Tencent Music Entertainment Group (TME) CEO Cussion Kar Shun Pang on Q3 2019 Results – Earnings Call Transcript

Tencent Music Entertainment Group (TME) CEO Cussion Kar Shun…

Tencent Music Entertainment Group (NYSE:TME) Q3 2019 Earnings Conference Call November 11, 2019 8:00 PM ET

Company Participants

Heather Diwu – Investor Relations

Cussion Kar Shun Pang – Chief Executive Officer

Cheuk Tung Tony Yip – Chief Strategy Officer

Shirley Hu – Chief Financial Officer

Conference Call Participants

Eddie Leung – Bank of America Merrill Lynch

John Egbert – Stifel, Nicolaus & Company

Daniel Chen – JPMorgan Chase & Co.

Rob Sanderson – Loop Capital Markets LLC

Wendy Chen – Goldman Sachs

Zhijing Liu – UBS

Thomas Chong – Jefferies

Ellie Jiang – Macquarie Research

Alex Liu – China Renaissance

Tian Hou – T.H. Capital, LLC

Binnie Wong – HSBC


Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group 2019 Third Quarter Earnings Call. Today, you’ll hear discussions from the management team of Tencent Music Entertainment Group followed by a question-and-answer session. Please be advised that this conference is being recorded today.

Now I will turn the conference over to your speaker host today, Ms. Heather Diwu. Please go ahead, ma’am.

Heather Diwu

Thank you, operator. Hello, everyone, and thank you all for joining us on today’s call. Tencent Music announced its quarterly financial results today after the market close. An earnings release is now available on our IR website at ir.tencentmusic.com as well as via newswire services.

Today, you will hear from Mr. Kar Shun Pang, our CEO, who will start the call with an overview of our recent achievements and our growth strategies. He will be followed by Mr. Tony Yip, our Chief Strategy Officer, who will offer more details on our operations and business developments. Lastly, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions.

Before we proceed, please note that this call may contain forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company’s control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company’s filings with the SEC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required as law.

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 the International Financial Reporting Standards in the company’s earnings release and filings with the SEC. You are reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measures, or other non-IFRS measures are not uniformly defined by all companies, including those in the same industry.

With that, I’m now pleased to turn over the call to Mr. Kar Shun Pang, CEO of Tencent Music. Kar Shun?

Cussion Kar Shun Pang

Thank you, Heather. Hello, everyone, and thank you for joining our call today. At TME CTS is the backbone of our business strategy. As I recently shared at the Music Matters Annual Conference held in Singapore, CTS represents contents, technology and services, which illustrate our commitment to enriching our content offering, deploying proprietary technologies to improve user experience, and providing comprehensive services to partners, artists and users.

With CTS as our core driving force, in the third quarter of 2019, TME achieved a solid financial performance, with total revenue increasing 31% year-over-year, which was attributable to accelerated growth from online music subscription and solid growth on social entertainment services.

One of the most recognizable achievements in the third quarter was the continued accelerated growth of our online music services. In terms of both paying users and subscription revenues, our online music paying users reached 35.4 million, rolling 42% year-over-year as we added 4.4 million during the third quarter, picking up further from the strong addition of 2.6 million in the second quarter and 1.4 million in the first quarter of 2019.

More importantly, the high-quality of this growth was demonstrated by the ARPPU expansion of 3.5% quarter-over-quarter. Paying ratio reached at 5.4%, up from 4.8% in the last quarter and 4.3% in the first quarter of this year, achieving an increase of over 1 percentage point within less than a year demonstrates our strong execution and pave the way for long-term sustainable growth.

This impression – this impressive performance was primarily attributable to continuous improvement in our user retention rate and a significant increase in the number of paying users driven by pay-for-streaming as the willingness of users to pay for our premium music service improved substantially.

As a leader in China’s online music industry, we have been closely researching user demand trends, particularly among the younger demographics, who show an increasing willingness to consume premium content. We extended our network penetration of this younger user group by covering hundreds of universities and higher education institutions.

We also launched target programs for students, such as the subscription plan, promotional events during summer holiday, and a streaming program called a summer fan appreciation [Foreign Language] inviting the idol fever. Summer fan appreciation is a special edition of our self-produced new song releasing events, which live streams the artists’ releasing events. It boosted the number of video playback of new song releasing events to 280 million in the third quarter, higher than that of the first two quarters combined.

On the content front, we also stepped up our investment targeting the younger generation by strengthening genres, including Urban, EDM, ACG and Chinese ancient style. Chinese ancient style has enjoyed the rising trend of popularity among young people, as we combine Chinese – China’s traditional culture with popular trends and provides the young demographics a strong sense of cultural identity. As one example of our investment in trending content, we recently signed a strategic agreement with Neman [ph] Cultural Media, the largest Chinese ancient style music label in China.

Finally, during the quarter, we continue to add long-form audio, such as audio books and podcasts, including a rich variety of categories, including audios novels, talk shows and a diverse set of topics on children, education, history, and humanity, et cetera.

