Tencent Music: Rich member privileges, continue to promote incentive advertising (phone meeting summary)

Below is the incremental information for the Tencent Music 2Q22 earnings call, and you can review the details of the financial report in 《Tencent Music: Decline of Performance Eased But Recovery Signals Remain Premature》.

Management speeches

Executive Chairman：

In June 2022, we celebrated the first anniversary of the dual-engine content and platform strategy launch. In the past year, TME has continually innovated its business model, enhanced its integrated music entertainment content and product capabilities, and provided better services to users and partners.

On the content side, we have steadily released our regional content production capabilities. In May, we rolled out new intelligent music assistant functions, allowing our proprietary PDM prediction model to make quick decisions at critical stages in the music production process, such as selection and evaluation of market attractiveness potential.

Every tool we have contributes to more efficient production of high-quality works, as evidenced by the production and playback of dozens of original songs with over 100 million plays in the second quarter. Particularly, "Three Lives Three Worlds" by Hailai Amu, a song dedicated to loved ones, featured in the variety show "The Gift of Sound" and performed outstandingly on major music charts, gaining over 2.5 billion plays and 350 million plays in the second quarter alone.

Meanwhile, we continue to improve our original content catalog, with our focus on key vertical fields, such as games and hip-hop music. In the second quarter, we collaborated with popular games, including "Honor of Kings," "League of Legends," "PUBG," and well-known artists, including Angela Ziang, Jim Shao, etc., producing 15 top-ranked game songs, especially the theme song of the "Honor of Kings" game character. This song had the most plays on the QQ Music platform among all game songs released in the first half of 2022. More importantly, in popular hip-hop music, we partnered with NBA to launch a 75th-anniversary commemorative album, and the title song "Time to Shine," performed by Chinese artist Zhang Yixing and American basketball star Nick Young, became the first ever Chinese theme song to appear in the NBA Finals.

We spare no effort in cultivating the community of independent musicians and providing them with rich online and offline promotional capabilities and monetization channels through the Tencent Musician platform. In the second quarter, we launched a new service that enables our musicians to easily release their music works to more than 150 popular platforms, including Spotify and YouTube, worldwide. By the end of the second quarter, over 190,000 songs by more than 10,000 musicians had reached overseas audiences thanks to this service. Kugou also allows musicians to easily release their songs on mobile devices and conduct paid live events with merchandise sales and feedback. As a long-term support project for musicians, our four-stage project for 2022 was launched in April with an Open Mic Series. So far, more than 70 music groups in seven cities have hosted offline performances. On TME Live, our online and offline comprehensive performance brand has presented a total of 132 high-quality live music performances in the two years since its launch. In the second quarter, in addition to Wang Yuan's online live concert, TME Live also injected new vitality into the two legendary album concepts of Leslie Cheung and Jay Chou, supporting ultra-high-definition visual effects and some artificial intelligence algorithm-enhanced restorations for specific events. These two hot items topped the list and accumulated more than 100 million independent viewers in the Tencent ecosystem, with a social media browsing volume of 6 billion times.

Jay Chou's concept also set a new record in the industry's online concert ratings, and his artist merchandise, including two dolls, achieved nearly RMB 10 million GMV in the second quarter through our Fu Tao mall and Tencent channel.

CEO:

In terms of platform strategy, in the second quarter, we continued to innovate on the four pillars of entertainment: listening, watching, singing, and playing.

In terms of listening to music, we added various exquisite product functions in the second quarter to provide a more professional music streaming experience. For example, we launched a high-level song function that supports real-time improvement of song quality, which is not available to Super VIP members, and has already been activated by 85% of users.

In addition, in order to further improve the efficiency of users' music discovery, QQ Music launched a personalized album listening function on the homepage in the second quarter to recommend songs to users, creating a new high for QQ Music's recommendation penetration rate. In addition, KuGou also launched a new search function that allows users to easily find different versions and remixed other songs. We also added functions such as playing selected song sections in a loop and customizing music chart preferences to create a more personalized music streaming experience.

In terms of watching, we added another dimension to users' immersive music entertainment experience. According to our understanding of user preferences, the music-related video content provided by WeChat video accounts is very popular and ranks high among Weixin Videos' music-related content. In the second quarter, we continued our cooperation with WeChat video accounts to improve our promotion capabilities, especially for independent musicians.

