Q2 2022 Tencent Music Entertainment Group Earnings Call
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<unk> Charlie Robb.
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Ladies and gentlemen, good evening and good morning, and thank you for standing by.
Welcome to the Tencent Music Entertainment Group second quarter 2022 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, Mr. Tony Yip. Please go ahead Sir.
Yeah.
Thank you operator Hello, everyone.
Thank you all for joining us on today's call.
<unk> announced its quarterly financial results today after the market close.
An earnings release is now available on our IR website at IR Dot Tencent music Dot com as well as via Newswire services today, you'll hear from Mr. Christian <unk>, our executive Chairman, who will start the call with an overview of our recent update next Mr. Ross now our CEO .
And hi, Tony <unk>, our CFO .
For additional thoughts on our product strategy operations and business development.
Finally, Ms Shirley Hu, our CFO will address our financial results before we open the call for questions.
Before we continue I refer you to our Safe Harbor statement in our earnings press release, which applies to this call as we will.
We'll make forward looking statements.
The company will discuss non <unk> measures today, which we believe are meaningful metrics for evaluating our performance. Please refer to our earnings release and SEC filings for a reconciliation of these measures to the most comparable <unk> measures with that I am pleased to turn over the call to cushion.
The chairman of <unk>.
Thank you Tony Hello, everyone and thank you for joining our call today.
In June 2020.
In June 2022, we celebrated the first anniversary of launching our dual engine content and platform strategy.
Over the past year <unk> has continuously innovative business models and improved our all in one music entertainment content and product capabilities to better serve our users and partners.
Meanwhile, facings of compacts and evolving industry landscape.
We continue to explore music intrinsic commercial and cultural value.
As always we try to nurture our music ecosystem and foster the sustained it.
Healthy development of Chinese music industry.
On the content side.
<unk> reached at our regional content production capabilities.
To that end, we launched a new smart music assistant functionality in May.
Enabling creators to quickly make decisions for our proprietary ppm predictive model at key stages of the new production process.
Thermal screening and market appeal potential evaluation.
Each of our tools facilitate more efficient production of high quality work.
<unk> thousands of original songs.
But in streamed more than 100 million times in the second quarter.
Notably pressing of the three lifetimes.
So I'm trying to sing a song by highlight envelope.
Dedicated to his beloved a partner.
Was a blockbuster that we produced promote and helped too ambitious on the variety show the treasure to avoid 10 she doesn't mean.
It is nominated major music cost and generate a huge social media.
On pricing over $2 5 billion views and 350 million streams in the second quarter.
Meanwhile, we continue to refine our original content catalog.
Focusing on key verticals, such as gaming and hip hop music in.
In the second quarter and collaborated with popular game titles, including honour of Kings laundry room Yao League of legends <unk> usual net G&A inside.
And Peter Cooper.
Hello <unk>.
Among others.
With well known artists, including Angela Dong somehow Hahn.
Jim Shao Salt income and seen <unk> 15 chart topping games songs, notably the theme song of the honour of Kings game character Sunglass.
<unk> bye.
<unk>.
<unk> has achieved the highest number of first week streams, among all QQ music games released in the first half of 2022.
Plus more in the trendy hip hop genre, we cooperated with the NBA on its 75th anniversary album.
Titled single time to Shine.
Performed by Chinese artist laid down some leasing and an American pro basketball Star Nick Young.
<unk> the first Chinese theme song to appear in the NBA finals.
Nick.
Food Tencent musician platform and spared no efforts to cultivate a ripen community of indie musicians, while creating a positive social impact.
Tencent musician platforms continues to and Paolo musicians.
<unk> of online and offline promotion capabilities and monetization avenues.
In the second quarter we.
We introduced a new surface for our musicians to UCD mass distribute musical works globally to over 150 popular platforms, such as Spotify and Youtube with a single click.
<unk> has already brought a 190000 songs by over 10000 musicians to overseas audience as of the end of the second quarter.
<unk> also now allows musicians to publish their songs easily on mobile phones and to self host pay per view live events with merchandise.
And impacted.
For instance, we recently hosted a pay online birthday party for a musician yen, we have a rich pipeline of additional pockets, yet <unk> and Webb plus.
More as a long term support program for musicians our phosphate plus 22 program launched at the open my fewest in April which has already produced the offline performances by over 70 groups of musicians across seven cities.
Tencent musician platform also plays a preferred to ROE in exploring China's reach deeply in back of social and cultural values <unk> at work.
