Q4 2020 Tencent Music Entertainment Group Earnings Call
Ladies and gentlemen, good evening and good morning, and thank you for standing by and welcome to the Tencent Music Entertainment Group 'twenty 'twenty fourth quarter and full year earnings Conference call. Today, you will hear discussions from the management team of Tencent Music Entertainment group, followed by a question and 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 T. Please go ahead ma'am.
Thank you operator, Hello, everyone and thank you all for joining us on today's call.
And the music announced its quarterly financial results today after the market growth.
And then just release is now available on our IR website and I am.
So and the music Dotcom Wow right and this was.
Today, you will hear from missed that question from our CEO, who will start the call with an overview of our reach and achieve.
He will be followed by Mr. Tony <unk>, our CFO, who will offer more details on our operations and business development.
And that's mainly Shirley Hu, our CFO and Scott.
And as a result before we open the floor for questions.
Please note that this call might contain forward looking statements made pursuant to the safe Harbor provision.
And finally Securities Litigation Reform Act up and Nike basketball.
These forward looking statements and based on management's current expectations and observations that you have on no no no risks and Sun.
And he and all that much it's not under the company's control, which may cause actual results performance or achievements on the company to be materially different from the results cause woman on flotation things like are these photos and see.
Yes.
These statements are expressly qualified in sight and Toby and their call.
And on generic statement responses and D.
The company's filings with the SEC.
So from that he does not want to you and your obligation to revise or update any forward looking statements and as a result, and he knew inflammation.
And then changes and market conditions or otherwise.
And as required by law.
Please go off and on that the company will discuss no on either side is measured and Sydney, which I'm sorry, when you reconcile to the most comparable measures reported another international financial reporting standard and the company's earnings release and filings with the SEC.
You're reminded that such non <unk> measures should not be viewed in isolation.
And as you said, the equivalent and highest measure and other non hot and iced measures and on unit volume declined by all companies, including those in.
And the same industry now is that I'm very pleased depending on whether cohort two with cash at T O and music.
Discussion.
Thank you Melissa.
Hello, everyone and thank you for joining our call today.
<unk> was and extra all of the new year with the pandemic impacting all walks of life and the macro economy.
Yes, and also brought opportunities expertise and from that.
And penetration, causing apparel industry and online content consumption and presenting potentials for online concepts.
The past year and demonstrate a strong syrians and agility.
Our commitment to investment and content and all.
<unk> and people.
Well with innovation and new products and services so on.
Defining our position as China's leading music entertainment platform, and allowing us to build a strong foundation for our music content ecosystem.
The close of 2020 on a very strong note.
And then excited about our latest plays up growth.
Along our journey to you walk into and all in one online music and audio entertainment destination in China.
First and foremost.
And the fourth quarter on please on both.
Both our financial and operational performance was solid.
In particular, our online music services maintained its momentum.
During 2090% year over year growth and revenues up from 26% in the third quarter.
Specifically subscription revenues increased by 42% year over year.
And as always spending performance was driven by 40% year over year growth of paying users.
And by all of your factories paywall strategy diversify the bundle membership offering as well as continuous rising user retention rate.
We are full with 56 media and online music paying users.
<unk> ratio of 9%.
From $6 two percentage a year ago. We finished the 2020 ahead on the Cook.
And are confident that this process will continue in 2021 and years to follow.
One on subscription revenues in the fourth quarter and we are pleased to report that the record of triple digit year over year growth from advertising for two consecutive quarters.
This impressive growth was driven by inclusion and asset inventory and the improving ECP and of course, our music application portfolio and.
And as a form of express screens.
And then and Ed.
We plan to continue developing our overall brand awareness.
Engage a boarder array of advertisers.
On initiating more creative advertising products, such as immersive video and we want to add and audio ads.
Looking into 2020, one as we continue to leverage our in house, and Tencent and founded advertising strength and capabilities, we expect and another year of strong growth from advertising.
Moving next to content.
I'll continue the investments and pull queuing and developing content has provided our users with a rich and diverse and and this choice of entertainment, which has been a key driving force behind our success.
Our platform comprehensive calculation from tactically, we expansion and deepening penetration to further captivate the young demographic.
We continue promoting and pursuing trendsetting and so on Ross from.
On <unk> predictive models to content procurement and promotion.
We have significantly increased and our pulp you like cost page and new hits content, which has continued contributed to the increasing engagement of our users.
And the fourth quarter, our partnership with leading rap music labels, such as schools and Paul will wrap up we felt it in more rap music screamed at by younger users as compared to the beginning of 2020.
We also made notable breakthroughs in Chinese ancient style music.
Total streams for which you wish to over 100 billion on our platform in 2020.
We also made significant progress in cultivating and promoting our regional music.
Let me provide just a few examples.
First the scale of our Tencent musician platform expanded rapidly in.
And the fourth quarter and the number of participating indie musicians on the platform grew over 100 percentage year over year.
And I was spending rates in the industry.
In particular, the number of exclusive indie musicians.
14 times of debt and the same period, a year ago showcasing the recognition by indie musicians on our capabilities and promotion.
Platform support and well defined it and incentive programs.
Second.
The number of original songs upload a roof over 1 million on Tencent music musicians by platform by the end of 2020.
Doubling the number compared with a year ago.
<unk> original blockbuster songs, but incubated on the Tencent musician platform, such as story, all day, Wondra lung PC and Wap.
By rupee, Hawaii platform with over 1 billion streams, we've been free months of its launch.
Our industry influence on significantly amplify that buy along sheet, whilst and Mr. By CCTV Spring Festival gala.
One of the world's most watched TV programs with more than 1 billion and viewers for years.
Performing his signature song the Shepherd copter, Okay, Coca Cola moving on.
And then.
Which has already began to the phenomenal popularity on our platform.
