Title

Presentation

Tencent Music Entertainment Group misses on earnings expectations. Reported EPS is $0.07 EPS, expectations were $0.11.

Tony Yip: Good evening and good morning. Welcome to Tencent Music Entertainment Group’s first Quarter 2023 Earnings Webinar. TME announced quarterly financial results today after market close and earnings release is now available on our IR website at ir.tencentmusic.com as well as via newswire services. Today you hear from Mr. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent updates. Next, Mr. Ross Liang, our CEO, and I, Tony Yip, CSO, will offer additional thoughts on our product strategies, operations and business developments. 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 make forward-looking statements.

Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in the company’s earnings release and filings with the SEC. At this time, all participants are muted. After management’s presentation, there’ll be a Q&A session. [Operator Instructions]. And please be advised that today’s webinar is being recorded. With that, I’m pleased to turn the call over to Cussion, Executive Chairman of TME. Cussion?

Cussion Pang: Thank you, Tony. Hello, everyone. And thank you for joining our call today. We are off to a great start in 2023. Our strategic emphasis on quality growth propelled strong growth of our online music revenues in the first quarter. As the revenue size of our online music services has now catch up with social entertainment services for the first time, it signifies that our long-term commitment to developing a sustainable online music business model is bearing fruit. In addition to a healthy increase in our total revenues, our focus on efficiencies optimization also drove robust net product growth. Content is the bread and butter of our businesses. We continue to deepen partnerships with top music labels and artists, so as to enrich our iconic music catalog and vertical content offerings as well as to expand our users benefit.

We established a strategic collaboration with Rock Records forward-looking statements, providing users with iconic Chinese songs and original soundtracks of popular TV dramas, such as the works of Chenyue Chang, Emil Chau, Jonathan Lee, Wu Bai and Mayday. We also strengthened our strategic partnership with Li Ronghao and Fenghua Qiushi whose managed artists include Lu Han and Black Panthers, as well as with HYBE from South Korea with artists such as BTS and SEVENTEEN on its roster. Additionally, with the feature of a seven-day head-start period, our partnership with JJ Lin for his new digital album was well-received among users. The new album also broke his previous sales record in terms of GMV on our platform. On top of that, we also reached collaborations with well-known artists including KUN and Oaeen for head-start benefits on their new songs releases on other areas, such as merchandise sales, online and offline performances, and artist-fan interaction events.

As for music verticals, to satisfy the increasing demand for rap music among younger audience, we enriched our rap offerings by adding a number of new songs from heavyweight rappers such as Masiwei. Meanwhile, we reinforced our competitiveness in different genre verticals such as electronic music, gaming, and classical music, among others. In parallel with our efforts to expand our content library, we have facilitated the production of high quality, original content, unlocking more opportunities in the growing music industry. We have taken it upon ourselves to foster creativity and nurture artists through a rich variety of support programs, stage performances and monetization opportunities. [indiscernible] the influence of musicians and their works with this goal in mind.

We participated in and promoted artists growth through our Tencent musician platform, which offers abundant resources and diverse monetization avenues. As a result, the number of active musicians and singers who released new songs kept growing sequentially on our platform during the quarter, adding to the vibrance of our ecosystem. For example, we unveiled a new initiative, the Emerging Force Program, to discover musicians with high potential and encourage the production of high class music. The program offers a wide range of artist services, including traffic support, revenue sharing, and on and offline performance opportunities. By increasing the exposure and popularity of quality songs, along with amplifying artist influence, we enhance the vitality of the musicians ecosystem on our platform.

As of the first quarter, we have assisted 260 up and coming musicians in reaching their first million streams and helped multiple artists make their debut performance on stage. Notably, after joining our Emerging Force Program, the singing songwriter Leezi and Slow-mo, both saw a surge in their followers and streamings. Going forward, we will continue to discover our musicians with great potentials by bringing together artists, producers and music programs, particularly in events, rap and pop music legends. Recently, Tencent Music also launched a customized homepage for musicians [Foreign Language]. Through this page, musicians can access data and insights in terms of streaming, followers and comments. This can empower better management of song distribution and promotion.

In addition, this page also provides up to date support resources and policies of our platform. Tencent musician Chris Lee [Foreign Language] was one of the many success cases that demonstrate our powerful ability to cultivate and promote artists. In the first quarter, we signed her to our Tencent musician platform, elevating her profile and promoting new songs through a variety of internal/external resources. As a result, the number of her followers more than doubled, growing from 50,000 to over 100,000 within just two weeks of her onboarding. With our diverse performance page and all around support in music production, we have been dedicated to elevating the influence of Chris Lee and other aspiring indie musicians alike. Furthermore, we team up with Billboard China to hold our first original music contest, THE ONE.

