Q3 2020 NetEase Inc Earnings Call
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[noise] Good day and welcome to the net current calls for Twentytwenty Earnings Conference call. Today's conference is being recorded.
I would now like to turn the conference over to Margaret share. Please go ahead.
Thank you operator. Please note the discussion today will contain forward looking statements relating to future performance of the company and the intended to qualify for the Safe Harbor online.
And the team I was just the established by the U.S. why would.
Security for the station for.
Such statements are not guarantees of future performance of the subject to the <unk>.
But the cheap assumptions and the other factors.
Some of this range.
Beyond the company's control of could cause actual results to differ materially from those mentioned in todays press release.
The general discussion of the risk factors that could affect the <unk> business for the financial results is included in that.
That's why the for the company with the Securities that's changed the mission, including the quotes form 20-F.
For the announcement of the fighting for what debt.
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For me, that's not on the table and I'll be thinking Oh Oh.
Forward looking information, except as required by law.
During today's call management. The we'll also discuss certain non-GAAP financial measures for because hurt the Cubs, it's only for a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results PC. The two Dollarstwenty third quarter earnings news release issued study of today.
The remainder of this call it being the coated in addition of that the presentation or the webcast replay code.
It will be available on the net corporate website.
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Joining us today on the call go net senior management it missed the window game Chief Executive Officer.
Young Chief Financial Officer, I will now turn the call a bunch of Charles who will read the prepared remarks.
[noise]. Thank you my the right.
Thank you everyone for participating in todays call before we'd be game I would like to remind everyone that all percentage is based on the need be.
We are pleased to reported another strong quarter with financial and operational growth across all of our primary lines of businesses.
Our total net revenues increased by around 27% year over year, reaching RMB 18.7 billion for the third quarter.
Our net income from continuing operations was RMB 3 billion, which includes a net foreign exchange losses of RMB 1.6 billion compared with RMB 4.1 billion, one year ago, which include the net gain on foreign exchange range.
Net revenues from online game services grew by 20% year over year, reaching RMB 13.9 billion in the third quarter, driven primarily by the resilience of our existing titles.
Best illustration of our operational efficiency in addition to our R&D expertise.
For our PC games net revenues, we believe that 13% growth, yeah, Oh, yeah, well about the general industry trends with.
With the new expansion packs launched for the summer holidays, our legacy PC titles, including fantasy westward journey online and new westward journey online true continued their strength into the third quarter.
As two of the logic and the longest running game IP using China. Both game continued to attract loyal crowd off the nearly two decades of operation.
We continue to build on that.
Hey, FWJ as an example owning to with the strong IP of fact, we successfully launched after the appeal J H five more casual version of mobile attracting retaining the FWJ fans and other animals play for us.
We continue to expand our strong game portfolio through consistent creation of successful new titles and franchises.
We are able to create losses, because all of games each introduce game play and the standards that the Mckee that's never seen before.
Many of them opened up the brand's new categories that the other is that you got to follow the.
It's particularly well demonstrated by the success, we have had the S. L G and H the Gi the games we.
We launched Invincible in 2015, which pioneered the new ex LG game play that's being GAAP invincible like S. algae, which new game rules, such as resetting game as the schools every season and creating a new combat model that encourages play struck the Jive and for me.
Alliances.
Overall, the game introduce the much more balanced game experience for Celgene game us.
The last five years the thinks its launch Invincible has grown steadily and organically in terms of both uses and revenue Charlotte.
Celebrating its fiftyth anniversary in October Invincible once again reached the top five on the Chinas Io S. game growth in China for the strengthening its position as one of China's biggest algae titles.
Despite numerous invincible like games popping up in the market Invincible holds all the way the ring loyalty from expand community, we are going to build upon our expertise in the ex LG genre and continue to innovate our.
Our plans include next generation S. L. G game, such as the lot of the rings rice, the wall and increments like Rollins for both China and the global markets.
Hey, Fiji is another widely talked about genre and all of the launch of Ami Oh Gee, Inc. 2016 was one of the major factors, Inc. Trending a C.G. into a mainstream games already in China.
As the markets very first AC GE themed blockbuster Yohji has accumulated the lodge true of loyal followers among younger players, allowing for another top talking momentum in September with the fourth year anniversary celebration.
