Unexpectedly, Tencent handed over a bad report card in the second quarter.

On the evening of August 17, Tencent Holdings released its financial report for the second quarter of 2022. In this quarter, Tencent’s total revenue was 134.034 billion yuan, down 3% year-on-year; net profit was 18.619 billion yuan, down 56% year-on-year, and it was cut in half; non-IFRS net profit was 28.139 billion yuan, down 17% year-on-year.

“Cost reduction and efficiency increase” is one of the key words of Tencent’s second-quarter financial report. Tencent Holdings said that during the second quarter, the company took the initiative to withdraw from non-core businesses, tightened marketing expenses, cut operating expenses, and achieved non-IFRS earnings quarter-on-quarter growth under pressure on revenue. In the future, it will focus on improving business efficiency and adding new revenue streams, including the introduction of in-feed advertisements in video accounts, while continuing to drive innovation through R&D.

In the first quarterly report, Tencent disclosed that the number of employees was 116,200. By the end of the second quarter, the total number of Tencent employees had dropped to 110,700, an overall decrease of more than 5,500. In the second quarter, news of Tencent layoffs appeared from time to time. Tencent Chief Strategy Officer James Michel said on the earnings conference call that in the next few quarters, the effect of cost control will gradually appear.

As the market had long expected, the poor financial report did not have a shock on Tencent’s stock price. On August 18, Tencent opened at HK$316, up 4.6%. Since then, it has declined. As of the noon market break on the 18th, the increase has dropped to HK$312. The current total market value is HK$3.007 trillion, a cumulative decline of more than 30% from the perspective of the year. Since the major shareholder issued a reduction announcement at the end of June, Tencent Holdings’ market value has evaporated by 900 billion Hong Kong dollars, and its stock price has fallen below the 300 Hong Kong dollar mark many times.

For the stock price, James Michel said that Tencent’s stock price is seriously undervalued by the market, and the value of the portfolio companies is also undervalued by the market. In response to recent market rumors that Tencent will sell shares of Meituan, James Michel responded on a conference call that the news report was inaccurate. Tencent has been optimizing its investment portfolio and attaches great importance to rebates to shareholders.

So far, the company has paid shareholders $17 billion to $18 billion in cash and stock as a return on investment, Michelle said. In terms of investment and divestment, including the reduction of shares in JD.com and other companies, the company has maintained a moderate rhythm, and the company’s repurchase and rebates to shareholders will continue in the future.

There is no doubt that Tencent today has reached its lowest point since the epidemic. There is only one question: will Tencent bottom out next? Or is this just the beginning of a steady decline?

01 Games and advertising continue to decline, and there is still a big worry

As Tencent’s largest revenue pillar, in the second quarter, the game business showed a downward trend in both the local market and the international market.

In the second quarter, Tencent’s game revenue in the local market fell by 1% to 31.8 billion yuan. Tencent said that the local game industry is facing transitional challenges, including a decline in the number of large-scale game releases, a reduction in user consumption and protection measures for minors. During this period, Tencent Prioritize focus on improving technical capabilities and solidifying leadership in player engagement.

Game revenue in the international market fell by 1% to 10.7 billion yuan. As players resume offline activities, the international game market is digesting the impact of the post-epidemic era, and Tencent is also accelerating its actions.

This quarter, in terms of game operations, in the highly competitive tactical shooting game category, the number of monthly active accounts and quarterly turnover of “VALORANT” developed by Riot Games, a subsidiary of Tencent, hit a new high. In terms of investment, European subsidiary Miniclip acquired SYBO. SYBO is the developer of the parkour game “Subway Surfer”. The game it developed has been the most downloaded mobile game in the world in the past ten years, and made Miniclip’s daily popularity. Active accounts increased by 30 million to 70 million. In terms of new games, Rise of the Night, a survival open-world building game developed by Swedish studio Stunlock, sold 2 million copies in its first month of early access.

Regarding the game business, James Michele said on the conference call that this year is a year of adjustment and digestion, and it is still unknown when the industry will resume growth. Even if the gaming industry remains in its current state, the company can still have decent growth in the coming quarters. He stressed that revenue growth is not a prerequisite for profit growth.

But the situation may not be optimistic, especially in the domestic market. After the first batch of game version numbers were released, Tencent did not gain anything. In this regard, executives once said in the first-quarter earnings conference call that for large-scale companies that have multiple games in their hands, no game version number will not hurt so much. , In the future, companies including Tencent will get new version numbers one after another. But in fact, since the restart of the domestic game version number review in April this year, four version numbers have been issued one after another, and Tencent has never been approved.

Another major revenue pillar of Tencent is also in decline. In the second quarter, online advertising revenue was 18.6 billion yuan, a year-on-year decrease of 18%, reflecting significantly weaker demand in Internet services, education and finance. The financial report shows that the advertising business was hit hard in April and May, partly offset by the advertising revenue brought by Tencent’s merger with Sogou. Then it gradually picked up in June, as large e-commerce platforms increased their advertising spending due to the 618 promotion and slightly increased advertising demand.

