Tencent Declares ‘Reckless’ Era for Tech Is Over As Growth Tanks

Pony Ma, the company’s co-founder, and President Martin Lau, the company’s president, were among the executives who backed Beijing’s year-long assault on everything from gambling to online shopping.

They said that it paralleled a global reaction against the huge influence of digital behemoths and that tighter regulation would lead to longer-term, healthier growth.

On a conference call following the results, Lau added, “We are proactively embracing changes to better align ourselves with the new industry paradigm.” “We have a long-term company culture that prioritizes user value, social responsibility, technological innovation, and compliance, all of which are critical components of long-term, healthy development.”

The company also dismissed rumors that it will launch a share-buyback program similar to that announced by rival Alibaba Group Holding Ltd. this week, saying it will instead focus on core businesses such as international games, cloud services, and its WeChat messaging service, as well as developing new games for its pipeline once the regulatory environment stabilizes later in 2022.

For a live blog on Tencent’s results, go here

More than a year after the commencement of a brutal crackdown that finally swept every internet field from e-commerce to online gaming and education, Tencent has joined Alibaba and other rivals in acknowledging a new period of cautious expansion. Tencent, like Alibaba, had the weakest quarterly growth rate on record, as online advertising revenue fell short of analysts’ expectations after declining for a year.

This is the first time it has been documented. Domestic gaming income increased by just 1%, indicating a months-long licensing stop that, along with restrictions on minors’ gameplay, has depleted Tencent’s largest segment.

The quarter’s revenue increased by just 8% to 144.2 billion yuan ($22.6 billion), compared to the 145.3 billion yuan average projection, marking the first time quarterly sales increased by single digits.

Net income increased to 95 billion yuan, above the predicted 31.5 billion yuan, but mainly due to a large one-time gain. However, non-IFRS earnings fell by a worse-than-expected 25%, and gross margins shrank as the company expanded internationally.

Naspers Ltd., which is seen as a proxy for Tencent because it is the company’s largest external stakeholder, lost 6%.

Even while it has mostly eluded Beijing’s direct monitoring, Tencent has lost more than $470 billion since its high in 2021. The corporation has been a staunch supporter of the government’s initiatives, arguing that it is preferable in the long term to rein in past excesses that have resulted in chaotic competition in fields such as ride-hailing, e-commerce, and food delivery.

Alibaba and Meituan are two of the most well-known corporations that have been penalized for monopolistic behavior in the last year.

“For years, industry participants have overemphasized zero-sum rivalry, aggressive marketing, irresponsible expansion, short-term growth, and corporate rewards, ignoring the most critical factors of long-term success,” Lau added. “As a result, the expansion of the sector has become frothy and unhealthy.”

Tencent, on the other hand, has a number of outstanding concerns

“Aside from macro and regulatory hurdles, Tencent has its own set of issues,” said Shawn Yang, an analyst at Blue Lotus Capital Advisors. “It has failed to produce its next gaming blockbusters, and ByteDance’s Douyin had a significant impact on advertising revenues.”

Bloomberg reported last week that regulators are considering compelling Tencent to merge its WeChat Pay service into a newly formed financial holding company, as part of a revamp of its large fintech unit that may jeopardize the company’s whole social media operation. On Wednesday, Lau said Tencent is still in negotiations with authorities about restructuring needs and that the business will follow all rules.

The world’s largest gaming market is nearing its ninth month with no new releases, reigniting fears of a 2018 crackdown that saw Tencent’s most profitable company decline.

Tencent is increasingly looking outside of China due to regulatory challenges at home. While acquiring game companies across Europe and Asia, it’s also collaborating with Western gaming behemoths to bring their popular titles to mobile, with Electronic Arts Inc.’s Apex Legends being the most recent example. Tencent created a new global publishing subsidiary in December, with headquarters in Singapore and Amsterdam.

The WeChat messaging network, which is used by over a billion people for everything from League of Legends purchases to TikTok-style video feeds, is at the heart of Tencent’s extensive web companies.

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