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Tencent headquarters in Shenzhen, China. Photo: Qilai Shen/Bloomberg
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Zheping Huang
August 17 2022 10:24 AM
Online entertainment giant Tencent logged its first-ever revenue decline after its workforce shrank almost 5pc, underscoring the extent to which China’s worsening economy is hurting its biggest corporations.
The country's most valuable company recorded its first quarterly drop in staffing since 2014, as layoffs rippling through the global tech sector finally hit the WeChat operator.
Revenue fell a deeper-than-projected 3pc to 134bn yuan (€19.4bn), while net income also missed estimates, plunging 56pc to 18.6bn yuan in the June quarter.
Tencent is grappling with a deepening downturn in the world's No. 2 economy, the product of a property slump and ad-hoc coronavirus lockdowns from Shanghai to Shenzhen.
The uncertainty is wreaking havoc on businesses from advertising to cloud computing and gaming.
Online retail giant Alibaba this month reported its first quarterly revenue drop on record, though the results were better than feared.
Even before the macroeconomic turbulence, China's giant internet industry had resigned itself to a new era of sedate growth after a decade of free-wheeling expansion.
Companies like Tencent are focusing on profitability over the market-grab of years past, after a sweeping government crackdown wiped more than $1trn off their combined market value in 2021.
There were some positive indicators.
Online advertising revenue slid a record 18pc in the quarter, but that was better than analysts feared.
And adjusted net income of 28.1bn yuan was about 15pc above expectations.
Shares in Prosus NV, one of Tencent's biggest backers, slid more than 1pc in Europe.
Beijing remains a headache for Tencent.
Although regulators resumed approving games in April after a months-long hiatus intended to curb addiction, China's premier developer has yet to win a nod for a single title this year.
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For now, it's counting on aging cash cows like Honor of Kings to spur its most lucrative business, while fighting newer hits like Genshin Impact and Diablo Immortal.
The company, which once relied on a network of investments spanning hundreds of firms to create opportunities and new markets, has since last year signalled it will begin selling down stakes in major Chinese internet investee from e-commerce giant JD.com Inc. to Meituan.
Given the new realities, Tencent executives have said that international games, cloud software and WeChat video will be their major strategic priorities.
The TikTok-style feed inside Tencent's super-app is the company's latest hope of countering ByteDance, which is increasingly luring away users and marketing dollars.
Alibaba, Tencent and other mainland China tech companies may face fewer penalties and lower fines in 2023 as they increase vigilance on following rules and work with regulators to avoid new violations, say Bloomberg analysts Catherine Lim and Tiffany Tam.
The fintech and business services segment — which includes cloud computing — is now Tencent's fastest growth engine.
But cloud revenue suffered a mild decline after the company cut loss-making contracts and ventured into services beyond infrastructure, executives said in May.
Just like Mark Zuckerberg's Meta, Tencent is staking its claim of a possible future of the virtual realm of the metaverse.
The Chinese company has revamped its aging social app QQ with customizable 3D avatars and Unreal Engine graphics, and is hiring developers to make open-world titles.
But such endeavours, along with a steady pace of investment in overseas game studios, could pressure margins before they come to fruition.
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