Q3 2020 Tencent Music Entertainment Group Earnings Call

Ladies and gentlemen, good evening and good morning, and thank you for standing by welcome to the tentative Music Entertainment group 2023rd quarter Earnings Conference call. Today, you will hear discussions from the management team of Tencent Music Entertainment Group followed by a question answer session. Please be advised that this conference is being recorded today.

Now I will turn the conference over to your speaker host today Ms. Millicent Tu. Please go ahead ma'am.

Thank you Matt.

Hi, everyone and thank you all for joining us on todays call.

And well take financial results today after the market closed.

And it's really no minimal or no I am sorry.

I asked all kinds of music dot com as well at the mine news why is that.

Today, you will hear from the <unk> our CEO.

The call with an overview of our recent achievements.

He will be followed by Mr., Tony yet I would say so welcome would be Nelson operations and business development.

Please make sure to cool I wish that all will address our financial results before we open the Fulfils question.

Please note that this call may contain forward looking statements made pursuant to the safe Harbor provision.

Carbon Securities Litigation Reform Act 90 95.

These forward looking statements are based on management's current expectation ambition.

Mostly known or unknown risks.

These and other back to not under the company's control, which may cause actual results.

Oh, Chief myself, the company to be materially different from the results performance with precision.

Hi by these funky thing.

Oh, good babies are expressly qualified in price car T or the cautionary statement responses and details of the Companys filings with it do you see the company does not assume any obligation to revise or update any golden state.

No new information future events changes in market conditions or otherwise as required by law.

No. There's a company will discuss non-GAAP measures today whats your most already explained and reconciled to the most comparable measures reported under international financial reporting standards.

The company's earnings release, it's always with if need be.

You are reminded that such non-GAAP measures should not be view in isolation.

Turning to the equivalent I measure and other non <unk> measure a union the only thing I like all companies.

Even though it's in the same industry with I'm not be.

No wonder call into question the O. attention do you think I should.

Thank you Melissa Hello, everyone and thank you for joining our call today.

In the third quarter, we continue our healthy trajectory knocking opportunities in China's online music entertainment services through various monetization models.

Oh online music services right caught a well rounded outstanding performance, while social and it came and said this is Vince its food longest recovery.

[laughter], that's it's almost all online music surfaces, we call it that well rounded outstanding football much.

To begin with.

<unk> revenues maintained a robust.

Increasing by 55% year over year.

This new entrepreneurial attributable shoot a strong both in paying users.

Upon six media.

I knew I caught part to lead that increase which took our number of online music paying users to 51.7 media.

Paying way show wished to 8.0%.

By 2.6 percentage points year over year, and still plus 8% points quarter over quarter.

Well, we we called that 46% year over year growth in online music paying users.

Oh, PPI, you expanded by 5.6% year over year.

Demonstrating our philosophy of quality equal.

Well known subsequent to that the news you Recollect outstanding performance.

Advertising.

Entering a weapon equal weight of triple digits year over year.

Randy will provide more color later.

Additionally, you.

The main thing that the top one position and a leading market share in digital album releases.

Thanks to our increasing promotional capability and the ability to monetize the idle spend based economy.

Our digital album release, and fan idle operations surfaces how.

Not only superstar [laughter] also emerging artists books.

For example.

Yes, I'll send me a young age thing, but Oh solo album, How's the weather today can't teaching.

Smile by Katy Perry, we all know powerful ranked number one in digital sales nationwide.

No coming back to California.

Probably the softest 14th outcome of teaching means yet not only rented the first in digital sales among all night.

Also quickly took the number one spot on eight of QQ music popped up on the second day, it's meat.

First of all on.

My music services had positive impact on overall margin again in the third quarter.

Benefiting from strong subscription and advertising revenue growth.

And demonstrating the scalability of our business and our commitment to win win cooperation.

Second we also continue to strengthen our music content leadership.

Hoof bombing more partners [laughter] acquisition, no domestic and international music labels bearish on what.

Copper in different regions.

We formed in that strategic cooperation with me long that you deem news at Thomas, including P., a newspaper and magazine network.

Moldova direct more resources to support Indian musicians and pull most original music.

Oh, it tends and decision platform has become an essential driving for [laughter] and wish you all a music and entertainment content ecosystem.

Well why supports two I pick it all in all stages of their careers.

And drive the growth of the industry.

We continue to see triple digit year over year growth in both the number of participating in the musicians on the platform and the lumber <unk> original songs uploaded to it.

You saw the number of empty musicians exclusive to us increased by more than 20 times compared with a year ago.

Most of it by US he was a financial incentive and Telo technology basis, a plus emphasis.

[laughter].

Got both PC and humbled to say that more and more younger users.

Embracing our pets.

Trust in our services and contributing to our increasingly interactive and parliament.

In return.

Continue to add more trendsetting content.

Including more music centric aside he shows.

Popular among the younger demographic.

We successfully attract a younger users on our platform.

Food home community. The innovative features we introduced into can we say bush in 10 plus year old in July.

Also we see the tremendous endorsement.

Particularly from younger users yeah.

We are pleased to see that user penetration continues to improve.

Community engagement is increasing and the number we do real was produced and he's also on the rise.

Not only has helped us bolster the cultural cohesiveness of our user communities.

Who said facilitating be released an update on music and industry trends.

But has also become a meal promotion channel for labels and artists.

Within a few months topics beneath pool.

Who don't come in as he has become home to more than 100 office and office groups and that number is still growing.

