Tencent Music Entertainment Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2023

There are 11 speakers on the call.

Operator

Good evening and good morning. Welcome to Tencent Music Entertainment Group's 2nd Quarter 2023 Earnings Webinar. TMB announced its quarterly financial results today before the U. S. Market opens.

Operator

An earnings release is now available on our IR website atir.tencentmusic.com as well as VIA Newswire Services. Today, you'll hear from Mr. Kachen Peng, our Executive Chairman, We will start the call with an overview of our recent updates. Next, Mr. Ross Liang, our CEO and I, Tony Yipa's CSO, We'll offer additional thoughts on our product strategies, operations and business developments.

Operator

Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we continue, I refer you to our Safe Harbor statements in our earnings press release, which applies to this call as we will make forward looking statements. Please also note that the company will discuss non IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in the company's earnings release and filings with the SEC. At this time, all participants are muted.

Operator

After management's presentation, there will be a Q and A session, and please be advised that today's webinar is being recorded. With that, I'm pleased to turn the call over to Kachen, Executive Chairman of TME. Kachen?

Speaker 1

Thank you, Tony. Hello, everyone, and thank you for joining our call today. We are pleased to report a solid second quarter with total revenues increasing by 6% and adjusted net profit of 48% year over year. These solid results were once again supported by our online music services' strong momentum. EMEA has been dedicated to driving the healthily development of China's online music industry.

Speaker 1

Following our long standing efforts, we are pleased to see users becoming increasingly accustomed and willing to pay for copyrighted music, Whether for songs they want to listen to or for the premium listening features they enjoy, driving this rate, We are happy to see that our online music paying ratio and monthly AR PPU reached an all time high of 16.7% and RMB9.7 respectively. Such achievements drove revenues from this business pillar In the recorded quarter, we exceeded that of social entertainment services for the first time in our history. This is a strong testament to our progress in developing a robust online music business model and marks a significant step along TME School Park. Looking at our social entertainment services, starting from the later part of the second quarter, We have proactively implemented several service enhancement and risk control measures to provide users with a more music centric Light streaming atmosphere as well as the reinforced risk controls. While these measures are expected to put pressure on revenues from our social entertainment services throughout the second half of twenty twenty three and first adversely impact our total revenue for this year.

Speaker 1

We believe they will provide users with an optimized user experience as well as pave the way for the good healthier and more resilient development in the long run. Moving on to our operational progress on content. As the key component fostering our music ecosystem, our comprehensive content ecosystem sets us apart from other industry players. During the quarter, we continued pushing the right presence of our content ecosystems Among artists, creators and labels, on the front of top tier labels and artists, We strengthened our partnership with them to expand our industry influence and content appeal. In July, We held the Tencent Music Entertainment Awards 2023, also known as TMEA in Macapa.

Speaker 1

It was a 2 day event comprising of 2 music ceremonies and 2 music festivals, joined by a prominent lineup of Over 80 well known domestic and overseas musical groups and singers such as JJ Ling, Ming Jun Jie, and 17. Being able to successfully organize such a large scale offline performance of all music events over a single weekend, Combined with an exceptional Moses of musicians demonstrates our strong industry influence and organizational capabilities With an audience of nearly 40,000 people offline participating in our 2 day event, Our TMBA also inspired social media buzz of over 10,000,000,000 views, once again creating a national music sensation. Furthermore, we remain the partner of choice for famous labels and artists on a wider range of content offerings and merchandise. This enabled us to provide music lovers with a rich selection of music content and products as well as a unique and trendy experience at TME. For example, in the Q2 of 2023, we renewed our strategic cooperation with Forward Music, I'll allow you guys to offer a wider variety of Chinese pop music to users in China better off.

Speaker 1

In addition, We cooperate with Jackson Yihan Tianqi on the release of his new physical album, Liu Yand Fen, Featuring a head start to release with GMV, this partnership delivered an outstanding sales record of Nguyen Phan on our platform. Another highlight was the debut of Chris Lee's Li Yuchun's brand new digital album, Have a Dance weekend, Songhu Yuchai, plus the sales of the album's limited edition merchandise. In addition, we continue expanding our vertical music content to attract a more younger audience. For example, milestone records and key hip hop labels recently joined our platform, Adding over 440 songs to our hip hop music library, some of which included 30 day head start releases. On the front of our up and coming musicians, we are helping to address the visibility within the industry by providing Critical technological assistance and integrated resources that support their global growth and time losing journey.