As a part of our IP extension strategy, we have a number of games comics movies played songs tracks and other entertainment products lined up.
We recently launched Onmyoji Yokoyama, a simulation game the third the spin off game based on the on the LG scene, which followed the our mobile and C.C.G. offerings release, the earlier years.
We also announced I was curious the movie based on the O.G.I.P. the in young Mostra, which we'll premia on Chinese new year. The movie stars some of China's top actors and actresses and hasn't shock the kid each in anticipation.
While we continue to cultivate all me Oh Geez IP. We are also leveraging the how hcg no halt in the development of other games Inc. This is John.
At the end of October we introduced for all the time, our very first hcg themes baking simulation game.
We have also a couple of H.C.G. themed game lined up for pipeline launch, including all non future and a cash of book.
In line with our innovative spirit last year, we launched the Io S. version of Sky, A license award winning adventure mobile game, featuring unique graphics and game play, which brings uses two of beautifully animated the kingdom waiting to be ex broad weak.
We used the launch of its Android version in July of this year. We are very pleased to offer these high quality game to a much larger user base.
That's a lot of brand new category with almost no direct competition Sky presents play a the heart warming experience and has established a vibrant same community among younger generations, Inc.
In September with the introduction of the next stage featuring a new map along with adventure Pos and in that I Ching similar to Battle Pos we saw the boost in gross billings for the Scouting September climbing to the top three on China's iOS the top growth in China.
The prerequisite for us to build a series of successful the titles he's the corporate DNA to innovate.
This is enabled by our World class R&D East of structure, we are always discreetly preparing for the latest technologies and we are always at the fall from the of many advanced development.
For example over the past three years, we have to deal with one of the best in House game AI Labs in China.
The group of experienced scientists of focus on the plane, the leading AI technologies for our game development.
[noise] being powered by AI, we are able to further increase our R&D efficiency as well as broad being more a high powered you know the team's game features and usually it back to enhance our players game experience.
All of the overseas problems, we are gaining more traction internationally with continuous content the updates to our leading titles.
This call to our overseas game revenue has reached a record high Inc.
In Japan knives out of remained a household name popping the Io s. growth in China multiple times during the quarter.
We further strengthened knives out Brent price and by engaging a series of successful collaboration including Eva and one Punch me [noise].
I didn't see the five also reached the top three grossing game on Japan, the Io S. Broking trod following a series of online and offline activities with the second year anniversary celebration in July.
Turning to our games on the development we.
We announced the number of titles in our robust pipeline, including unknown future cash of book Revelation Mobile game inks and that's the garage pirate plots of magic awaken the law of of the ratings rice the wall Nightmare breaker goes the World Chronicle.
The abelow immortal and walking on cash.
Revelation is one of our flagship animal ARPG, which we have the upgrading for more than five years on PC.
He just close the LOD final round of beta testing of its mobile version and use of feedback was very encouraging.
Carry on the legacy of the PC game Revelation mobile game brings players to a big load of discovery and the venture they can travel across the boss fields through a deep oceans and up to the Sky. We are expecting to bring this highly anticipated game to the use of before Chinese new year.
As for our education business Yodle had another strong quarter with total net revenues of hundreds of 59 cents to RMB 896 million.
Growth billions from Yodles online courses accelerated by 200, and some of the 8% year over year to RMB 955 million.
Supported by all the large scale marketing and branding initiatives.
Gross billings growth Inc.
All of K 12 segment reached a record high of RMB 676 million up 369% year over year.
K 12 paid enrollment expanding to around 499000, Inc. This quarter.
You'll recall for the strength in the southern capabilities as well.
You bet. The served the new enrollments during the summer we continued strengthening our top quality instruct the team by recruiting those of the highest caliber and the.
The we increased the number of teaching assistance by over 600.
To around 3400 now.
We are constantly looking to upgrade our content offerings with the best in class technology, and the teaching materials for make learning more efficient for our students.
This effectively improve the conversion and retention rates for certain cost us during the third quarter.
Net revenue of Yodles learning devices also grew significantly by 200, the 89% year over year to RMB 163 million attributes for largely to the huge market popularity of our dictionary can second series.
We continue to lead the intelligent lending device market with our active technology advancement.