In October Tucuman say poor don't comment he has chosen by the like you must pay pop female been ramping bought their new album tabled.

[noise] last but not least our new initiatives have been tracking well.

And so that's an important foundation for long term sustainable growth.

We continue to win share in a growing long form automobile market in China.

During the third quarter.

We have food and wish to our content offering.

A couple things the number of licensed titles year over year.

The enhanced content library as we sold it.

In increasing and you penetration.

Switching gears, 11.7% in the third quarter.

Compared to 9.4% in the second quarter as bolt on 7% for the same quarter last year.

Additionally, the robust expansion of both license it and UGC content. That's continue to enhance EPS user time spent in the third quarter.

We also started to make headway in growing long form all dual paying users through.

Through the fact that subscription pets, ranging from high value Standalone, one to our cross sell packages at Lepage quick synergies between our music and long form audio businesses.

Our online called said T.M. He lives in school went from strength just right.

[laughter] innovative performance value continued to attract more high profile domestic and international artists such as Andy loudly with us while using Chen Phoenician Charlie Joe Jolson.

Yes, TJ among others.

Since its launch in March this year.

We have hosted more than 30 like online closest both domestic and international I called that out because often specialness and styles reps.

Representing full two five live events fish, but month.

We also made further progress exploring monetization opportunities, including attracting sponsorships from well, that's a nice a domestic and international brands across different industries.

Separately.

The growth paying user base, we had T M. Eli underpin a solicitor scalability and monetization potentials.

Which will add to densify. The reason online calls it all which had been done yet she.

[laughter] concludes my prepared remarks.

Now Tony will discuss the highlights and important areas of focus for all of this is that.

Oh. Please go ahead.

Thank you question Hello, everyone.

Apart from the key developments discussed by Cashing just now I will provide additional highlights for online music services before I move on to the discussion on the on my Social Entertainment services.

In terms of product upgrades, we continue to innovate and optimized products to make our online music streaming experience more visual and personalized Lee.

Lee leading to enhanced user satisfaction.

On video in Richmond, we added more music centric short form videos MVC as well as other UGC content.

Which has contributed to improved average time spent and the total video streams on Kugel music.

For Q2 music users are more engaged with video content creation.

And we have seen sequentially increased daily published UGC.

We continue to make the music discovery journey more fun and immersive far users with personalized recommendation accounted for an increasing proportion of streaming volume on our platform.

Now turning to social Entertainment services.

Overall it continues to recover steadily in the third quarter, resulting in a faster revenue growth rate compared to the second quarter of this year.

We're also pleased to see its a RPP you expanding both on a year over year as well as on a quarter over quarter basis, driven by users improving willingness to span following the COVID-19 pandemic for both live streaming and online karaoke.

Our music centric live streaming services maintain healthy growth.

The key operational targets are two fold.

One growing and maintaining the number on the number and the quality of life performers to solidify our advantaged in music centric live streaming content.

And to growing a fan based economy by drawing on the strength of our popular content and interactive features.

As of the end of the third quarter. The number of live streaming performance I'm cool <unk> grew by over 40% year over year and the number of exclusive performance increased at a healthy pace compared to the same period last year.

We are in good momentum recovering from the pandemic and our paying users have seen sequential improvement in terms of retention rate driven by effective and targeted operational initiatives as well as personalized recommendations.

To meet uses demand, particularly younger ones born after 19 nineties, we continue to expand our live streaming categories to include more AC cheap Chinese Asian style and cost play to enrich content offering.

We're pleased to say that our efforts are paying off illustrated by increasing user time spent on newly added categories.

And like the separate like streaming applications for Q2 music launched in June.

Also shown good traction.

The third quarter, we saw more musicians and joining the platform and we started to introduce interactive features to facilitate more interactions.

We are on track to scale, it up and expect more meaningful revenue contribution from fan line in 2021.

Next let me discuss how unlike her oki services.

While we strive to provide better services to more users to core users who are loyal to our platform. We continue to proactively tackle the competitive pressure on user time spent from other forms of entertainment.

Over the past few months, we have been making significant investments into improving leasing product experience, which are beginning to yield encouraging result.

Most recently, we launched a fresh you why design of the recommendation feet on the home page of the App as well as enhanced recommendation algorithm to make browsing content more immersive and engaging and allow users to see a greater variety of interesting content.

Instead of just content posted by their friends.

These efforts have resulted in increased content consumption by users on leasing compared to the second quarter.

Which in turn are incentivized as content creators to publish more content.

Thereby create a virtuous cycle of content creation and consumption.

As a result of these product improvements.

We think has recorded a faster advertising revenue growth within the revenue mix compared to virtual gifting among friends.

Which left to healthy ARPU expansion and healthy revenue expansion with an understandable decline in the number of paying users in the third quarter.

In addition, we're also pleased that these product improvements have contributed to growing average daily use a time spent on leasing since September.

We also continue to enhance social networking attributes off we say.

Oh strained to facilitate the deepening and broadening of social ties with family and friends is a key element that this distinguishes us that distinguishes us ourselves from other online entertainment platforms.

To better cater to the increasing demand for long distance socializing.

And capture the opportunities arising from the pandemic, we added Frenchay TV, how he'll go follow within online thing and moves which as vividly emulates the offline karaoke experience online to facilitate unique social connections amongst families and friends.

Since its launch in late September it has been gaining traction among users and we expect it to further boost the penetration online singing moves.

