Written by Zhao Chenxi
Editor / Li Xinma
On May 18, Tencent announced the Q1 financial report for 2022, and the net profit fell unexpectedly. According to the financial report, the operating income of Q1 Tencent in 2022 was 135.471 billion yuan (RMB, the same below), which is basically the same as that of 135.303 billion yuan in the same period last year. The net profit of Q1 was 23.413 billion yuan, down 51% from the same period last year and 75% from the previous month. Under non-IFRS, the net profit of Q1 was 25.545 billion yuan, down 23 per cent from a year earlier and up 3 per cent from a month earlier.
Tencent's net profit under non-IFRS has declined in the last three quarters. In 2021, Tencent's net profit was 31.75 billion yuan, down 2% from the same period last year; Q4 in 2021, net profit was 24.88 billion yuan, down 25% from the same period last year.
Under non-IFRS, Tencent's net profit for the last five quarters
Among Tencent's three major business sectors, the revenue from value-added services was 72.738 billion yuan, the same as the same period last year, accounting for 54% of the total revenue; online advertising revenue was 17.988 billion yuan, down 18% from the same period last year, accounting for 13% of the total revenue; financial technology and corporate services were 42.768 billion yuan, up 10% from the same period last year, accounting for 31.6% of the total revenue. In addition to To B business, Tencent's traditional advantage business revenue is not impressive or even significantly declined.
Tencent's business revenue changes for five consecutive quarters
Data source: Tencent financial report drawing: DoNews
Tencent's ROE (return on equity) fell sharply to 2.96 in that quarter from 29.77 in 2021, the lowest point since 2012.
Tencent ROE change line chart from 2012 to now
An industry source told DoNews: "it was expected that Tencent's financial data would not be too good, but I did not expect that net profit would decline so much."
According to the financial report, the decline in profit of Q1 Tencent in 2022 is mainly due to an increase in revenue costs of 8% to 78.4 billion yuan, including server and bandwidth costs, increased transaction costs due to transaction growth, and increased content costs. Especially in the business of value-added services and financial technology and enterprise services, the increase of video number live broadcast revenue sharing cost, game content cost and payment amount all lead to the increase of revenue cost.
On the other hand, Tencent's general and administrative expenses also soared 41% to 26.7 billion yuan in that quarter. This is mainly due to the increase in R & D expenditure and hiring costs (an increase in the number of employees in key strategic areas), as well as increased spending by overseas subsidiaries and acquisitions of subsidiaries.
Despite the increase in costs and administrative expenses, Hu Hao, an associate professor at the School of Economics of Guangzhou Business School, believes that the growth rate of Tencent's business is also completely lower than expected: "it is not only revenue and cost problems, but also Tencent's core basic business, such as QQ and Wechat, which has also declined to varying degrees, which is a red signal for Tencent. It is expected that Tencent's performance will continue to be weak in the second quarter of this year. "
Zhang Yi, a consultant from Ai media, told DoNews: "Tencent's Q1 business shows that Tencent has encountered certain problems in growth. Tencent needs to think about how to improve users' desire to pay and the value-added business of digital entertainment when the entire Internet traffic dividend is at its peak."
The basic market is unstable and suffers from a growth bottleneck.
Tencent's largest business revenue section value-added services, divided into social networks and games two parts.
In terms of social networks, Tencent Q1 revenue of 29.1 billion yuan, an increase of 1% over the same period last year, the growth dividend "peaked" obviously. The number of monthly active user accounts on QQ mobile was 563.8 million, down 7% from the same period last year and up 2.1% from the previous month; Wechat and WeChat combined 1.288 billion monthly active user accounts, up 3.8% from the same period last year and 1.6% from the previous year. At its peak in 2018 and 2019, QQ had more than 700 million monthly active users, which has now fallen back to the level of 2016.
As a 23-year-old Internet product, QQ has always been aimed at young users, and many primary and secondary school students use QQ as a learning and social communication tool. The number of monthly active user accounts on QQ mobile is declining year by year. On the one hand, it is related to the transfer of QQ users to Wechat. A post-00s told DoNews that after she went to university in 2021, her frequency of using QQ gradually decreased: "because all kinds of notices and activities of class groups are carried out on Wechat"; on the other hand, China is aging and the young population continues to decline.
The growth of Wechat has also slowed significantly. In 2018, the number of Wechat and WeChat merger and active accounts reached 1.082 billion, and then began to grow in single digits, growing by 6 per cent in 2019, 5.2 per cent in 2020 and 3.5 per cent in 2021.
Monthly active account accounts of Wechat, WeChat and QQ (100 million)
Games are Tencent's largest cash cow business in this quarter, accounting for 32.4% of revenue, surpassing financial technology and corporate services (31.6%), of which revenue from games in the domestic market is 33 billion yuan, down 1% from the same period last year, while games in foreign markets are 10.6 billion yuan, up 4% from the same period last year. The revenue growth in the international market mainly comes from the revenue growth of games such as Tencent "VALORANT" and "Tribal conflict". Ma Axin, an analyst at Analysys, told DoNews: "the domestic mobile game market has developed for a long time, and the operation is more mature. Other countries and regions are in the stage of development, and the market user characteristics are different. For example, South Korean players prefer MMORPG games, and American players tend to leisure games. But this phenomenon is being broken by domestic game companies. "
The domestic market is affected by the protection measures for minors, as well as the decline in revenue from games such as "Moonlight Blade Mobile Games" and "call of Duty Mobile Games". Zhang Yi believes that Tencent is supported by old products in the domestic market, such as "Arena of Valor" and "Game for Peace". The new game products have not made much achievements, while the overseas markets have the characteristics of high promotion costs but not obvious effects. all these have caused Tencent's net profit to decline sharply.
