Q2 2021 Tencent Music Entertainment Group Earnings Call
[music].
Yeah.
Ladies and gentlemen, good evening and good morning, and thank you for standing by welcome to the Tencent Music Entertainment Group 2021 second quarter 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.
Music announced its quarterly financial results today after the market close.
And it's really easy now available in Ireland, I I don't have the news that dot com as well as newswire services.
Today, you'll hear from me today comes from Paul I want to stick it to chairman, who will start the call with an overview of our recent update.
He'll be followed by Mr. <unk>, our CEO and Mr. Tony you Alistair so well will offer additional thoughts on our product strategy operations and business development.
Lee.
Uh huh.
Okay.
He probably open to poll for questions.
Please note that this call may contain forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These forward looking statements are based on management's current expectations and a solution that involves known and unknown risks uncertainties and that's not.
Not under the company's control.
Which may cause actual results performance or achievements of the company to be materially different from the results performance or expectations implied by these forward looking statements.
All forward looking statements I specially qualified in their entirety by the cautionary statements.
Factors and details of the company's filings with SEC. The company does not assume any obligation to revise or update any forward looking statements as a result of new information future events changing market conditions or otherwise, except as required by law.
Please also note that the company would be one time.
It's not as mission today, which are most I already explained and reconciled to the most comparable measures.
Under the international financial reporting standards.
Companys earnings release and filings for D. C C.
You are reminded that such non ISR measures should not be viewed in isolation or anything.
Turning to the equivalent.
Michigan and other non <unk> measures are not uniformly to falling by all companies, including those in the same industry.
With that I'm very pleased to turn over the call to Cushman executive Chairman all kinds of music touch on please.
Thank you Melissa Hello, everyone and thank you for joining our call today.
As we announced on July 26 pension.
Pension recently, we speed and administrative penalty decision issued by the state administration for market regulation of the peoples peoples Republic of China.
F E M O.
Really assessed the decision and will continue to strengthen our operations in accordance with all regulatory requirements drive innovation and fulfill our social responsibilities.
In compliance with the requirements of copyright license exclusivity.
Operationally focused on the dual five use of content and platform to deliver high quality products and services to users and foster innovation.
We have taken several important steps in this regard.
Specifically as executive Chairman I'm responsible for enriching our content ecosystem, where the license it or sell producers as well as expanding our capability within the music industry to all the additional no value services and solutions to artist and Eustis.
Our CEO Ross oversees our platform and product strategies and is responsible for further deepening partnership with Tencent ecosystem.
Ross will elaborate on this in a moment.
We will continue to deepen our pilot groups with hundreds of music labels to expand our licensing content cultivation in alignment with the new requirements and work to provide more and better content offering to over 600 million music users through our multifaceted product portfolio.
We are pleased to report that we have been consistently making breakthroughs in diverse music verticals.
Including New hits, Chinese Asian style, keep Paul and music, both gaming movies, Pat efficient programs and variety shows demonstrated by a comprehensive cloud based of song and particularly full coverage I'll keep up our auto shows.
We are also raising our profile among the younger generation by expanding cooperation with leading content IP boost programs such as the collection of Chinese stimulus file welcomed.
And the roughest Elias <unk> hundred and loan.
This is <unk> has resulted in us sequentially increase in user engagement from young users.
While broadening our offering of copyright the music.
We have also been working closely with our upstream value chain.
<unk> and other partners to create and produce more differentiated content.
Example, we began to work extensively with tencent across multiple businesses.
Over the past few quarters, we partnered with prominent artist such as Ben <unk> <unk>, Tennessee.
Angela Zhao Dr. Han and produced over 2000 chart topping song across gaming volume literature and common categories.
We also recently played a role in cobalt using the theme song of the popular movie Cliff Walker's Shanghai Vishal directed by a highly regarded Chinese scream director.
Creating the theme song itself to leveraging our talent pool to bring up and less active on Costa performed as all we were pleased to be able to contribute to this award winning project.
I'm also pleased to share our progress in cultivating and promoting indie musicians.
During the second quarter, our funded 401 through the Tencent musician program. Our Roes that are in the August achieved triple digit year over year growth with our songs streamed showing consistent increase both year over year and quarter over quarter.
Musicians, who view us as a reliable partner, given our well structured financial incentives.
For the first time included a revenue sharing mechanism for the narrow risks and song writers.
They are also attracted by our efforts to pioneer enhance the copyright protection based on blockchain technology.
Helping indie musicians to uphold copyright with OEM posting financial burdens on them.
On top of that our average Q4 cultivating blockbuster on the Tencent musician program platform has grown significantly for example, within three months of this release we've collaborated.
Cross platform Atlas from QQ music, <unk> music and cocoa music.
All coming in late life.
Valued home.
The more than 1 billion streams and in spite of numerous copper solutions in the future. We will strive to build a closed loop system, while musicians discovery and management through multi dimensional support including more financial reward copyright protection and agitation in training bombs.
Patients.
All of which reflect our desire and determination to help <unk> grow and SEC.
We have also upgraded our platforms promotional capability.
Further developed our active and repertoire anr capability.
For example, we connect that Larry risks and discussions with entertainment program producers and how our musicians such as Cellulite climate you Duncan.
<unk>, then Beth and me.
Europe more run at least and perform on a variety shows such as the treasure the voice to <unk> and <unk>.
<unk> isn't too warm in local.
Providing them new stage on which shine.