Notable examples in the second quarter include first new trend in Chinese ancient style <unk> call, an album boosted by up and coming and compositions, who cater to promote Chinese cultural full music.
Mike goes our music creation painful female musicians.
We signed it to promote female and dependencies and shelf awareness.
But.
Final finished album music.
Upon that John .
John effort between our musicians French musicians and the French embassy.
<unk> was showcase it on the front page of Apple music recommendation list further enhancing our musicians international appeal.
We have our finger on the pulse of our users' preferences continue to assuming on both trendy and time on Adobe user experiences.
To further enhance the quality and variety of music on our platform as well as our reputation as the go to destination for Q music verticals, such as Costco BJ and keep pulp yes.
Yes that pushed the strategic cooperative relationships with Paul fashion, no coffee cold us institutions.
<unk> launched the <unk> Vijay for ethane plan, one boot JP block and build up kudos, New Rep brand Rep trial basis saw chunks handful among other initiatives in the second quarter.
One remarkable success was the 2022 single she can do magic Hathaway multiply by PJM to fish.
Which dominated chops on many music platforms. After has created joined at the DJ for everything plan.
Achieving nearly 700 million streams.
The end of the second quarter on <unk> platform.
Moving onto <unk>.
Our comprehensive online merged offline performances brand was presented 132 high quality live music performances since its debut two years ago.
In the second quarter. In addition to online live concert for World ranked <unk>. Among August PMT life was also prouder to breathe new life into two legendary series of record. The concept by household named August Lastly, John <unk> and <unk>.
So cherilyn supporting the Altra high definition video and song restorations and tangible by AI algorithms for selective events.
These two huge hits when survival and dominated the top trending lift accumulating over 100 million unique viewers.
Within the Tencent ecosystem, and social media Buzz of 6 billion views.
Gatehouse concept also set a new record in viewership for online concerts in the industry and his August merchandise, including two action figures, so flu output, how more and Tencent channels achieved close to 10 million RMB in <unk> in the second quarter.
Jim July is not only serve as an online stage for artists and musicians.
But also demonstrate our game changing creativity offline.
Our <unk> live in House Lighthouse tour, we are providing precipitating August end users with immersive interactive experiences.
Early start.
Including young Jack.
Wrecked Paypal <unk> and cafes.
Live events in the second quarter and ticket for some events was sold out in just two hours.
In summary, what matters most to our music lovers.
We created and brought some nuclear industry as the primary areas, where we will continue to invest and drive innovation.
<unk>, our ambition to support the sustained growth of the music ecosystem in China.
That concludes the progress update on our growing content capabilities now.
Now I would like to turn the call over to Ross, who will share more about our platform strategies Roth. Please go ahead.
Thank you Carsten.
Hello IRA.
Moving onto our platform starting in the second quarter may continue to innovate.
Our four pillars of entertainment, namely leasing large steam underplay so provides us.
With a stage to express their meal they call tested on the builders ericsson's offline identity platform.
Platform.
In return deepens their recognition.
In connection with our products.
In terms of leasing in the second quarter.
Iot offering fun product features to provide a more professional music streaming use periods.
For example, we're pioneer the homepage theory coast, Columbia, Gulf, which displays syncrude owners on the mobile home screen mainstreaming fossil.
Also road at all.
Premium song feature GDP injured supporting real time phone call. If the husband basically is now available.
Our Super VIP membership on the highest bid activity by 85% of this southwest.
While small.
Further improve you also need today for this.
<unk> efficiency in the second quarter <unk> line.
<unk> radar more laid out moisture on the homepage.
Nickel mat recommend songs for Yieldco based on their favorite artists.
Of course in our lives.
Contributing to new highs for QQ music recommendation penetration yes.
Yes <unk>.
Cobalt drilled at Neal such fascia, allowing <unk> to fund the dividend portion.
All staff all of those things fall they also added.
Features such as mobile playback of all selected a strong section kinda on bolt.
On the SaaS defined music chart three equivalent in size to the panel to create a more personalized music streaming experience.
I saw watch.
Another dimension to use us in months.
In the 10 minutes is Perez.
Based.
On understanding of <unk>.
Great.
The music related video content <unk> media accounts is very popular among users on <unk>.
<unk> are among the best in the EMEA territory operation, maybe all homes.
<unk> also continued its will work with Lisa maybe I'll call during the second quarter will bolster our promotional capabilities.
It's positive for India.
The number of organizations with our connected TV video accounts continued to grow by a double digit quarter over quarter.
