
This quarter, Tencent’s management remains optimistic about the recovery of the advertising industry. “The previous cycle has also rebounded, so we believe this cycle will also rebound.”
02
There are many expectations for the continued decline of Tencent’s advertising business, and the game business is also expected to stagnate.
Although the absolute numbers are still high, in terms of growth rate, Tencent’s game revenue in the domestic market declined in this quarter, down 1% year-on-year to 33 billion yuan. The financial report pointed out that this is because the protection measures for minors have affected active users and paid users. The number of users has a direct and indirect impact.
In May this year, the recharge of “Honor of Kings” on the iOS side canceled the extra coupons, and the official replied, “Based on the needs of business development and to provide users with a better experience, Tencent has recently recharged its direct recharge business and Q coin recharge. Some marketing channel offers have been routinely adjusted.”
At the same time, WeChat, QQ wallet recharge Q coins and other large-scale cancellation of 3% discount, QQ members and super members’ Q coins recharge discounts have also changed from 5% off, 94% off to 92% off, 93% off.
Obviously, this is a collective action of Tencent’s value-added business. Tencent’s value-added business revenue includes two major parts: game revenue and social network revenue. In the case of failing to increase users’ willingness to consume, Tencent had to find another way to increase value-added business revenue by increasing unit prices.
For Tencent, an optimistic situation is that in April this year, after a lapse of 8 months, the game version number was resumed. “It seems that the regulators are very satisfied with the current adjusted industry situation, which means that the future regulatory environment will be relatively stable, and there is no need to worry about unexpected situations.”
Tencent executives pointed out in the conference call after the release of the first quarter financial report that with the continuous increase in the number of version numbers issued and the regulatory environment stabilizing, the revenue of industry companies this year will gradually improve in the next few months.
Unexpectedly, the growth of the financial technology and enterprise services sector has slowed down, after all, this business has just taken over the baton of growth last quarter.
One of the factors that Tencent took the initiative to do is, “We have repositioned IaaS services, from simply pursuing revenue growth to achieving healthy growth, and actively reducing loss-making contracts. ” In the last quarter’s financial report, Tencent’s revenue increased by 8%, and the cost of income increased by 15.49 %, the net profit fell sharply by 25%. 
When games and advertising businesses with high gross profit margins can support the loss-making enterprise service business, Tencent can make strides forward, but today is different from the past, Tencent has also come to the moment to tighten its wallet, and cost control is an inevitable choice.
In the first quarter, although the cost of revenue of fintech and enterprise services accounted for the highest proportion of segment revenue among the three businesses, it was the only business that did not increase significantly.
The year-over-year slowdown in fintech revenue was unexpected. The financial report pointed out that since mid-March 2022, due to the re-emergence of the epidemic in some cities, the growth of payment amounts in categories such as transportation, catering services and clothing has had a negative impact, and commercial payment transaction activities have continued to be weak. It is conceivable that this impact will continue into the next quarter.
03
With regulatory factors superimposed on the impact of the epidemic, it seems that Tencent’s performance this year will not be too optimistic, but fortunately, Tencent still has a video account, a traffic pool that has not yet been fully developed.
Regarding the video account, two things were mentioned in this quarter’s financial report. First, the news, pan-knowledge and entertainment content of the video account are becoming more and more abundant. Coupled with the improvement of recommendation technology, the video playback volume and usage time have increased significantly year-on-year; the second is the increase in social network revenue. This was mainly attributable to the increase in revenue from live streaming services of video accounts.
The video account is the hope of many creators who are waiting to be fed, and now it is also the hope of Tencent. In the past few months, it can be clearly felt that Tencent is increasing the horsepower of the commercialization of video accounts.
At the end of last year, the short video internal test of the video account added the shopping cart function, which is similar to the Douyin little yellow cart; starting from mid-April, the live broadcast room of the video account that selects the “shopping” category to broadcast + hang the shopping cart will receive the support of the platform. The video numbers took two steps in the direction of Douyin one after another.
In addition to video accounts, the strategic growth areas mentioned in Tencent’s financial report that it will continue to invest in also include enterprise software and international market games.
Despite the year-on-year decline in revenue this quarter, enterprise services are still the key business for Tencent’s future revenue growth, and Tencent will naturally continue to increase investment. Tencent’s current strategy is to focus on the healthy growth of enterprise services, actively reduce loss-making businesses, and focus resources on PaaS solutions in the video cloud and network security fields.
The international game business is also a key business that Tencent will bet on. From the end of 2020 to the end of 2021, Tencent’s game business outside of China, especially mobile games, has seen good growth. “It will definitely not reach that level of prosperity in the future,” Tencent executives said bluntly on the conference call. Last year’s high base also affected the year-on-year growth of Tencent’s game international business to some extent. Even so, the business maintained positive growth this quarter.
Perhaps the outside world has long expected a slowdown in Tencent’s revenue this quarter. On May 16, Ma Huateng said that Tencent is facing a new stage of coexistence of challenges and development: on the one hand, the growth rate of revenue and profits has slowed down; on the other hand, Tencent also believes that it can change gears to create higher quality. Development, “should do these hard and right things.”
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event tracking
- 2022-05-19 Indicators fell across the board, Tencent bid farewell to huge profits
- 2022-05-18Tencent ‘s revenue in the first quarter of 2022 is 135.5 billion yuan, and its net profit is 25.5 billion yuan, down 51% year-on-year
- 2021-08-18Tencent’s second-quarter net profit was 42.6 billion yuan, a year-on-year increase of 29%
- 2021-03-24Tencent’s revenue in the fourth quarter of 2020 was 133.669 billion yuan, a year-on-year increase of 26%
- 2020-05-13Tencent ‘s revenue in the first quarter was 108.065 billion yuan, a year-on-year increase of 26%
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