[noise], if we stay focused on keep working on the key areas such as video enrichment and social networking attributes we thing.

We are seeing encouraging results in its user metrics and I'm optimistic that the social Entertainment Emmy you as a whole would bottom in the fourth quarter and begin to improve into 2021.

Last but not least we are expanding our value proposition within the online music entertainment space.

Leveraging our deep insights into music trends and strong content promotional capabilities, we will become more engaged in cultivating artist and content production through deeper partnerships with content providers and proactively explore cross domain corporation to capitalize on future monetization.

Opportunities.

With that I would like to turn it over to our CFO surely who for a closer review of our financials.

Thank you Tony Hello, everyone next I'll discuss our these are from a financial perspective.

Well all right achieved outstanding growth in online, maybe it's not as high as I take on a mix of subscription and advertising revenue this quarter on a continual accommodating our search antamina business well.

We are also very pleased to see our gross margins in format to sequentially.

Our total revenues well on the 7.6 spinning up 16.4%, Yeah, Oh yeah.

I want to be able to accept questions business continues to grow rapidly with dominos 1.5, beginning in the fourth quarter and the year over year gross 50, 55%.

Oh, Yes, Oh, yes, basically paying you also an RPP grew 46% and 6% respectively.

From a content you must have intensions improvement.

In fact, you will pay it was just it was actually.

In addition, along with pricing how does significant growth this quarter as our strategic focus to grow but the timing then it's back to the showing these out this quarter.

So these are all non music revenue at least on the two point to say beginning this quarter up 26% year over year piece of BARDA be quickly and you stop licenses annually and the sales of digital Alan.

So social Antamina services and other revenue was five.

I just want to say building up 10.7% year over year, primarily due to growth from all non core okay and laughing.

On PPI increase.

32%, Rob me knows that jumped 14.6% I always get back.

[noise] during the quarter Blake well I'll ask bill nice significantly and also offer them more device.

Content on platforms.

Both of these out and how they actually Peel.

We have always been focusing on monetization improvement.

A lot of people with hasn't been outpacing what kind of phone is one way to improve my intonation ability up the platform.

This quarter, we balance between growing number of our paying users and that the amount of political advertising business.

No we reduced incentive that I like to think that in terms of attracting new paying you is that.

Consequently, lumber paying use that decline, but its quota, but oh man monetization on the platform has improved.

Our goals matching what the city to appoint a 4% increase you'll see told you, 21.1% decrease Johnny well Oh, 1.6% compared to two is then peel like last year.

The year over year decrease was primarily due to increased investment in Newport that an accountant offerings.

That's right long from Oracle and Mckenzie life that I deal with ramping up in terms of revenue generation.

We will increase the revenue sharing fees to strengthen our platform company cumulative yeah as compared to twist MPS that lasted yet.

The question gross margin improvement was a result of lower revenue sharing ratio.

He is staying the course, we focused on improving you're facing a promotional activities and that we deal with it like if they send you think you will use the vending as our loving sitting beneath the kaaba online.

Ill, let me list them, if they have had pumps will impact our overall margin with it yet and it is a chain. If you back that will continue I. Once the production revenues continue to grow well license the content cost gradually this or not.

Oh, a music industry you both.

Now moving onto operating expenses.

Total operating expenses for Q, it seems like a turnkey well I'm being.

One point competing with that agent.

18.9% as a percentage of total revenue.

Thank you and that should be stable compared to 19% innocent appealing not yet.

During the quarter, we increased the promotional spending for new and existing products to strengthen our pulled back because I.

No its already filed Robert emails conventional lamps the Jamie.

Additionally, we continue looking back on the full product enhancement and the technology to innovation.

Moving to higher I'm going to let you mentioned that caught on.

Our effective tax rate was nine point, if they put that equates to from 20.8% last quarter I said, one of our operating entities in China, you can quantify that for certain tax benefit this quarter.

Our net profit attributable to equity holders of the company.

One point to one thing.

No it's not appropriate attributable to equity holders of the company was RMB, one point to save money.

All right and that's probably the March one.

17.8%.

As of September 30, Consequently, our combined balance of cash cash equivalent and that can be part well be tiny standpoint as they feeling.

Represents an increase of.

5.4, beginning Q2, which was primarily driven by pressing received a final note offering.

Looking forward, well keep focusing on monetization coleman and that that medication, including growing out there with that and we're tracking fairly well.

Well maintaining call content you recommend as.

As we have said previously we continue.

Hi, Bob the builder that brought the milk industry and are confident in overall system and the Paul talked a pipeline that we are in the long run.

This concludes our prepared remarks, operator were ready to open the call for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on a touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed any we'd like to withdraw. Your question. Please press Star then two for the benefit of all the participants on today's call. Please limit.

To one question and if you have additional questions you can reenter the queue. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Alex <unk> with Morgan Stanley. Please go ahead.

Hi, Good morning, Thank you management for getting my question Congratulations on very strong results.

This question is related to new chip that that can you also comment on the gross addition, lumberton also a historical high number in fourth quarter, because I suppose retention is also improving at the same time and then overall in terms of gross additions can you comment on the you have a number of drivers including your pay.

He wanted promotion bundling, it's volatile audio she had the large open communities a lot of drivers, helping big overall growth was that and can you just on the overall basis are you seeing.

Each percentage of sell movie behind a wall you have seen a better conversion more end users. So I just want to understand are we seeing a better inflection of fuel efficiency of moving some of the people.