The third pillar of the music entertainment experience we provide is karaoke. The National K Song was upgraded in a major version release online. In the second quarter, we launched the 3D virtual character function to provide ID authentication for our users in the virtual world, allowing them to feel more realistic when recording, singing, and dressing up as virtual characters on stage. In addition, in the second quarter, we provided innovative singing tools to inspire users' interest in music creation and participation.

We also enhance our game elements by expanding use cases and revenue opportunities based on music-based virtual interactions. In the second quarter, immersive virtual concerts and Adidas Originals co-hosted the first virtual rap concert in China, which even attracted more than 7 million viewers. We also continuously upgrade the VR album studio. Since its launch, 13 stars, including singer and actor Cyndi Wang, have entered our VR album studio. CFO:

Total revenue for the second quarter of 2022 was RMB 6.9 billion, down 14% YoY but up 4% QoQ due to our effective cost control and improved operational efficiency. In the second quarter, we achieved net profit of RMB 892 million under International Financial Reporting Standards and RMB 1.07 billion under non-International Financial Reporting Standards, up 13% QoQ.

In the second quarter, we will focus more on promoting subscription services and continue to strengthen content operations. We achieved expensive growth in subscription services, with music subscription revenue of RMB 2.11 billion, up 18% YoY and 6% QoQ. Online paid users grew to 82.7 million, up 25% YoY. Monthly ARPPU was RMB 8.5, down from RMB 9 in the same period last year but up from RMB 8.3 in the fourth quarter of this year.

Advertising revenue declined YoY due to the negative impact of industry adjustments following the end of the COVID-19 epidemic. However, since June, advertising business has started to recover moderately from the prospects of COVID-19. The 618 e-commerce promotion also promoted the continuous growth of advertising revenue.

Analyst Q&A:

Q: Gross margin increased by about 2 percentage points QoQ in the second quarter. Although social business revenue was flat QoQ in the quarter, can management explain gross margin trends by segment from Q1 to Q2? How should we view the second half of the year?

A: Regarding gross margin, in this quarter, we have taken more measures to control costs and improve operational efficiency. We have already achieved results, with gross margins up 2% QoQ in the second quarter. The following factors have a positive impact on gross margin:

Firstly, the proportion of live broadcast revenue sharing is controlled and continuously decreasing.

Secondly, we have increased the content cost requirements of RC. We have readjusted agreements with some music companies and discussed audiences' positive feedback. This has had a positive impact on our gross margin.

Thirdly, our services and equipment utilization have been improved through technology and operational strategies related to bandwidth and storage capacity, and our operating costs have subsequently decreased.

Finally, the growth in subscription and advertising revenue has also had a positive impact on gross margin. We will continue to focus on improving the efficiency and cost items of all business departments, and expect gross margins to increase in the next quarter.

Q: Will QoQ ARPPU continue to improve? How should we view future ARPPU trends? Can you give more explanation on the usage rate, user feedback, and contribution of Super VIP to ARPPU?

A: Yes. Regarding ARPPU, we have seen a continuous improvement from RMB 8.3 in the previous quarter to RMB 8.5 in this quarter, thanks to more effective promotion and more disciplined marketing spending.

As we mentioned last quarter, our overall goal is to achieve high-quality growth in subscription revenue, and to increase paying users and ARPPU at a healthy rate. We have achieved this goal in the second quarter and expect this trend of user and ARPPU growth to continue for the rest of the year. Q: I have some questions about the music subscription business. Could you share with us your progress in increasing the paywall? What percentage of companies support paywalls? What is your goal by the end of this year? For non-paying music, the user experience is getting worse and they are able to listen to less content. Will you attract these groups through other strategies and features?

A: First of all, regarding subscription packages, we will continue to be on the right track because we have more and more discussions with label partners about adding more content to the paywall packages. The progress in this area is going smoothly, and we expect more content partners to join the paywall in the second half of the year.

Secondly, regarding the balance of free and paid user experiences, the free listening model based on incentive ads has made good progress. We believe this is a good way to balance because, like any online entertainment platform, there will inevitably be a part of users who are hard to convert to paying users, and the incentive-based free listening model is a profitable method. Currently, about 10% of our advertising revenue comes from incentive-based ads, and we hope this will be a surface balancing factor to provide a good free user experience.