Speaker 1

In July, We upgraded banners, our all in one music production and promotion destination, To better help indie musicians improve their efficiencies in producing, transacting and promoting songs, Vynix's latest iteration and integrated our full suite of AI to Vynix. As an AI enabled music separation, sheet music generation, line rep writing and creations of cover for songs, Significantly improving creators' efficiencies at each step of the music creation process and elevating their music quality, Ben is also creating enhanced the efficiencies of resources consolidation as it gathers a wealth of demos on its platform and empower us convenience music transaction and promotion processes. Having attracted a diverse range of creators and labels, VENAS has recorded music transactions with a total value of over RMB 10,000,000 as of the 2nd quarter. Furthermore, we've leveraged our differentiated and comprehensive set of resources and opportunities to further up and coming decisions and foster creativity. For example, our Tencent Musician platform strengthened its holistic support system for musicians, Which ranges from offering additional exposure for offline performances to launching theme programs to promote creative content production and even extends to helping musicians find commercial opportunities.

Speaker 1

In the Q2, Our Emerging Force program sent several of its emerging artists to 7 offline music events. We also offered the Morefield And VV Band, the opportunity to produce the film song for the Viagra's car sales and conversion event. Our deep involvement across the music value chain enable us to be in a unique position of having extensive insights in China's music industry, which we in turn hope to give back to the industry by contributing to its advancement. In June this year, our TMB Research Institute released its 1st consecutive annual edition Of 2022 year end report of Digital Music in China, full in-depth data analysis and multifaceted interim interpretation, We provide a comprehensive and pioneering insights as well as case studies aiming to promote healthier and more sustainable industry development. That concludes the overview of our 2nd quarter and the progress we have made across our growing content capabilities.

Speaker 1

I would now like to turn the call over to Ross. He will share more about our platform strategies. Ross, please go ahead.

Speaker 2

Thank you, Kaeshe. Hello, everyone. We are excited to have reached an important milestone of 100,000,000 online music paying users in June. This demonstrates our strength as Chinese leading online music platform and reflects our growing appeal to music lovers. As we see an increase in growth Potential materializing from users in volume music consumption mindset.

Speaker 2

We are continually elevating our music experience to meet users' higher standards and stronger desire for quality. On top of the progress In our content ecosystem, as Kaisheng shared earlier, we are continuing to optimize user experience on our platform in order to reinforce the traction of our lovely and passionate music community among music lovers. Along with ongoing refinements to our distinctive and immersive leasing experience, We are also exploring more innovative and personalized means of entertainment and interaction. In terms of user experience, we optimized premium feature and product experience to attract Higher user engagement and stickiness to our platform. For example, QQ Music upgraded its Series of QQ Music Audio to ensure optimal sound quality and effects, Which are now also available in our in car service.

Speaker 2

We also launched QQ Music Audio Certification, which sets industry standards for sound quality across headwell devices such as earphones, speakers, Music players and car audio speakers, allowing access to superior sound quality among users in their daily lives. QQ Music also expanded in 3 d music player offerings such as players customized for Subscribes are designed for classical music to bolster product Attractiveness and thus user use. In Google Music Flagship apps, we recently upgraded We highlighted a more intuitive interface and an engaging unlimited music discovery function. Google also unveiled its Viper 3d Quisha's Changing Sheng, bringing an immersive live concert like Visiting Experience to Users. Furthermore, Visiting introduced a brand new function in drone that enhance Users recording and seeing experience, including optimized work details, enhanced balance between human voice and our competitive environment and our wider selection of sound effects as well as recording screens.

Speaker 2

Coupled with these enhancements, we also stressed our ability to recommend music through refined user Preference analysis and optimized algorithms, allowing a convenient and individualized music discovery. All of these efforts contributed to higher DAOs derived from various recommendation scenarios and a larger portion of recommendation related streaming share. In terms of leasing scenarios, We expanded our music services to additional use cases, such as various IoT scenarios, to serve a large audience in a more immersive way. Specifically, for the in car Use Cases. We improved user experience across sound quality and effects, music recommendation and interactive functions.