In September we launched a brand new product named Super Dictionary, the electronic dictionary device, that's the parts translating text and photos and all the other functions from you all without dictionary without the distraction of smartphones we.
We are highly committed to online education space and we believe this is the right time to be acquiring students and taking advantage of the sectors rapid growth. We are confident that youre. The all we'll continue to grow in the robust and sustainable manner.
Turning to music.
That is called music is growing rapidly we saw notable increases in the non the paying users supported by all of continued assets to create and they know that give you the experience and the recent successful collaboration with Alibaba and the customer royalty Bob VIP program paying.
Racial has also notably improved.
In terms of music content, we continue to partner with worldwide music labels and talk opted for provide all the users with access to the full of music content the possible.
In the third quarter, we secure the more direct partnerships with leading record labels such as you M G and the energy gaining us access the even larger music catalogs kind.
Concurrently we continue to emphasize on our are reaching the music library by strengthening our support the and investment in independent musicians.
With that the case of teams of professionals song writers composes produces as well as other resources such as the <unk> technology and marketing solutions, we have various incubation initiatives in place to help young and the aspiring musicians to create lots of music and to be appreciated.
By the users net.
Net ease cloud music is now home to more than 200000 independent musicians, where they will always find the helping resources they need an avenue to connect with millions of music levels.
For you mentioned, we saw encouraging year over year net revenue growth in the third quarter as well as continued improvement in operating efficiencies.
Our strategic for focus for you mentioned, it's clear by creating compelling merchandise popular product and enhancing brand recognition among users jinsha, if now making steady progress establishing itself as the leading new consumer brand in China. Some.
Some of our most popular products include the cat food Bluetooth earphones.
The other than bombing share each of these for example has become the best sellers of their respective categories for online sales in China.
Additionally, as we continue to improve our operating efficiencies for young shot we further enhanced our pull membership benefits, giving our loyal customers value. They truly appreciate the.
This has resulted in revenue growth in pro membership use the base.
We have also taken strict measures to manage all stages of products from early the product development. The post marketing tracking of product performances effectively lowering the production and logistics cost.
In summary, our consistent focus on creating innovative and high quality content is what the propels our leading role within these market verticals and what makes it even more comfort for them as we further expand in each of our key business segments.
We will fulfill our commitments to use isn't share holders as always with the strong sense of purpose and solid rationale focusing on the return on investment. We are confident that we can continue to provide all the use of community with excellent products and services. That's the part of solid long term returns.
For our investors.
This concludes William's remarks.
I will now provide the very brief overview of our two southern Plenti third quarter financial results.
Given the limited time on today's call I will be presenting some abbreviated financial highlights. We encourage you to read through our press release issued earlier today for further details.
Total net revenues for the third quarter, well, RMB 18.7 billion or U.S., the 2.7 billion representing tip, the 27% increase year over year.
Net revenues from online games were RMB 13.9 billion up 20% year over year, primarily driven by the increase in net revenues of for.
EPS Wjh five life after nine years old and Sky mobile game accounted for approximately 73% of natural revenues some of our online games in the third quarter.
Net revenues from Yodle increased by 159% year over year in the third quarter, reaching a record high of RMB 896 million, primarily due to the increased net revenues from online courses with the rapid increase in the K 12 paid student enrollment and increase.
Net sales of intelligent lending devices.
And that's revenues from end of the to it misses and others were RMB 3.9 billion for the third quarter up 42% year over year, mainly due to increased contribution from that east cloud music business.
The total gross profit margin was 53% in the pocket with the breakdown as follows GP.
GP margin for our online game services for the third quarter was 63.6% as.
As a reminder, this number is generally stable with some narrow fluctuations based on the revenue mix of PC and mobile as well as self developed and licensed games GP margin for your dollar for the third quarter was 45.9% comparing to toot plenty of 5.8% a year ago.
The year over year increase was primarily attributable to a significant increase in net revenues improved economies of scale and for the optimization, our faculty compensation structure the.
This marks our for all to of consecutive improvement on the sequential basis.
GP margin for you know the two businesses and others was 16.8 per cent compared to 15.2 per cent for the third quarter of last year the.
The increase was due to improved the GP margin of Matisse cloud music driven by strong revenue growth as a reminder of the GP matching of innovative businesses and others like what's the fluctuate mainly due to the revenue mix of the fly.