And then.

Another question is around a couple of 11 promotion. So you are doing there to the buy one get one we and you back to chip for Green Dot and then there's it's a half price last year do you expect this to be a better.

Paid musical merchant gets your presence like next year and the second question is regarding gross margin.

So then you also mentioned the number of drivers, helping the gross margin improvement in Green Bank advertising subscription and Lexus incentives for the social entertainment side.

If I take a longer term view in Q4 and next year can advertise shoot advertising and subscription business, the and more sustainable gross margin driver and so we should expect this gross margin improvement through continued sequentially from Q4 onwards. Thank you very much.

Thank you for your question I'll take the first part of your question around.

The net adds and I'll, let Charlie answered the question relating to the margin.

We're very pleased with this quarter's result in terms of the net adds we reported the largest sequential net adds of 4.6 million and surpassing 50 million subscribers for the first time.

You know that is driven by the <unk>.

Combination of a very well execute a pay wall strategy.

We've talked about in the past.

By the end of this year you know we are on track to exceed the 20% target of content behind the pay wall.

And which is a very strong case.

And while there may be quarterly fluctuations, especially into kind of this is the fourth quarter given that we have been fairly aggressive in adding a lot of content in the first three quarters of this year. Overall I think this continues to be a a massive secular girlfriend that are supporting us as a team.

When in the years to come.

And so we wouldn't be too focused on it on a quarter over quarter basis Intel.

In terms of.

The rest of the drivers are bundling a promotion or in terms of the temporary promotional discounts.

All very good drivers you know we.

We indeed are seeing retention rates continue to improve on a sequential basis.

Which is a trend that has begun since the beginning of last year and that trend is continuing.

And in terms of your question about a sort of one off.

Promotional discounts.

I would say that those are.

Yes, those are effective in capturing no longer term subscribers, who may opt to signing for multi month as opposed to a single month.

And while it look as if it's a discount in the in the front month. They asked they are they are actually accretive to our overall ARPU in the long run because we are able to lock them in for a longer period at the full ARPU in the subsequent months. So I think overall, that's an efficient way for us to acquire a new addition.

Yes.

And I'll, let Kelly address the margin question.

Okay, let's address at the margin closely goes module is the second too full I didn't highlight that appeal to the I used the two reasons one when I was skinny down to recover from MACOM to my team. They focus on operational you say sense of lobbies, Jamie is a nice and reduce the less you pay.

The promotion appetite for human they can use the spending so it does I'm just showing me what these properties are saved to subscription revenue and the other ones have cemented revenue growth is absolutely have a positive impact on gross margin.

Yes, we think the what are the what type of an advertisement grabbing Neal that billings growth will be continue and does that also will be have a positive effect on the gross margin lakes back at our gross margin to be relatively stable in Q4 compared to net income you'll see my hand, our music.

Question, Dan Ellis and what has been driving your growth have pumps will impact our gross margin on the on hand, we have annual karla and Q4, well pads put it comes back to a more promotional event and provide a higher incentive which agenda and wondered is out we'll have revenue sharing cost. So overall, we expect.

Our gross margin real to be but it will be.

They bought in Q3 compared to Q.

In Q4 compared to Q3.

Understood. Thank you very much congrats again other than yourself. Thank you.

Next question please.

Next question comes from Benny Wong with HSBC. Please go ahead.

Hi, Hi, good.

Good morning management. Thank you for taking my question. So I was wondering that in terms of later.

That's true on the anti monopoly regulations and then also some won't see all potential monitoring their into guidance from government. What are some of the things that you think might potentially impact the industry says and how do you view at all maybe potentially any implications we should we should pick back up again.

And then second of all I said look at the net add right on the Q on Q basis, you feel a little bit soft Friday August fiber side and also on the paying users like sitting side. So any anything that we can to try sunset possible and also if you can comment a bit on the audio I like to play like that.

To your strategy in terms of the potential monetization I know understand I understand that that's already you know subscription revenue there, but that's what it is I see this EPS will be potential.

Jason you mentioned and Thats, when you see 11% awful for Sally.

So if you can.

Help us understand that that.

That's your question. Thank you.

[noise] Oh, thank you for your question.

We also notice the new draft regulation that came out just yesterday.

Obviously when you are in the process of evaluating that we've always maintained a close and constructive communication channel with government authorities.

And we committed to complying with the relevant laws and regulations.

And to contribute to the overall healthy development of the music industry.

And so I think that's as much as we can say in relation to the regulatory front.

Let's touch and talk about the law firm audio podcast question Yeah sure.

First of all I think that we have been fully committed to provide more long term audio content to our users. We started that business just in this year, but we have already gotten a very significant progress.

On tissue of global audio.

The total content that we have right now is actually over triple digits year over year growth when compared to last year and the most encouraging we saw good you're seeing that right now.

The use of penetration has actually wish to over 11% regarding on our total.

User base, so which means that this is well accepted by our users and also we are seeing a very strong and healthy growth trend.

I think that.

For the love them all deals it really fleets.

Treated with our content strategies, because what we are aiming news we are seeing that we got the platform that can provide the best content to our users which is not limited to only moves at all deals content, but also other forms of content and we're also seeing that this is a very natural wave file use.

So not just listening to music, but can also enjoy different farms all content throw the days you're also seeing that there is a lot of synergy for example, with alkermes upon those like the top tier axess all oddly emerging.

Oh, two wells on the Internet there, providing producing content. They can also help us to create a very good quality along with our mall do as well.