Speaker 2

For example, QQ Music launched its in car version 2.0 in June this year and forged partnerships with more Car makers such as SAIC, Volkswagen, FAW, Volkswagen and Volvo, among others. We also expanded collaborations with more car vehicles and embedded our in car offerings in more car models, Potentially tapping into a wider base of users who then can enjoy a seamless native in car music listening experience. Alongside the recovery of offline tourism, driving times have lines, thus increasing the use of in car music services. As a case important, during the Level day holiday period under summer vacations, we saw a notable uptick in user activities and stickiness for our in car service. In terms of user engagement and interaction, We created a highly individualized and differentiated music entertainment experience for Users through our AIGC endeavors, while fulfilling their desires for 20 filters to keep up with the AIGC BOM.

Speaker 2

On the online music side, We started Test AI enabled listening together that allows Xiaoxing, our AI Music Company, To join users' music listening journey, share a variety of topics, include her views on music and the recommended songs or playlists based on their real time interaction. This new function will offer More Trend Sighting Interaction between Users and Anchors Such virtual gifts can be automatically virtualized quickly As users input text descriptions, promoting a more creative and unique user Performer funding during live streaming. All these efforts have, in turn, Reinforce our platform's traction among users. As we continue exploring opportunities and Possibilities in China's online music arena. Our dedication to copyrighted music will position us to better ride the way of users changing music consumption habits, promoting great Prosperity across the music industry, we are creating long term value for our shareholders.

Speaker 2

With that, I'd like to give the floor to Tony to review our business options. Tony, please go ahead.

Operator

Thank you, Ross. Hello, everyone. For online music services, our efforts over the years to cultivate users' copyright awareness are bearing fruit, By allowing U. S. Users' increased willingness to pay for premium music content and optimal listening experience, We continue to see exciting growth in online music subscriptions.

Operator

The number of paying users reached a record high of 99,400,000 in the 2nd quarter, Driven by a combination of operational measures such as refined operation strategies, which explore opportunities associated with traffic topics or special occasions, more subscriber privileges and additional attractive music content. These factors translated into new paying users, returned churned subscribers and improved user retention. In addition, we launched a premium package tailored to couples in June, promoting customized features and privileges between couples. In terms of paying user spending, we witnessed a monthly AR PPU increase for the 5th consecutive quarter to reach an all time high at RMB9.7 in the 2nd quarter. The ongoing uptick was mainly a result of effective promotional activities, a consistently high user retention rate and the increased appeal of our subscriber privileges among others.

Operator

In addition, we made notable progress in our in car music services as well, seeing expanded user base and enhanced monetization, primarily as a result of our extensive relationships with more car makers and its applications in more car models. Online music services other than subscriptions also delivered robust growth as we further enhanced monetization. For advertising, our diversified product portfolio An innovative ad format remained highly attractive to advertisers across different industry verticals. Advertisers from e commerce, gaming and travel industries were outperforming on the advertising spend list. Ad Supported Mode continued outperforming our overall advertising services with penetration steadily improving and revenues significantly increasing.

Operator

Sponsorship advertising also attracted various types of brand advertisers as our IP mix provided them with a broad and diverse target audience such as our campus music contest, Nix Singer 2023, our signature music events WaveMaker, QQ Music's Dianfeng Music Festival and cool music festivals with barbecue related themes. Such a portfolio of music IPs attracted Sprite, Tongyi Shuang Chu and JD dotcom to sponsor among others. As for artist merchandise, We also saw an exciting performance driven by our strong relationships with well known artists, which normally gives us a head start in the release of their albums sales of various merchandise. Moving to social entertainment services, as Ka Shing mentioned, Starting from the latter part of the Q2 of 2023, we have implemented several service enhancements and risk control measures across our live streaming services to provide users with more music centric user engagement experience, such as adjusting certain live streaming functions and adopting more stringent compliant procedures. Such measures led to a weaker than expected performance in our social entertainment services for the reported quarter and will bring continued adverse effects on its revenues throughout the rest of this year.

