The latest financial report of goose factory: reasonable and unexpected

August 17th, Tencent Q2$TENCENT (00700.HK)$The financial report arrived as promised. At the current node where challenges and development coexist, where Tencent will go is undoubtedly a topic of concern to many investors.

Today, through this financial report, let's take a look at Tencent's current development, which are reasonable and which are unexpected.

01. Revenue fell but net profit recovered month-on-month

According to the financial report, Q2 Tencent achieved operating income of 134.034 billion yuan and non-international accounting standards (Non-IFRS) net profit of 28.139 billion yuan, down 17% from the same period last year and up 10% from the previous month.

Conclusion: under the general trend of weakness in the industry as a whole, Tencent is hardly an exception. Revenue is now negative for the first time, and net profit has declined for four consecutive quarters compared with the same period last year. However, this is also expected by the market, and BABA and Huawei, which disclosed the latest results, are also facing the dilemma of stagnant growth.

But the bright side is that Tencent's net profit has recovered for two consecutive quarters, which is a good positive signal, which means that Tencent's measures to reduce costs and increase efficiency are beginning to bear fruit, and whether the shift to fine operation can bring continuous profit improvement for Tencent is worth paying attention to.

02. The basic disk of the game is solid.

Tencent's game revenue in its home market fell 1 per cent to 31.8 billion yuan, while that in the international market fell 1 per cent to 10.7 billion yuan.

Conclusion: although the growth of the game seems to be weak from the perspective of year-on-year changes, it is actually relatively rare to maintain this figure. After all, at a time when the epidemic is repeated and the economy is in the doldrums, it is good that the consumer index and consumer confidence fell sharply in the first half of the year, the public's desire to spend money is not high, and game income does not fall sharply. And with the relaxation of the game version number and the warming of the economy in the second half of the year, Tencent, who has great advantages in research and development, distribution and operation, is not necessary to be so pessimistic.

03. Advertising decline

Online advertising Q2 revenue fell 18 per cent year-on-year to 18.6 billion yuan, social and other advertising revenue fell 17 per cent to 16.1 billion yuan, and media advertising revenue fell 25 per cent to 2.5 billion yuan.

Conclusion: the decline in advertising can be said to be the least unexpected result. In the first half of the year, everyone should have a personal feeling that under the premise of the overall slowdown in social prosperity, enterprises are tightening their belts and advertising budgets are cut sharply, so revenue in this area will naturally decline. However, as the epidemic situation improves and the economy picks up in the future, the demand of advertisers is expected to be boosted.

04.To B continues to be strong, "twin engines" solid

Financial technology and corporate services business Q2 revenue rose 1 per cent year-on-year to 42.2 billion yuan, accounting for 32 per cent of revenue, the same as game revenue.

Since the 930s reform, Tencent To B has begun to make efforts and has become Tencent's fastest-growing business segment in recent years. From the perspective of application, Tencent industry Internet has blossomed and borne fruit in many tracks. In the field of SaaS, Omdia, an international information and communication technology research institution, announced the 2022 global Top30 ranking of AI-driven SaaS manufacturers, with Tencent ranking first in China.

Tencent Cloud has teamed up with more than 9000 partners and launched more than 400 joint solutions in 30 industries. There are dozens of partners with annual revenue of more than 100 million and hundreds of partners with tens of millions of partners.

Conclusion: although the income growth rate has slowed down, the business structure of Tencent's dual-engine development of consumer Internet and industrial Internet has been quite sound. The slowdown in To B business growth this quarter is largely due to the fact that the COVID-19 epidemic briefly curbed commercial payment activities in April and May. In terms of corporate services, the industry as a whole is facing incremental pressure, and Aliyun also showed a stall trend in the latest financial quarter, with a sharp decline in growth.

From an external point of view, in the past few years, the competition in the cloud market has been very fierce, and many big companies will compete for projects and revenue scale at all costs. Even for a company of the size of Tencent, this is a huge capital investment. Since last year, Tencent Cloud has announced that it will not do low-profit business, and it is expected to significantly improve the profit side in the future. In addition, I also saw a set of data before, Tencent is also in the cloud of self-research business, the scale has exceeded 50 million cores, cumulative cost savings of more than 3 billion. Tencent also said in the financial report that with Tencent's income structure and cost reduction, enterprise service gross profit margin increased month-on-month.

05. Social Ecology: a growing number of users, a video number to look forward to

Wechat and WeChat have 1.299 billion monthly active users, an increase of 3.8% over the same period last year. The number of monthly active user accounts on the mobile terminal of Tencent QQ is 569 million, down 3.8% from the same period last year.