Finally, <unk> our online merged offline performance brand.
Continues to bring new opportunities to the company with our strategic focus on omni channel promotion and monetization.
On the online side, we host monthly concept for top access to include New interactive monetization features such as ticketing VIP privileges and merchandise to create a holistic and more immersive user experience for online live performances.
On the offline side <unk> is expanding its footprint with a plan to launch offline initiatives, including daily live performances in key cities, such as Beijing, and Shanghai in collaboration with Tencent musician platform and the local tourism industry.
We are also working with Playhouse organized weekly indoor music festivals merging the offline party experience.
<unk> online features.
With our purpose updated in content I would like to pass the call to Rob who will share more about our platform strategies.
Go ahead.
Okay.
Hello, everyone. Since I became CEO in April my focus has been on strengthening our platform's competitiveness on the funding new ways to serve our users by her so Robert utilization centralization on a community building.
Over the past few months <unk> made good progress on these fronts.
Basically despite total utilization we are applying showed that <unk> on the architecture, which is closer to further enhance radio content offering cross platforms.
<unk> continued to enrich embodied andres on streaming page and we are pleased to say that the SBA or penetration is increasing quarter over quarter.
<unk> Doctor.
Launch new versions featuring immersive phase in August basically.
Finally, he will focus on the most diverse content.
Anticipate that these efforts will increase video bills under the amount of time responded by users on our platforms.
Overall socialization and community building efforts include cyber on yield initiatives.
<unk> are still working progress one we are upgrading the synchronize their listing feature in QQ music to encourage interactions among fronts.
We recently launched the Pudong planet, which connects that you also with our commentary <unk> more efficiently. So it will target a mattress to inspire.
Connection amongst lenders.
We are obligated upgraded leasing online Karl K rooms, who will make online thing more fun on the social engaging the new version, where all of our broader sales of online shopping experience, including deeper in the party size ranging from solo under the ice towards more on the large groups.
As well as catering to different needs.
<unk> seen on demand seeing along on demand so in practice interim PK across room activities.
For mobile phone launch basing virtual and live streaming room to provide cloud.
Cloud provider in the tremendous experience comparing <unk> and allow streaming in the future, maybe our expanded metal earth, allowing streaming to more use cases.
<unk> interaction opportunities on the more you might have into virtual reality experience.
We have also made progress in partnering more closely with broader tencent ecosystem and other sort of key Jake most voting or long term.
During the second quarter late deeper collaborations with innovation in video account reassessed an important step for us.
One in rates to the music video content on <unk> platforms.
The vision, maybe oil comps to leverage information to a fund our promotional capability under three Windsor location of video traffic that total army platforms. The first Friday stallman traffic and the interactions to increase room tools sold monetization in the future.
Either first startup risks <unk> for the first time, joining enforced reservation video accounts on the priorities Allegiant some are not.
On online, even the featuring well known musicians and brands on the bonds or a nicer start well be strengthening the interactions between artists on the users by probably mid <unk>.
Musicians, which in turn will improve music content in actions on each of our platforms.
Moving forward to harness provisions pulp all social networks to Boston, you also engagement and music focused collaborations firstly tubular mills with the launch of annual feature which allows users to update their innovation cyber vessel songs, we are listening to making and sharing more dynamic kind of fun.
Second users can now customize their mission and tunnels based on selecting that music from Tencent music.
Third by lowering.
Patients translations AI Tech knowledge Kilkeel music now supports high quality translations of English songs into Chinese last but not least very well.
Look the best our Tencent video to enhance exposure of radio content for example.
Meeting two weeks of release I will now Chinese sooner lead Gen. So new newly released album Foregather Yourself <unk> time also will Cook, we say over half of our billing and social boss.
<unk>, probably the QQ music chart.
Looking forward to sharing more examples in in future quarters.
Long form audio is an effective complement to our music.
Docs on account on the portfolio on a value add into user engagement.
Joining the second quarter, we restructured this business unit will further streamline our two pronged product strategy.
Continued to enrich our license title.
Acceleration or biased in IBM podcast.
So our content.
Diversification.
The MBA Chinese Chinese as MBA, China's offered official strategy music partner very high we consummated an MBA polycarp seller ecosystem are tracking our broad broad range of both funds looking for new and creative ways to enjoy sports content basis improvement long.
Audio <unk> growth or 19% year over year in the second quarter.
As one of our industry leading innovators.
Lastly, digital on site platform based on blockchain technology.
Maybe I'll stick to all of our molecules.
Just to I'd say your broader exposure on the unlocked monetization opportunities in conclusion. There is a still a lot of work can be done, but a very high we made a good start on the high wall Cleveland oscillation of Hydro now I would like to turn the call over to Tony to discuss.
<unk> highlights on the important area of focus Tony. Please go ahead.
Thank you Ross Hello, everyone Hello.
Online music mobile meus were $623 million in the second quarter.
Despite some churn of casual users, resulting in a year over year decline may use were up slightly on a sequential basis.
In terms of user engagement.
Music users have become more engaged with our platform.
As total user time spent was up year over year and quarter over quarter.
In addition, <unk>.
Paying users become more active on our platform. After they have subscribed to our service when compared to before they subscribe, which means our paying user base grows not only does this improve our overall monetization.
The level of engagement on our platform coming from this core group of users also increased.
We continue to expand our scope of services to the Iot market.
As a result.
Our Iot may use recorded a year over year growth of 43% during the second quarter.