Operator

As a result, we expect our total revenues for the company to experience a lowtomidteens percent decrease year over year for the Q3 of 2023 and a lowtomidsingledigit percent decrease for the full year 2023 as compared with 2022. Nonetheless, we remain confident that we will deliver year over year bottom line growth for 2023, driven by the continued strong performance of online music services. We also believe all these efforts We'll lay a more solid foundation for TME's sustainable and resilient development in the long run. Meanwhile, We are also trying out new interactive features such as AIGC empowered virtual gifts and functions of bullet chats in our live streaming services to enhance user interaction experience while increasing our product competitiveness. In addition, we continue to explore overseas opportunities, leveraging our operational experience in the domestic market.

Operator

For example, We further enhanced user experience in overseas singing rooms and introduced new localized features to boost engagement, showing satisfactory initial results in both penetration rate and time spent. Last but not least, TME continued to fulfill its social responsibilities in a unique and distinctive way through its strong commitment to music based Social Welfare Activities. In the Q2, we cooperated with Tencent Charity and other public welfare organizations and held 2 Little Red Flower Charity Concerts, for children. In May, we hosted the 1st Concert to raise public support for children with hearing impairment. We helped 7 hearing impaired children replicate their own voices With our Li NingXin AI capabilities, then utilize their AI generated voices to create and perform a concert along with several musicians.

Operator

On Children's Day in June, we hosted another concert for children in rural areas, offering them a platform to express themselves through music while showcasing music aesthetic education in those villages. These programs not only raise the public's emotional Resonance, they also allow us to explore music's possibilities and across and impact across different areas. Going forward, We will continue to drive progress across our content and platform to bring users a differentiated superior music entertainment experience that can only be obtained on TME's platform while sharing the fruits of industry development with all other stakeholders across the music value chain. I am so proud of the progress we have made both as a company and as an architect of the online music industry's future. Thank you once again for allowing me to be a part of this incredible journey.

Operator

Now, I would like to turn the call over to Shirley, our CFO, for a closer look at our financials.

Speaker 3

Thank you, Tony. Hello, everyone. Next, I'll discuss our results from financial perspective. In the Q2 of 2023, Driven by significant growth in our music subscriber and advertising business, our total revenues reached RMB 7.3 earnings, up by 6% year over year. Revenues from online mail services contributed 50 80% of total revenues, passing the revenue contribution from social and challenge service for the first time in our history And the marketing was a significant milestone for us.

Speaker 3

IFRS and non IFRS net profit was RMB 1,300,000,000 And RMB 1,600,000,000 respectively, non operating net profit margin reached 21.7% this quarter. Mailing subscription revenues in Q2 reached RMB2.9 million, up by 37% year over year So this is Fangyu. Number of online means paid users grew to 19,400,000, up by 20% year over year, representing 9x of 5,000,000 users sequentially. Monthly AR PPU has grown for 5 consecutive quarters and reached a record high of RMB 9.7 this quarter, Up by 14% year over year and 5% sequentially, our optimized use operations, More appealing member privileges, attractive music contents and disciplined promotions have driven the growth and will continue to strengthen the foundation for sustainable growth in our music subscription business. Additionally, revenues from advertising achieved strong growth on a year over year basis due to strong performance from our 8 based model As well as low advertising revenues for consumption in Q2 2022, the annual 6 1 8 e commerce sales event generated a higher demand for advertising and contributed to a sequential increase In advertising revenues, we continue to explore new products and formats to offer more diversified options for our advertisers and remain confident about the long term growth potentials in our advertising business.

Speaker 3

Social entertainment services and other revenues were RMB3.1 billion, down by 25% year over year, Starting from the later part of the Q2 of 2023, we have proactively implemented several adjustments Requirement for competence intended to over better musical centric user appearance. These measures have negatively impacted our live streaming revenues this quarter and we expect the negative impact to continue in the second half of twenty twenty three, resulting in a lower than previously expected revenues for full year 2023. Lastly, we believe these measures are necessary and are beneficial to our users, which will help lay down a healthier and a more sustainable foundation for our long term growth. Gross margin in Q2 was 34.3%, up 4.4 percentage points year over year, Primarily due to the following factors. 1st, online music services have shown strong growth momentum With high quality growth of music subscription revenues driven by the continued uptick in online music paying users base and AR PPU and a robust growth in advertising revenues.