For the third quarter total operating expenses were renminbi 7 billion.
Our selling and marketing expenses as a percentage of net revenue was 18.5 per cent compared with 12.8, the sand in the prior quarter the quarter over quarter increase was mainly due to increased marketing related to get the Dol, excluding you'll of Dol, our selling and marketing expense as a percentage of mats rather.
The news was 12.9% comparing with 10.7% in the prior quarter, mainly due to increased spending on certain games promotions during the quarter.
Oh, the R&D expenses, what remains the 2.8 billion.
As we remain committed to investing in into the piece of content creation and product development.
Lets walk defines the us as a technology company as.
As a percentage of net revenue was R&D expenses were 14.9 of this quarter compared with 13.2% in the prior quarter, mainly due to R&D headcount increase our R&D expenses, mainly related to the online game.
Other income was RMB 266 million for the third quarter, which include the net investment income of RMB 1.3 billion and net foreign exchange losses of RMB 1.6 billion due to the U.S. dollars exchange rates for depreciation against RMB.
This compares with other income of 915, RMB <unk> million RMB in the same period last year, which included the investment income of RMB 395 million on the Mac Foreign exchange game of RMB, 100, and plenty of 1 million.
Effective tax rate was 10.9% for this quarter compared with 18.6% in the prior quarter.
The effective tax rate if the lower this call to ask for certain of our subsidiaries received and recognized a certain tax credit being this quarter.
Non-GAAP net income from continuing operation attributable to our shareholders for the third quarter of 2000, and Punky was RMB 3.7 billion or U.S. dollar 540 million.
Our non-GAAP diluted earnings per eight yes from continuing operations was RMB 5.35, or U.S. dollars 0.79 for the third quarter.
Our cash position remains strong as of September and our total cash and cash equivalents current and non current time deposits and short term investment balance pull told the RMB 103 billion compared with RMB 74 billion as of the year and last year.
In accordance with our dividend policy. We are pleased to report that our board of directors has approved a dividend of U.S. dollars zero, playing 195 per ATM cash all U.S. dollars 0.039 per share as a reminder, we changed our ats ratio on the pulled the trigger.
Someone 80 EPS for every time, the five ordinary shares to one adss for average five ordinary shares.
And finally on the our current share repurchase program for up to 2 billion as of September quarter end, approximately 15.3 million ATM cash past being repurchase under this program for us.
Total cost of U.S. dollar 1.1 billion.
Thank you very much for your attention we would like now to open the call to your questions operator, let's go to the two out of <unk>.
Ladies and gentlemen, if you would like to ask the question you can do so now by pressing star one on your telephone.
Thats Star one if youd like to ask the question.
We.
Take our first question from.
Alex <unk> Morgan Stanley. Please go ahead your line is open.
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Oh actually my question. My question is regarding overseas game strategy of I mean, the last eight nine to 10 months during cold the.
We have seen very successful expansion overseas expansion of Chinese mobile games and overseas markets.
Even for the Chinese RPG games.
So net east has a lot of strong top legacy RBC I piece of it.
Can you share with us what's your strategy in terms of geographical focus genre of your products investment and lastly about the competition landscape. Thank you very much.
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I'll provide a brief translation of Williams the remarks, so Alex first of all of 'em, we are very dedicated and focusing on the overseas strategy for Netease right now in Japan, we have achieved the small.
Yep.
Beyond the Japan, we think a major my kids, how what now to use the island fall in terms of a game line ups a.
There will be game, that's being developed specifically for global launch games, such as the Harry Potter as well as certain games in the U.S. algae genre.
There's also another of more casual game, you know a which is being also performing quite well being the other Ses My kids going forward. We are very confident about our not east of develop games competitiveness when the Chinese games are going overseas.
Because the quality and the sophistication of these games out of what we think we have the competitive edge piece of the the peers.
Okay. Operator next question please.
Thank you.
Well take our next question from at least from the G.S. Please go ahead. The line is open.
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Well I will briefly translate the question and then also the translation of Williams remarks. So the question is asking what is in the next three to five years, what is the Netease game development strategy. How what is all of you of of the the industry are both in China and globally William.
<unk> response, the stat. So first of all we think this is a very good sector of the game Entertainment is a very good sector. If if you read the recent news of how well received that's the P.S. five and ex bogs, but by the global consumers as well as for Inc.
