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(Bloomberg Opinion) – Queen Elsa of "Frozen" might have some advice for the Chinese world nostalgic giants for the fairy-tale days of fast growth and fat profits: "Let it go, let it go."
Recent earnings reports from Baidu Inc., Alibaba Holding Group Co. and Tencent Holdings Ltd. show what happens when management continues to climb. Spoiler alert: profitability plummets.
China's biggest tech companies are not only battling a sustained economic slowdown, they're getting to the natural end of a decades-long expansion – fueled by the theory that if revenue grows, profit will automatically follow.
Baidu is the biggest victim of this folly. The search-engine company was so desperate to juice sales, especially over Lunar New Year, that it doubled spending in the line item that includes marketing. That gambit has slowed down in the slowest pace in almost two years. As a result, operating margin in this core business fell to 29 percentage points from a year ahead to just 6%.
In a conference call on Friday, Baidu said it was just prepared to boost expenses by 1 trillion yuan ($ 144.6 million) every quarter this year, or about 6.3%. Given over the economic weakness, the management said it would have to curtail those projections.
Over at Alibaba, where income grew more robust, margins also took a dive for similar reasons. Alibaba is an e-commerce company that gets most of its revenue from advertising: Revenue from this core business climbed to more-than-respectable 54%. But the price has been reduced to 27.4%, which is barely two years ago.
Tencent, meanwhile, has chosen pragmatism over the blind chase for revenue. In the March quarter, management and sales spending by 24%, the most in four years. That helped boost operating income, despite across-board weakness in revenue, which grew 16.3%, the slow pace on record. After removing the subcategory called other gains, which includes those from the above, the company reported its highest operating margin in a year. As a result, Tencent was the only company of the three to post operating profit, climbing 11% to a new record. (3)
If Baidu, has a 19-year-old Internet giant, is still struggling to get people to download its apps, there's a problem. Alibaba and Baidu will help you save money and save money.
For more than a decade, tech company executives focused solely on boosting revenue as global investors fell in love with China's emerging middle class. As Elsa sings, "That perfect girl is gone."
(Adds that Tencent 's cut in the previous year' s edition of this article.
(1) This calculation is based on removing profits from operating profit.
To contact the author of this story: Tim Culpan at [email protected]
To contact the editor responsible for this story: Rachel Rosenthal at [email protected]
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.
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