Meanwhile, our products also released new office to strengthen.
<unk> experienced inc, including one customized dynamic images personnel play that play this under two focused station Thunder within high which provides.
Julia has at least being in service across the.
The same scenarios.
<unk> <unk> and <unk>.
Ah patient.
The third pillar.
The only.
<unk> may provide interesting.
Launch major wasn't articulated in July towards expanded the experience of seeing from mineral production audio work into market dimension.
<unk> experienced in the second quarter Auto Australia Amato function function.
T K K salt plethora user's identity car innovation award and allow them to generate.
<unk> Lindeman recording on Athene in their address.
On page <unk>.
Additionally, in the second quarter by <unk> <unk>.
<unk> tools to stimulate interest in music creation.
But the participation for mice.
Lithium propane out of the industry, it's AI based on.
Sales I'll say, it's technology, allowing user locate a store create.
Ratios based on their own <unk> recently improved.
Although its likely to its owner.
Obviously the reserve.
Additionally, import cobalt also also unveiled its first.
In the life of a gen Z celebrating <unk>.
Enabling youll start.
On the sales side source, let's start the one fleet.
I think our trend.
Mutualization may also enhance our play element by extending.
Or use cases and monetization opportunities across the base late <unk> into <unk>.
In the second quarter, Yes, Milan or you must say same.
Same park team Novelis, our Ddos original on the hosting of the China, China is a first rate show that Concord, London on the OLED feature.
Although it may not.
Including.
Since there isn't a laptop polymers bipolar Robert.
<unk> tells that fund and then I'm thinking OEM king as well as Vito solvable.
Actually installed.
Thus thumps up even the <unk> or cellular million mills, certainly youll recall their email shape okay.
We also continued to upgrade our rules.
Rules, which combined they seem to stall Rachel Rachel <unk> halt for.
While total also 13 staff outside held in our <unk> Saint Lawrence.
Including Cigna and express Cindy Wang functioning and emulation Neal Shah who joined in the second quarter.
As a pioneer in the application of innovative leasing was sitting on the plane functions kilkeel meals like highest continued to improve year over year, our persimmon to our young content obligations and the other one is the future interactions.
Our long form audio service to run off.
Pulp portfolio well simultaneously.
<unk> our content notable notable way higher will be in strengthening our brand appear in sleeping iron content, one of the fastest growing categories on <unk>.
We have team in optical based professional organizations.
<unk> <unk>.
<unk> hotels in the us.
Other ecosystem partners will provide.
<unk> diverse professional sleeping iron content needed by AI.
Real world celebrated in the dealer to the equation.
Growth in user scale.
Jamie on the time spent in the watsco.
<unk> in the second quarter, we continued to enhance our collaborations with Tencent video.
Sizable APRA almost promote popular audio books and the associated IP such as the third season of <unk> on the chicken shack.
Along with the dry must pay the <unk> long form audio all parts of the same title enjoyed a mark <unk> is there a streaming volumes.
With that I'd like to give the floor to Tony.
Reveal our business operations Tony Please go ahead.
Thank you Ross.
So everyone in the second quarter, our online music Miu were $593 million down year over year, primarily due to reduced marketing spend however.
However, subscription revenue continued to deliver robust year over year and quarter over quarter over quarter growth, along with paying user growth and a sequential rebound.
<unk>.
Meanwhile, we continue to strengthen engagement among our core user cohorts.
<unk> rich content innovative product features and continual new iterations.
Our Iot service <unk> continued to achieve double digit growth year over year as we enriched the use cases of our prana.
And then establish collaboration with a broad group of partners for example.
We now partner with the top 50 passenger vehicle and top 15 electric vehicle manufacturers by sales, bringing car owners the ultimate in vehicle music enjoyment through new features such as Dolby surround sound and thousands of customized sound effects.
In addition through our partnership with little Genius, Smartwatch shall Kintigh Sylvia which.
Which is mostly used by students.
We things Miu in the Smart watch segment grew triple digits year over year.
Despite the macro headwinds weighted on our online music services revenue in the second quarter subscriptions maintained its growth trajectory.
With 18% subscription revenue growth year over year we.
We are also confident we can sustain the ongoing rebound of our arpus, while continuing to boost paying user growth during the remainder of this year.
As a result of macro changes in the resurging COVID-19 outbreak in the second quarter.
Advertising revenue soften year over year.
However, it rebounded quarter over quarter.
Driven by the June 18, ecommerce sales promotions as well as at.
