Domestic Internet manufacturers have increased profits: cost reduction and layoffs have been effective?
Source: Visual China
Author | Zhang Rui
Edit | Kang Xiao
Produced | Deep Web Tencent Xiaoman Studio
After reducing costs and increasing efficiency in the past year, Internet giants have handed over a bright financial report.
In the past half month, Alibaba, Tencent, Baidu, JD.com, Kuaishou, B Station, iQiyi and other Internet giants have successively released their financial reports for the second quarter ended June 30, 2023. Overall, the strategy of cost reduction and efficiency improvement has begun to show results, which are specifically manifested in the following three aspects:
1. Affected by the reduction of cyclical business personnel and cost reduction, the net profit growth rate of most companies is significantly higher than the growth rate of revenue;
2. Compared with Q2 2022, the gross profit margin of Internet giants in this quarter increased significantly;
3. iQiyi, Kuaishou and other companies that had suffered large losses began to make money, and the losses of station B also narrowed significantly.
The net profit of the "province" increased
Looking at the year-on-year growth rate of revenue and net profit in the past five quarters, it is found that the net profit growth rate of major companies is significantly higher than the growth rate of revenue.
In the second quarter of 2023, the revenue growth rates of Alibaba, Tencent, Baidu, JD.com, Kuaishou, Station B, and iQiyi were 13.91%, 11.32%, 14.87%, 7.6%, 27.88%, 8.05%, and 17.21%, respectively, while the corresponding net profit growth rates were 62.58%, 40.53%, 44%, 50.39%, 146.63%, 23%, and 282.65%, respectively, and the net profit growth rate was significantly higher than the revenue growth rate.
The net profit growth rate of major companies is significantly higher than the revenue growth rate, mainly due to cost control, cyclical layoffs and business adjustments.
Since last year, affected by the retreat of the high-growth dividend period and the accelerated implementation of regulatory policies, most Internet giants have started the mode of reducing costs and increasing efficiency, saving costs, shutting down or reducing innovative projects with too high trial and error costs.
The most intuitive manifestation of cost reduction and efficiency improvement of Internet giants is cyclical employee adjustment. Since the beginning of last year, the top Internet companies have repeatedly dynamically adjusted the total number of employees.
Take Ali and Tencent, which announced the number of employees in this earnings report, for example. As of June 30, 2023, Alibaba and Tencent had 228675 and 104503 employees, respectively, compared to 245,700 and 110715 in the same period last year, and the number of employees decreased by 17,025 and 6,212, respectively, during the year.
The continuous cost reduction and efficiency increase of Internet giants directly affects gross profit margin. Compared with the second quarter of 2022, the gross profit margin of major Internet companies in this quarter increased significantly.
Among them, Tencent's overall gross profit margin increased from 43% in the second quarter of last year to 47% in the second quarter of this year; Baidu's gross profit margin increased from 49% in Q2 last year to 53% in Q2 this year. JD.com's gross profit margin increased from 13% in Q2 last year to 14% in Q2 this year; Kuaishou's gross profit margin increased from 45% in Q2 last year to 50% in Q2 this year. The gross profit margin of station B increased from 15% in Q2 last year to 23% in Q2 this year; iQIYI's gross profit margin increased from 121% in Q2 last year to 26% in Q2 this year.
With the gradual improvement of gross profit margin, several long-term loss-making Internet manufacturers began to turn around losses and even achieve overall profits.
Loss-making businesses are starting to make a profit
Although Internet companies have a variety of monetization methods such as advertising, commissions, value-added services, financial services, and enterprise services, advertising has always been the bulk of Internet companies' revenue. In the context of tightening policies, capital ebb and pressure on advertising revenue, whether it can make self-blood and profit has become a company's guarantee against uncertainty.
Driven by the main theme of cost reduction and efficiency increase, iQiyi, Kuaishou, B Station and other companies that had been burning money and losing money before began to make profits. Among the three companies, the first to achieve real profitability is iQiyi.
Cash flow from operating activities is an important criterion for judging whether an enterprise can have independent hematopoietic ability. Driven by cost reduction and efficiency improvement, iQiyi showed signs of "making money" in the first quarter of 2022, with a quarterly operating profit (non-GAAP) of 330 million yuan, achieving positive quarterly operating profit for the first time. But iQiyi's real profitability began in the fourth quarter of 2022, when iQiyi's net profit was 305 million yuan, ending its long-term loss dilemma.
Kuaishou's path from loss to profit is similar to iQiyi's, first achieving positive operating profit, and finally achieving overall profitability under the impetus of continuous cost reduction and efficiency increase.
Since the third quarter of 2021, Cheng Yixiao has set the main tone of "reducing costs and increasing efficiency" for Kuaishou, which has been losing money. In terms of personnel optimization, Kuaishou has laid off employees in multiple business departments such as e-commerce, algorithms, internationalization, commercialization, games, and A station. In terms of saving on employee benefits, Kuaishou adjusted its benefits such as rental subsidies, free afternoon tea and free meals at the end of 2021.
"Kuaishou used to be fat in terms of personnel composition, and even if it lays off 30% of employees, it will not affect the operation of the business," an industry insider close to Kuaishou at the time told Deep Web.
In the first quarter of 2023, Kuaishou achieved its first overall profit after listing, measured by non-IFRS, with an adjusted net profit of RMB42 million.
However, Kuaishou's first earnings in the quarter were tricky because it was achieved on the basis of unapportioned share-based incentive expense and net changes in the fair value of investments. Equity incentive is a rigid labor cost in the operation of Internet companies, although not directly related to business activities, but will affect the company's net profit.
Kuaishou is truly profitable in the second quarter of 2023. In the quarter, Kuaishou recorded revenue of RMB27.74 billion, Group profit of RMB1.48 billion and adjusted net profit of RMB2.69 billion, which was the first time that Kuaishou recorded a group-level IAS net profit after listing.
iQiyi and Kuaishou have achieved overall profitability by continuously reducing costs and increasing efficiency, while Station B is still struggling in the quagmire of losses. However, under the continuous cost reduction and efficiency increase, the loss of station B has narrowed significantly.
In the second quarter of 2023, the revenue of station B was 5.304 billion yuan, a year-on-year increase of 8%; The net loss was 1.548 billion yuan, compared with the loss of 2.01 billion yuan in the same period last year, and the adjusted net loss of station B narrowed by 51% year-on-year.
In order to achieve the goal of breakeven in 2024, Station B continues to promote cost reduction and efficiency increase. In the second quarter of 2023, the total operating expenses of Station B decreased by 14% year-on-year, of which marketing expenses decreased by 22% year-on-year and management expenses decreased by 14% year-on-year.