As a new music content consumption channel Iot enhances our ability to effectively rollout and promote new music content to a wider audience in the broadest set of use cases and users daily lives, making our services more ubiquitous and more convenient.
All users.
We're pleased to report that growth momentum in our online music services continued into the second quarter.
As a result of effective marketing and continued progress in adding high quality music content into the subscription plan.
The number of paying subscribers.
Our online music services grew to $66.2 million.
With record high net ads of $5.3 million paying subscribers during the quarter.
Our paying subscriber ratio grew to.
To 10, 6% in the second quarter.
From seven 2% during the same period last year.
On a year over year basis user retention continued to improve and average revenue per paying user remained healthy.
Reflecting users growing willingness to pay for high quality music content.
Advertising revenues delivered robust year over year growth rate in the second quarter.
AD revenue benefited from an expanding pool of advertisers from a variety of industries increased AD inventories and CPM on a year over year basis as well as optimized at display.
Growth in the second quarter was lower than our expectation as they were impacted by regulatory guidance on App launch splash screen ads to improve user experience.
We will continue to improve the user experience of our app to comply with the guidance.
And we'll also invest in new AD formats to meet the needs of diverse advertisers.
Turning to our online music products.
We further refined product positioning within our multifaceted portfolio.
For example, we further bolstered the QQ music image as a young and trendy brand.
First we continued to add popular and trendy content to meet the younger generation's demand for Chinese Asian style music hip hop and ACG genres, as well as music variety shows.
Second we deepened our presence into schools and college campuses.
Online and offline activities, such as on campus competitions and graduation ceremonies.
Notably the 2021 QQ music graduation concert spurred nearly half a billion social buzz.
Third.
Our new functions, such as synchronized listening and Pootle planet will further boost interactions among users.
Finally, as our Pusan community has become a cultural hotspot for young users we.
We are attracting more artists such as Quinn Tashi Quinn a pop star, who just released his new album unknown meet on our platform.
Switching gears to our social entertainment services.
Both <unk> and paying users declined quarter over quarter due to intensified competition with other pen entertainment platforms.
In response, Ross elaborated elaborated earlier regarding our areas of focus to strengthen our competitiveness and we look forward to sharing more progress in the future.
But we think in addition to the new leasing initiatives that Ross just laid out during the second quarter. We adopted technology to include an immersive course, a compliment sound effect to mimic a large scale graduation ceremony as well as multi dimension.
Scoring system to sharpen our recording tools.
These improvements have led to a more enjoyable user experience, while recording songs, which in turn Spurs increased engagement among users.
For our live streaming services.
Increasing competition.
Will steadily embrace the latest industry guidance and remain firmly committed to promoting a healthy and sustainable ecosystem for our users and performance.
In this regard during the second quarter, we continued to make progress with contributions from QQ music live streaming and category expansion, adding to us to our efforts.
With a dedicated tab fueling additional traffic within QQ music QQ music live streaming recorded solid growth and is on track to further scale up into the second half of 2021.
In terms of category expansion could go live continued expanding its exposure in the Chinese ancient style category with 33 themed events launched in the second quarter alone.
One highlight for our live streaming is that we introduced our first cross platform live streaming event to extract operational synergies across Tms live streaming platform.
In June cocoa life, and we sing jointly hosted the first cross platform competition.
Giving live streaming performance broader exposure to both platforms and an effective way to tap into a new audience base.
Effectively increasing the vibrancy of both platforms.
This resulted in significantly higher revenue for participating host during the event attracted more paying users to participate as well as more first time paying users to send virtual gifts for the first time.
Moving forward, we plan to replicate the successful events into new cross platform opportunities.
That I would like to turn the call over to Shirley our CFO for a closer review of our financials.
Sure.
Thank you Tony Hello.
Next I'll discuss our data from financial perspective.
Our total revenue for Q2 of 2021.
<unk> eight <unk>.
Up 16% year over year, driven by strong growth in online activity.
28 music subscriptions and advertising.
Our online music revenue.
Beginning this quarter.
That is 3%.
Yet in the second quarter of 2021 hour minute, but <unk> continued to grow rapidly with revenue of RMB, one 8 billion and a year over year growth uptick.
6% net of paying user number.
<unk>.
Putting the same meaning in Q2 of 2021 up 41% year over year like you said mid part.
Hi.
APAC obtain USF.
This was resulted from our continuous improvement in product on the content.
<unk> sales channel and effective marketing campaign.
Martin <unk> was under <unk> nine this quarter.
Got it.
One <unk> in the same period last year as of late also the more effective promotions to drive revenue growth in paying users this quarter.
Our Q2 advertising revenue.
Growth over yet, but the Ada was lower than our expectation.
Was negatively impacted by a new guidance.
On splash at each of the pie.
To protect the use of the.
The year over year growth was mainly the court we partner more closely with Tencent on the provider side other testing solutions to serve our customers leading to increased AD about Mccain enhancement with Macy's and <unk>.
<unk>.
To comply with the new guidance and mitigate impact our revenue.
I have two more we started to explore new advertising format, such as titanium page pop up and page and other innovative product to meet the needs of.
But it would help us.
Which may take time to bear fruit.
Social and 10 minutes on Amazon.
Five.
1 billion up 7% year over year.
Driven by growth in revenues, but we'll keep you alive.
Facing the competition from other independent platforms.
We are making efforts there Toni.
Tony existing and attracting new pro forma and improving.
