Tencent Music: Early-Year Promotions Exceed Expectations in Acquiring Customers (4Q23 Earnings Call)

The following is the summary of the Tencent Music.US 4Q23 earnings conference call. For a review of the financial report, please refer to "[Tencent Music: Leading with BUFF, "Price Increase" Countercyclical](Tencent Music: Leading with BUFF, "Price Increase" Countercyclical)".

I. Financial Indicators Overview

II. Management Report

In 2023, our subscription membership reached a milestone of 100 million users, with an annual addition of 18.2 million subscribers, higher than 12.3 million in 2022. The growth in single-user payments collectively drove our subscription revenue to accelerate throughout the year. Particularly in Q4, online music revenue growth exceeded expectations, with MPU and ARPPU both increasing by over 20% year-on-year.

The membership business alleviated the pressure on overall performance from adjustments in social entertainment business, promoting profit growth in Q4 and for the whole year. Entering 2024, we see strong user growth momentum in Q1, thanks to our strong content and platform dual engines.

1. Content Development

(1) First, by utilizing and deepening cooperation with domestic and international music labels, we continuously increase the copyright music content library to enhance our competitive advantage. By the end of 2023, the platform already had 200 million tracks.

For example, in terms of content coverage and attractiveness, we recently renewed a multi-year partnership with Universal Music Group (UMG), allowing users to continuously listen to a growing music library and achieve a noticeable sound quality upgrade through Dolby Atmos and high-definition music streaming. Taylor Swift's record has been recorded, and we recorded the album "1989," Taylor's version. In the first week of October, it topped all the charts on our platform.

Building on this success, we further increased fan engagement through a series of customized interactive guessing song contests. Additionally, we renewed our partnership with Pickup Records. The record company is quite legendary in Phoenix, deepening cooperation in high-quality top song releases, physical albums, and various artist-related services.

Furthermore, we have further enhanced our content attractiveness and advantages in the pop, rock, and traditional Chinese music categories, enabling us to better attract and retain young users.

Next, we provide differentiated content through internal and collaborative creation. In terms of mid-to-long-tail music content, we leverage rich multidimensional resources to enrich content and promote its prosperity. By 2023, over 480,000 Indian musicians on the Tencent Musician platform contributed over 3 million songs spanning multiple genresBy providing comprehensive music training programs and other support, we have effectively unleashed their creativity and nurtured their music careers.

To accumulate music resources of different styles, we are collaborating with independent musicians to enhance their visibility and performance careers through customized resource support.

(2) Self-produced and co-produced content can differentiate our content and enhance user engagement.

For example, we showcased 10 songs at the 2024 CCTV Spring Festival Gala, among which the self-produced song "Embracing the Light" was an outstanding representative, sparking widespread discussion.

Another example of a self-produced song is "Xilou Ernv" sung by our strategic partner independent musician Hailai Amu. This song, after being covered by cross-talk performer Yue Yunpeng, quickly gained popularity, with a total platform playback of over 1 billion times as of March this year.

(3) A rich content foundation and partnerships with music labels enable us to seize various opportunities to penetrate users and amplify content value.

For instance, driving activities such as offline concerts, in Q4 we held the final leg of DJ Alan Walker's China tour in 6 cities globally. During the tour, we introduced fan interactions, artist merchandise, ticket sales, performance management services, enhancing industry influence.

For example, collaborating with local governments to conduct music events. We partnered with Tencent Charity to host the 2023 Shenzhen Linzhi Music Festival, using offline music performances to drive rural economic and tourism development.

2. Improving User Experience

(1) Expanding membership privileges. This includes more industry-leading quality song selections, rich sound effects, more personalized players, new skin designs, and additional interactive features. For example, we have accumulated China's largest Dolby panoramic music library to provide users with a more immersive listening experience.

Currently, our Dolby Atmos music service can be used on mobile devices, cars, and PC platforms, achieving higher quality music experiences in a more comprehensive range of use cases. Additionally, we held a special online promotion event for Jay Chou's new song "Christmas Star" to promote closer and more interesting artist connections and deeper community awareness. Within 24 hours of opening registration, millions of viewers signed up for the event. We also introduced AI features for this single to further enhance user engagement.

(2) Upgrading smart device experiences. In December last year, QQ Music underwent a major upgrade on mobile and PC platforms, providing customized user interfaces and music players. Recently, QQ Music upgraded its in-car application for Tesla, bringing users a more intelligent interface and better recommendations.

Kugou Music has added the Viper 3D music library to its in-car products, especially optimizing audio performance in enclosed cabin environments. Furthermore, we maintain a leading position in smart voice coverage and recently renewed our partnership with Li Auto.

(3) Enhancement of content distribution and recommendation technology. More accurate recommendations drive more content consumption, effectively improving our user conversion and retention ratesWe are pleased to announce that in the fourth quarter, the share of recommended music streams on QQ Music and Kugou Music reached a new high.

(4) AI Artificial Intelligence: We continue to expand the AIGC application to enhance user experience and promote artist music creation, while improving efficiency. In terms of products, we integrate AIGC into music streaming, creation, viewing, and socializing to create increasingly intelligent and personalized music experiences for users and creators.

For example, enhancing QQ Music's AI listening function with additional virtual DJs. By focusing on different music genres, we can make music discovery faster and more personalized.

Additionally, we have introduced AI compensation tools on Venus to support artists in using original text promotional videos or rhythm clips for music creation. Lastly, we have integrated AI live streaming features into Kugou and Quanmin K Ge. Initial results indicate that users are increasingly willing to pay for this feature as it can easily create a positive impact in the market and language sales.