Speaker 3

2nd, as we gradually ramp up our own content, It has a positive impact on the margin and will continue to be a favorable factor for our margin. In addition, The continuous improvement of operational cost efficiency also contributed to the increase in gross margin this quarter. Now moving on to operating expenses. Total operating expenses for Q2 were RMB1.3 billion or 17.2% as a percentage of total revenues, down by 3.3% from 20.5 percent as a percentage of total revenues in the same period last year. Sales and marketing expenses RMB211 million, down by 30% year over year as we have optimized our promotion strategies By reducing use of acquisition spending, monitoring the ROI of each promotion channel and being more focused on high quality paying user growth, With the effective promotion measures, we have seen significant growth in subscription revenues this quarter.

Speaker 3

General and administrative expenses were RMB1 1,000,000,000, down by 6% year over year. This decrease was primarily Due to decrease in employee related expenses as a result of improved headcount expenses, Expenses related to our application for secondary listings last year also contributed a year over year decrease. We continue to closely manage employee related expenses by improving headcount increases and invest in Increased search and development to further empower music related content creation, enhance production defenses and improve sound quality and effects. Our effective tax rate for Q2 was 12.2%. For Q2 2023, our net profit and net profit attributable to equity holders of the company were RMB 1,300,000,000.

Speaker 3

Non IFRS net profit and non IFRS net profit attributable to equity holders of the company were RMB 1,600,000,000 and RMB 1,500,000,000 respectively. Diluted earnings per ADS was RMB 0.82, up 55 percent on a year over year basis. Non IFRS diluted earnings per ADS was RMB 0.97, up 54% on a year over year basis. As of June 30, 2023, our Combined balance of cash, cash equivalents and term deposits were RMB30.5 billion As compared with RMB28.5 billion as of March 31, 2023, The increase was primarily due to strong cash flow generated from operations of RMB2.1 billion For the Q2 of 2023, such a combined balance was also affected by the change in exchange rate of RMB to USD at debarated balance sheet dates. In conclusion, our milk subscription business has demonstrated significant growth With keen focus on user experience and monetization, we will continue to invest in new products and services, Include high quality contents, differentiated premium packages with apparel privileges and new technology such as AIGC Through organic development and M and A to certified our foundation for long term growth.

Speaker 3

This concludes our prepared remarks. With that, I'll turn the call back to Kajun.

Speaker 1

Thanks, Shirley. Before we enter the Q and A session, I would like to take a few minutes to express our gratitude to Homi. During his tenure, Homi played a key role in our 2 successful public listings And contributed his professional expertise to Adfiance TME's prosperous development. We really appreciate Tony's excellent work

Speaker 4

Okay. Our today's first question comes from Alex Yao from JPMorgan. Alex, your line is open. Please go ahead. Thank you.

Speaker 5

Thank you, management, for taking us through the fundamental developments during the quarter. And Tony, best wishes to your future in Denver. My question is around the revenue outlook, given the very different dynamic between music and Social entertainment business, can you elaborate a bit more on the underlying assumptions of These are 2 segments in the next couple of quarters. And then I have a related follow-up Question, I. E.

Speaker 5

If we take a multi year view, should we think of the nature of this risk management Initiative as a permanent loss of certain high risk revenue streams So such that you have at least 4 quarters of rebasing period? Thank you.

Speaker 1

Okay. Thanks, Alex, for the questions. I'll take the first part regarding the revenue outlook and maybe Tony can take the second part of the questions. This quarter, our online music services Revenue contributions reached nearly 60%, representing a significant growth from only 30% 5 years ago. So looking at the revenue contribution of our subscription businesses, it has started from low 20 percentage 5 years ago to 40 this quarter.

Speaker 1

So this progress really demonstrating that since we go IPO, IITME has been continuously expanding and solidifying our core online music business. This is where our long term development is built upon And the exact reason why we are confident of our solid development for this year and beyond. Looking ahead to the Q2 of 2023, Our online music business is expected to maintain a robust growth, driven by both the paying user growth and ARPPU expansion for the subscription business, as well as the continued advertising and merchandise business expansion. This robust growth will be a stronger driver to both of our top line and also bottom line. Meanwhile, our social entertainment service will be expected should continue facing some pressure on its revenues due to adjustment related to certain live streaming functions.