We are directing <unk> platform to lasting platforms.
We are also the ramping flip back a field trial and if volume more that was by the initiatives to maintain steady revenue scale.
Okay.
Additionally, although.
Revenue, our leasing platform will contribute to year over year growth.
Growth.
Hi, Dara.
Relative to the growth slowing down.
And it was also negatively impacted by the new guidance issued by regulators.
As discussed above.
Gross margin was 34% in Q2 of 'twenty to 'twenty one.
Nearly 9% year over year due to increased revenue sharing ratio has always been to strengthen our platform's competitiveness as well as increased investment in new product and content offerings.
Such as the long form audio.
Now moving.
Operating expenses.
Operating expenses for Q2 of 2021, while on the $1.17.
Was it 21% as a percentage of total revenue.
As compared with 19% in FMT is not there yet.
Selling and marketing expenses.
$609 million.
<unk> year over year.
The increase was due to higher use of Croatia, debating and promotional spending on new products, such as long form audio.
<unk> output back long term positioning.
General and administrative expenses were RMB 1 billion.
Up 39% year over year, driven by higher lumber underlying underpinning.
<unk> will complement and technology innovation.
For example, we are applying pressure to meet Laila and Pasha and re listen to the launch of the portal climate and will soon launch leasing Russia last June.
Additionally, post acquisition award and the share based compensation expenses for program management of Portland, and amortization of intangible assert addressing fund a creation of Maisie ordeal.
Approximately.
Thanks.
Milling also contributed to higher general.
General and administrative expenses this quarter.
Some of the impact from the acquisition of Amazing audio.
<unk> would have increased.
31% year over year.
Our effective tax rate for Q2 were talking 'twenty one.
11, 5%.
Our net profit was RMB 871, meaning the net profit attributable to equity holders of the company was RMB $827 million.
Net profit was RMB.
116 million and a non op net profit.
To equity holders of the company.
And the one client.
One 2 billion.
Not opex that matches with 14, 5%.
As of June 30.
121, our combined balances of cash cash equivalents term deposits and short term investments.
Well RMB 26 billion, representing a decrease of <unk> 1 billion from Q1, <unk>, primarily driven by payment for stock repurchase.
Cash generated from operating activity had a positive impact on the combined balancing.
Looking forwards.
Expand our investment in sales, but back to contract on a constant on utilization per plan to foster innovation for a multi development.
Online music industry allows us adding basket.
And our music users.
Furthermore, we will keep focusing on we will put back such as noncore audio and revamping existing product builds on our long term growth.
This concludes our prepared remarks, operator, we are ready to open the call for questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
And to withdraw your question. Please press Star then two.
For the benefit of all participants on today's call. Please limit yourself to one question and if you have additional questions you can re enter the question queue.
At this time, we'll pause momentarily to assemble our roster.
And the first question will come from Alicia Yap with Citigroup. Please go ahead.
Hi.
Good morning management, Thanks for taking.
Any more questions.
I wanted to follow up on management's remarks regarding these potential all business operation impact that youre expecting pulse directly later refi.
That would be more on the Susquehanna.
Or is it more on the PC cookie to comfort more future paying users and <unk>.
What kind of stepping back in.
<unk>. Thank you you plan or have done to minimize the impact would it be possible.
To push more on the freemium model with higher online that removes potential. Thank you.
Thank you for your question I'll take the first part of the answer and then.
Perhaps.
From management and Ken can add.
I think as you know towards the end of July there was a penalty position by directly metairie authorities.
Pursuant to which among other things we.
Have you implemented rectification plan to terminate it.
Exclusive music copied.
Copyright licensing arrangements within 30 days from that from the date of that decision.
We sincerely except that decision and are committed to complying with all the requirements fully in the timely manner.
While the decision will have an impact on our music business.
It is worth noting it is worth noting that all of the music that has been available on the platform.
<unk> to be available on the platform to our users.
And we will focus on strengthening our operations in accordance with the regulatory requirements.
We will also focus on better serving our users through product innovation.
Which ross.
<unk> has has elaborated on.
And we will also focus on fostering the healthy development of the.
Musicians and the music industry as a whole.
Let me pause there and see if others and management has other things.
Yeah.
I'd like to add is as I think that's all the questions and I think to add one of the key competitive edge.
<unk> and try to.
Dual <unk> strategies, which means that we had with the largest music platform, but again as we mentioned that we also committed to continue to develop our content ecosystem, which will make us to be in a more long term healthy development and create value for our users.
As you mentioned and frankly speaking we definitely we will follow the petition by the regulators and we will comprise on it in a timely manner and also we are seeing that is to have some impact on the operational day to day operations, but I don't think that is going to be have too much impact on our for example, driving our online.
Prescriptions.
As you see I think we are still in a really good momentum because the users has been educated and they really see the value of music and they are willing to pay for music as long as we are providing high quality content to content to them. So we still have the confidence that our own.
Online music services Youll be.
Driving in a healthy manner and also as I mentioned, we continue to extend our footprint and working together with disciplined industry partners, especially on the content creation side.
Not just the upstream for the content and production, but we are also doing the downstream, which I'll organizing more and more like the online and offline music concerts and this is not just the regular contracts, but we also have some <unk> and new features for the online interaction to use us.
So I think that all of these but it <unk> strategy.
Help us to continue to create value for us in the long term.
And then kind of when do you want to <unk> sorry.
Our income which Andrew.
Hey, Ron.