Our collaborative contest is designed to discover emerging artists with the ability to produce quality original Chinese music, as well as to help expanding their global reach. To that end, we invited excellent singer songwriters and renowned singers in China and abroad, including Greyson Chance, Lenka, MIKA and TIA RAY, among others, to inspire contestants to produce original music and assess their performances. Through this cooperation, we will leverage Billboard’s global resources, influence and high international standards to provide talented musicians with end-to-end services, ranging from talent evaluation, song list, worldwide promotions and all the way to customized performances. Upon the solid foundation of our Tencent musician platform, we are well positioned to effectively facilitate the production and promotion of original contents.

We are also excited to see that we produced a number of blockbuster songs, creating many mega hits in the first quarter. For instance, Rose of No Man’s Land [Foreign Language] has accumulated students over 100 million with his melody and [indiscernible] platform. Not only did this song make its way on to several music charts, but also it garnered additional market exposure via [indiscernible] on short video platforms. [indiscernible] in the first quarter included [indiscernible]. Excelling in producing prime original content, we have played an integral role in expanding IP values across the entertainment industry. As a case in point, we have created quite a few musical works for iconic films, games, animations and other media. In the first quarter, we co-produced [indiscernible] Chinese cover of the film of Makoto Shinkai movie [indiscernible].

This song ran in over 100 million streams within only three weeks of its release. It also ran the first on the CMG Global Chinese Music Popularity Chart [Foreign Language] and topped 12 other music charts. As you may notice, this song is also the hold music for today’s call. Meanwhile, we continue to cooperate with the broader Tencent ecosystem, producing singles for 11 well-known games and 4 animations in the first quarter. Notable examples including Praying for the Mountain and the Sea [Foreign Language] for Honour of Kings and [Foreign Language] Light of Dawn [Foreign Language] [indiscernible]. Before I conclude, I would also like to highlight the progress of TME Live, our comprehensive online versus offline performance brand. Amid performance market recovery, we’re exploring innovative ways to monetize and interact with users.

TME Live is well positioned to capture these market opportunities via our online versus offline capabilities, allowing us to provide users with superior audio-visual experience anytime and anywhere. In the first quarter, we hosted a total of 29 online and offline concerts, including online concerts for [indiscernible], generating a total of 1.4 billion social media views and attracting almost 70 million unique visitors in the Tencent ecosystem. We also provide fans with the option to purchase custom merchandise while enjoying the shows. TME Live unique performances formats, coupled with this high profile in the industry and [indiscernible], appeal to many well-known advertisers for sponsoring, such as PepsiCo, and JD.com. We also continuously increase our presence in the offline performance, particularly as the traffic shows a growing interest for offline activities.

In the first quarter, we organized tours in cities such as Shenzhen, Changsha and Hangzhou for musicians including Coola, Kafe.Hu, Pharaoh, Switch GodLes and the rock and roll band WhitePaper to foster closer and more encouraging and more engaging connections between musicians and their followers. We encourage online audience to share their thoughts and feelings through online bullet charts during performances. Going forward, we will continue to explore the online and offline integrated performance formats, offering integral artist lineups and an exciting user experience, evaluating our content ecosystem and user engagement and first capture incremental monetization opportunities. That concludes the updates on our growing content capabilities.

Now I would like to turn the call over to Ross, who will share more about our platform strategies. Ross, please go ahead.

Ross Liang : Thank you, Cussion. Hello, everyone. Moving on to our platform innovations. In the first quarter, we further refined users’ musical consumption experience. We’re advancing audio live streaming services. In addition, by further exploring large language models, we energized our platform ecosystem with a broader range of AITC applications that are meeting users diverse and nuanced music taste in new and exciting ways. On the front of users music consumption experience, our efforts to enhance sound quality and effects combined with our optimized operations in different leasing scenarios have been well recognized by users. This further bolsters users’ stickiness or monetization capabilities. As a result, higher users engagement brought us a year-over-year growth of average daily time spent per daily active user who listening to the music on our platform.

We have extended our premium sound quality and the effects to cover a wider range of scenarios during the quarter. In addition to lowering the automatic sound effect, we also introduced customized sound effects for Teens in Times’ album [Foreign Language]. This song effect highlights highlights vocal details and instrumental layers creating an air of a live performance. A total of 2.3 million users have used this song effects in 170 million streams. Moreover, we extended our premium sound quality to in-car use cases. For example, our QQ Music’s Galaxy Sound Effect maximizes the performance of in-car audio systems [indiscernible] song effect to match many in-car audio systems of mainstream car models. This has further enhanced our users’ listening experience.