Sponsorship opportunities arising from <unk> life in T&D land.
In addition, we consistently innovated to build a diversified advertising portfolio.
Our incentive at base free listening mode is making good progress and during the second quarter, we launched a host of new advertising formats and infantry on music charts search pages.
And platelets among others.
As we have strengthened our advertising monetization with additional avenues.
We also successfully attracted well known brands such as <unk> right.
Beijing, Hyundai and Pepsi to sponsor a variety of customized online and offline life events recently, attracting participation by dozens of popular artists and aspiring musician in these highly engaging events.
We continue to deepen our content partnership to enrich the user experience and explore additional monetization avenues in digital music.
Accompanying the launch of GH House Zealand's latest digital Elba.
<unk> works a lot say wait now that Philippines, we tailored diverse activities for <unk> <unk>.
As the customized vinyl record player interface and sound effects.
Just merchandise and interactions in channels and virtual room.
Copies sold exceeded 6 million by the end of July marking another digital album blockbuster on our platform.
Next in the second quarter, we entered into strategic partnerships with time, Fujian Entertainment the music label of <unk> and teams in times should I Sony unplanned.
Eight ex China, and the talented female artists seem new.
The only seen among others.
Our platform has a headstart period on the latest music customize artist merchandise or unique artist to fan interaction events.
Third we joined hands with Y H Entertainment group.
Unify.
A well known artist management company to launch <unk>.
Subscription housekeeping the packages.
13, well known artists such as <unk> and Justin long.
Bombing home, providing customized audio and video content for the subscribing things.
We also doubled down on our efforts to build a young and trendy cultural community to expand our GNC user base in.
In the second quarter, our campus musician cultivation plan <unk> Tempus <unk>.
<unk> organized the wish for a happy graduation.
Copy of pilot events and teamed up with artists from Hawaii.
On campus musician.
Younger to release, some small world jumpsuit yet.
These initiatives brought inspiring messages to that first group of graduate born in the 2000 <unk>.
Resonating strongly with the new graduate demographic.
What's more we began to bring offline music festivals back to our audience in the second quarter.
Such as crew goes crew fund Coufal, Samsung life performance Parade, which debuted in Hangzhou in May and the first wave music Festival.
Honored with SAIC Audi <unk> in June .
Encouraging online live streaming and offline interactions between fans and musicians.
These events are just the beginning of our return to live performances.
We have an exciting lineup of offline experiences planned for the coming quarters.
Now, let's turn to our social Entertainment services.
<unk> sequentially improved while paying users decline year over year due to competition and industry adjustments we.
We will continue to improve our competitiveness through ongoing product innovation and new initiatives, such as audio live streaming and virtual interactive product offerings.
So we think we launched its latest version with tools to energize the singing experience, while lowering the barrier to participate for instance, the upgrade at one click voice enhancement feature you can maintain.
Customizes voice improvement based on the songs with them as well as users voice in volume and timber producing a more natural effect.
Along with other upgrades mentioned earlier.
These efforts paid off as evidenced by the strong double digit year over year expansion in karaoke room penetration and user time spent in the second quarter. In addition to the year over year growth in recordings penetration and user time spent.
In the second quarter leasing also capitalized on the success of the hit song Loamy Warrior, who enter which debuted on T&D and achieved 4 billion streams across our platform since its launch with a nationwide cover context to convey positive cultural power is.
School students, attracting a broad group of participants online.
In response to the competition faced by traditional live streaming services, we continue to expand our content verticals and bring more differentiated content to improve user experience.
<unk> music live streaming continue to expand the scale of its audio live streaming content offerings.
It expanded content across sleeping eight studying and commuting use cases.
<unk> y user a claim.
In the second quarter. It also collaborated with Tencent musician platform to organize 39 sessions of the real time like singing events.
Meat less thing Jim Inbox, So Tom connect.
Connecting musicians and their fans and gaining over 10 million viewers.
These efforts contributed to double digit growth in the average daily number of hosts and viewers as well as a year over year increase in QQ music live streaming revenue in the second quarter.
We were also successful in exploring overseas markets with audio live streaming activities, such as chat rooms, leading to strong revenue growth in overseas market in the second quarter.
We also dealt into the virtual idol and animation live streaming verticals favored by the young generation.
We think added a new life to the function, which captures hosts expression and movement in real time and allow the host to use an avatar for live streaming and multi person interactions.
<unk> <unk> live streaming hosts together with its self owned virtual idol shambaugh.