I think this year also have already good partnership with the Chinese literature and also what are the long term audio financial by this so I think that we are really in a good trend and right now we have already focusing also in growing our user base and the penetration rate up and love them audio and used to come I think.

That the monetization will also pick up as well not just following those subscription point of view, but also from the appetizing opportunities as well. So we're very positive on the site.

Your next question.

Thank you.

It's.

Hi, Matt.

Our next question operator.

Hey, Lou with Bank of America. Please go ahead.

Hi, Good morning. Thank you for taking my questions I've two questions. If I may the first one is a follow up the overall or music mobile and May you. I think is the method that the having some pressure given all these stocks to put more content.

Oh I thought the pay wall, but just wondering if as we add more video content.

As far as all about frequency.

Is it any scratchy or anywhere he just two more.

Turning it more sustainable and Mei yu pays off or the music side. So pieces mall called long term strategic question and then secondly, just a on the amount of caution and we know to stop all the Oh, who all all shows I and the team.

When we acquired.

It all so just wondering how much is because of the mix all shapes up between like caused thing and Oh, Hello, Kay and not.

And we can be sure that pay attentions to the trends. Thank you.

Oh sure.

So the music I mean, you I think given our very large user base on the music side. This quarter is a small decline it's a minor fluctuation.

In the in the Grand scheme of things we're.

We are very confident that we'll be able to maintain our leadership position in the industry market in the online music streaming market you know as a result of all the efforts that we talked about which includes enriching our content offering continue to make a number of our product improvements.

As well as new business initiatives.

Piccolo with regards to the content offering.

And in Richmond.

You know as you rightly pointed out our content offering is not just limited to music audio based or media format, but increasingly as we alluded to across a hour our earnings call. We continue to make a lot of investment into the video enrichment across all about half.

That includes official music videos. It also includes our user generated content provided by content creators.

And these video content show up.

Across a number of different modules within the platform it could be in ER into feed a recommendation feed it could be in the streaming page, while you listen to music.

It also could be through just overall, just know social community such as put on community. So I think all these asset.

And combined with about for example, you know new formats of media consumption like T. MD life, which is a truly pioneering effort within the industry, bringing all the offline concert online and we've done.

Done over for about 30 online courses this year, which by far is a more number of constant organization than any online or offline a constant organization entity or even if you look at it before the call to consume it. So I think these are assets that we can.

Teaching to make seeking richer content offering to strengthen our platform that would help maintain our leadership in the long run and then in terms of the question around ARPU and revenue mix within assumption that payment.

Yeah. It is not that the live streaming revenue is outgrowing the currency revenue that's not the case.

In fact, the turnkey revenue continue to grow at a faster pace than the last coming revenue.

This quarter.

The reason for the ARPU to to increase is.

Primarily a mix well a mathematical reason because the.

My ARPU is calculated by dividing the social entertainment revenues hold up by the page number of paying users and because of what myself and surely has talked about within we saying Oh, we made a number of our products or enhancement.

Enhancement for example, we launched a new design off the recommendation feed on the front page, which includes the full screen feed that makes browsing content more more immersive and along with that we also enhanced a recommendation algorithm.

Algorithm to allow users to see a greater for variety of that content instead of just content being posted by your friends. So this actually creates more demand.

Content consumption, and which is what we saw and that brings about more opportunity for us to monetize through advertising as opposed to monetize through a virtual gifting amongst friends.

And that's why overall the leasing revenue continue to grow as a platform and the and within that the advertising revenue is growing at a faster pace than the virtual gifting revenue among friends.

And that lead to a a drop in the pain number of paying users, but resulted in a growth in the overall leasing revenue and so taking all that into account. That's why you saw the improvement in revenue and ARPU terms, but I use a.

A drop in the number of paying users.

Maybe I'm going to the next question. Please.

Our next question comes from John <unk> with Stifel. Please go ahead.

Great. Thanks for taking my question congrats on the results.

I love to follow up on advertising as you're just alluding to it.

Sounds like advertising with a bigger driver of the momentum in online music services. This quarter are you able to quantify the momentum and AD revenue or give us a sense of how meaningful contributor. It is for this segment.

And maybe could you talk about any recent innovation and your suite of AD products that you're excited about or anything in the pipeline that you think can move the needle on advertising growth next year and I guess, a follow up to that have you have you given a additional consideration to sponsored recommendations or other tools for artists to grow their audience basis, because it it seems like you're rapidly growing.

The artist population could really benefit from tools like that thanks.

Yeah, Yeah. Thank you.

Advertising is indeed, a very strong both driver a win.

Within the online music segment this quarter advertising revenue has grown over well over 100% a this quarter on a year over year basis.

Approximately cadfour just less than half of the non subscription revenue.

Within all our music.

And so it's a it's the largest piece of the revenue.

Within Nonsubscription.

Revenue in online music.

And as Weve talked about actually over the past two quarters now we've said that this year is an investment year for us to improve on our advertising capability, our sales team Oh, a advertising products that et cetera, and with the recovery of the overall economy and the overall advertising environment.

Following the pandemic, which are mostly impacted the first half we have started to see that opportunity arises and we are ready to be able to capture that opportunity because of the investments we made in the past.

And we will continue to.

A scale up the advertising Momo.

Momentum as we go into 2021.

In a number of ways.

Number one is that really just a cost or many of our platforms that we have in the past have been a fairly conservative in the form of advertising monetization or there was a lot of advertising inventory that are on.