Since through all of the coal volume 19 situation entertainment new format of game interactions of all being the encouraged it's been it's a it's a demand demand. The there's a strong demand from the consumer side. So we think this is really a good sector with the very.
The promising future upside now focusing back to Netease, we have a track record of almost two decades dedicating ourselves in game development and game operation, we are willing to invest more and more into the future Inc to R&D into marketing.
And we we are not only complacent about Japan, but we are also I think for the mainstream that's kind of my feared.
The last my Kid you repeating my kids. So all in all we are very confident that by combining our experienced track record willingness to invest and also our.
Our sadness, Inc to directing the a younger as the future game development. We have every confidence that our high quality of game products can be well received by both of the domestic China market as well as more geography in the international market.
Operator.
Let's go to the next question please.
Thank you.
If you wish to ask the question in Chinese please translate.
Due to the timeliness and please limit to one question per time.
Our next question.
Somebody say Yap from Citigroup. Please go ahead your line is open.
Hi, Thank you I mean, then Charles Mcgrath.
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[noise] cash I will provide a brief translation of William's remarks. So first of all of 'em, We have launched a let's call. It the music seems more than seven years ago and over the last seven years as we we all can see the consumer habit has dramatically changed.
Changed to streaming music streaming of consumption, rather than buying the CD or downloading a M. P of three well.
We right now there are two players obviously, we are very confident that ambitious that into the future. We will have a leading market share a the way for us to has seen ourselves just on one side, we do want to emphasize on our regional and organic music and breathe.
Then to the end users to be batch of appreciate to the accessed by the music listeners and at the very same time provide the resources to support and nurture China's independent musicians and <unk> being supplying more and more.
Hi quality the music content building, a healthy cycle of organically.
Obviously, there might be more challenges challenges coming into the sector, but we are confident that as long as we committed to the purpose and the mission, we should be able to achieve a leading market share. During this very promising online music.
The <unk> China.
Thank you Chad I give you the operator next question. Please thank you Alicia.
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Isn't all that but I will provide the I'll provide a brief translation of Williams. The remarks, so kind of it. So first of all of a we remain very optimistic of how the future trend. It's shifting right now as we all know China is arguably the most.
Expansive channel feet a country in the world are especially for Android kind of see where by the global extended is the same as Apple iOS App store, 30% in China. The Namias, if you get the sand enjoyed the channels. The so we also encourage a player.
The chest drainage and the others, including ourselves to try the explore other non conventional ways of distributing high quality content to the end use is last night.
I I think we all saw the news the Apple has announced that they are going to reduce the channel fee of 210 per cent for small developers in the assets to encourage the the ER back to the upside and economics for the developing as we do things.
The probably go.
Google play and all of this we're well. We're also follows suit, let's let's wait and see but about the broadly speaking as a as the trending a a wise a shift towards content providers is probably a little more and more clear and visible trends that we can all observe globally.
And that should also come to China.
Shifting to the Charles.
Thank you.
We will take our next question from the Bonnie Wong HSBC. Please go ahead.
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Sounds in the content, especially the show the trend of no one quantifying what the when Ti Oh my questions, mainly on the sales and marketing expense Oh actually see that even excluding all the data on net use itself also increase the intensity of the Simpson marketing is the percentage of revenue of is it because of some of the older sons launches.
And then into going forward into the future quarters as we are launching some of the ticket sales we had in the pipeline or shall we expect the.
The other sort of changes or any other structural changes in our marketing strategies that you should be aware off to Ah. Thank you so much.
And congrats on the very strong point of <unk>.
Hi.
I think it's been the ER I will answer this I of selling marketing expense of question directly from my end.
Well I think for Yodle, a they posted the earnings call. Just just now ahead of this call. The explanation was a fairly sufficient that we are very very confident that this is the right time and we are in the ready state to continue the putting basketball.
Aggressively Inc.
Hiring users or we will be rewarded by the al I given the how how how prudent we are although we are investing more in two of selling marketing your Dol, but the unit economics works. So this will not shy of being basketball, Inc. Too.
Expanding our market share and the use of scale as as robust as possible excluding yourself for this part of our selling marketing as the percentage of net revenues again, excluding the odell stays at around 12.9% or slightly below 30%. This is still a very healthy.