<unk> animation and comics function demand jointly organized a number of events to recommend popular comic IP to ACG fans through live streaming.
During which events participating hosts recorded triple digit growth in user time spent and the number of views of their live streaming routes.
Last but not least I'd like to close with a word about our social responsibility initiatives.
On children's day, we worked with <unk> to launch a little Red flower charity concert.
Clinical need in their fleet.
Uniting over 30 groups of artists and musicians in a heart warming light concept for children with special needs.
We also partnered with Lamar to host a special public welfare concert.
World Ocean State.
Launching a welfare sone blue new life.
<unk> seen some <unk> to create environmental awareness around the marine ecosystem.
We're proud of these assets to leverage the emotional power of music to advance our social commitment to conclude as our dual engine content and platform strategy move forward. We will continue to use technology to elevate the role of music in People's lives and support the sustained development of the music industry.
With a strong and growing ticket with that I would like to turn the call over to Shirley our CFO for a closer review of our financials.
Thank you Tony Hello, everyone next I will discuss our results from a financial perspective.
Our total revenues for Q2 2022.
<unk> six 9 billion.
By 14% year over year and up by 4% sequentially.
In the second quarter of 2022, our asset.
Net profit was RMB 819, two meetings and non <unk> net profit was RMB one point.
Billing.
<unk> represented a sequential increase of <unk>.
13%.
Out of our effective cost control and improved operating efficiency.
In Q2 of 2022, we are more focused on the return of the promotion for subscription that surveys and the continued to as Jason content operation.
We achieved quarterly growth in subscriptions Sterling.
<unk> revenues grew to RMB $211 million.
At 18% year over year and by 6% sequentially.
Online music paying users grew to 82 7 million up five times or 5% year over year.
Decorating up.
Two final, meaning net add sequentially as we benefited from expansion of sales channels and the paying users of <unk>.
These are data from the ongoing efforts, we have made to calculate the use as they need to pay for music and high quality content and the services they provide.
Mark up was <unk>.
<unk> eight <unk> <unk>.
<unk> a decrease from RMB nine independent peer at lesser yet.
<unk> increased from eight <unk> in the first quarter of this year.
Our strategy to grow our music business in a healthy and as a dependable way has started to bear fruit and the contributor to the continuous growth in music subscription.
Subscription revenue.
Revenues from advertising decreased year over year.
Typing business continued to be negatively impact by the impact of adjustments ended the output of COVID-19.
Hi.
Advertising revenues grew sequentially.
I think it became kind of a moderate to a bundled outlook.
COVID-19 and control.
The June 18th E. Commerce sales promotions also contributed to the sequential increase.
Housing revenues.
Our productivity is spending AD inventory optimizing display and eroding out innovative advertising formats to managing these challenging ladies and men.
Long term growth potential and expect advertising revenues to continue to recover moderately in the second half of 2022.
Social Entertainment services and other revenues.
For billing.
LMI tend to present over yet at the waitlist and loathing macro environment and increased competition from our platform.
To adapt to the changing environment and it'll stabilize then this deal we have differentiated our content offering.
In reaching our ratios in active put packet buffering and acreage across platform ablation.
Well, we've continued to invest in audio labs, obtaining and expand our international business, resulting in growth in revenue from audio live streaming and OFC business year over year and sequentially.
Gross margin in Q2 2022.
<unk> nine <unk> <unk>.
<unk>, 5% year over year, because the decrease in our total revenues.
The pace of decrease.
Total cost of revenue as some of the men are fixed in nature.
Gross margin includes the <unk> right now.
I'll take the <unk>, our effective control on content cost, including revenue sharing fees for live streaming business and improved operational cost efficiency.
We will continue to take megawatts to manage cost effectively and improve our real estate.
Now moving onto operating expenses.
Operating expenses for Q2 2022.
One 4 billion or <unk> five.
5% as our presentation of total revenue.
They will report the full pathetic from 29% as our presentation total revenues in the same period last year.
Excluding the impact from expenses related to our application for a secondary listing operating expenses as a percentage of total revenues would have increased by 1% year over year.
Selling and marketing expenses.
<unk> <unk> hundred the same meaning down by 50%.
<unk> year over year during the quarter, we continued to take measures to employee basis closely monitored.
Each promotion channel, partly recognize the external promotional channel and the line related to our internal checks to attract users and to promote our brands.
Our reduced marketing spend resulting in loss of some occasional use and impact our meals and <unk> negatively.
Our military sub question is relates to continue to Google is that a delay based on hill's growth in paying users and the level of user activity.