These are great examples of what we can do.
Moving on a prestigious industry and knowhow as well as index insights and data mining abilities to foster and growth original music.
Third we are proud to share that during the past year, we have dedicated even more financially to the size of the business book.
And enable over 60% of musicians to more than double their income.
Such support will continue in 2020, one contributing to a win win situation for everyone.
Finally on our Tencent musician platform I'm very proud to say debt with deeply care about diversity and we are doing our part to promote gender equality.
Our support of female artists and musicians traditionally a minority in the music industry has led to female musicians accounting for nearly 40% of total office on Tencent musician platform as of the end of 2020.
This is significantly higher than the industry average of around 20 per cent.
According to the 2020, China and nutrition reported.
Our music content leadership has been further cemented by strengthening partnerships with leading music labels and artists.
For example, recently and ahead of schedule and we extended our multiyear strategic licensing agreement with Warner music.
And expanded our in depth cooperation full forming a joint venture revenue.
Table in China and future.
We have confidence to continue to showcase new generation artist to music Love Us and knock intrinsic value of music in China, and keep contributing to the plus variety and development of the music industry.
The next topic I would like to discuss each day.
Strategic and policy of our long form audio and our initial achievement during the first year of investment.
Before going into details.
I'd like to outline the exciting opportunities the audio surface this market presents us weird and.
And how we turn on the stem to compete and factories and.
And scale quickly.
Firstly this market has exceeded exceeded in China for a decade with Nokia and significant needle yet.
Market penetration remains extremely low.
Second.
This past cooling market has value as potential natural synergies with online music and entertainment.
I think a tremendous advantage over vertical players.
According to third party research data the audio market and China is protracted and two weeks and massive user base and seamless with debt of online music streaming over the next few years.
Our massive user base and the complementary nature.
And then of music and all of the deal from Us.
Able to seamlessly convert our music users to audio users.
Positioning us to the merch and.
Significant payer, while ultimately spend and really taking the penetration of online audio and China.
Certainly.
Strategic alliances with pharma and then content partners.
And the China literature, and other content and collaboration with Tencent on light Entertainment ecosystem, we will continue to empower us to offer a wide range of content and quickly.
During the fourth quarter and the number of licenses and titles was up by 370% year over year comp.
Covering a broad spectrum of audio categories, such as audio drama Chinese comedy.
Parenting and history apart from the well loved the literature.
Yeah.
Paul.
And two pronged approach to integrating with our music applications and smell is launching stand and the loan application is unique and.
And allow us to you back from fee acquire users at low cost and scale up quickly.
For example, we significantly increased and our long form audio and May use penetration in the fourth quarter of 2020 to 14, 8% from $5 five per cent political humid plenty and 19 touch.
Such a hybrid model differentiates us from other payers at home and abroad.
Fifth our recent acquisition of lease the audio which is expected to be consolidated in the first quarter on 2020. One will become another driver that will help us forge ahead and the pursuit of growth in the years to come.
Our view on long form audio is strategic and long haul and long term, we believe that investment and content.
The license and audio books on our podcasting PTC or UGC, we improve user time spent user loyalty and eventually revenue per user this.
This is evidenced by the 20% sequential increase in average daily user time spend in the fourth quarter.
<unk> wished that need 10 million at year end of 2020 and is on track to double by 2021 over the past few quarters, we had a good start and monetizing our long form audio business food and factors bundled offerings with our existing music streaming services and net.
Pricing for stand alone audio memberships.
We are increasingly and we used to content and growing users, we will tap into the audio AD to unlock commercial value, which will push our revenue.
Yeah.
We consistently ask ourselves what else, we can do better and improve user engagement.
And clearly <unk>, we further expanded our cost base of a broader set of music usage scenarios.
Integrating with smart speakers in car audio systems.
TB and making inroads in the profit performance market on.
And though not yet included in our reported online music and they use during the fourth quarter of 2020 smart devices and enjoyed a solid year over year growth and user scale from <unk>.
Finding additional channels for users to consume more content and interact with us.
In summary, we achieved a solid progress across our full business spectrum in 2020.
In terms of scale.
And the industry leadership, Comed, and diversifications monetization and innovation.
In particular, our online music services with improving economies of scale and diversified revenue streams and achieved a high quality revenue growth and margin expansion throughout the year.
And clearly the one new one we expect the strong momentum of our businesses to continue and anticipate a faster revenue growth across the board compared in 2020.
With that now I would like to turn the call over to Tony who will discuss on the highlights and important and there's a focus for our businesses. Tony. Please go ahead. Thank you Hello, everyone and apart from the key developments discussed by cash and just now I will provide additional highlights.
And for our online music services before I move on to the discussion of our social Entertainment services.
During the fourth quarter.
Coal users are increasingly engaged with our platform.
Despite the sequential decline in music and they use.
Average daily time spent per user has increased.
This is a result of our concerted efforts to enrich both music and audio content offering as well as the launch of innovative product features and services for putu and community and <unk> life.
Next I will elaborate more on these assets first.
A pioneer in the music fan based economy, our digital album performance continued to create new milestones.
Becoming a vital distribution channel for musicians further distancing ourselves from peers in terms of promotional capabilities in.
In the fourth quarter, we released many digital albums, such as volume Doc for Baidu Hahn.
A well known trendsetting male singer.
And the album by Black ink.
A top patient female band.
And in my thoughts Chin coop by challenging even late.
Rising star as a singer and a Chinese media.
JJ Lin Lynch and tier maze, III digital releases on our platform, including his 14th Elba.
Drifter like you do Syngenta Rooney.
Which topped multiple music charts on the first day of its release.
Okay.
And to explore new opportunities and the dynamic market.
We continue to transform and innovate fan based economy and Chinese music industry.