Under our control with Oh in the past not not made it available.

But going forward I think that becomes an opportunity for us to make it available and as there is increasing demand for them and secondly is we will start you start to see us doing more testing around you know of.

Or some form of a freemium model whereby.

Whereby if.

We use this would be a more exposed to advertising as an example, and paid user would be less exposed to advertising and that's that's.

A form of another form of advertising a driver that we look to invest in into 20, only look yeah exactly and I also seeing that this we also creating more and more use cases for our users to enjoy muesli anytime everywhere right. So like the entire a violent which is really.

Good.

Use cases for our users to enjoy music and also advertising is going to be have a lot of opportunities out there.

As we also mentioned that during our prepared remarks, we talked about here in July.

I think this is a tremendous assessed especially under the carpet pandemic, you're seeing that this many new opportunities there has been created especially on the online and offline.

Concepts right now we are focusing on the online concepts, but you also seemed as some of the other advertising sponsorships is coming in a desk also some on the new form of advertising partnership as well and in the future when to cope with that.

Darling is under control I think that this order for their rounds of X synergies has can be created like the online and offline console synergy. This is something that we are focusing on T.M. is always not just focusing on today's misses. We are also focusing on the future business we.

We are focusing on creating an ecosystem. So not just on the news apps that we have been doing well, but we need to do it well from an ecosystem partner was all on the offline online synergies and also the.

Different areas I think that there may be opportunity. So that advertising is going to become one of the significant revenue stream 40 Mg they use the comp.

Thank you next question.

Our next question comes from Elisa Yap with Citigroup. Please go ahead.

Hi, Good morning management, Thanks for taking my questions.

However questions regarding more medium to longer terms on the social entertainment opportunity. So given the developments off the industry and also the evolved off the user behavior.

What does management view on medium to longer term opportunity for social entertainment, what type of new monetization opportunity evaluation tool the online advertising, which you just mentioned that we quit for export into <unk> odaniel.

Hi station ways that we could think about.

And it comes off of some of the challenges that you have seen phasing.

Oh, no I understand the company has been doing a lot of product enhancements features to retain the user. So what are the areas that you think.

You'll need to attract a two income felt the challenge that youre facing for especially on the time spent dilution all for radar applications out there and how confident are you on the payment on the engaging user. Thank you.

Yes. Thank you.

As I previously mentioned we freeze.

Back to social Entertainment May you in time span.

Which primarily relates to we saying because that's a a time for a majority of that you.

We've made a number of significant investments into improving the product spirits and the platform we.

We talked about the recommendation feed.

Which I will I will repeat but just as a a a <unk> 0.222 to highlight we encouraged by the fact that we starting to see these improvements translate into improvements in the underlying metrics within weeks.

Thing for example.

Average daily use of time spent has started to improve on a sequential basis since September and that gives us the confidence that the social entertainment may you would bottom in Q4, and and stabilize and start improving to 2021.

In addition to in in addition to that we.

We also made.

Made investments to better data for the increasing demand for long distance long distance social used cases, such as strengthening the friend TDV sure within online singing route.

Because we want to better position leasing in the long run that's the leading online social entertainment destination, among friends and family and so the social networking attributes is an important area for us to focus on.

And through these online singing features which emulates the offline experience, we're able to better cater to a long distance connections between friends and families and since we launched the feature.

In September it is staying very good traction.

And we believe this feature will help further boost the penetration on singing booms and as a result, most social networking attributes on the platform in the long run and so.

All of these things ultimately translates to two two times, then anti U., which we starting to see improvement in the underlying metrics starting in September yeah.

Tony we make a good point regarding the social aspect I think 14.

For TMB is always our competitive advantage. This is something that we have but the other competitors do not have.

Not just limited to the social entertainment side, but also on the new platform as well.

We as we mentioned, we talk about the poodle commodity which.

Which is the new features that we just launched a couple of months ago, but has already been receiving tremendous success.

This is all talks about interactions okay. So all the users can interact with that themselves.

In dead put ultimately take a share the pictures they can show different contents.

They can also interact with the Opcos and also other defense society as well. So it is when important goal was to create a place for our useless and also the artist community Kate and we're also seeing that he is also have another area just like a media approach okay like Brad.

Thanks, Phil you mentioned they choose put on community to become their pace. You. Today. You then you will solve we.

We also we see a tremendous effect. So I think that this is something that you should you and Tim you should continue to invest again not just on those shows the entertainment side like the currency will for friends and family, but we also have this kind of put on committee for the new logos and also to add to it I think we will continue to doing this and its global.

And to me or south to be distinguished from our competitors.

Okay.

Thank you my question.

Our next question comes from Thomas Chong with Jefferies. Please go ahead.

Hi, Good morning that brings management board, taking my questions and congratulations on another solid set of results.

Cody subscription services.

Given that we are seeing a very strong net adds in Q3, how should we think about the trend in Q4.

Well as our outlook.

21, thank you.

Oh. Thank you like I previously mentioned I think you know, we're not overly focused on quarter over quarter fluctuations attacking the net adds.

We've had a very strong a year.

Irrespective of how you measure it in terms of the growth in the subscription revenue as well as paying user.

And we've been fairly a ahead of schedule in terms of the first three quarters in terms of going to paying user as well as adding content on the pay wall. So I think into the fourth quarter.

At the absolute level of net adds may not be a strong third quarter, but overall it could remains in a cyclical trend that will continue into next year and beyond.