Okay.
Distributing the Bon ton guidance at all on trying to take 12.
<unk> presented.
<unk> EMEA clearly.
Digit Susana <unk>, so are you going to.
The answer to that would be oncology at home in the.
China Digital Cage, Huguenot gentlemen, thanks for taking you should do a moment, either partly or fully integrated ahah continued in Asia.
We are also in discussion with Tencent video.
To cooperate in the area of join subscription.
That's a work in progress.
Update everyone in the next quarter.
Thank you.
Next question.
The next question will come from Alex Poon with Morgan Stanley. Please go ahead.
Okay.
Thank you management for taking my question. My first question is regarding the exclusive contents.
Could management share roughly how much streaming volume overall and behind the paywall is driven by exclusive content.
And what is the percentage roughly from independent musicians.
Moments.
The mix change overtime.
My first question My second question is regarding <unk>.
A quick question.
Because from now on we will have.
We have we'll have last six quarters license content.
Do we expect.
Spend more on just a quick question.
And how much right now we are spending on acquiring new users.
And.
Apart from.
Just a marketing tool.
Do we have to.
Increased more discounts.
And to attract new Josh.
That's.
How we will all have music.
Pending future. Thank you very much.
I'll answer the first part of the question and then regarding.
Acquisition costs in our pool Shirley can address that.
We historically have not disclosed the exact percentages streaming share.
Relating to various types of content.
But we do historically have.
Exclusive content.
On the platform and also.
As part of subscription plan.
Although it's also worth noting that.
That there is.
A fair amount of non exclusive content within the subscription plan also.
Then specifically with regards to the indie musicians.
Our streaming share that has been growing steadily over time.
And we intend to continue to grow that over time.
As more and more musicians join our Tencent musician platform and we're committed to supporting the development and as more and more of them joined to the platform. We are able to discover and work closely with the promising new talents.
To be able to jointly create music together, so I think that brings new opportunities for us in the content <unk>.
Creation area as well.
And then in terms of.
How it affects.
Our our subscribers.
I think it's important to note that the users.
Have been educated over a long period over a number of years.
To subscribe to a music service.
It is a fairly consistent monetization model across the industry.
And from a regulatory standpoint, we believe the regulators.
Also keen to promote the overall healthy development of the music industry and having a viable long term monetization model is an important part of that.
And so I think we will continue to focus on.
Delivering high quality products and service to users.
Through the June flywheel of content and platform that caution and Russ mentioned.
And as we add more quality content, whether it is licensed or whether it is.
Co produced or.
Perhaps going forward there may be increasing so production.
As well.
We will be adding more quality high quality content into the subscription package and as well as more.
Privilege is behind the subscription plan to make it an attractive offering to grow the use of basin.
As of Q2, we continued to see.
Healthy growth.
Our net adds which recorded a record high net adds in the second quarter as.
As well as we continue to see a healthy improvement of continuous improvement in the retention rate.
For our subscribers.
Yes, Alex Thanks for your questions and I will let you add a little bit more color regarding the Tencent musician program I think we have been doing a really good work since we launched the Tencent music folder and program back in 2017. So after four years of hard work I think that we have achieved a revenue.
<unk> results and we are seeing that there is not just in terms of the quality of songs.
The number of songs that has been distributed to our platform, but I think that we are really creating value.
The musicians and music creators like folks onboard the IP rights protection.
Also has developed as an open platform, which can help our users and also the musicians to distribute and registered music's.
<unk> us and then we help them to distribute food of Tencent ecosystem and also either.
Outside China as well.
Besides we also try to focusing on health paying the musicians theyre not there on their own we try to do some collaboration between the 900 risks and also other professional produces as well so we try to bring them altogether and the most important thing is to post continued to produce high quality.
So this is really important that we will continue to do and also we are always focusing on creating valuable the musician as well we want them to the hardware can be reward. So we also have continued to enhance our revenue sharing and rewards system, which led our young generate.
Against the generation musicians to continue to make a living on our platform and after the close of hard work, we have been achieving a lot and I think that we are in the <unk>.
<unk> progress and also the last but not least I would like to mention is the PMD lie.
We have this kind of.
Online and offline consciousness and music festival, we can also letting our tencent musician two started to participate in the <unk> as well and also in our live event like the online broadcast as well so theres a lot of them that we can work and this is strongly believing that this is one of the key.
Competitive advantage of <unk>.
Total ecosystem that we built for our users and also the music creators. So I hope that is the answer we will help your questions now.
Hi, there if I may on <unk>.
Women's Clayton.
I mean, I can towards honestly enzymes hybrid type you might able than women Chennai is only going to be our daughters are even if united towards the Eagle Ford U.
<unk> core <unk> you're right.
<unk> bought a year or so Julio who'll go and Thats about <unk> <unk>.
Let me answer I applaud you lowered.
It won't be all called on.
Hopefully they all fall on humans seemingly going blockchain for guidance showing now.
So we thought about in a few <unk> announcing nitrogen on women.
Hi, Jon Chu module shipped in <unk> achieved in shutdown and it is unbelievable.
These issues continuing <unk> co.
<unk> got Fabulous single motion onshore in Angola.
<unk> resumed on Eagle.
Company issues tied to when you distribute announcing legal who don't Joey tissue dye put home shipyard platform in Chennai, Andrew Chang was with you I think on total.
Using a needle John upon on <unk> syndrome.
<unk> I believe <unk> to another one this year.