In 2021, we will continue to push the boundaries of our fan Idaho connections and lead industry innovation in areas, such as digital album, and virtual benefits fed meetings offline events and merchandise sales.
Second.
And our relentless pursuit of enhancing the user experience.
We continuously upgrade on products with music as I'll call him and ground to make online music services more social visual and personal lives.
In July 2020, we introduced Pudong community and QQ music.
Through which we foster cultural communities with youthful and trendsetting content and interactions.
We have continued to make it more interactive and appealing which has led to consistent increases in D. A penetration rate and user retention and the full quarter.
Our efforts also broad we astounding endorsement from younger users would use us in the teens and early twenties accounting for a larger proportion of pooch on community users higher than the present and QQ music.
In December 2020, QQ music successfully held boom Boom Award.
Forum that encourage young people to vote on what was popular in 2020.
And offered a glimpse into their views on future trends.
It attracted interactions from home and abroad generating 2 billion instances of social media bus.
Driving active users in the pooch on community to a record high.
Fans club and official a new community focus to channel introduced by Google Music and are.
And the second quarter of 2020 also received strong recognition, particularly among young users.
This is evidenced by more than half our fan club users being in the teens and mid Twenty's with.
With total user time spent increasing 15% sequentially during the fourth quarter.
When it comes to video enrichment we.
We continue to transform the conventional experience of music streaming.
Google Music created a video based music product by pioneering embedded MBS on music streaming page.
Further catering to the needs of users who are consuming music videos and bringing in a more immersive audio visual experience as a result on a sequential basis and <unk>.
A use for embedded and visa on streaming page grew over 70%.
And daily total time spend increased by 88%.
With tens of millions of songs available to be stream, we continue to leverage our proprietary user insights and data analytics to provide users with more personalized experience.
And which has led to a sequential increase in the proportion of streaming volume driven by recommendation.
Technologically we continue to shine.
In the World with now merits Global song recognition technology competition and 2020.
<unk> music was the winner in the audio fingerprinting category, while QQ music predictive model broke multiple world record in the area of patents for prediction.
Aided by these technologies, we are able to improve and our predictive capabilities.
On the popularity potential of music before a wide scale promotion and.
And in the fourth quarter, we successfully discovered and promoted chart topping songs such as wrong headed excuse me <unk>.
And swallow Nevertheless, yes, yes.
And we share.
Now, let's turn to our social entertainment services, which in general and maintain a steady performance and the fourth quarter.
While live streaming business continued to recover Healthfully post COVID-19.
And we think delivered faster growth, thanks to product and enhancements to improve its competitiveness and monetization efficiency.
And first.
Let me discuss our online karaoke services.
The year 2020 presented we thing with challenges and opportunities.
To take up and respond to competitive pressure, we refocused and made effective adjustments to enhanced we think core and differentiated services that our music centric and socially interact and creating a fun and engaging platform that provides the best online karaoke experience.
<unk>.
We are pleased to see we think <unk> bottomed out during the fourth quarter and user engagement has improved as active user increased in November December compared to September October and now turning increasingly loyal on leasing platform.
And making a good start going into 2020 one.
Our fresh UI design and short form video recommendation feed on the homepage rolled out in September 2020 continue to gain traction.
The lower the entry barrier and improved performance on recordings.
We continuously enhance audio and video recording tools, including multi genre remains thought she full remix and.
And also tune to the Dol and showing making it simpler and.
And more fun to create and publish recording book.
And number of users publish videos and penetration rate of publishing recordings improved sequentially and the fourth quarter.
These efforts boosted content consumption as well as user engagement, which in turn enhance the virtuous cycle of content generation and consumption.
Besides our friend karaoke room has brought the offline karaoke experience online for families and friends to enjoy real time interaction and facilitate a day social connections.
Leveraging the social power of music for entire Oki room maintained its uprising momentum and led to a significant increase in user penetration and user time spent.
Online singing rooms in the fourth quarter.
As a result of this operational focus we think has recorded improving average daily user time spent.
And the bottoming out on me use and improved monetization efficiency setting a solid foundation for strong growth in America and advertising.
Our music centric live streaming services delivered healthy operating metrics Besides assay performance.
Our robust content offering effective and targeted operational initiatives and personalized recommendations.
Drive sequential improvements in user retention in the fourth quarter of 2020.
We're also pleased with the increasing user engagement as we roll it out and diversified live streaming content and attractive performance in categories, such as ACG Chinese ancient style and gaming.
In the fourth quarter QQ music live streaming and continue to scale up and.
Tracking popular musicians joining the platform and more interactive features added to facilitate social interactions.
We are confident that such strong momentum will continue into 2021 and contribute more to our overall growth.
And as users need compete needs continue to evolve.
We are constantly looking for new business opportunities and actively pursuing new drivers for our next phase of growth through building and innovative online merge offline performance ecosystem.
<unk> life there are a few exciting developments as of the end of 2020, we successfully hosted more than 50 online like concept of different styles and genres.
In the fourth quarter T and E. Further expanded its brands audience by holding 25 live performances for a wide range of influential musicians from both home and abroad.
In 2021, we will cultivate a comprehensive performance pipeline to enhance our support a musician and expand and utilize the coverage beyond top artists and provide a stage for a wider range of musicians to display to talent.
As T M. Eli continuously increased its popularity and brand awareness, we are attracting rich pipelines of sponsorship to unfold long term monetization potential.
In addition, we successfully hosted the second and New Tencent Music Entertainment Awards.
Ceremony in Macau on January 23rd 2021.
Within the short to 48 hours it generated 66 trending social media topics.
Attracting cumulative page views of $18 5 billion across the Internet.
The awards should serve to cultivate and promote high quality music content to the public as.
As well as highlight the cultural virtues of the Chinese music market benefiting the industry office and users alike.