Level comparing to many of the industry peers.
Our net either approach towards the setting marketing is is always very straight for what it is always Oh I true then we have a very very high standard of the required rate of the 10 internally. So when we embarrassed by the way the excluding you with all the moving the substantially substantial amounts of the sales.
For the marketing our game related now game related either for the existing titles for the maintenance Oh packs that we spend to maintain the launch of it he and the efficiency of the gross billing as well as new game, such as the FWJ H five and new genres of the game that we will.
I'm going to launch down the road so owning all I do not think when we tracking tool.
International My Kid when we go into a new genres, that's the determining factor for us who spend the rationally, regardless of which market, which is younger all of which specific new game that we are going to launch I think we always do a very crew the math behind it.
For we will be of fall, we deployed the selling and marketing.
Resources. So it's just a matter of of of timing gaps or sometimes we will be launching a we will be spending up surrounding the thing plus the other growth billion of these of Saturday sales, so sales and marketing expenses will be reflected into the gross billions, which.
Might be only recognized in the subsequent quarters into recognized revenue.
Oh, Thank you Charles for clear Thank you.
Thank you.
Thank you of the nation.
From the Natalie.
International. Please go ahead your line is open.
Hi.
She is the I guess over the winter yeah trends in the yet.
No I wish it sounds that change has an opinion.
The total Oh, yes.
Yes, I'm Glenda or trials, she sounds like Uh huh.
So to the bad you the highlights I'm glad that you got the show tunes.
Yeah.
I don't get you down the line.
I'll just pass.
The margin as you enter the 18, you should the chain yen.
For the debt.
Not as to what you saw did the just to kind of so many of the <unk>.
Eat either the remedy the yeah. It had the political Jen Hsun God, it's anything sort of.
Sure you know day keep had the young who Oh Gee data. It just got out of you can't do it.
No just kind of.
I just don't tell check on some of the 10 decried. The you got all of those the sort of go 10, not doing sort of onetime today.
Yeah, Hi, Centene Shibani 10, I will miss him.
Ah, Okay, Oh, a 10 day myself so thanks.
Thanks for taking my question and congratulations lot better sort of caught up. So my question is regarding.
Ah yes the.
Sales and marketing just wondering how much of that is related to sales.
And on the regarding the margin.
Excluding the impact about how large of a deal last year and Oh, so you're without without of expanding the loss actually the margin job of 4% of reality yet. So just wondering how much of that is related to expanding scale of low margin there [laughter] or if you have not of some investments.
On the Oh other business units.
Speaking of outcome is it how should we think of the about the model compensation net.
The debt as well.
Some margin profile going forward. Thank you.
Okay. Thank you for Napoli, it's the finance related questions I'll answer directly from the <unk> and for this quarter total selling marketing expenses was 3.4 billion or roughly speaking 1.15 billion is you'll Dol the remaining about two point.
The 3 billion a setting mocking the excluding you with all all of the stats 2.3 billion.
A super majority of that is game related so music Yens Jan media and other the comparing to game. That's the that's at the that's that's just the represent the small fraction for it it's not really about us investing irrationally, Inc to some low.
Lower repair and segments in a big amount you have also pointed out the the declining trend of the operating margin overall I think I think obviously mathematically a a big reason of that is what I just explained to beneath the question, there's a timing GAAP.
Right for instance for Bosio of Dol, a and and games in particular the expenses are recognizing this quarter. However growth billions I'm not inc. Highly recognized into revenue into the same quota of.
Beyond that there's also a another factor is in in the game revenue mix for instance, the PC and PC and mobile game racial stays relatively stable. However, within the mobile games. We are also.
Hi, nearing with some different genres of the games of for instance, I stopped the old J H, five which is a more casual mobile game. So even though it is the same broad category of the mobile game, but if you were to look at the more casual game vis-a-vis up.
The hot or M.M., all our P.G. a mobile game they would demonstrate different margin profile is I think that's another small backed the explaining why are you out of observing a downward trend of the of.
Of the operating margin that in fact, it reminds us of.
Most of many years ago, when we decided to transition from the PC game, Inc to mobile game.
A revenue mix change, resulting inc. Certain margin profile of changes I do think that again, that's at the mathematics, right, whether you want a big up high whether or not he is boding nothin confident enough to tap into more genres of the game they might.