Speaker 1

Nevertheless, barring any major unexpected events, we anticipate that the impact level Of these adjustments, we stabilized by the end of Q3 and sub sequentially, monthly revenue in Q4 will become relatively stable on a month to month basis. So therefore, we expect that the total revenue for this year will decline by low to mid single digit percent Year over year, but our full year profits and profit margins, we see further improvements. So at the Group level, I think our development strategy is focused on exploring the diverse business opportunities in the music arena and discovering the long term growth potentials. As for our social entertainment services, our current goal is to maintain stable business scale. Although social entertainment revenue is currently facing some pressure When compared to the 5 years ago, but we now have more resources and a growing accumulation of industry insights to strategically plan for the Group's long term development.

Speaker 1

So we believe that the adjustment made to our live streaming business will allow us to unlock The next level of development on a more solid footing.

Operator

Thank you, Kachen. That's a fairly elaborate answer. The only thing I'd Add is that the social entertainment services revenue adjustment took place in the later part of Q2, which means that, that downward pressure will continue into the second half, which effectively resets The level of the social entertainment revenue at a lower level, however, barring any significant unexpected events, We currently do anticipate that impact level of these adjustments to stabilize by the end of Q3. And therefore, month we expect monthly revenue for social entertainment services to stabilize on a month on month basis in Q4.

Speaker 1

Yes, I

Operator

think that's the only thing I'll add. Thank

Speaker 4

you, Alex. And our next question comes from Lei Zhang from Bank of America Merrill Lynch. Lei, your line is open. Please go ahead. Thank you.

Speaker 6

Hi, management. Thanks for taking my question. And the best wishes to Tony on your new journey. And if I may want to follow-up on Social entertainment said, can you give us some, you know, the rationale behind these significant adjustments? And

Operator

I think the motivation behind these adjustments are to create a more music centric Live streaming atmosphere for our users and these adjustments include stricter compliance procedures And also adjustments to certain live streaming functions, it enables us to better control potential risks that the platform may face in the future. And so even though these results in significant short term pressure on our revenues, We see these as necessary in order to provide a solid foundation for our platform's healthy development in the long run. And I think like I said, I think in terms of outlook for this the social entertainment revenues, So that when we look at each month in Q4, monthly revenues for social entertainment services are likely to be relatively stable on a month to month basis within Q4.

Speaker 4

Okay. Thank you, Lai. And our next question comes from Alex Huang from Morgan Stanley. Alex, your line is open. Please go ahead.

Speaker 4

Thank you.

Speaker 7

Thank you, management, for taking my question and all the best, My first question is congratulations on reaching the 100,000,000 paying user milestone. Can management share your next targets, 1 or 2 targets for your subscription business and the timing of that target? And my follow-up question is regarding our share buybacks and dividends, if any consideration. Thank you.

Operator

On the subscription side, we continue to expect the subscription revenue to grow at a healthy trend, driven by a number of factors. And frankly, I think many of these have been our results of years years of hard work. I think from a kind of top down perspective, we spent years of market education, encouraging users to develop A music consumption mindset to support copyrighted music, we We have continued to refine our operational strategies, enrich user privileges such as sound quality and sound effects. As a result, we are seeing a gradual shift towards increasing willingness to pay for music services as well as for privileged product features. On the AR PPU side, As we mentioned for several quarters now, we will continue to follow our strategy towards optimizing our promotional discounts, gradually reducing them and to enhance the users' perception of the value that they're paying.

Operator

And for those users who are who have higher for sound qualities and additional demand for use scenarios, we do have other premium product options at a higher price point Besides Super VIP as well as other IoT memberships, we also launched premium packages that are tailored to couples, for example. And so I think as we continue to see Increasing willingness to pay among the user group, we are confident to be able to continue to grow the paying user both the paying user and ARPPU at a healthy pace to drive the subscription revenue going forward. And then on buyback, obviously, I think we have announced the buyback as you saw. We haven't conducted a buyback to date, but we will be actively looking for opportunities to do If the right opportunities present itself, especially in times of share price weakness.

Speaker 4

Okay. Thank you, Alex. And our next question comes from Nathan Pou from Goldman Sachs. Nathan, your line is open. Please go ahead.

Speaker 4

Thank you.

Speaker 8

Thank you, management, for taking my question, and all the best to Tony as well. So I want to ask about AI AGC. I see. I think management emphasized the importance of AGC to our platform and to our business. Could management elaborate A bit more on the latest development of any AIGC tools or the large language model We are currently leveraging how we think about the whole AIGC to empower our business.