General and administrative expenses were RMB, one 1 billion up by 11% OLED yet.
Excluding the impact of.
Navigate to the RMB $44 million from the effect in Q2 related to our application for second Gen missile.
<unk> would have increased by 6% to over yet they continued to match in product enhancement technology innovations and more diversified.
Product offering as well as closely manage employee related expense base by including head count that you are facing.
Our effective tax rate for Q2 2022 sales point.
0.2% compared to 11, 5% in a certain period of time to 'twenty one.
The increase.
The effective tax rate was mainly due to some of our entities are entitled to different tax benefit in 2021 'twenty two.
For Q2 of 2020 to award our net profit authority.
$892 million and net profit attributable to equity holders of the company was RMB $856 million.
<unk> net profit was RMB, one <unk> billion.
And the net.
Net profit attributable to equity holders of the company with.
One point to <unk> 3 billion.
<unk> net profit margin was 15, 4%.
As of June 32019 to our combined balance of cash cash.
Prevalent tenants deposit and short term investment will climb to $5 8 billion.
Compared with RMB 25, 9 billion as of March 31st 2022.
During the three months ended June 32022.
Net cash generated from operations was RMB, one two meeting and the cash used in share repurchases was RMB 669 million. While also incurred a net cash outflow of RMB 497 meaningful acquisition of shut in barrels update.
And as those eight.
Such confined pilot was also expected.
Change in exchange rate.
RMB to USD.
At the balance sheet date.
Looking forward, we will continue to folks.
Our core business and in less demand for new products and services, including long form audio and international business.
Maximize our investment grade tenants and the future growth potential.
Well, we will continue to implement cost of culture in airlines, including revenues showing please for social and came into billet content oriented operating costs headcount related cost and sustaining and maximum expenses to improve our overall operational the same thing.
This concludes our prepared remarks, operator, we are ready to open the call up 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 you are using a speakerphone please pick up your handset before pressing the keys.
Anytime you question Thats been addressed and you would like 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 may reenter the queue. At this time, we will pause momentarily to assemble our roster.
Our first question will come from Alex Poon with Morgan Stanley . Please go ahead.
Okay.
Morning management, congrats on a very strong quarter.
On the <unk>.
Syed.
My question is really related to gross margin.
Gross margin is up about two percentage point sequential basis in Q2.
And despite the social revenue was flat on a <unk> basis.
Management explain all along each of the segments gross margin trend from Q1 to Q2 and how should we think about the second half. Thank you very much.
Okay.
About the gross margin.
This quarter, we've taken more control costs and improve operational efficiency and we have started yet.
Therefore.
Gross margin in Q2 increased 2% sequentially.
The following factors have positively impacted our gross margin faster.
Sharing ratio of live streaming has been controlled and the continued to decrease sequentially.
And I think that will increase as the IFC requirement of content lasers.
Ladies check date agreements with a musical label and I'd say the positive setback that have positively impact our gross margin.
Net search.
Optimize the tech knowledge and operations related to bandwidth and storage capability and include the Gwich'in nation of our service and equipment.
Our operational costs decreased sequentially.
And for.
Subscription revenue growth and advertising revenue recovery also.
Impact our gross margin.
And we will continue to focus on increasing same thing of all business units and across the Italian and the we expected our gross margin will be increased in the next quarter.
Our next question will come from Lei Huang with Bank of America. Please go ahead.
Hi, Thanks management den Congrats and that's all great thoughts.
My question is mainly about your music.
You will notice that Q on Q.
Any more color on CRB handy and hopefully we will look at the RFP going forward.
Tuesday, Okay.
If you have more color on the field.
IP adopt.
Adoption user feedback has the control, but also ensure the artful.
Yeah.
Okay.
Yes in terms of the ERP Bu.
We saw a sequential improvement from last quarters.
<unk> 8000.
30 Reminbi.
This quarter's $8 50 renminbi.
And Thats a result from.
Yes.
More effective promotions.
As well as more discipline in the way that we manage the.
The marketing spend.
Our focus as we mentioned last quarter is on the quality of the subscription revenue growth as the overall target in that we are aiming to both grow the paying user as well as the arpus at a healthy pace.
And we've been able to achieve that in the second quarter and we expect.
This.
Level of.
Our growth trend for both our subscribers and <unk> to continue into the rest of the year.
Our next question will come from Alex Yao with Jpmorgan. Please go ahead.
Okay.
Good morning.
Question.
Questions.
Music subscription cycle.
<unk>.