About four.
Mahmud.
Oh, sorry.
Thank you Dave.
Well, Craig we've had on Wassa.
Yes.
Sure.
In terms of user acquisition from a platform perspective.
Our strategy continues to be a multi product portfolio approach.
Whereby in addition to the three major.
Music apps across QQ music, Google Music music.
As well as we saying, we continue to incubate and expand our footprint into other segments with new products.
And then within each product the overall strategy is to focus on video <unk>.
Social as well as community building.
As an example within kugel they've recently.
<unk> launched a new feature which allows users to upload and generate video content.
And also facilitate user interaction around those video content.
Within the music App and then similarly, QQ music launch an immersive full screen video feed.
Two.
Provide and a rich video content within the music platform <unk>.
Through these measures.
We hope to acquire more users.
Shirley Please go ahead.
Yes.
On the online music services, we factor that will be stable in the third quarter as compared to Q2, where we will balance that promotion.
<unk>.
<unk> ended.
Ended the rapid growth of our subscribers and the <unk> expansion.
Our subscriber numbers.
Very good performance in <unk> in that quarter.
Sure.
Thank you management for sharing the full picture.
The next question will come from Eddie Leung with Bank of America. Please go ahead.
Good morning, just a question on gross margin.
We know too.
Right.
In the gross margin.
So we understand that there could be a few reasons for example, you guys expanding content.
In addition, we also know that from some other live streaming companies the revenue sharing ratio to live streaming hosts.
Industry.
The increasing and then finally, you also understand that payer.
<unk> has been more long form audio content. So could you occupancy I think more collar on.
The few factors a holiday effect.
Margin and how should we think about it in the upcoming couple of quarters. Thank you.
Okay.
About the gross margin.
You bet.
The reasons why our gross margin decreased in the tier two and then in the <unk>.
Next.
We expect.
Revenue sharing ratio for leasing will be continuing to increase and the investment.
The new product and content offerings, such as the long form audio also people.
No.
It is now.
One one.
One aspect and the second.
We.
Our social and 10 minutes LLP.
Ah patient.
So.
So.
<unk> gross margin is generally higher.
Yeah.
So the revenue mix shift to avail from social to music that will also be.
Negatively impacted our gross margin.
<unk>.
And then for the.
A cross license of coffee to drive cost.
In the short term.
Hi.
Now to that clearly impact.
Sure.
Scott.
Because.
We think next.
Label.
And the industrial also need to tighten tool changes they are operational.
Sure.
<unk>.
Cost structure will be.
In a stable in the near term accurately non travel we think next cost structure up music will be changed.
From high minimum guarantee tool revenue sharing natural uptake.
Our gross margin.
So.
Conclusively at believe Inc.
In the next quarters, our gross margin will be under pressure.
Got it.
Add a little bit more perhaps I'll add a little bit more context.
Behind that as well I think in.
In terms of the outlook for the full year 2021.
We currently expect the <unk>.
Total revenue year over year growth rate to be approximately 10%.
With online music revenue growth around 30%.
And we continue to see healthy operating leverage coming through for online music.
So I think within the online music business.
It continues to grow very nicely.
On the other hand.
Social entertainment revenue for the full year is expected to be roughly flat on a year over year basis due to the weakness in live streaming as well as the margin reinvestment.
Sure we talked about.
Now within online music.
We continue to expect strong year over year growth for subscription revenue.
With paying user net adds continuing the pace of between $4 million to $5 million per quarter.
And then on the other hand, while AD revenue is expected to continue to see strong growth.
As we mentioned in the prepared remarks, the growth rate is expected to be lower than previously expected.
As that business is impacted by regulatory guidance relating to the launch.
At in order to improve user experience.
And then within social entertainment.
The weakness we're seeing in live streaming is due to a combination of.
Macroeconomic impact on paying users spending behavior.
It's also a result of competition with short video platforms for users and for performance.
And also a result of conservative adjustments, we're making to the last fuming operations to comply with regulatory directions in the areas of content safety and tipping behavior.
And therefore, I think taking all this into account.
In terms of margin, we do expect the SEC.
<unk> have to see.
Further pressure in the margin.
As a result of the.
The what.
Cost pressure in terms of revenue sharing.
Two last gaming performance the weakness in revenues that have a higher margin in the past and also reinvestments into new businesses and products.
Got that thanks Antonio.
The next question will come from Thomas Chong with Jefferies. Please go ahead.
Hi, Good morning, Thanks management for taking on my questions Mike.
My question is about our long term piece in this trial.
Given that we are seeing a softness in the second half.
We still stick to our long term.
<unk> target and then my second question is about.
The.
Is there any.
Station.
Impact coming from the piece of our initial test rates.
We need to think about in terms of net.
Net margins, sorry, and on that front.
I will also comment about any.
<unk>.
Protection and privacy issues that we need to.
Think about.
In our music apps as well as on our advertising business. Thank you.
Okay.
I'll address most of that question and then Shirley can talk a little bit about Tac well first of all in terms of.
Data protection.
We are committed to complying with the relevant regulatory requirements in the areas of data privacy and data protection.
So I think that's an important priority within the company.
We continue to improve our operations to be in compliance and then in terms of long term growth.
Trend.
We're confident that despite the short term weakness in some of the business specifically relating to the last streaming we're confident about the long term trend of the business.
And as I mentioned.
The subscription net ads for a subscription of between $45 million per quarter continues we expect that to continue.