The p. demonstrating some different margin profiles birth is our most familiar minimal Aki gene, but we do think it is the right move for us to be more diversified in terms of Donald the offering.
So Natalie hopefully the answers your question.
Yes, net Korea, but went up out of there are lot of that.
<unk>.
Yes.
Oh for music. So you you of hierarchy of pets [laughter].
Period of first customer for music, yeah. So I have to admit that if the loss, making business now even at the GP margin level, because we all know that's the of music content licensing fee. If you add the irrationally high level or because of our music money.
Hi, Beijing is is growing very well be the economies of scale its helping us to improve the margin. So in the sense. It is still negative GP margin negative operating.
Operating margin, but the magnitude of managing its being a narrowing down going into the future. We do think the macro trend is in favor of us on one side the or the music the record labels music licensing fees on more rationalized, especially following the non exclusive.
Licensing arrangements in two of the medium to longer run at the same time. We are also emphasizing a lot more organic and original music from independent musicians. We saw that I think it if it is something to expect that.
Very soon in two to three at the time the overall Chinas online music segment should be a very profitable sector.
Got it okay. Thank you Charles.
Thank you we will now.
Q.
Second from Thomas Com front of Jefferies. Please go ahead your line is open.
Well I sort of how Oh, so you should the funny each on the Jay So other to you as well.
Well the when he is true why do you have for them as well.
No no no.
Sure a woman died said Oh.
I'm in the government debt.
Of course, I'm, sorry, when you saw the dosage form the go through the <unk>.
Oh, the dosage forms of reported EBITDA, so I kind of part of it.
A couple of it for the time, Oh, it's tied to the commissions on the Mab woman or kind of the light it was saying that she was quite.
Right.
The revenue mix that's true.
The ban weighed on the.
I'll, let you go for it does bother you decide to be the whole kindly the piece of this model.
No so must be part of the business model are you most of the potential.
Our friends of management, but taking my questions and congratulations on the street strong of sexual free so its I couldn't just about all of the net use called music I'm, just maybe just touch upon the other strong revenue growth momentum.
We go into the revenue mix can you talk about the pool for momentum income.
So I'll start paying subscribers as well as the like streaming revenue and how we should think about the revenue mix of overtime as well as the opportunities on the new business models. Thank you.
Okay. Thank you Thomas I I'm say of Crescent directly in the interest of time I I think the probably would be the last question on the Sudanese call. So first of all subscription revenue, it's been trending up very well we have.
Being a notable increase this quarter both in terms of the paying user base as well as the paying ratio as mentioned in the in the script earlier on the fact, what we compare that to appears to have publicly disclose the are paying range.
Shows I think all the paying ratio is slightly better.
But for the entire industry. This is still a single digit it's a very low paying racial there's plenty of upside room of for China's online music industry true or to improve substantially improved the paying ratio. That's the first comment a live stream.
For me is a very fast growing monetization vertical for them that is called music, but lot of partly also because we also growth from a relative to the much smaller base. So right now live streaming has already becoming a very sizeable and significant major revenue contributor of my overall.
And that is college of music revenue.
At the same time, we are also very very actively ramping up other formats of monetization such as such as advertising for instance.
New business models, it's always the timing the era I I think that I I've been saying this for multiple cost is already that's the exciting part of China's online music industry, because try not to fix your imagination by what Apple music of Spotify has being bleed in the different geography I think.
For Chinas online music industry as a whole we will be a together with the other players in the sector, we will be experimenting and pioneering some interesting and new format of monetization that is probably not.
Yet available in the Western World.
And on that Oh, we can give winding down of the direction. We do think that music if not at least now. These cloud music is not just the platform to to play songs. It is the advent of new for social interaction, so social interaction of social media.
This is a this is the direction that we are focusing a lot exploring potentially new business models and potentially new monetization model.
Thank you for house, congratulations on a strong cash flow.
Thank you Thomas.
Ladies and gentlemen that will conclude todays <unk> session I will now turn the call back to your host.
Thank you for for John Yesterday, if you have any further questions. Please feel free to cut the s. directly to the congratulations have a great day.
Thank you, ladies and gentlemen that will conclude today's call you may now disconnect.
HM.
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