In conclusion, we're pleased with the well rounded progress that we have achieved and 2020 was a year defined by all evolution into an all in one online music and audio entertainment destination in China.
With a strong existing foundation increasingly diversified growth engines, and our commitment to long form audio investment and its future potential we are confident and look forward to our next phase of exciting growth and 2021 and are used to come.
And with that I would like to turn it over to our CFO Shirley Hu for a closer review of our financials.
Okay. Thank you autonomy and Hello, everyone.
Next I'll discuss our.
And Asia effective.
And the first quarter of plenty time day hour.
And then maybe someday and say the continued its outstanding growth trajectory.
Particularly in music and subscription and advertising.
Wow, and social and chairman, depending if it comes in and out if the sales growth despite the economic uncertainty and Accenture and competition environment.
Our total revenues for Q4, 2020 reached RMB eight appointed meaning <unk>.
Before falling to 3% year over year.
In Q4, 2020, our music subscription business continued to grow rapidly with revenues of RMB, one 6 billion and that year over year growth of 42%.
And the result of use of internal improvements and in fact and it was Chesapeake is excellent.
Paying user grew 40% while monthly on remained relatively stable year over year.
Yeah.
<unk> Patriot and the high quality user growth and protect the value of music and the industry.
Yes.
And we're passing is our key debt to do during the quarter, we continued to increase debt.
And that ability.
On our platforms and highest quality for our devices in Peru in phases.
Luckily and food.
And to expand our sales force.
As a result, our.
And what happened and revenue well more than doubled year over yet for the second and third consecutive quarter.
Consequently.
On Amethyst revenue reached RMB, two add any this quarter up 29% year over year.
Social content and services and other revenues well RMB five 6 billion up 8.2% year over year, primarily due to growth from on and kind of okay.
Social and tend to mask, the app increased 26%, while paying users job Fortunately pointed to 3% on a year old empathy.
So they need us and the growth of our AD business and annual dialogue, England both contribute to.
Increased this quarter.
As we discussed last quarter, we have always and inbox on monetization improvement in Q4, 2020.
Our advertising revenue continued to grow the number of paying users increased sequentially, leading to our or monetization improvement on the platform.
Gross margin was 32 volume, 4% and Q4 2020.
Which was unchanged sequentially and down one seven per cent compared to some peers locked yet.
The year over year decrease was primarily due to increased last month, and new product and the content offering and such.
And long form audio and that are still ramping up in terms of revenue generation.
And and Christian revenue sharing fees to strengthen our platform for Q&A.
And maybe some day is continuing to positively impact our overall margin.
Now moving onto operating expenses.
Total operating expenses from Q4, 2020 well on me one point and.
Meaning and there was a plan to present at the puts and takes of total revenue as.
And as compared to 90% in the same period last year.
Selling and marketing expenses and B E $373 million.
I have a 15% year over year.
The increase was due to higher promotional spending and the user acquisition and the Panther is to strengthen our product competitively and is 45 and why.
And in music centric live streaming.
Higher cost associated with annual and that humans such as ammonia.
The amount of England leasing Carla also contributed to the increase.
General and administrative expenses were RMB 906 million up 21% year over year.
The increase was driven by increased investment in R&D or product enhancement and technology innovations such as long form audio wasting International Washington brand and kind of okay room and.
And that's all leading to higher employee related costs on a day.
I went and effective tax rate for Q4 of 2020, it was a five 5%.
Because the from 908% last quarter.
And so some of our operating entities in China became and quantified and for certain tax benefits in the quarter ended the cumulative impact was reported in Q4 2020.
Our effective tax rate for full year, 2020 was nine 8%.
Our net profit attributed to hold us up the company. What's on me one pointed to beginning now.
<unk> net profit attributed to equity holders of the company was on the one <unk>, meaning and non Opex net profit and margin was 16 point of corporate debt.
For full year, 2020, our total revenue well on B 29 pointed to meaning.
Up 14.
Paul and the 6% year over year.
Net profit attributed to equity holders of the company on the off price and the <unk> well on the all point to Amy and on <unk> 5 billion respectively.
As of December 31st 2019, our combined the finances of free cash cash equivalents and time deposits well on B 28 <unk> representing.
We are presenting and increase of RMB, one 2 billion from Q3.
Which was primarily driven by cash flow generation operations.
Looking for what the.
And the continued to be optimistic about the future of the broader music and audio industry.
We are confident in overall expect them and the product pipeline that we are building and the long run well.
We will pay per focusing on new products and a few trials.
Monetization improvements on our platform.
While maintaining call continent and last month.
And what has been is always our pes adjusted and.
And we will keep improving and talking to college effectively and safely.
Additionally, we are investing proactively on long form audio and.
And I hate that the Navy audio joined on.
Lets you will further accelerate our long form audio opinions and lot of it.
This concludes our prepared remarks, operator, we are ready to open the call for questions.
Thank you and if you wish to ask a question. Please press star one on your telephone and wait and see and aimed to be announced if you wish to cancel your request. Please press star two.
On a speaker fine please pick up on the handset to ask your question.
But the benefit of all participants on today's call. Please limit yourself to one question and if you have an additional question you can reenter the queue.
First question comes from Eddie Leung from Bank of America. Please go ahead.
Hey, good morning, guys. Thank you for taking my questions talks and quick question. So the first one is about.
Cost of propulsion of salt.
And you have schools across the paywall.
Do you feel we are reaching more of like a <unk>.
On a high level, which.
Going forward.
And you can see a launch.
Oh.
And so I'll just pick a pay wall.
And why not and then secondly.
Uh huh.
Uh huh.
I think on pricing.
First time and some debt.
Follow the user base on a so called Internet of things on devices right.
Augie all speakers et cetera, So could you give us an idea work on these users are basically the same users on your mobile app or are we addressing a different set off on user base. Thank you.