And I think it's worthwhile also.
Coming back to our long term strategy, which is the jewel flywheels of content and platform.
Because that's the.
The plan that we continue to execute on with respect to content.
Our goal is to build the most comprehensive content ecosystem covering a broad spectrum of music and audio offering.
So on one hand, we will continue to enhance and broaden our cooperation with label partners to expand our content library and while on the other hand, we will also partner with upstream content partners, we will partner with artist.
On indie musicians to co produce differentiated content or even self produce differentiated content.
And then thirdly, we will continue to foster the development of indie musicians.
I won't elaborate there is caution has talked a lot about and fourthly, we will deepen our cooperation with Tencent group in the area of content production.
Businesses like Tencent video Tencent Pictures, Tencent games, China literature to co produce music content together to better capture the full value of their existing IP in.
In fact, we have already.
<unk> produced.
Two thousands of chart topping songs relating to games movies literature Comics IP incorporation with prominent artist.
Such as time to achieve and young TNC.
And as we mentioned in the prepared remarks.
Theme song of the popular movie Shanghai Tang is also of production from <unk>. So I think.
Thats.
Our comprehensive content ecosystem strategy that we pursue and then within our platform.
We aim to strengthen our core competence around music audio in social user experience.
Specifically as Ross mentioned.
There are four main areas.
Number one in the form of visualization.
We'll continue to enhance the video features across all of our platforms.
And as an example, we launched the video feed within QQ music and immersive full screen video feed.
And as a second example.
We will continue to deepen the cooperation with <unk> video account.
And then secondly.
We will continue to emphasize on social and community building.
An example of that QQ music launch the Pudong planets are social feature that connects users with common.
As a case and we also.
Launched new features that allow users to update their <unk> status.
Using songs they are listening to.
So that's there's also opportunity for us to deepen our cooperation and waiting in the area of social and community and.
And thirdly.
Audio.
As a highly complementary.
Our content and service to to our music users.
And as we have seen in the past from the actual results.
Providing audio content to music users actually helped increase the stickiness of the platform and increase the overall time split.
And more attractive and provide a more attractive content across both mute.
Music and audio which is differentiate it compare to.
Other competitors in the industry and then I think finally.
We continue to operate a multi brand and multi product strategy.
Each product within the portfolio have its unique positioning that covers a unique user segment that has a very has a very strong leadership in.
And we'll continue to sharpen.
The operational synergies that will extract across the platforms and R&D efficiencies that will extract across our platform through middleware architecture building.
So that's the overall strategy that we intend to pursue.
And we're committed to executing on that.
A positive tax rate.
We think and believe that our ETR will be stable in.
Next quarter.
Caught us because we do not take into consideration of the professional tax rate case the company.
Entitled to when calculating our effective tax rate until the application is approved.
So <unk> be no impact.
Net margin yes.
Got it thank you.
The next question will come from.
Will come from <unk> <unk> with Goldman Sachs. Please go ahead.
Thank you for taking my question.
Michel you talked about how you move away from the current contract structure.
The labels could you just generally speak about how you'd position on a competitive perspective versus the other company when MSG go taking into account and how this is likely to evolve.
That would be great. That's my first question and secondly, the other company that was looking to go public they talked about a social RP that was significantly above yours does that represent the opportunity for you and if so how would you exploit that thank you.
Yes, I talked about the contract first.
First of all we would like to reiterate that we strictly follow the direction.
And we will continue to we negotiate our license contract with our partners in the and change often exclusive content in contracted into a non exclusive.
Track within a month.
A month. So we are now in progress on to discuss the details with them and as we know it will.
Also in Boston.
A detailed discussion regarding the <unk> so.
So we are in the <unk> progress to talks about these houses and we really want to shut off.
Hunting manner and also in the other way we are also talking to some of the other content partners debt.
We do not have contracts than before because they have some of the other exclusive contract with out of the platform. So we view fully committed to bringing the best quality of music.
Continue to expand our music library of all users.
Besides the license.
Contents. We are also committed in doing our self productions and co production with our partners and in terms of the margin side I mean in terms of the business side I think that after co produce that Asaf will do the content. We will have a more superior margin. So this is also will help us to continue to lower.
Our content cost.
So JD what you also mentioned about the second half okay. The social entertainment.
Upon such antennas.
I believe.
We expect to naturally will be under pressure in the future quarters because of lead to some other government automatically by our staff because we think that the regulator will be tight at higher on their part so we will change our.
Operational massage and.
Mike.
This business.
More closely in the future.
And we believe.
If we can expand.
Use of our social and payment platform such like.
Leasing impactful.
Our ratio.
Okay room can be.
Positive.
In fact.
Our.
Im not sure we can.
Chance to increase our social and Tim and op.
Next.
So we think we.
How many men and we have.
Manley makes us to increase this patch.
Such as we can.
Cotton module or the performance in our platforms such as.
Okay.
Cool.
And.
We also can use our public abdominal.
Tom Gorman caskets in kind of okay platforms and the.
If you would.
More.
More revenue out of this part so likely in next year, our search and turn that into revenue can be.
Ah.
A good performance and.
Revenue can be stable, yet can be stable and a little increase.
Our loan portfolio at <unk>.
Okay.
Mitchell.
Okay.
Nick.
<unk> settlement unlocking anatomy, oncologic boarder opposite of what I'll call the garage with Jimmy <unk>.
DNA <unk> maintained with you my lines to.