Specifically, social ads and media ads both declined. Social and other advertising revenue fell 17% to RMB 16.1 billion, due to weaker advertising demand and sluggish advertising bidding, which led to a decline in eCPM. Media advertising revenue fell 25% to RMB 2.5 billion due to lower advertising revenue from Tencent Video and Tencent News.

02 Video account, responsible for WeChat income?

The two cash cows were weak, and the video account business was one of Tencent’s few bright spots this quarter.

According to the financial report, in the second quarter, Tencent’s value-added service business revenue was 71.7 billion yuan, which was generally stable year-on-year. Among them, social network revenue increased by 1% to 29.2 billion yuan, reflecting the increase in revenue from video number live broadcast services and digital content subscription services, while revenue from music live broadcast and game live broadcast decreased.

The financial report mentioned that video feed advertising will be an important opportunity to expand market share and improve profitability. In the second quarter, the total video playback volume of the video account increased by more than 200% year-on-year, the video playback volume based on artificial intelligence recommendation increased by more than 400% year-on-year, and the number of daily active creators and the average daily video upload volume increased by more than 100% year-on-year.

In terms of monetization, James Michele said on the conference call that video account advertisements are indeed different from Moments. First, the reference indicators for video accounts are more clear; second, machine learning and software and hardware are more advanced; third, short-term The advertising cost of video is lower, because compared with social media including Moments, video account users will swipe over the advertising content they are not interested in, and it will not distract them. The advertisement load of the short video platform is about 14%-15%. The circle of friends displays 3 to 4 advertisements every day, and sometimes users cannot see some advertisements, so the effective display volume is only 2%-3%. It is estimated that the video number The advertising load must exceed the circle of friends.

The growth rate of video account advertising revenue will also be higher than that of Moments ads in the future. The video account advertising bidding system will be launched soon. On the one hand, it will be used as a supplement to contract pricing, and on the other hand, it will also be beneficial to video account advertising revenue. increase. Tencent is confident that after the bidding system is launched, it will be able to achieve an eCPM level at least comparable to that of domestic short video platforms.

Regarding the prospects for the revenue growth of the video account business, James Michel mentioned several reference indicators.

First, the video account business has contributed to 80% of the users’ usage time in WeChat Moments, and it has grown rapidly. The advertising revenue per thousand impressions (eCPM) of the video account is slightly lower than the eCPM of the Moments, but the advertising intensity is larger than that of the Moments, so the video account service may contribute more revenue per minute of user viewing time. .

Another indicator is that compared with the existing short video service, the total viewing time of the current video account is still less than that of the short video, but in terms of CPM, the video account is more competitive and outperforms the short video service, so Overall, the two businesses can be tied.

03 “Menghualu” is difficult to prevent the loss of users

The key operating data of Tencent’s major products did not fluctuate significantly this quarter. As of June 30, 2022, Tencent’s WeChat and WECHAT had 1.30 billion monthly active accounts; Tencent’s fee-based value-added service registered 235 million accounts, a year-on-year increase of 2.3 percent. %. Tencent Video has 122 million paid members and 83 million music paid members.

What is particularly noteworthy here is Tencent Video. Tencent’s self-produced TV series “Meng Hualu” ranked first in the number of broadcasts on the entire network in June. According to QuestMobile, Tencent Video outperformed its closest peers by more than 20% in the number of daily active accounts on mobile in June. In music, the number of paid members increased year-on-year to 83 million. In July, TME sold over 6 million Jay Chou digital albums.

Although there are hits such as “Menghualu”, the number of paid members of Tencent Video is still continuing to lose, showing a negative growth month-on-month, down 1.6% month-on-month, losing 2 million people, down 2.4% year-on-year, and losing 3 million people. For two consecutive quarters, the number of paid members experienced a year-on-year negative growth.

To a certain extent, the loss of Tencent Video subscription members may be affected by price increases. In April of this year, Tencent Video announced to adjust the price of subscription members. From 0:00 on April 20, the continuous monthly subscription price of Tencent Video VIP was adjusted from 20 yuan to 25 yuan, and the continuous annual subscription price rose from 218 yuan to 238 yuan. The continuous monthly subscription price of Super Video VIP has been adjusted from 30 yuan to 35 yuan, and the continuous monthly subscription price of Super Video VIP has increased from 88 yuan to 98 yuan. The overall price increase of subscription members is around 10%-25%.

Tencent Video, which is still the old way of playing, encountered challenges, and at the same time, its old rival iQiyi began to seek changes. By significantly reducing costs, iQIYI will turn losses into profits in the first quarter of 2022, and has reached a cooperation with Douyin in July to explore the secondary creation and promotion of long video content. In addition, QuestMobile data shows that in June, the active penetration rate of users under the age of 24 on iQIYI was 43.5% higher than that of Tencent Video, which was 43.3%. Among Generation Z users, Tencent Video did not dominate.

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