Thank you for your question in terms of paywall.
And at the end of 2020, we're just over 20% in terms of our streaming share of content and sitting behind the paywall and we actually don't see there to be a ceiling and the near term and we continue to expect debt by the end of this year 2021, and we continue to increase our paywall and a similar pace as the previous years.
And wished it would take us to just over 30% by the end of the year, we wanted to note that.
And the fourth quarter, our net adds and deliver a very solid performance of over 4 million $4 3 million net adds and we continue to expect on net adds to be strong in particular in Q1, we expect and we expect the net adds in Q1 to be even stronger than Q4 driven by it.
Very successful paywall strategy and our various marketing campaigns.
In terms of your second question on Iot.
There is actually a different user group, we see that majority of them on non overlapping because it's a different use case.
Who listen to music on <unk>.
Smart speakers or in car are slightly different.
And do you use compared to the music platform.
So effectively our Iot strategy is helping us broaden our user base.
We note that.
While the Mou online MBA you saw a slight decline, which is mainly attributable to a higher churn of noncore users, but on the other hand, our coal use has actually increased the level of engagement on our platform and by that I mean, if we look at the average daily time spent four on.
<unk>, which is more representative of our core users it actually increased year over year and.
And that's a result of all the products and enhancements that we've been investing over the past years, such as local audio embedded MVS on streaming page photo and community Tammy life et cetera.
And it's important to note that our reported music Mou figures do not include the Iot devices, such as smart speakers and car and smart TV and the Iot devices MCU actually recorded strong double digit growth year over year.
And fourth quarter and that presents additional opportunities for us, which we will share more in the future.
Great next question please.
Yeah.
Thank you and your next question comes from Alicia Yapp from Citigroup. Please go ahead.
Hi.
Good morning, and management, Thanks for taking my questions on my.
My question is related to your long form audio given the 15% penetration rate could you share more detail regarding the user profile and any overlap of the FCC and music subscriber and also Dr. Kwan handoff interests are in relation to that can you also elaborate the batteries.
Monetization model that you plan to push more aggressive share would that be more on the frustration or would that be more on the on my app to.
And to drive for growth and 2021. Thank you.
Yeah.
Okay. Thank you so much for your questions actually the long form audio is a very important strategy for T. M. D. We are fully committed to invest in this area.
This is a very natural way for CME to doing it because we have a very strong competitive advantages compared to the odd a vertical player and the industry right now.
First of all we seeing debt. This is a very natural extension of music consumption because a lot of our music users nowadays besides listening to music day will be more easily to be.
Extended their time and listening to more audio programs.
So this is a very.
And you see for us to convert our existing music users into the long form audio users. So we will save the user acquisition cost in this expert.
And besides this we are seeing debt, we have already setup and log off content partnerships, especially with the very renown.
A company like the China literature, we have already set up.
The strategic partnerships and last year, we also starting to team up with the content providers in the industry as well not just the professional content, but we are also extending our footprint into the podcasting and also other UGC and <unk> area.
The first one day I would like to mentioned news for the <unk> long form audio strategies.
We are taking the two pronged approach.
It is unique in the industry, which means that on one side, we are going to leverage our music application to have a long form audio section on our apps, but on these other side. We are also launching out our standalone long form audio application this fall and with the ecosystem.
The laser audio team the news that we announced it by the Russia.
Actually for the strengthened our strength on the standard of long long form audio side. So I think that this is a very unique strategy and make us to stand out from the competitions and the industry.
Besides this we are also continuing to pull in more financial resources.
And also we have setup.
Core team to working on the long form audio businesses and I am sure they and their year 2020, one is going to be another huge step for us.
And by doing this we strongly believe that the long form audio and create long term value to the entire group first of all EBITDA includes as Tony mentioned EBITDA increase the user engagement because their time spend on our platform will be improving and also to be increasing because and join me.
More and more content and format from our platform secondly, because of the different monetization model that we have for example, we have the premium content monthly subscription model. We also have the advertising model as well. So we will further bring in others monetization opportunity for us and creating strong revenue.
And the globe in the future.
Yeah.
Next please.
Your next question comes from John Egbert from Stifel. Please go ahead.
Great. Thanks for taking my question advertising clearly has a ton of momentum I think you each highlighted a few of the key drivers of recent strength there, but wondering if you could dig deeper into the runway for future advertising growth by maybe looking at the current state of your business there versus what you might think is possible and the next few years.
In terms of like add coverage on your various services on AD load within the screens that you're actively monetizing today.
For new AD formats to to kind of change your capabilities anything worth calling out there.
Okay.
Yes sure.
Advertising grew at a very rapid pace of over 100% year over year for two consecutive quarters and.
And in the fourth quarter advertising now accounts for the majority of the non subscription revenue within online music accounting for just over 50%.
And this is all and as a result of the investments in the advertising technology and solutions that we've made in the last year.
As well as leveraging Tencent this group's overall strong AD sales capabilities.
<unk> enable us to penetrate into an increasing number of advertisers. We also continue to.
The room for us to increase our AD load there is more real estate on our various multiple platforms.
And that provides us with ample inventory.
And so far all AD formats have been rather homogenous to the traditional banner <unk> splash screen.
And as <unk> mentioned in his earlier remarks, we do intend to broaden.
Our AD format into other ads such as audio ads, we bought at as well as other and as a result, we expect such strong growth in advertising to continue.
For the near to mid term.
Okay. Next question. Please thank you and your next.
Question comes from Alex <unk> from Morgan Stanley. Please go ahead.
Hum.
Good morning, Thanks for taking my question I wanted to go back to the music subscription business.
And so I want to understand about that you'd factor from those folks.
Payroll you mentioned about simple for 20% by end of last year and last year on average roughly we have added about $4 billion per quarter.
I want to understand about.
And if we go from 20 per cent of 30%.