Accumulative.
So until they eventually make sure you're going through bottom high number of around <unk>.
<unk> number of course on <unk> I mean can you goes out to two zone, three and learning Jabbar mentioned.
<unk> also mentioned being with a woman so any sort.
So the guidance I mean, if youre running a few nice aren't being put into each one of the automobile aggregate similar patterns. We saw in excuse me, Sean <unk>, Jo mill, and lower <unk> oncology and unless that changes.
Now I'll try to answer the annual amount.
So financial with function of Sungard, knocking hydrogen, though if we don't know path for the peak season is that.
Hi, Andy mentioned Neogen, Walt Disney Hope United into broadly I know you compete animals.
Thank you everyone. Its actually <unk> change on the Jimmy can you grow <unk> Eagle PJM or not doing.
Jamie This is actually a high and a shortfall in our daily as senior women elimination on Golar <unk> zone to water Division Footworn unless he is on the AUR will generate.
Are you going to use them.
Okay.
Two points first.
Within the social Entertainment <unk>.
The Cougars live streaming <unk> is historically higher.
Whereas the leasing or <unk> is historically lower.
And.
Within live streaming.
We are actively building our middleware architecture.
That leverages the cuckoo capability.
Two leasing latch streaming so that we could improve efficiency while.
While the focus is more on the <unk>.
Paying users for leasing.
Through these middleware architecture building, we hope to extract increased efficiency and thereby should add some value to the overall revenue generation.
Secondly.
We pioneered for the first time in the industry recently across platform.
Streamer PK competition across Google life, and we're seeing.
Specifically.
That happened in June where we hosted.
The first ever cross bar for the competition.
It gives the last streaming performance and.
An opportunity to tap into the other platforms audience and thereby increased exposure and the result, we've seen is a significant increase in the revenues of participating performance as well as Ah.
Tracking more paying users to participate even those that have never send virtual gifts on the platform. They are attracted to participate for the first time and so we hope to replicate that successful event now into more cross platform opportunities.
And I'll also add that within social entertainment.
Ill plan, specifically within leasing is that we are undergoing a major product revamp to improve user retention.
And the revamp is centered around strengthening we things core competence around singing and social interaction.
And we think will be upgrading the online karaoke room.
Make singing more fun and socially engaging.
The new version of the.
Karaoke room would offer a wider suite of singing features from solo to do add two small group singing to large group singing as well as Takeda.
Four.
To allow the audience to pick the sum they want the main singer to sing will allow the audience to sing along together with the main singer as well as to enable cross singing room interaction.
We think would also.
Soon be launching a virtual live streaming room.
To pioneer a new entertainment experience that brings live streaming into a unit to a meta versus like environment.
And in the future.
In that environment performance can choose the avatar to perform their live streaming and interact with audience in this virtual setting and so in the future will expand.
This meta versus like.
Environment to more use cases.
And provide richer interaction opportunities.
And more imaginative.
Virtual interactive experience.
Thank you Tony.
The next question will come out.
With Jay with JP Morgan. Please go ahead.
Good morning, and thank you management for taking my questions.
A quick follow up.
On previous questions number one regarding the use future needs.
Social entertainment side.
We do see we see new shoes.
On these user asked you on crude <unk>.
Usage and time spent.
On streaming.
<unk> on the platform.
And number two I think Tony.
Tony You mentioned the revenue outlook for the social entertainment.
Snaps.
Which implies second half revenue.
Decline on a year over year basis.
Okay.
Almost done.
Monetization weakness using SEC.
On one hand, you guys mentioned the.
Increasing monetization ashrams friction costs.
So the PK initiatives across key on streaming platforms.
Platforms.
Hans.
Mistaken.
Sure we mentioned.
Dan.
Model.
Clinical strategies and moderating your monetization on these platforms.
Any color on <unk>.
Revenue weakness using second council.
Social entertainment that will be helpful. Thank you.
Sure.
Our social Mou perspective, the year over year decline is across both that we're seeing as well.
Streaming and.
A key reason for that is competition coming from other planned Pan entertainment platforms, such as short video.
And we've talked about the action plans and the product revamp and the areas that we'll be doing to retain to better retain users and acquired we acquired the traffic in a term in terms of revenue weakness in the second half for social entertainment.
The weakness as.
As I mentioned is primarily relates to.
Metric relates to live streaming revenue weakness in the second half.
That is a result of.
Three fold first the macroeconomic impact.
On paying user spending behavior.
And secondly continued competition.
Specifically from in particular from short video platforms.
For users and also competition for performance.
And then thirdly, we are also making conservative adjustment.
The large streaming operations.
In order to comply with stricter regulatory directions that we are facing.
As an industry overall, so I think the impact of these.
Items obviously.
It has a bigger impact and we are mitigating these impacts through a number of measures that we talked about.
Such as the cross platform competitions, such as the new features that our new product the rebound that we're doing within social payment, but that would take time.
To fully compensate.
We are now approaching the end of the conference call I would now like to turn the call over to your speaker host today Ms. Millicent T for closing remarks. Please go ahead ma'am.
Thank you everyone for joining us today, if you have any further questions. Please feel free to contact the IR team. This concludes today's call and we look forward to speaking to you again, thank you and goodbye.
Do you.
Thank you everyone and thank you again.
Yes.
This concludes today's conference call.
Thank you for attending today's presentation you may now disconnect.
[music].
Okay.
[music].
Okay.