In terms of the outlook, we again I'm very pleased with this quarter's results were very strong online music subscription revenue continuing to grow at a rapid pace are paying ratio continues to improve.

Very strong AD revenue as we talked about.

As a result from a you know a lot of the investments we've made in prior quarters and while achieving all of this with a growing margins sequentially.

We believe Chinese online music industry is still at an early stage of development and continues a and continues to be in the long term secular trend that will provide a lot of monetization opportunities.

And as soon as we are the leading platform in the industry will continue to benefit disproportionately from this long term trend.

So in the near term basis into the next quarter. We expect the total revenue to continue its healthy growth of around mid teens on a year over year basis.

That's on the total revenue level.

Which is driven by continued strong growth on the online music revenues.

Which should grow at a similar pace to Q3 on a year over year basis.

And for social Entertainment revenue to go around low teens on a year over year basis, and looking beyond the next quarter, which is more important given.

Given our businesses continue to recover across all cylinders at a healthy pace from the impact of Cove in in the first half we are very optimistic that the total revenue growth next year would continue to improve and be stronger than the growth rate. This year, and we'll share more details around that when we announced the full year.

2020 results.

Thank you Tony So we can take the next question. Please.

Our next question comes from Vincent Yu with need him and company. Please go ahead.

Sure. Thank you management were taken question and congrats on the quarter and so I have two questions. One is oh, we notice that you music and the peso has just completed the.

Ellen to all on the event so should.

Should we expect more partnership between the two platforms in the future and how should we think about the potential of monetization or or conversion opportunity for these partnerships on my second question is in terms of the pay wall strategy.

Well, we take a more conservative approach into in Q1 compared to the you are this year to less natural acceleration the use of picking up a bit to play out.

Or any specific targets, we have in mind, we'll pay will penetration for 21. Thank you.

Sure in terms of partnerships with external a short video platforms.

You know we've been fairly proactive in a partnering or across the board with a number of video platforms are going to be.

Good short video as well as long video such as Tencent video.

And because each platform has different target audience and did a slightly different user segmentation we.

We would obviously leverage that to the fullest when we see opportunities are with respect to queso and short videos in general we've said in the past that they are a helpful promotional channels for music and we will continue to leverage that.

That ER and ER and leverage the promotional capabilities I'll show video platforms.

Cooper Mill, a music and monetization opportunities and.

And in terms of the pay wall a progress.

Like.

Uh huh.

If you look at 2019.

Added approximately 10% of the content Miata pay law. After after the first year and by the end of this year you know would be just over 20% by the end of this year. So I think we'll continue to follow this path and pace and obviously, we'll need to do so.

With a lot of careful consideration to ensure that we balance our the user experience with monetization opportunity.

Because as we continue to scale up the advertising opportunity subscription while is a strong growth engines are main no longer be the only both engines and so we also need to balance or other growth opportunities such as advertising as well. In addition to that we will continue.

To make investments.

Into new businesses.

Beyond just a subscription and pay all such as Tim He lives as well that's all from audio that.

A question talked about.

You know Tim your line has seen tremendous amount of success in a short period of time.

With iconic a mega stoss, joining oh the performances.

The loudest and Chad Jessie J just to name a few.

And we are already starting to explore monetization models I would hear me lie for example in the recent regions a concert retention cheese, a concept that is only available to paid users.

And so not available for free so that's a a an example off Oh excuse me lifetime to venture into different monetization model.

Beyond advertising and.

In the form of long audio.

That's actually a very good opportunity because depending on the different content a tight.

There are different monetization opportunities that arise I mean for example, if it's a if it's a cereal or literature.

Chapter by Chapter then it's easier for us to monetize through subscription.

It's a bit other forms of.

Potash or other forms of long form audio content and there is opportunity for us to monetize through advertising.

So I think we are excited about all these revenue growth opportunities as we look forward.

Thank you we can to the next question. Please.

Our next question comes from CJ Lu with Qbs. Please go ahead.

Thank you management for taking my question and congratulations on strong results I have two questions.

First how should we think about the revenue potential of could you musical EPS Gimi in 2021, well become a major driver of social revenue in the year second pending potential drug from the last June regulation, which.

Recently.

You mentioned.

For December thank you.

Okay in terms of the regulatory.

Guidance said you talked about.

We have been very.

Very committed to comply with all laws and regulations.

And based on our internal assessment, the new guidance does not have a meaningful negative impact until our streaming business that's within a fairly compliant to the relevant news.

And then in terms of two two music's live streaming business fan lie.

That business continues to grow.

While it is still early days to persist the positioning is.

It is very unique we continue to see very strong. Additionally in terms of the positions that are joining the fan life platform to live stream and as a channel for them to connect with the fans.

While the revenue.

Contribution this year is not meaningful we do expect it to go at a much faster pace into 2021.

I think the exact details will provide more as we announced the full year results and give more guidance into the next year.

Thank you again to the next question.

Our next question comes from Hans Chung with Keybanc. Please go ahead.

Good morning, Thank you for taking my question.

So I have a couple of question first.

Just can management provide sound.

Other matrix about along for all deal.

No we have a we have a cheaper.

Very good progress in terms of penetration and then but what about the kind of expand on average on the audio and now so well what's the mix change.

In terms of the content consumption.

For example, like the license content versus a UGC and now so what will be the potential margin profile for the business would that be how does that compare to the immune Z subscription or such and Tim and then second question will be in a soldier antenna.

