Alibaba has faced growth challenges amid tightening regulations on China’s domestic technology sector and a slowdown in the world’s second-largest economy. But analysts think the e-commerce giant’s growth could pick up through the rest of 2022.
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Chinese tech giants Alibaba and Tencent often talk about all their innovations and new products during earnings talks with investors.
But the second quarter was different. Executives at China’s two largest tech companies focused on something less flashy: keeping costs down.
It comes after Alibaba and Tencent released a series of second-quarter results confirming that these once free-running and high-flying behemoths are no longer growing.
China’s largest e-commerce player, Alibaba, first reported flat growth in the April-June quarter. On Wednesday, gaming and social media giant Tencent posted its first quarterly annualized revenue.
Alibaba and Tencent have been feeling the effects of a Covid-induced economic slowdown in China that is affecting everything from consumer spending to advertising budgets. The tightening of domestic technology regulations in areas from antitrust to gaming over the past year and a half is also weighing on the results.
As revenues remain under pressure, both giants have looked to be more disciplined in their spending approach.
“During the second quarter, we actively parted ways with non-core businesses, tightened our marketing spending and lowered operating expenses,” Tencent chief executive Ma Huateng told analysts on Wednesday. “This enabled us to sequentially increase our revenues, despite difficult revenue conditions.”
Tencent’s profits, excluding certain non-cash items and the impact of M&A transactions, were up 10% from the previous quarter.
Tencent president Martin Lau said the company has exited non-core businesses such as online education, e-commerce and live streaming of games. The company has also tightened marketing spend and reduced investments such as user acquisition. Tencent’s sales and marketing expenses decreased 21% year-over-year in the second quarter.
The Shenzhen-based company’s workforce also fell 5,000 from the first quarter.
James Mitchell, chief strategy officer at Tencent, said that with these initiatives plus investments in new areas, the company “can return the company to year-over-year earnings growth, even if the macro environment remains as it is today” and even if revenue growth remains flat.
Alibaba, meanwhile, marked its drive for cost savings earlier this year and continues to do so.
“In the coming quarters and throughout this fiscal year, we will continue to pursue the strategy of cost optimization and cost containment,” said Toby Xu, chief financial officer at Alibaba, during the company’s earnings call this month.
Xu said the Chinese e-commerce giant has cut losses in some of its strategic businesses.
Where does the growth come from?
Alibaba and Tencent have had to play a delicate balancing act to convince investors that even though costs are being cut, they are still investing in the future.
“For Them To Go Back To” [the] profit growth path, cost optimization alone is not enough. They need to find new growth engines,” Winston Ma, an adjunct law professor at New York University, told CNBC via email.
Alibaba has focused on boosting its cloud computing business, an area that executives and investors believe is key to improving the company’s profitability going forward. Cloud was Alibaba’s fastest growing area in the June quarter.
Meanwhile, Tencent spoke of the potential for ads in its WeChat short video feature to become a “substantial” revenue source in the future. Tencent operates WeChat, China’s largest messaging app with more than a billion users.
Alibaba will continue to focus on areas with “long-term potential” such as cloud computing and overseas e-commerce, Chelsey Tam, senior equity analyst at Morningstar, told CNBC. “For the unprofitable companies, it will evaluate the costs and benefits.”
Ivan Su, senior equity analyst at Morningstar, said Tencent has “did a very good job balancing long-term investment and short-term profitability.”
“If you look at the cost initiatives they’ve announced, some of the reductions are permanent, such as cloud migration and shutdowns of unprofitable non-core businesses, while others (marketing budget withdrawal and hiring delays) are more temporary in nature. are levers they can pull to create such a balance,” Su said.