Between streaming plants, you will prove growths in terms of.
She wants a paywall.
Cindy.
Paywall.
Huntley on you.
<unk> achieved two years and also be flogging the mountain.
Julian.
On the.
Hum.
<unk> gets into Vincent.
Okay.
We'll be trying to do with us.
Bob.
We want to.
And through our dividend.
Strategy.
Thank you.
Sure well first of all in terms of our subscription package, obviously I think we continue to be on track.
As we.
We have more and more discussions with our label partners.
To add more content.
In ceded premium package.
And that progress is going well and we expect there to be more content partners to be added to the paywall in the second half.
So I think we will.
Talk more about that as that.
Bears fruit and then in terms of the balance between user experience and the pay user experience.
We mentioned previously and we also touched upon at this time.
Is the incentive at base free listening mode.
We are seeing very good progress on that type of free listening mode.
I think thats, a good way for us to strike the balance because they will.
With any.
Entertainment platform online you're bound to have a portion of users.
Very low probability of conversion to become a subscriber.
Yes.
We need to find a way to be able to monetize and so the incentives AD based.
The listening mode.
Is is a good way for us to do so.
Right now within our advertising revenue.
Close to 10% of that on a run rate basis is generated by the incentive at phase III listening mode.
Incentive that more correctly speaking, so I think thats and thats growing quite well.
So we continue to expect that to.
Surface B.
Our surface the balancing factor to provide a good user experience.
Our next question will come from Alicia Yap with Citi. Please go ahead.
Hi, Good morning management, Thanks for taking my questions.
I have a question related to the advertising.
So can management share with us.
Because I think you meant among the advertisers, which if I recall actually has to recover strongly in each industry body course, ASP remains quite weak.
And then when can we expect that Robyn.
<unk> XR late on the year over year basis, we accelerated growth again.
Okay.
Yes.
Obviously I think in the first half.
As a result of industry adjustments on the splash ads as.
As well as the pandemic measures.
Advertising revenue.
Was quite weak in the first half.
However, as we.
As the pandemic improves as well as the opening.
As well as the macroeconomic situation improves we are.
We're starting to see moderate recovery of the advertisers demand.
Coupled that with our ongoing effort to.
To expand our advertising format as well as advertising inventories that we've mentioned.
See we are expecting to see a recovery of the advertising revenue in the second half.
In addition to kind of.
The AD formats that we mentioned such as incentive that or in.
In countries that we mentioned in the various parts of the platform, we are seeing increasing amount of interest.
Bye.
By asked sponsors that are particularly interested in interactive events.
And our events that we organise, both offline and online such as ones that we do on PMD land or <unk> or other.
Sponsored events with.
Pepsi sprite in Beijing, Hyundai et cetera.
In terms of verticals in this quarter.
We see decent demand recovery, particularly from e-commerce, given the E Commerce Jean season.
The consumer stable, specifically categories, such as food and beverages as.
As well as the.
The auto industry.
Our next question will come from shaking Shang with TICC. Please go ahead.
Hi, Thanks management for taking my question and my question is related to <unk>.
Some are they shut the video platform have launched online.
Clemens who aren't <unk>.
So I was just wondering how to Appalachian Kenny lab, and how can we think about the competition landscape, which was Jackie Chan and monetization plan for the expenses. Thank you.
Okay.
<unk> I think we have.
Very good planned in having arrangement or not just for the top tier artists, but we are also pulling the long tiers.
Different verticals as well we have a really good.
Cooperation with leasing we do accounts.
We also strengthened our distribution paper.
Capabilities for our large projects.
You mentioned that during our call we mentioned about some of the.
Top tier artist Jay Chow and also Leslie Cheung will be trying to do.
New business of the traditional pop.
Popular classical that closet.
Concepts.
A lot of interest from the users and we also bring in our technology.
Finding that to be help too.
Improve the quality of the overall video and also the audio quality so to ensure better user experience for our users.
Well continue to bring in some of the auditors for example, interactive capabilities to demonstrate in allergy MD life.
Program as well so we have very good confidence, especially.
We're doing an online and offline.
Elaboration spa concepts. So all of these will be continue to strengthen our <unk>.
Yes.
<unk> projects and we definitely feel that is going to be some more quick programs will come into future.
Our next question will come from <unk> Shah with UBS. Please go ahead.
Good morning management. Thank you for taking my question and congrats on the earnings beat this quarter. My question is around.