In addition, we also offer a highly personalized and engaging music experience that caters to users’ unique preference and tastes. For instance, we launched our 3D Music Player Interface and customized playlists with various design templates, where users may choose their favorite styles. Beyond that, we tailored playlists to specific holidays and festivals, such as the Chinese New Year and the World Sleep Day to offer a listening experience for this special occasion and user’s current state of mind. Thanks to our ongoing algorithmic upgrades and product optimizations, we are able to constantly advance our recommendation efficiency. This bring us deeper insights into content on a user’s behavior, allowing us to create a more personalized listening experience.

In the first quarter, QQ Music and the Kugou Music recommendations stream menu together with the time spent per user increased year-over-year and quarter-over-quarter, taking the proportion of recommended streaming to a new high on our platform. On the front of audio live streaming, it has become important growth driver for us as we offer a unique engagement venue for our users and performers with our differentiated content and interactive features, the driver is growth, enhancing user experience and attracting more vibrant audio anchors. In terms of content, we differentiated our audio live streaming content, offering with focus on audio categories of music, emotional healing and talk shows, highlighting our performers’ exceptional talent.

Meanwhile, our vibrant audio anchor ecosystem also benefits our musician community as it provides them with a platform to showcase their skills and reach a wider audience. [indiscernible] rising musicians on our QQ Music, live streaming platform. For example, [Foreign Language], these four musicians contributed a total of 110 million song streams. Notable, upon the promotion in one of our audio live streaming programs, [indiscernible] quickly made it to QQ Music’s new song recommendation chart. In the first quarter, the number of performers in audio live streaming continued to rise year-over-year and quarter-over-quarter. In terms of user interactions, we added new social interactive features to our platform. This have created an additional user traffic and scenarios.

And we are better serving users [indiscernible] as important icebreaking tools beaten performers and users, these interactive features also drove year-over-year and quarter-over-quarter increases in daily time spent per user. Going forward, we will keep upgrading and expanding our social interactive offerings to higher user retention and additional commercialization opportunities. Turning to AIGC [indiscernible] empower us to produce content more efficiently as well as to create our increasing engaging user experience. In the first quarter, we launched TME Studio [Foreign Language], an AI enabled smart tool for music production. We also introduced local producer [Foreign Language] musicians can be more efficient in lyric writing, composing music content, analysis and editing.

Such tools also have generate outstanding content by [indiscernible] users’ original verses into different songs. On top of that, our first AI music companion, Xiaoqin, hosted a live streaming show of singing and dancing, providing an immersive entertainment experience. Users were also able to interact with Xiaoqin’s AI generated virtual gifts and personalized game plays. Furthermore, in fostering a more customized listening experience, QQ Music pioneered an AIGC empowered music player. With various AI generated virtual styles, users can enjoy different things of music players. With that, I’d like to give the floor to Tony to reveal our business operations. Tony, please go ahead.

Tony Yip : Thank you, Ross. Hello, everyone. During the first quarter, we have seen enhanced monetization in our online music services. We booked robust year-over-year growth in online music services revenues, driven by the advancement of both subscription and non-subscription businesses. On the subscription side, a strong performance was propelled by the growing number of paying users and its ARPPU, which comes to 94.4 million and RMB 9.2, respectively. Notably, our online music paying ratio hit a record high of 15.9%, while our ARPPU expanded sequentially for the fourth consecutive quarter. All these results reflect our refined content operations, users’ higher willingness to pay for premium sound and effect features, as well as more effective promotions.

In addition, our IoT service has been growing over the past few quarters. Seeing its increasing importance to our overall business development, we began to include certain IoT devices in the disclosure of operating metrics for our online music services, starting from the first quarter. On the non-subscription side, it also delivered strong year-over-year growth. Advertising revenue grew notably year-over-year, mainly due to lower revenues last year caused by COVID-19 impact, increasing interest from advertisers in our innovative advertising formats, as well as improved macroenvironment. In particular, we have seen an increasing advertising spend from advertisers in the e-commerce, gaming, travel and food and beverage industries. Meanwhile, revenue from our ad supported mode also grew well as more users adopted this model.