Speaker 8

Thank you.

Operator

Okay. I'll provide a brief translation. We'll continue to ride the wave of innovation that are brought to us with AIGC. While there has been a lot of focus on large models, our own focus more on the application layer, which are primarily twofold on either the content side or on user interaction side. On the content side, we Work on providing productivity tools to assist musicians to become more efficient with the music creation.

Operator

Whether or not we will see one day a fully automated end to end solution remains to be seen, But that's something we would continue to monitor. We are working And assigned to provide synthetic voice creation, which where users can pay to use AI to create their own voice to sustain and to do other things. And then finally, we are using AI capabilities to dramatically shorten our R and D time. On the user interaction side with Xiaoxing, which we mentioned previously, is a companion that guide your music journey. She can recommend songs to you.

Operator

She can chat with you and tell you her views of particular songs. She can also comment on individual results. On the live streaming front, we are able to use AI to instantaneously create A customized virtual gift based on the words that users type in, so that every user can create a very unique virtual gift and use that to give to their favorite live streamer. And then finally, we are working on a new product called Weiban, which are similar to a feature where users can chat with various AI characters.

Speaker 4

Okay. Thank you. And our next question comes from Alicia Hyatt from Citigroup. Alicia, your line is open. Please go ahead.

Speaker 4

Thank you.

Speaker 9

Hi. Good evening. Can you hear me okay? Okay. Good evening, management.

Speaker 9

Thanks for taking my questions and also all the best to Tony. So can management share with us what should we expect for the gross margin in the coming quarters With online music now contributing also higher proportions of the revenue and then social entertainment continue to face the ongoing pressure, What is the net profit trend for the rest of 2023 and overall 2023? Thank you.

Speaker 3

Okay. Let me first talk about the gross margin. Gross margin is 34 point 3% in Q2 increased by 44 percentage year over year due to some factors as follows. 1st, online music service has shown strong growth momentum with high quality growth to musical subscription revenues driven by the continued uptick in the online mutual paying user base and the monthly AR TPU and second, the robust growth of advertising revenues. And third, our self owned content Gradually ramp up, that has a positive impact on our gross margin and will continue to be a favorable factor for our gross margin.

Speaker 3

And 4th, we optimized the content cost model of ROCE and increased our requirement of Content cost this year. And 5th, license cost of long form audio decreased at a year over year basis. And 6th, to optimize the technology and operations related to bandwidth and storage capability and improved the utilization of our service and equipment. Our gross margin has improved for 5 consecutive quarters. Looking forward to Q3, we expect the subscription revenue and the advertisement revenue will continue to be strong growth.

Speaker 3

On the cost side, we expect our in house made content will have positive impact on gross margin continually, And we will continue to increase our operational efficiency and monitor cost items by our Simodial. Despite the live streaming revenue will be decreased significantly in Q3, we expect Our gross margin will be increased sequentially and the gross margin in 2023 will be higher than that in 2022. And now we move to our OpEx. We continue focus on improving our efficiencies of OpEx in 2023. Over the past quarters, our ROI oriented marketing strategy has proven successful In saving cost and enhance efficiency, our sales expenses declined year over year for the 6th consecutive quarter.

Speaker 3

Thanks to effective management of sales channels ROI and a well balanced allocation of international and external Internal and External Resources. And we will remain committed to this principle. We anticipate a continued year over year decrease in selling and marketing expenses. We will also further refine our operations, Enhance the headcount efficiencies, pay more attention to improve the profitability of business and products, Adjust the headcount according to profitability of business. Meanwhile, we are continuously monitoring new opportunities within the content ecosystem and the cutting edge technologies and invest in such areas.

Speaker 3

Looking forward to Q3, the live streaming revenue will decrease significantly, So we anticipate our adjusted net profit will be around stable at year over year and adjusted net profit margin will increase. We also anticipate that adjusted net profit and margin all will increase at a year over year pace in the second half year of twenty twenty three.

Speaker 4

Thank you.

Speaker 10

Hi, good evening. Thanks management for taking my questions and all the best for Tony. May I ask a Question regarding our content strategies. Given the solid results we achieved in our original content, Can management comments about the strategies going forward? Thank you.

