Alibaba has faced growth challenges amid tightening controls on China’s domestic technology sector and a slowdown in the world’s second-largest economy. But analysts think that e-commerce’s massive growth could continue to grow through the remainder of 2022.
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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 at China’s two biggest tech companies are focused on something less flashy – cutting costs.
After Alibaba and Tencent posted second-quarter results, it proved that these once free-wheeling, high-flying behemoths are no longer growing.
China’s biggest e-commerce player Alibaba reported flat growth for the first time in the April-June quarter. On Wednesday, gaming and social media giant Tencent posted its first quarterly year-over-year earnings report.
Alibaba and Tencent have felt the impact of the Covid-induced economic slowdown in China, which is hitting everything from consumer spending to advertising budgets. The tightening of domestic technology regulation over the past year and a half, from antitrust to gaming, is weighing on the results.
As earnings continue to come under pressure, both giants appear to be more disciplined in their spending approach.
“In the second quarter, we actively exited non-core businesses, strengthened our marketing spending and adjusted operating expenses,” Tencent CEO Ma Huateng told analysts on a call on Wednesday. “This allowed us to grow our revenue sequentially despite difficult revenue conditions.”
In fact, Tencent’s profit, excluding some non-cash items and the impact of mergers and acquisitions, grew 10 percent from the previous quarter.
Tencent President Martin Lau said the company has divested non-core businesses such as online education, e-commerce and game live streaming. The company has also tightened trading costs and reduced buying of lower investment positions as leverage. Tencent’s sales and marketing expenses fell 21 percent year over year in the second quarter.
The company’s headcount at its Shenzhen headquarters was down 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 return the business to year-over-year revenue growth even if the macro environment remains the same” and even if revenue growth remains flat.
Alibaba, meanwhile, demonstrated a cost-cutting drive earlier this year and continues to push forward.
“We will continue our cost growth and control strategy over the next quarter and the remainder of this fiscal year,” he said during the company’s earnings call this month.
According to Zhou, the Chinese e-commerce giant has “lost losses” in some of its strategic businesses.
Where does the growth come from?
Alibaba and Tencent had to play a delicate balancing act to convince investors that they were still investing in the future while cutting costs.
“To return [the] As a means of revenue growth, cost optimization alone is not enough. Winston Ma, a legal adviser at New York University, told CNBC in an email that they need to find new growth drivers.
Alibaba is focused on growing its cloud computing business, an area executives and investors believe is key to better profitability at the company in the future. Cloud was Alibaba’s fastest-growing area in revenue in the June quarter.
Meanwhile, Tencent has touted the potential of advertising on WeChat’s short video feature to be a “significant” source of revenue in the future. Tencent operates WeChat, China’s largest messaging app with over one billion users.
Alibaba will continue to focus on “long-term potential” such as cloud computing and offshore e-commerce, Chelsea Tam, an equity analyst at Morningstar, told CNBC. “It evaluates the costs and benefits for non-profit businesses.”
“Tencent has done a good job of balancing long-term investments and near-term profitability,” said Evan Sue, senior equity analyst at Morningstar.
“If you look at the spending initiatives they’ve announced, some of the reductions are permanent, such as cloud migration and the closing of unprofitable non-core businesses, while others[marketing budget returns and hiring cuts]are temporary in nature. Those are the levers they can pull to create that balance,” Su said.