In terms of operations, we use AIGC to improve the efficiency and effectiveness of advertising, helping us better target and convert users. We also utilize our goals to better promote and distribute new songs. They help us analyze the audio features of songs and identify content that resonates most with users.

Analyst Q&A

Q1: Revenue growth expectations for the first quarter of 2024?

A: The accelerated growth in Q4 has laid a solid foundation for this year's subscription revenue growth. We are optimistic about the future development of the industry and are committed to building a popular integrated music and audio platform.

In short, I believe that this year, we are confident that our online music business will maintain steady growth, with subscription services being the main driver, while continuing to explore new opportunities in advertising and artist merchandise to grow the business. As part of our overall user ecosystem, our focus on social entertainment aims to better serve core users, and revenue in this area will remain relatively stable this year.

Q2: What are the main characteristics of newly converted users in the past year? Geographical location, city level, age group, and their preferred music genres?

A: In terms of age, the most active or largest user group currently falls within the 18-30 age range. Geographically, users in first-tier cities are more active, but in terms of user volume, second and third-tier cities in China have the highest distribution.

In future operations, we will focus on the younger user group, as they still have the most potential to explore.

Q3: Strategic outlook on long audio content? User scale, conversion rate, revenue, etc.

A: Regarding the issue of long audio content you mentioned, our current strategy is still to fully integrate long audio content with our QQ Music, Kugou Music, and other music platforms. So far, we have found this strategy to be very effective.

However, we will also closely monitor long audio content, especially its activity level and monetization capabilities. We will also use ROC to obtain the most popular content in the marketWhile we are producing long audio content, we will also accelerate its penetration into the car market, as we clearly see that content like novels is very popular in car applications.

2023 will be a very important year for long audio content, or we can call it a year of transformation. The results and performance of long audio content are better than expected. So based on our outstanding performance in 2023, we hope that long audio content and audio will continue to be distributed on our music platform and improve commercial efficiency.

Q4: The gross profit margin accelerated to increase by more than 2pct compared to the previous quarter, what are the reasons behind it?

A: Firstly, the significant growth in subscription revenue, as well as the growth in ARPPU and MPU, have a positive impact on our gross profit margin. Secondly, the strong growth in advertising revenue also has a positive impact on the gross profit margin. Thirdly, accelerating our self-produced content is also beneficial for our gross profit margin, and in Q4, we can see a rapid growth in self-produced content.

We have always focused on ROCE, effectively managing content and maintaining a win-win relationship with record companies and independent musicians, which allows online music revenue to grow faster than content costs. We expect the gross profit margin to continue to increase.

Q5: What are the reasons for the continuous increase in user-paid ARPPU? Users seem willing to pay for price increases, please explain in detail the technology behind it. Will this growth trend continue in 2024?

A: Our goal is to increase overall revenue, balancing flexibly between the number of paying users and ARPPU. In Q1 2024, the number of user subscriptions got off to a good start, mainly driven by early-year promotions, so ARPPU will fluctuate. But I believe that for the last three quarters of 2024, ARPPU should still show a slight upward trend.

After years of user education, I believe that Chinese music enthusiasts now truly see the value of music and are willing to pay more for it.

Q6: Your profit margin and cash flow seem quite good, will you consider increasing shareholder returns in the future?

A: We have been actively engaging in stock buybacks in the past, and we are actively exploring the possibility of a dividend plan, with detailed plans to be developed later.

Q7: The user trend in Q4 showed a decline compared to the previous quarter, how do you view the user trend in 2024?

A: The decline in Q4 compared to the previous quarter is mainly due to the return of students to school and some impact of short videos on our mobile business.

From the data perspective, the current churn is mainly low-active users, while high-active users are quite stable. On the other hand, in 2023, we have been reducing our marketing expenses throughout the year, reducing our channel promotions, which naturally affects customer acquisition.

In addition to mobile, we are focusing on some traditional channels (PC) and emerging channels (car, IoT). From an operational perspective, we hope to see an increase in the user base across all channels.

In 2024, there will be an impact from the Spring Festival in the first quarter, leading to a decrease in MAU. In the following quarters, we will have significant version updates for QQ Music, continue to improve the performance of KuGou Music, and make some adjustments and improvements to our marketing strategiesQ8: What is the adoption status of AIGC?

A: We pay more attention to the application direction of large models. Currently, we mainly use them for:

(1) Using large models to enhance product attractiveness. For example, the latest version has added a one-click listen feature. Drawing the user's mood curve, recommending songs based on the user's mood. Improving dialogue interaction with users, adding interesting chats to enhance the user's sense of companionship.

(2) Using large models to improve content creation efficiency. Providing effective music creation tools for creators, such as the recent addition of the separation function, which can separate vocals from songs, a feature that is currently quite popular. We have found that users are willing to pay extra for some AI features.

(3) Using large models to generate promotional materials to help improve customer conversion rates.

(4) Using large models to improve content distribution and recommendation effectiveness.

Q9: How to guide the subscription user scale for 2024Q1 and the long term?

A: In the first half of last year, offline concerts were popular, which was very favorable for us. Coupled with our operational capabilities and execution, we accumulated a lot of user conversions. Entering 2024, with our product innovation, increased membership benefits, and promotional activities during the Spring Festival, the current number of users looks better than we expected, laying a foundation for 2024.

Recently, we will focus on the operation and development of super members, who are key users. We will further expand their product experience in other channels, including in-car scenarios.

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