Speaker 1

Thank you, Thomas, for your questions. And As the leading music platform in China, I think one of our key focuses is still discovering and also cultivating the musicians and encouraging them to create more music. We're also assisting them in promoting their works on our platform. We are so delighted to witness that the continuous increase in the proportion of original content on our platform nowadays after years of Investment and cultivation and this is increasingly good. So the increase has also contributed to our margin expansion as well.

Speaker 1

Leveraging our comprehensive resources and technological capabilities, I think that in TME, we are actually offering a holistic support to all of the artists. Firstly, the Kansan Musician platform, as we mentioned before, they always offers offline performance opportunities and also exposure and launches film programs to encourage the innovative content production. It also provides various Commercial opportunities as well, including the royalty, online gifting, digital album sales and overseas distribution. So all these are all solid means of support for the artists. Secondly, our all in one music production and promotion platform Vynas is designed for producing and transacting the demo and also the cover works.

Speaker 1

It has attracted numerous Content creators and music labels, selectively promoting resources consolidations efficiency. In addition, I think we also collaborate with a well known domestic and international IPs to attract a broader audience and expand TME's industry influence. For instance, in the gaming sector, we have Johnny Creative Film songs with Tencent's Honour of Kings and Piece Meeker Elite. And in the animation and film, we have also partnership with the popular IP like the Land of Warriors and the Spider Man And all of these are really exciting content development project that we have online right now. In terms of the content production promotions, we have a wealth of Internal and external resources.

Speaker 1

Internally, we have the 3 major major platforms and also externally, we can work with the Tencent Ecosystem For our cooperation with the racing and we can promote on the racing official account and racing video account Which a massive user base as well. And last but not least, we're also helping our talent provider to Do the music distribution to overseas market as well for our TMB music hall service, which I think is very Meaningful to help promoting Chinese original music in the international market as well.

Speaker 4

Thank you.

Speaker 9

Thanks management for taking my question and also best wishes to Tony. Just a quick question on IoT. Do you have any color on in car service progress such as monetization and the revenue contribution? Thank you.

Operator

So within IoT, our current main focus is in car services, especially smart cars, which we believe will be a huge market, primarily domestically, but also to some extent overseas fear chokes. Music, as you know, will be a prime entertainment use case within smart cars. And through our premium sound effects, such as our partnerships with Dolby. We are well positioned to benefit. We also have deep cooperation with a broader set of carmakers and we've launched QQ Music's 2.0 version that are dedicated for in car services.

Operator

As a result of all these efforts, both our in car music users as well as revenues are seeing rapid growth. And as an example, during the May holiday, where there have we've seen a significant increase In holiday and time spent during Cars, we have seen a significant uptake in music consumption and spending. And as a result, over the long term, we're very optimistic That IoT, specifically card services, will provide us with a clear opportunity for subscription and revenue going forward.

Speaker 4

Thank you. We have grown the end of this conference call. I will now turn the call over to our host, Mr. Chung Yan, for closing remarks.

Operator

Well, this closes our call for today. I just wanted to extend my personal thank you to all of the senior management team at TME as well as the company and the Board for their trust in me throughout the years. It's been an incredible journey, and I'm incredibly proud of everything we've achieved together over the past 5 years. Thank you, Denis. Thank you, everyone.

Speaker 1

Thank you, everyone. Thank you, everyone. Thank you. Take care.

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Key Takeaways

  • Solid Q2 2023 financial performance with total revenues up 6% YoY to RMB 7.3 billion and adjusted net profit rising 48% YoY, while gross margin expanded 4.4 ppt to 34.3%.
  • Reached a milestone of 100 million online music paying users in June, driving subscription revenues up 37% YoY and ARPPU to an all-time high of RMB 9.7.
  • Online music services overtook social entertainment as the largest revenue pillar (50.8%), reflecting users’ growing willingness to pay for copyrighted music and premium features.
  • Implemented risk controls and service enhancements in social entertainment from late Q2 to foster a more music-centric live-streaming atmosphere, expecting a low-mid teens QoQ revenue decline in Q3 but aiming for long-term resilience.
  • Expanded content ecosystem via flagship events (TMEA Awards), partnerships with top labels/artists, AI-enabled tools for indie creators, and product innovations including AIGC features and enhanced in-car music services.
AI Generated. May Contain Errors.
Earnings Conference Call
Tencent Music Entertainment Group Q2 2023
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