During earnings calls with investors, Chinese tech giants Alibaba and Tencent frequently discuss all of their breakthroughs and new products.
However, the second quarter was unique. The two biggest tech companies in China’s management paid more attention to controlling expenses than to anything particularly showy.
It follows the release of second-quarter data from Alibaba and Tencent, which demonstrated that these formerly nimble and high-flying behemoths are no longer expanding.
For the first time ever, the largest e-commerce company in China, Alibaba, reported flat growth for the period from April to June. Tencent, a major player in social media and gaming, reported its first-ever quarterly revenue decline on Wednesday.
A Covid-caused economic slowdown in China is having an impact on consumer spending and advertising budgets, which has been felt by Alibaba and Tencent. Results are also being hampered by the tightening of domestic technology legislation over the past 1.5 years, which has affected everything from antitrust to gambling.
Both behemoths have sought to exercise greater restraint when it comes to their spending as income continues to be under pressure.
“During the second quarter, we actively exited non-core businesses, tightened our marketing spending, and trimmed operating expenses,” Ma Huateng, the CEO of Tencent, spoke to analysts on a teleconference on Wednesday. “This enabled us to sequentially increase our earnings despite difficult revenue conditions.”
In fact, Tencent’s earnings increased 10% over the prior quarter when certain non-cash items including the effects of merger and acquisition activities were taken out.
Martin Lau, the president of Tencent, stated the company discontinued non-core ventures like online learning, e-commerce, and game streaming. The corporation reduced low-investment areas like user acquisition and trimmed its marketing budget. In the second quarter, Tencent’s selling and marketing costs decreased 21% over the prior year.
The number of employees at the Shenzhen-based corporation decreased by 5,000 over the first three months.
Tencent’s chief strategy officer, James Mitchell, stated that the company can “return the business to year-on-year earnings growth, even if the macro environment remains as it is today” and even if sales growth remains flat with these initiatives and investments in new areas.
Meanwhile, Alibaba announced its cost-cutting initiative earlier this year and is still moving through with it.
“In the coming quarters and the remainder of this fiscal year, we will continue to pursue the strategy of cost optimization and cost control,” Alibaba’s chief financial officer, Toby Xu, stated during this month’s results call.
In several of its strategic operations, the Chinese e-commerce behemoth, according to Xu, has “narrowed losses.”
Where does the growth originally come?
To persuade investors that even while costs are being reduced, Alibaba and Tencent are still making investments in the future, they have had to do a delicate balancing act.
“For them to go back to [the] earnings growth path, cost optimization only is not enough. They need to find new growth drivers,” According to an email to CNBC from Winston Ma, an adjunct law professor at New York University.
Alibaba has been concentrating on growing its cloud computing business because executives and investors think it will be essential to the company’s future profitability. Alibaba’s cloud business experienced the fastest revenue growth in the June quarter.
The WeChat short-video feature’s adverts have the potential to become into a “significant” source of income in the future, according to Tencent. WeChat, the most popular messaging app in China with over a billion users, is operated by Tencent.
According to Chelsey Tam, senior equities analyst at Morningstar, Alibaba will continue to concentrate on industries with “long-term potential,” such cloud computing and international e-commerce. “For the unprofitable businesses it will evaluate the cost and benefits.”
Tencent, according to Ivan Su, a senior stock analyst at Morningstar, has “done a really good job balancing long-term investments and near-term profitability.”
“If you look at the cost initiatives they announced, some of the reductions are permanent, such as cloud migration and shutdowns of unprofitable noncore businesses, while others (marketing budget pullback and hiring slowdown) are more temporary in nature. So there’re multiple levers they can pull to create such balance,” Su said.