In addition to TME Live’s advertiser sponsorship mentioned by Cussion earlier, we cooperated with Uni-President [indiscernible] and Heineken in the first quarter to create customized brand zones, playlists, and music festivals, helping advertisers increase brand visibility without innovative ad formats. On top of advertising, we also enhanced our ability to monetize through artist merchandise, long form audio and music distribution. In terms of artist merchandise, in the first quarter, we worked with well-known artists such Ren Allen, Lu Han [indiscernible] to introduce collection cards, action figures ,T-shirts and more. As a highlight, sales of the album Utopia by Teens in Times exceeded 1 million copies on our platform within two days of its release.

In the future, we will keep expanding the offerings of artist merchandise on our platform and we also have a number of artist cooperation projects on the way. In terms of long form audio, its revenues expanded year-over-year as we increased our offerings of popular content in the first quarter. For example, we introduced a new format that combines leading IP and radio drama. During the quarter, we released Reunion : The Sound of the Providence, adapted from the original work of [Foreign Language]. Its streaming volume exceeded 340,000 in the first week after launch. These distinguished content further complemented our music offerings and increased overall user engagement. Moving on to our social entertainment services. Facing a tough market environment, we focus on product innovation to differentiate ourselves and gain user mindshare.

For WeSing, based on our multi-person singing room in both video and audio settings, we upgraded our chorus features to chorus for all, which can support a real time chorus of 1,000 people, further enriching users’ immersive experience. In addition, we released extra interactive features in our singing rooms, such as score competition and red envelope sharing. These features allow the singing room’s penetration rate to grow year-over-year for the fifth quarter in a row. In the future, we will leverage these chorus and singing features to explore collaboration across different products on our platform, such as TME Live, artist/fan interaction events and sponsored advertising. In terms of WeSing membership, we expanded VIP privileges to include features such as customizable sound effects, recording interface themes and name tags, all resulting in year-over-year revenue growth in the first quarter.

Meanwhile, WeSing’s revenue grew steadily in the overseas market. We will expand its presence further through both organic growth and M&A. For live streaming services, although revenue from traditional live streaming remain adversely affected by the macroenvironment, our audio live streaming delivered double digit year-over-year growth rate in the first quarter. Audio has become a growth engine for our live streaming services as we keep providing differentiated content and interactive features. We also strive to build a growth path for more live streaming performers, further tapping into their potential, whilst strengthening their connection with users, which in turn cultivates users’ willingness to consume and pay for content. In the first quarter, Kugou Music rolled out its singing room feature following QQ Music’s successful validation, delivering year-over-year revenue growth as well.

Lastly, we remain committed to fulfilling our social responsibilities through music. For example, TME provided care for people with autism through music for the seventh consecutive year. We launched a caring program called If Music Has a Shape [Foreign Language]. We invited over 50 groups of singers and musicians from China and abroad, including Joker Xue, Sean Xiao and TIA RAY, and to perform in our program and share the love. Simultaneously, we debuted at the caring through music theme song, Secrets Hidden in the Stars [Foreign Language], sung by LUCY, TME’s first hyperreal virtual pop idol. This program’s social media views have exceeded 500 million, raising awareness of autism among the public. In conclusion, we started 2023 on a high note with innovations across content and platform.

This establishes a clear path for our creative and sustainable development in the coming year and beyond. Our progress in monetization efficiency, cost optimization, commercialization and user experience has also positioned us for ongoing business growth. Going forward, we’ll continue to explore the intersection of music and technology, pioneering new forms of art and entertainment, while upholding our commitment to society and fostering a healthy, more diverse music industry. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financial.

Shirley Hu : Thank you, Tony. Hello, everyone. Next, I’ll discuss our results from a financial perspective. In the first quarter of 2023, our total revenue resumed the year-over-year growth and reached RMB 7 billion, up by 5% year-over-year. With the success of effective cost control and improved operation efficiencies, our non-IFRS net profit margin reached 20.9% this quarter. In Q1, music subscription revenue continued its rapid growth and reached RMB 2.6 billion, up by 30% year-over-year and by 11% sequentially, propelled by rapid expansion of both online music paying users and ARPPU. Specifically, monthly ARPPU in Q1 was RMB 9.2, increased by RMB 0.9 from last year and RMB 0.3 from last quarter, recording four consecutive quarter of expansion.

Online music paying user grew to 94.4 million, up by 18% year-over-year, representing a 5.9 million net adds sequentially. The strong ARPPU and paying user growth resulted from high quality content and services, attracting member privileges and more effective promotions. As we extend use cases and the service offerings, we are seeing growing demands on our key services and expect more opportunities to monetize these in this area in the future. Therefore, starting from this quarter, we have updated the definition of online music MAUs and include certain IoT device users in our online music MAUs. Additionally, revenue from advertising achieved a strong growth year-over-year due to strong performance from our ad-based relationship model as well as low as lower advertising revenues for comparison in Q1 2022 due to the impact from COVID-19.