Okay and Nick.
Version would increase from 4 million to something say 5 million would.
And would be faster than before and actually on top of paywall.
You have better user engagement and long form audio freemium model promotions content and a lot of new tools that you can drive conversion. So we tried to understand that.
Just the first part is on the organic and factory that's off the paywall going from 20 per cent that 30 per cent compared with the high percentage of 20 per cent and then this new drivers and how they can how much additional growth that can come from these new tools that can convert subscribers. Thank you.
Yes sure.
Music subscription.
Our revenue has obviously continued to deliver very strong growth at around 42% year over year.
In particular, the paying users recorded strong growth at over 40% year over year.
And the solid net additions of $4 3 million.
Which brings the total paying users to $56 million.
Or a 9% paying ratio, which is a substantial increase compared to just about 6%.
Lost share.
In addition to the paywall strategy that we've mentioned.
There are actually many other party invest investments as well as marketing campaigns that we've embarked on and which are starting to pay benefits.
We continue to observe the retention rate of our paying users continue to improve.
And basically be and improving every quarter since the first quarter of 2019, so for eight quarters, now which means that once we've converted a user from free to paying and they are actually.
Remaining.
As paying for a longer period of time compared to before and Thats also helping us to improve the <unk> the paying user and we are able to achieve all of this throughout 2020, while seeing an increasing trend and ARPA right. So we are very optimistic.
In terms of our subscription growth, we expect like I said, the net adds in Q1 to be stronger than in Q3 net debt in Q4.
And I guess for the year 2021, we expected average net adds to be approximately between $45 million per quarter.
And.
Which would be a strong growth driver to our overall business.
Next question please.
Thank you. Your next question comes from Alvin Yeah from J P. Morgan. Please go ahead.
Yes.
Good morning, Matt and thank you for taking my question.
I have a follow on question regarding the paywall strategy can you share with us on how do you strike the balance between sign.
And so it's a pretty wall and we show on the platform and insurance.
And that's actually you cannot ship from 100% of the paying ratio and if you are.
And Apple music and pulpwood.
Monetization model I E.
Content on me.
Available to premium subscribers.
That will probably it comes at a.
Cost and in terms of the.
Platform usage.
And then and you.
And while more prevalent on strategy is.
Pushing the size of the paywall gradually you will.
Driving.
And the paying ratio.
Can you share with us on people on Salford and hope.
Do you strike the balance and what are the key consideration from the queue more aggressive or not so growth machine besides of the paywall and over the longer term what could be that you couldn't hear him.
Nevertheless, the paying ratio and thank you.
Oh sure.
There is a good balance that we do need to strike between a paywall strategy as well as the free user experience.
At this point and time, we continue to see the paywall strategy to be very effective.
Without substantially hurting the free.
User experience. However, we are investing in new monetization capabilities, such as various forms of advertising.
To help us monetize the free segment of users that for whatever reason may be very difficult to convert to premium and for that those particular user.
Monetization strategy isn't paywall and monetization strategy for those user would be advertising.
And perhaps.
We would provide them with advertising.
And.
As a way for them to unlock certain benefits, which allow them to access a limited volume of songs behind the paywall I think Thats. An example of how we could strike a good balance.
Tween free and pay users again I think.
We continue to see the Halo strategy to be very effective we expect the pace of that.
That strategy will out to be in line with previous two years.
And.
And because of the various factors that we mentioned we expect the net adds this year to continue to perform well of approximately $45 million per quarter. This year, which is an increase compared to last year.
And one more point that I would like to add is excellent.
As we mentioned that before and educating the users, saying that the music to have a value we take times, but we are super excited because in the last two or three years, we have to drop and our users with each fresher.
The music and also they are willing to pay for it but not all of these when we are executing to our users to buying a monthly subscription day.
And we'll be happy to per user experience, what I mean, you speak and enjoy all of these phones and.
And the only to wearable, which kind of songs that they can listen on which sounds like you're expecting.
And that we cannot buy at the same time, we are also providing.
Are the privileges to them. So besides of the zone to song as we mentioned there will be also has the TM and live events that we offered.
So for our monthly subscribers day, we'll have some privileges for example.
And different special user experience and enjoy.
Joining the team and live event. So this is all of the things that we ought to be boarding and keep innovating and we are targeting to bring a new type of experience.
The team utilizing the share and also it will help our VIP, which is among the subscriber to have more purposes. Besides this we are also focusing on defense based economy, So which means that if you on a monthly subscriber you will also enjoy some of the <unk> on <unk> and Colombia as well so all of this will be.
Work together as a total package and let our user to really think debt being a Monday subtyping VIP and this is the right way to enjoy music and also all audio to people and experience on our platform.
We have been gathering a really encouraging result by moving to the retention rate.
Our Memphis and currently has already been keep continuing and improving.
And so I think this is a really good signal to us and we strongly believe that group.
And with the combination of putting the songs behind the paywall and a steady pace together with the pruning them debt I just mentioned.
And really make our subscription model and together with.
Advertising model and small.
And we will work out together and bring a good.
Healthy.
Development of our revenue in the future.
Next question please.
Thank you. Your next question comes from <unk> <unk> from UBS. Please go ahead.
And I enjoyed it.
And my questions I have two questions per se.
Okay.
Good day week.
And here you on that whether you might speak and I'm Elizabeth.
Oh, Yeah, Yeah, Yeah, sorry. My first question is how do we think about the timing for us to promote a freemium model off music apps do we see any potential risks golf balancing and user experience and competition on premium model and set.
Can you also share on some colors on how long form audio and contributes to overall Tom spent of our music apps. Thank you.
Oh sure.
In terms of the timing, we continue to make investments in the various ad formats.
That.
Leverage to monetize the free user base and particular the segment that may be difficult to convert to premium and that's ongoing and you see us talking about this and the last one to two quarters.
