Alibaba and Tencent in China focus on cost cuts amid slowing growth

Alibaba has faced growth challenges amid tighter regulations in China’s tech sector and a slowdown in the world’s second-largest economy. But analysts believe the e-commerce giant’s growth could accelerate through 2022.

Kuang Da | Jemian News | CGV | Getty Images

Chinese tech giants Alibaba and Tencent often talk about all their innovations and new products during earnings calls with investors.

But the second quarter was different. Executives from China’s two biggest tech companies have focused on something a little less flashy: cutting costs.

It comes after Alibaba and Tencent released a series of second-quarter results that confirmed these once freewheeling, high-flying behemoths are no longer growing.

China’s biggest e-commerce player, Alibaba, posted stable growth for the first time ever for its April-June quarter. On Wednesday, gaming and social media giant Tencent posted its first-ever quarterly decline in year-over-year revenue.

Alibaba and Tencent have felt the effects of a Covid-induced economic slowdown in China that is hitting everything from consumer spending to advertising budgets. The tightening of national technology regulations in areas ranging from antitrust to gaming over the past year and a half is also weighing on results.

As revenues remain under pressure, both giants have sought to be more disciplined in their approach to spending.

“During the second quarter, we actively exited non-core businesses, tightened our marketing expenses and reduced operating expenses,” Tencent CEO Ma Huateng told analysts on a call Wednesday. “It allowed us to sequentially increase our revenue despite difficult revenue conditions.”

Indeed, Tencent’s profit, excluding certain non-cash items and the impact of M&A transactions, increased 10% from the prior quarter.

Tencent Chairman Martin Lau said the company exited non-core businesses such as online education, e-commerce and live game streaming. The company has also tightened marketing spend and reduced weak investment areas such as user acquisition. Tencent’s sales and marketing spend fell 21% year-over-year in the second quarter.

The Shenzhen-based company’s workforce also fell by 5,000 from the first quarter.

James Mitchell, chief strategy officer at Tencent, said that with these initiatives and investments in new areas, the company can “get the business back to year-over-year earnings growth, even if the macro environment remains as it is today” and even though revenue growth remains stable.

Meanwhile, Alibaba signaled its cost-cutting campaign earlier this year and continues to push it forward.

“During the coming quarters and the rest of this fiscal year, we will continue to pursue the strategy of optimization and cost control,” said Toby Xu, chief financial officer of Alibaba, during the company’s earnings call. this month.

Xu said the Chinese e-commerce giant had “trimmed losses” in some of its strategic businesses.

Where does the growth come from?

Alibaba and Tencent have had to play a tricky balancing act to convince investors that even if costs are reduced, they are still investing in the future.

“For them to return [the] earnings growth trajectory, cost optimization alone is not enough. They need to find new engines of growth,” Winston Ma, adjunct professor of law at New York University, told CNBC via email.

Alibaba has focused on bolstering its cloud computing business, an area executives and investors say is key to improving the company’s profitability going forward. The cloud was Alibaba’s fastest growing area in terms of revenue in the June quarter.

Meanwhile, Tencent has hinted at the potential for ads in its WeChat short video feature to become a “substantial” revenue stream in the future. Tencent operates WeChat, China’s largest messaging app with over 1 billion users.

Alibaba will continue to focus on areas with “long-term potential” such as cloud computing and overseas e-commerce, Morningstar senior equity analyst Chelsey Tam told CNBC. “For unprofitable businesses, he will weigh the costs and benefits.”

Ivan Su, senior equity analyst at Morningstar, said Tencent has “done a very good job balancing long-term investments and short-term profitability.”

“If you look at the cost initiatives they announced, some of the reductions are permanent, such as cloud migration and unprofitable non-essential business shutdowns, while others (marketing budget reduction and slowing of hiring) are more temporary in nature, so there are several levers they can pull to create such a balance,” Su said.

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