We are pleased with such results and remain confident about long term growth potentials in advertising business. Social entertainment services and other revenues were RMB 3.5 billion, down by 13% year-over-year due to the evolving macro headwinds and the competition from other platforms. To adapt to the changing environment, we are focused on cultivating talented performers and differentiating our contents to stabilize the revenue skew of the traditional live streaming and making efforts in increasing our competitiveness through ongoing product innovation and new initiatives in social entertainment services, such as audio live streaming, real-time interactive periods and international expansion. Gross margin in Q1 was 33.1%, up 5.1 percentage points year-over-year, primarily due to the strong growth of online music revenues, our effective control of content costs, as well as improved operational cost efficiencies.

Now moving on to operating expenses. Total operating expenses for Q1 were RMB 1.2 billion or 17.5% as a percentage of total revenues, down by 2.7% from 20.2% as a percentage of total revenues in the same period last year. Selling and marketing expenses were RMB 212 million, down by 36% year-over-year. Overall, the reduced spending on user acquisition had impacted on our MAUs. Our core music subscription service delivered strong growth. We continued to take measures to improve expenses, closely monitored our each promotion channel, added nice extra promotion channels, and leverage our [indiscernible] to attract users and promote our products. When elaborating the healthiness of business and assessing ROI, we focus more on measures such as level of engagement, user retention rate, et cetera.

General and administrative expenses were RMB 1 billion, which was relatively stable compared to the same period of 2022. We continue to closely manage employee related expenses by improving headcount efficiencies and invest in research and development to further empower music-related content creation, enhance production efficiency and improve sound quality and effects. Our effective tax rate for Q1 2023 was 12.2%. For Q1 2023, our net profit and net profit attributable to equity holders of the company were RMB 1.2 billion and RMB 1.1 billion. Non-IFRS net profit and non-IFRS net profit attributable to equity holders of the company were RMB 1.1 billion and RMB 1.4 billion, respectively. Diluted earnings per ADS was RMB 0.73, up 97% on a year-over-year basis.

Non-IFRS diluted earnings per ADS was RMB 0.89, up 65% on a year-over-year basis. Such results demonstrate our commitment and the continued success of our operating efficiency improvement, as well as the impact from share repurchase program were integral to provide high quality investment returns for our investors and shareholders. And we remain confident about our financial performance, the development of our business and the overall industry. As of March 31 of 2023, our combined balances of cash, cash equivalents and term deposits were RMB 28.5 billion as compared with RMB 27.4 billion as of December 31, 2022. The increase was primarily due to our healthy operating cash inflow of RMB 1.9 billion for the first quarter of 2023. Such combined balance was also impacted by the change in exchange rate of RMB to USD at different balance sheet debts.

In conclusion, we started 2023 with strong revenue growth momentum. And the revenue side of our online music services caught up with social entertainment services for the first time. Going forward, we continue to expect balanced the growth of both ARPPU and paying users and remain confident in the growth potential of our advertising business. Social entertainment service continued to face evolving macro headwinds and competition from ad platforms and we will continue to differentiate our content and entertainment from peers and create a more high quality content [indiscernible] stabilized revenue [indiscernible] for social entertainment services. Meanwhile, we’re continuing to invest in new products and services, high quality components and technologies, especially in areas such as IoT, gaming, singing room and original content, and the AIGC to build up a solid foundation for our healthy long term growth.

This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Operator: [Operator Instructions]. And today’s first question comes from Alex Poon from Morgan Stanley.

Operator: And our next question comes from Alicia Yap from Citigroup.

Operator: And our next question comes from Lei Zhang from Bank of America.

Operator: And our next question comes from Wei Xiong from UBS.

Operator: And our next question comes from [indiscernible] from CICC.

Operator: And our next question comes from Wei Fang from Mizuho.

Operator: And our next question comes from [indiscernible].

Operator: We’ll take our last question today from Lei Zhang from Bank of America.

Operator: We’re now approaching the end of the conference call. I will now turn the call over to our host, Mr. Tony Yip, for closing remarks.

Tony Yip: Thank you everyone for joining us today. If you have further questions, please feel free to contact TME’s IR team. This concludes today’s call and we look forward to speaking to you again next quarter. Thank you.