We start to implement some of that as as a beta test.
During this year.
But in terms of.
The exact timing of when we will scale up and in our largest and obviously, what we need to.
And I observe on how the adoption level and how the.
And the effectiveness level of debt and then in terms of long form audio I think it's important to.
Understand that there is a lot of natural synergies between music and audio and.
And just like.
And the radio era users are very used to listening to both music and audio content together.
And similarly.
We actually see that dynamic playing out in online platforms and so when we provide audio content.
To our music users they don't switch off and listen less to music in order to listen more to audio they actually end up increasing the total time spent.
And therefore, it's actually very it puts us in a very advantageous position.
And being the leading music platform going into audio and and with the addressable market expected to reach to a similar size of music users.
And large several hundred of millions and the next few years, we're very optimistic about the audio market as Christian mentioned.
And that's why we actually think.
Together with our content strategy within audio that touched and talked about on monetization strategy as well.
Our two pronged integrated music and audio App as well as stand alone.
Audio App strategy I think all of this would play very well to provide us with ample growth opportunity and the next few years.
Great and wherever I can sit and next question. Please.
Thank you. Your next question comes from Eastern needs from Eaton and company. Please go ahead.
Okay.
Yes.
Hello.
Thank you management for taking my question. So the first question is also on long form audio just following up on that question can management share some light on how these users paying paying habits.
Impaired to the music on our users and I hear other analyst asked about our target penetration rates.
For the near term for long form audio so do.
And do we have.
And some.
Number of it and we can share and my second question is on the podcast.
So does company have a plan to try and creators for exclusive.
Exclusive content and the podcast space.
Thank you.
Yes in terms of target.
Users for long form audio I think touch and mentioned that we've reached about 10 million Teu are and you can see that our MAA reached about $90 million by the end of last year, and we expect our user base to double.
By 2020, and on 2021, right. So thats the near term target and by no means we're done we actually think the total addressable market as I. Just mentioned is a very very large for audio market.
And similar size to the music market in the high several hundred million dollars.
In terms of scale and that would play out over the next few years.
And we also see there to be ample monetization opportunity.
The and it's different depending on the type of audio content for example.
Audio books, which was talked about in the past being the biggest content category within the audio consumption.
Obviously, primarily driven a lot by subscription alright chapter by chapter.
And that plays very well in terms of synergies with our music subscriptions, because we could bundle our music subscription plan with the audio and subscription plan.
And.
And on the other hand, there are other forms of audio content and which are much more suitable for audio advertising.
And so we're also seeing that play out and as our <unk> growth, we see ample opportunity in both of these two categories.
For the podcast content that you mentioned actually we are also closing and talks with different content providers I think the different key of content and we try to bring into our platform first of all we should see similar to what the strategy that Spotify is doing they are also talking to some of the top tier assets on.
And maybe Paul classes, we also and coffee some of them on some of them may be from the music industry and some of them is providing other content Pall mall and payments area.
So the top tiers, we are and tops and we are also working on the long tail as well and I'll.
Our platform is really big and I think that one of the competitive advantage that we have is we have different music platform like the QQ music cocoa and pool and off target and audience will be a little bit different in terms of debt positioning so they can tailor make different kind of.
On.
First of all the professional content or the user generated content.
According to the needs of their own.
Audience. So I think that we will open right now and having a lot of talk and especially heavily investing and the content cycle not just on lump on module, but also podcast as well.
So we took on this question.
Thank you. Your next question comes from Benny Wong from TICC. Please go ahead.
Sorry, this is Amy Wong from HSBC.
My two questions here very quick one I just wanted to follow up all the cash early.
In terms of the conversion because I think and the PUC yesterday talk about debt.
And I think a lot of and business acquisition and also on your pharma business.
Just wanted to understand that how much of it.
We expect to see more meaningful revenue contribution.
And 'twenty one.
And just one question and just one quick follow up in terms of life's training. So we see some I'll get shocked me deal.
And that's also helping us.
And that like Lifesaving, and it's also being you know softening on the last year.
And he sounds right and then if you look at into 2020, one on how do we position and life screaming because.
I think also you know if you look at like Oh.
And also paying ratio.
Yeah, something like that.
And how how can we maintain it at a more competitive landfall and the lifestyle and business and housing and <unk>.
And I tried to walk this will try different that's interesting on one of our most meaningful on earnings cycle. Thank.
Thank you.
Sure.
Hours of live streaming.
Social entertainment broadly revenue grew by 8% year over year.
As a result of obviously a more difficult base effect comparison, comparing to the pre Covid Q4 last year.
But also impacted by the lingering weakness in the macroeconomic situation, which affected the paying users willingness to spend.
However on the other hand, we are encouraged to see AR continue our recovery and.
And our traditional Google life, and crew alive and inorganic sense and in addition, we also also broadening the content a.
Category to include ACG, China ancient style.
But also around music and that's the key point because.
Even though you maybe benchmarking us against other peers, but it is important to stress that our live streaming is differentiated it is the most music centric compared to other peers and that continues to provide us with differentiation in terms of effect.
<unk> performance as well as users in addition to that.
And we obviously have.
And we're very pleased to see the continued scale up in Q2 music live streaming, which will continue to see and increasing contribution to our social entertainment revenue into 'twenty, one as well as.
We also encouraged to see that we things.
<unk> and Mou decline clearly bought bottomed in Q4 and beginning to see a sequential growth in December January compared to September October for example, and.
So as a result.
As we look into the full year of 2021.
And the leasing platform churning Chico actually is a very unique platform that here and you have and especially make us to stand out in the industry.
And lastly, I think debt we are doing actually is that air pollution and trying to make it to be more shoe the current needs of the users.