The advertising business was even more bleak, with social and other advertising revenue of 15.7 billion yuan, down 15% from the same period last year, and media advertising revenue of 2.3 billion yuan, down 30% from the same period last year.
Financial report revealed that Tencent Mobile Advertising Alliance's advertising business was affected by regulation, revenue decreased significantly, Tencent News, Tencent video and other media advertising revenue declined, resulting in poor revenue performance of the overall online advertising business. Tencent is not the only family affected. In November, the full meeting of byte-jumping commercial products confirmed that the growth of its domestic advertising business stagnated in the first half of 2021, according to the Shanghai Securities News.
"the whole advertising industry, the Internet advertising market ceiling gradually, customers put more emphasis on the effect transformation, Tencent advertising business is inevitably affected to a certain extent." Zhang Yi said. The 2022 China Brand Marketing and Consumer behavior Test report of Ai Media Consulting shows that with the gradual weakening of traffic dividend, mobile advertising has ended the era of traffic competition, and the industry as a whole has fallen into a period of stable development. instead, it has entered a stage of strengthening policy supervision and content competition, and the scale growth rate tends to be stable. It is expected that the growth rate will decline in the next three years, and recommended content platforms such as Douyin, Little Red Book and Bilibili Inc. will become popular communication channels.
In the case of the sluggish performance of the traditional business, will the To B business vigorously promoted by Tencent in recent years be the growth point in the future?
It is difficult for To B to increase profits
After Tencent's "9 / 30" reform in 2018, the To B track, represented by CSIG (Cloud and Intelligent Industry Group), has received more and more attention, and its revenue scale has doubled in a single quarter since the revenue scale of financial technology and corporate services was officially disclosed in 2019.
Q4 in 2021, financial technology and enterprise service income reached 47.958 billion yuan, surpassing game revenue for the first time and accounting for 33.26% of total revenue. However, in 2022, the revenue of the Q1mento B business fell 10.8% from the previous month, and the gaming business returned to the top spot in revenue.
The month-on-month decline in revenue is related to the seasonal decrease in the deployment of cloud service projects. in addition, according to the financial report, the year-on-year growth rate of Q1 Tencent's financial technology and corporate services slowed down in 2022, mainly due to the new round of COVID-19 epidemic at the beginning of the year. it has a negative impact on the transaction amount of transportation, catering services, clothing and other categories, and corporate service revenue also decreased slightly compared with the same period last year. This is because Tencent repositioned IaaS (Infrastructure as a Service) service from simple income growth to healthy growth, and took the initiative to reduce loss-making contracts.
Zhang Yi believes that Tencent has always invested heavily in financial technology and corporate services, but the income is limited: "although revenue from financial technology and corporate services has increased, it has made little or no contribution to profits, or even negative growth." Financial report data show that since 2019, the average gross profit margin of Tencent's value-added services has been maintained at more than 50%, the average gross profit margin for online advertising has been maintained at about 47%, while the gross profit margin for financial technology and corporate services is the lowest, with an average of only about 28%.
In the field of To B, especially in the cloud computing track, the continuous high investment and low return is a common feature of the industry. in recent years, both overseas and domestic, the cloud market has fallen into a high degree of homogeneous competition, and the trend of price war is obvious. Since 2011, Amazon.Com Inc AWS has been using a continuous price reduction strategy to squeeze the survival space of competitors to gain market share. According to the global cloud computing tracking data released by IDC in 2021, the top eight cloud manufacturers are Amazon.Com Inc AWS, Microsoft Corp Azure, Aliyun, Google Cloud, IBM, Huawei Cloud, Tencent Cloud and China Telecom Corporation Tianyi Cloud. The cloud computing market shows Matthew effect, "only the first, no second". Aliyun didn't make its first profit until Q3 in fiscal year 2021. As Tencent Cloud, which ranks third in China, in the face of the adverse environment of the outside world and the siege of competitors such as Aliyun, Huawei Yun and Tianyi Yun, the profit pressure is naturally greater.
Starting from 2021, it has been reported in the industry that Tencent has carried out personnel optimization in various business groups, among which CSIG (Cloud and Intelligent Industry Group) has become the hardest hit area of layoffs due to the influence of the "double reduction" policy of the education industry and other industry factors. According to 36Kr Holdings, since the end of 2021, Tencent Cloud has strategically scaled back its loss-making business, and CSIG has laid off more than 20% of its employees. Tencent Cloud will change its past sales strategy of seizing the market at low prices, general collection and subcontracting, and hardware tie-in, and begin to take "profit" as the value orientation, but the expectation is good, but there is a long way to go.
In the short term, Zhang Yi said: "Tencent's future strength lies in two aspects: first, the financial system represented by WeChat Pay; second, video number Q1 reflects good growth in 2022. From the perspective of domestic mainstream netizens, the attractiveness of video accounts continues to rise, and it is expected to pose a great threat to Douyin in the next year or two."