Business as a whole.

How should we think about the near term to medium term driver.

In turn so.

The trend in terms of that.

ARPU and where it says the paying users inside of the paying user.

Sort of the state you are right in that but we do have.

The upside in the Apple and then is that going to be that trend going forward. Thank you.

Sure in terms of long audio metrics are we.

Like we said, we continually see the Mou growth very strongly.

You know from a just less than 5% any your penetration last year into a about 11.7% this quarter.

So that's well over double in terms of the M. may you thought if you do the math.

And looking and that's driven by obviously continuous improvement in the content offering.

Our licensed titles the number of license title quick tripled on a year over year basis no.

While the consumption is primarily relates to online literature at the moment.

But we also talk about in the past quarter. This quarter, we've made investments into adding more user generated content. So thats going to be an area of focus as well going forward.

And while it is still small at the moment in terms of time span.

I think understandably given and we're at an early stage of a growing this business. The absolute level of time spent is not where it's still a long way from where we want it to be so theres a lot of upside for us to grow that however, when.

When we do get additional time spend from the long form audio users. Those are additional time spent on top of the music time spent that they spend on the platform.

It doesn't cannibalize some user time spend so I would every edition.

Well with everyday additional kind of spend that we get on this type of a long haul module content. These are incremental and accretive to the overall strength of our platform and.

And then in terms of your question about social entertainment grow going forward.

Because of the.

A product design and product shift.

What's more advertising opportunity in particular within leasing.

We do see a that ARPU will continue to represent a you know I'm.

Slightly more contribution in terms of revenue growth compared to paying users.

Yeah.

Let me talk about the social entertainment businesses I think there's two key works. The first one to as we mentioned that people. It's a social element is very important so as Tony and I mentioned before we are focusing on creating the venue online venue for users to interact with each other so that's the reason why we're pushing.

On enhancing.

The friends and family Scott coffee room or.

The second key points that I would like to make news I think content existing became but when we are talking about the content on the social entertainment side is not just the performance, but also the user generated content as well.

So we need to lower the.

Failure, followed useful to generate data and content. So we have been putting in a lot of EPS was in creating more easy using tools for them to recognize sol, creating their own NVS and then by doing all this kind of enhancement, we can help I'll use it to create more and more.

Contents and higher quality content and the matrix and also the numbers really give us very positive feedback and now we are seeing that the number of content that was published by the users is increasing.

We're also seeing that by the U line enhancement more and more you Susie.

Enjoying all consuming more content by.

By the other uses as well and we also improved the interaction among the users. So I think that by doing this to actually to five you. Okay. One gets the social entertainment aspect. The ollie's account aspect I think that we will be able to issue.

Encourage and also improve the user engagement platform, which will make us to be more competitive when compared to the idea of less emphasis.

Available in the market.

You've seen so far for the margin.

Well part of the margin off the line.

Hi, Joe speaking about a lot a bundled up by matching up or down from a non leasing natural healthy.

Now as I read competing with Twitter.

On the gross margin and the sometime in the margin and in the short term we need it to what you ask them all on our on contract.

And do some promotion on their Oh the revenue.

Well outpacing any last Monday period quicker.

Lodging backed up long slump audio ace and that came in short time yeah.

Thank you Shirley good interest time went to the last question from.

[music].

Our next question comes from Elie Jang with Macquarie. Please go ahead.

Oh, Thank you management for taking my question just a quick follow up on the regulation question like the previous.

Alan So given that we are seeing a regulatory environment type lending part in that space and also considering.

Joel more content control a restriction next year under the 100th anniversary.

Can management share some thoughts on the overall outlook for the interactive media space, especially for live streaming and just a quick follow up on that.

The fourth quarter, if the management can share some color into our signature music Award event.

How should we think about the potential impact on paying something awful. Thank you.

Oh sure.

In terms of regulatory fronts.

Things like we said within a committed to complying with the relevant laws and regulations.

Music in general.

You know tends to be.

An area that we are able to keep up with the [noise] fairly well.

We've not had a major regulatory negative incidences so far.

And we will continue to work very closely and maintain a constructive dialogue with the regulators on this front and.

And we will continue to do a pot to contribute to us.

Development of the industry and so I think thats a commitment and then in terms of the I think you asked about Jimmy life events Yeah.

Is there a little bit more details on that regarding the PMG. Okay.

Last year, we have a very tremendous successful IPO NJ the annual awards and one understanding that this year, we are under the challenges of the cobot pandemic. So we are actually our team is working super Hot and and see how we can continue to have the TMB a 12 and I think this year that may be the format.

Maybe changing we definitely wanted you all nine all flash as well, but it really depends on how dependent is going on so we will provide more details one that these EPS was confirmed it or the.

The other part with Debbie talking about ball and you put it really is not just that one day. We also have a lot of our the end you.

Event, as well, especially for the lifeboat Kosmos entertainment businesses like to leasing and you.

The bands and also the Google life as well, we will continue to doing this especially for all the operations that Debbie for the on eye operations I think that we will continue so on the basis point of view is not going to affect too much but that definitely we want to see if we can arrange our southern kind of online to offline.

You bet it would be a bad up on the news about that people buy more details when we have it on that.

Thank you Christian well, thank you everyone for joining us today.

Any further questions. Please feel free to comment I actually think this.

This concludes todays call and we look forward to speaking with you again next quarter. Thank you and goodbye everyone. Thank you. Thank you.

Hi.

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