Q: Can management share with us the views of advertisers? Which vertical industry has actually rebounded strongly and which vertical industry is still weak? When can we expect advertising revenue to accelerate again on a year-over-year basis?

A: Due to the epidemic measures and industry adjustments to splash screen ads, advertising revenue in the first half of the year was quite weak. However, with the improvement of the epidemic and the macroeconomic situation, we are seeing a moderate recovery in advertiser demand. We are working hard to expand advertising formats and inventory, hoping to see a recovery in advertising revenue in the second half of the year.

In addition to the aforementioned advertising formats, such as incentive ads, we also see that advertising sponsors are particularly interested in interactive activities. These activities are organized online and offline, such as the activities we sponsor at TMELAND or through TMD Live, Pepsi, Sprite, and Beijing Honda, etc.

As far as vertical industries are concerned, in this quarter, we have seen good demand recovery, especially in major consumption categories such as food and beverages and automotive and film industries during the June e-commerce season.

Q: My question is related to TME Live. We have seen other short video platforms also launch online live performances in the summer. So I want to know how to position TME Live and how to view the competitive landscape? What are the industry's strategies and profit plans?

A: Okay. For TME Live, we have a very good plan not only for top artists, but also for other levels of artists and different verticals.

We have a close cooperation with WeChat video accounts, and we have also strengthened the distribution capabilities of ongoing projects. As we mentioned in the conference call, users have a great interest in new versions of classic concerts of first-line artists such as Jay Chou and Leslie Cheung.

We have also introduced advanced technologies to help us improve overall video and audio quality, ensuring that users have a better experience.

We continue to introduce artists who showcase their interactive abilities in TME live shows. So we are confident, especially as we are collaborating online and offline for our concepts. Therefore, all of these will continue to strengthen our TME live projects, and we will see more great shows in the future.

Q: Congratulations on this quarter's profit growth. My question is about adding online music subscription or paid users. We found that the net paid user growth rate for this quarter is slightly lower than the previous quarter, so how should we consider the growth rate of paid users in the second half of the year and next year? Will marketing expenses to strengthen cost control affect the retention rate of paid users?

A: As mentioned earlier, our overall goal for online music subscription revenue is to see healthy growth in overall subscription revenue, rather than relying too much on subscription users or ARPPU.

So we hope that both metrics will have healthy growth, as focusing on service quality can benefit the industry more than focusing on prices. We believe that the music subscription service we provide has great value, and we are constantly striving to cultivate users' willingness to pay for the subscription service, with good results.

Therefore, by taking a more balanced approach, we have laid a solid foundation for long-term growth, and we still think it has great potential.

At the same time, we are also very focused on expanding the privileges and services provided in subscription plans . We keep adding more and more privileges, for example, this quarter's super VIP at 30 yuan per month, which is twice the normal price, but users will get a lot of digital photo albums and super high-quality music effects. This is still in the early stages, but we are seeing good traction in promotion.

Users are accepting such subscriptions, and they really appreciate the privileges we offer for super VIP, such as the high-quality audio function, which more than 80% of super VIP users have adopted. This has also helped us improve ARPPU while enhancing cost control and promotion expenses.

Q: This quarter's results are good, and I want to know how many of the new subscribers came from Tencent's channels? As Tencent continues to add new features, how will you collaborate in the long term to attract more sustainable users, rather than just relying on these popular albums or artists to drive growth?

A: We have extensive cooperation with Tencent in content production and music promotion.

In terms of content production, we showcase original songs almost every quarter, which are either produced for some of Tencent's game IPs or for some of Tencent Video's IPs. Many original content have achieved very good results on the music charts.

In terms of content promotion, the most typical example is to deepen cooperation through WeChat video accounts, which is an important way for us to enrich music video content. All our platforms, whether QQ music or KuGou, have promoted many video content related to music through WeChat video accounts. In fact, the content we provide ranks best in the music category on WeChat music accounts. This provides a way for music lovers to discover music and return to the TME platform to explore and enjoy music in a more profound way.

Finally, although from the users' perspective, we do not rely on Tencent's channels at all, we do have an increasing number of collaborations, such as QQ Music and WeChat - Everyone Sings. We also have more product feature collaborations, such as setting ringtones on Everyone Sings with songs provided by QQ Music, listening to these songs on QQ Music, and updating your profile with songs provided by QQ Music, etc. Therefore, we see more and more collaborations, and we hope that these collaborations will continue.

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