And what we're doing is actually I think debt seemingly still a very strong demand from our users. So we are focusing on making the singing experience even better than before we lower the content.
Productions, and chip area, and we create a lot of tools and helping our users to make their content better and let them to share on the social and social platform. So I think that what we're doing is not just doing and user engagement that we are doing user interaction. This is very important and besides we are also bringing in the short form.
Commendation feet on.
So let me take on the recent platform, which really allowing us to increase the people to consume more.
Audio and video based content so on.
I think this is and some of the evolution that we have made and we didn't make it.
Overall, the user base is really bottom out and we are seeing a positive trend.
The early 2021, so I think debt for the year to come and specialty for the social entertainment side. Besides all.
The last remaining.
<unk> and also the revenue.
Outlook I think debt.
And typically is also another platform that we will be strongly focusing on and this is also the unique.
And those special platform debt here and you have when compared to our competitors.
Okay time.
We said on last question operating them.
Yeah.
Yeah.
Thank you. Your next question comes from Thomas Chong from Jefferies. Please go ahead.
Hi, Good morning, Thanks management for taking my questions and congratulations on a solid set of results.
Let's talk about our thoughts about the 2021.
Revenue growth on that.
Also ask about how issue.
Think about the margin side or how we should think about the trend in terms of expenses and given that we also have a lump behalf areas for investment.
On that one.
And you also comment about our M&A strategies as well as a pullback on the HOA and vitamins are in China.
<unk> expand our scale. Thank you.
Sure well first touch upon deregulation and M&A and then I'll, let Shirley take the margin question.
And in social regulation, we continue to maintain a very constructive relationship and our close working dialogue and relationship with the relevant authorities.
If and when the relevant authorities issues any new rules.
We are committed to work closely with them to comply with the applicable laws and regulations because our overall goal is to work towards.
Promoting a healthy growth and development of the China and music industry.
And <unk> has been.
And operation for 16 years over 16 years and we faced.
Multiple new regulations throughout our corporate life.
And we are experienced and dealing with new regulation and we are fully committed to to comply.
And with relevant authorities.
And then in terms of M&A.
And as you can see we recently announced the acquisition of Lacey audio.
Which is an integral part of our long form audio strategy, which is a highly strategic and long term, which we're very committed to.
You see us continuously set up increasing amount of joint venture.
Venture into content development.
With our pod label partners, we set out we announced that we will set up a joint venture with a universal.
Universal and then just today, we're announcing that we're setting up our joint venture with Warner and Thats.
Following a very successful JV that we've already had with Sony and all of these will lead us to continuously.
Continuously improving our content development and promotional capabilities, which is also very.
Synergistic to our music platform and music distribution business. So we'll continue to explore.
M&A opportunities around our core music and audio platform and we'll deploy capital.
And they and disciplined manner.
In terms of the M&A.
Really from day is a really exciting journey for us because our view is not just doing financial investment and is that we really want to have a very strong business cooperations.
With our partners as Tony mentioned and also joint venture of music labels, and we really worked well I remember that around three years ago, where we talked about the first.
Mr label, JV with Sony Music.
Just bringing it all and then I'm so glad that we have the support of the pre measures and it's only released one has with us and nowadays. If you guys are recognizing that we are just rolling out a number of really good song and dispute as especially we have a very close partnership with.
Tencent games and rolling out the theme song on the top tier free the first anniversary and we are.
Actually rollout project together with some really rebounded worldwide <unk> like the DJ we have and also with Jody and site.
Which is also another very popular female artist in Asia. So I think this is some of the we started to bear fruit and so I think thats something that we didn't make us very excited because we are not just doing some financial investment, but instead, we are creating a wonderful music content that was widely accepted and.
Being free.
Created by the industry and also especially for our users.
And as we mentioned debt during the last volume. So the announcements. We are also going to have another JV, we have on universal music.
Good day are setup.
Now and really good progress the management. He is on board already and we have a deep and.
Positioning bodies music label and I'm looking forward to creating more quick songs for the industry and the future and today, we announced that we announced another joint venture which has group one.
<unk> music I think we reported.
Part of it.
And we.
Really made us too.
To show that <unk> really opened and we would like to team up with all the industry players in order to make it's going to be a win win situation and created by the content for our users. So this is very exciting for us. So maybe you can talk about the margin side.
Okay, how about that.
Margin in Q4 2019, our gross margin is 32.4% net is relatively stable compared to net down from Q3 and to meet our expectation in Q4, the growth and revenue growth of four subscribe fishing revenue and the other one.
<unk> and revenue.
Positively impacted our gross margin and <unk>.
In Q4.
Why did the <unk> gamma.
We will provide more put promotion and <unk>.
For the.
So the revenue sharing of the.
Let me share does that and it's showing of social entertainment.
And Grace.
Inconclusive.
Q4, gross margin and stable looking forward at 2021.
And we expanded the first.
Our growth also.
Subscription revenue and.
And the way that housing revenue will be a continue a high level.
Relative and impacted our gross margin and <unk>.
Second we will keep eye on the industry, we will control our revenue sharing fees from our social entertainment.
So etcetera.
Except as these two pints, we will invest more on our new products and Newfield trusts and such as the non from audio and per passenger and because this time.
In conclusion in 2020, we will invest more on new products and pave the way for our long term growth.
And so just to close out I think we're very pleased with this quarter's results.
And with online music subscription revenue continuing its rapid growth.
And we believe China's online music industry continued to be in a long term secular growth trend that will provide us ample opportunities in the future.
And our outlook in 2021 and remains very positive we expect total revenue growth to accelerate compared to.
2020, close to 20% driven by faster growth rate in both online music and social Entertainment services.
Okay.
So thank you everyone for joining us today and this concludes today's call and we look forward to speaking to you again next quarter.
Thank you and goodbye. Thank you so much thank you.
Thank you.
Okay.