The total number of video number users has exceeded 80% of the total time spent on moments, the total video playback volume has increased by more than 200% compared with the same period last year, and the number of video playback based on artificial intelligence recommendations has increased by more than 400% year-on-year. The number of daily active users and the number of daily video uploads increased by more than 100% year-on-year.

Since the beginning of this year, the presence of the video number has become stronger and stronger. The commercial action is becoming more and more obvious. In July, the video number successively received the information flow advertisement and launched the "video number store", which shows that the video number is rapidly entering a new stage of commercial development.

Summary: from a business point of view, Wechat and QQ, the two major national App, are still contributing a steady stream of users and traffic to Tencent. What is especially worth looking forward to is the Wechat video account. The series of concerts that have been brushing the screen since the beginning of this year have made the video number famous, considering that the video number is not fully commercialized at present, the input sharing cost and server and bandwidth costs are in front, and even pull down the gross profit margin, but with the steady progress of commercialization, video number will become a new source of income and growth force for Tencent in the future.

06. Marketing expenditure: promotion expenses have dropped by 20%, and the effect of cost reduction is beginning to show.

Tencent's sales and marketing expenditure fell 21 per cent year-on-year to 7.9 billion yuan in the current quarter. As a percentage of revenue, sales and marketing expenditure fell from 7 per cent in the second quarter of 2021 to 6 per cent in the second quarter of 2022.

Tencent's general and administrative expenses rose 16% year-on-year to 26.2 billion yuan in the second quarter of 2022.

In terms of the number of employees, as at 30 June, the Group had a total of 110715 employees, a significant increase over 94182 in the same period last year. In addition, the total salary cost so far this year was $56.779 billion, compared with $44.388 billion in the same period last year.

Summary: for the decline in operating costs, Tencent said in the financial report that he took the initiative to withdraw from non-core business, tighten marketing expenses, cut operating expenses, and achieve month-on-month growth in non-IFRS profits under income pressure.

In the past, the Internet made great efforts to achieve miracles, often densely spread people, and it is difficult to reappear in the future with a high budget of hundreds of millions of dollars. In the coming period of time, Internet companies will develop meticulously, and it will become the norm to improve human efficiency. Under the main tone of reducing costs and increasing efficiency in the industry, the number of Tencent employees also declined month-on-month in this quarter.

It can also be seen here that the main source of Tencent's cost reduction and efficiency efficiency is promotion costs, operating costs, and finally personnel costs.

07. Investment in R & D: more than 151.6 billion since 2019

Continue to increase R & D investment, strengthen technical capacity building, and build a matrix of self-developed products covering chips, operating systems, servers, databases, audio and video, security, and so on. This is the most intuitive experience Tencent has given to the outside world in the past two years.

The financial report shows that when Tencent controls marketing expenses and optimizes operating costs on the one hand, he is still not soft on R & D investment on the other hand, with Q2 R & D investment reaching 15.01 billion yuan, an increase of 17% over the same period last year. Since 2019, Tencent has invested more than 151.6 billion yuan in research and development.

Hundreds of billions of R & D investment also really saw Tencent's breakthrough in technological capability. Tencent's core self-research technology has been continuously exported, opening up more than 160 projects. As of June 30, 2022, Tencent has disclosed more than 57000 patent applications in major countries and regions around the world, and the number of patents granted has exceeded 27000, of which invention patents account for more than 90 per cent.

Conclusion: the industry generally has its periodic law, and if an enterprise wants to maintain the stability and long-term growth trend through the cycle, it needs a solid foundation and the driving force of continuous innovation.

It can be seen that Tencent, who is actively transforming, is very willing to invest in research and development in order to enhance the company's sustainability and long-term anti-risk ability. But hard technology is different from games and advertisements, which not only costs more money, but also has a long R & D cycle, so we can also see Tencent's struggle at the profit end.

However, now that he has decided to change gears, Tencent really needs to take the initiative to sacrifice some profits in exchange for investment in the future direction. I hope Tencent's sacrifice will enable investors who care about it to see the results more quickly.

End message:

Over the past year, sustainable and healthy development has become a key word in the Internet industry, and Tencent is no exception. In this financial report, although Tencent's former ace C-end business hit the growth ceiling, we can also see the efforts made by the company to go through the cycle for itself and the industry: by re-developing and polishing the technology base, the way of taking root in hard core technology has embarked on a path of pursuing rational growth, and if the gear shift is successful in the future, it is bound to usher in the next wave of high-speed development cycle.

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