Online music subscription or paying user addition, we see that this quarter. The paying user addition was it a little bit lower than the previous run rate given our focus on quality growth and also seek the balance between paying user and <unk>. So just wanted to check how should we think about the run rate of the paying user addition.
For the second half also next year and given our focus.
On the marketing spend to strengthen our cost controls will that impact the paying user retention. Thank you.
Yes.
<unk> mentioned before.
Overall <unk> for.
For the.
Ascription revenue.
And for the online music is to see a healthy growth in overall subscription revenue and.
And not be overly.
Leaning on just.
Neither the subscriber or the Arpus. So we won.
Equally in both metrics.
Because we think the whole industry will benefit.
From focusing more on <unk>.
Quality of service as opposed to just on price.
And we do believe there is a lot of value in the music subscription service that we offer and that continues.
Continuous effort to cultivate the users' willingness to pay for this prescription service that continues to see good results.
And so by having more of a balanced approach we lay a stronger foundation for the long term growth, which we can PTC there to be a strong potential.
Obviously at the same time.
We.
Very focused on expanding on the <unk>.
Privileges and the service that we offer within the subscription plan. So.
And we mentioned that we continue to add more and more publishers such as this quarter, we mentioned about the Super VIP.
Whereby.
For 430, Renminbi, a month, which is double the price of a normal premium subscription.
You get a lot more.
Such as you can't access to <unk>.
Number of digital albums.
You get access to the Super high quality.
Sort of music effects once that Ross mentioned.
We get access to the leasing membership you get access to the long audio membership et cetera et cetera. So we are seeing we are seeing is.
It's early stage, but we are seeing good traction.
As we rolled that out.
And people are adopting and they are appreciating the.
The privileges that we putting in to those Super VIP. So for example, the premium sound quality.
Feature that's adopted by over 80% of people, who subscribe to the Super VIP.
And so that also help us.
Improve the AARP.
<unk> in addition to having more discipline in cost control as well as promotional spend.
Our next question will come from John Hall, with Th capital. Please go ahead.
Yeah morning management it sounds like.
That's a good quarter.
The question was related to the much more.
Thank you Kevin.
And we've got lots of already started to do advertising number Ken.
And I wonder.
For our.
Number.
What percentage of them come from.
No.
Yes.
Yes.
Thank you.
The new function.
And the Hong Kong Q.
Long term cooperation.
You bet.
Sure.
Both.
No.
Okay.
Part of it driven by this.
Yes.
Or.
And that type thing.
Yes.
Have very extensive collaboration with Tencent I can start and perhaps Ross can add additional comments as well.
We have an extensive collaboration with Tencent both on the content production side as well as on the music promotion side.
On the content production side, we mentioned that we are almost every quarter. We showcased our original song setup produce either for some of the Tencent Ips.
Such as selected Ips and Tencent games or is some of the IP from <unk>.
Tencent video's for example, and many of these original content that are either produced by ASO Coproduce together.
Dave.
The very good results in terms of popularity on the music charts, that's kind of one big bucket of areas. The second big bucket of areas in the form of content promotion.
A prime example of that is.
Our deepened collaboration through the waiting video accounts.
It's an important means for us to enrich the music video based content.
All of our platforms <unk> QQ music or Hugo who are we.
We promote a lot of music related video content through wasting BDO account.
In fact, the content that we provide is a ranking amongst the best in the music category within the week.
We can video account.
Sort of music vertical.
And so that surface away.
Our way for the music lovers to discover music and <unk>.
After which the users come back to <unk> platform to continue to explore and enjoy music in a more deepened way.
And then finally.
While we don't rely on Tencent channels at all from a user perspective, given our music platform is already very established and within.
In operation for many years have very established brands. So most of the trial.
Our traffic is organic.
We do have more and more collaboration for example through our.
Partnership between QQ music and Wechat, we seen.
They're more product features collaborations such as you can now set ringtones on wasting using music provided by QQ music.
Obviously, you can go back to QQ music to listen to the songs.
You can update your personal profiles.
<unk> provided and.
And listen being listened to by on QQ music et cetera.
So we are seeing more and more collaboration and we expect that to continue.
We are now.
Absolutely.
Okay.
Okay. We are now approaching the end of the conference call I will now turn the call over to your speaker host today, Mr. Tony <unk> for closing remarks.
Okay.
Thank you very much for joining our second quarter earnings call. If you have further questions. Please feel free to contact the Investor Relations team.
And this concludes today's call. We look forward to speaking with you all again next quarter, Thank you and goodbye.
Goodbye.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.