We are pleased to see the proportion of long-form audio users on our platform because of healthy growth year-over-year. In fact, in September, average daily time spent on our platform by audio books users was over 50% higher than an average user.

Another achievement that I would like to highlight was that, throughout the third quarter, thanks to our vast user base, deep understanding on music fans and music insight, we continue to improve our platform promotional effectiveness and emerged as a preferred destination of artists to build a fan-based economy.

With digital albums, we support artists in the promotion of their music, regardless of whether they are aspiring up and coming, established, domestic or international. We have a lot of success in creating an interactive setting for content consumption, particularly with the younger demographic, who are in primary contributors in the fan-based economy.

For example, R1SE, an emerging male band with members selected with a variety show produced by Tencent Video, [Foreign Language], a male version of the tremendous popular variety show Produce 101, sold almost 1.5 million copies of its first digital album on the first day of its release.

Another example showcasing the power of our fan operation capabilities is Jay Chou’s newly released single, Won’t Cry, [Foreign Language]. Aside from strong sales, more than 12 million karaoke song recordings were produced by our WeSing users within 10 days after the release. The release also generated a massive amount of social buzz with more than 417 million page viewed – views on external social media by the end of October 2019.

International artists also enjoy and benefit from our promotional capabilities, which allow them to connect with music lovers in China. A case in point, the title song of Taylor Swift’s new digital album, Lover, sold nearly 6 million copies within 24 hours on our platform after the release.

Another highlights of our fan-based economy on our platform was the successful live streaming or a highly popular boy band called TFBOYS of their sixth-year anniversary concert. This concert called, The Fever, was the top five – was the top live streamed concert on TME platform in terms of fans participations.

Its live feed attracted more than 45 million users and generated over 300 million real-time user interactions. These are excellent example demonstrating our unique strengths in building a fan-based economy, Inspiring content consumption and providing an additional way for fans to interact with idols and socialize with other fans.

In summary, we were pleased with our solid third quarter results, our continued innovation and investment to attract a younger demographic, relentlessly efforts in content expansion and diversifications and our ever-strengthening efficiencies in operating our fan-based economy continue to pay off.

Next, Tony will elaborate on how we deploy technology, as well as other areas of focus, which will enable us to continue enhancing overall user experience. We are true believers in integrating music into every aspect of people’s lives. Tony, please go ahead.

Cheuk Tung Tony Yip

Thank you, Cussion. Hello, everyone. In addition to the strong results from our online music services, our social entertainment services also maintained steady momentum in the third quarter, with a nearly 33% year-over-year top line growth, as is paying users and ARPPU grew over 23% and 7% year-over-year, respectively. Our healthy third quarter financial results were driven by a combination of concerted efforts focused on product enhancement and improving user experience through proprietary technology.

First, on product enhancement and innovation. As you may recall, during the second quarter, we mentioned we pioneered a product innovation by adding short videos on to the Google Music streaming page, which has enabled users to watch short videos, while listening to music. And since then, our short video library has expanded to include a wide range of professionally generated and user-generated videos. Such an innovation has proven to be popular, with average daily streams of short videos, up almost 40% compared to the previous quarter.

For our social entertainment services, we added new interactive features to build a rich and diverse landscape by bolstering our social and young attributes. We upgraded the universal duet feature, [Foreign Language] in September, which allows listeners to sing a duet much more easily, and therefore, further lowers the barrier for participation.

This has led to an almost 50% increase in the number of duet participants in October compared to September, with nearly half of these new users, with half or nearly half of them being new users of the duet feature.

In addition, through music-centric social and gamification features, we added new functions within our singing rooms to facilitate social connections among users. Further, in an effort to cater to the younger demographics preferences, we introduced WeSing Lighthouse [ph], [Foreign Language] allowing users to integrate their offline stage singing experience with online social interaction.

With all these features, we strive to provide a common destination for users of similar interest, age or location together and interact virtually or in person in order to create tighter user communities and improve user time spent on a platform.

Another highlight during this quarter was WeSing’s partnership with CCTV and Tencent to launch a singing campaign in conjunction with the celebration of China’s 70th National Day. The campaign attracted over 10 million participants, with more than 1 million WeSing users uploading their own karaoke recording of a National Day celebration song grew WeSing’s quick sing feature.

This feature lowers the barrier for campaign participants and improve user engagement. The success of this campaign is a testament to a broad user base, demonstrating our ability to make online karaoke more engaging and entertaining.

And lastly, on WeSing, its international expansion, we mentioned last quarter, continues to show encouraging results, with MAU continuing to grow at a rapid pace of over 30% quarter-over-quarter. In the third quarter, WeSing consistently ranked number one among music-related apps on Google Play Store in the Philippines and achieved top two ranking in Indonesia, Thailand and Malaysia. We will continue to proactively explore new opportunities to bring our products or services to a larger user base outside China.

Next I would like to discuss how improved data analytics and the deployment of proprietary technology allow us to offer a superior experience to users. Aided by leading smart tagging and analytics technology, we have greatly improved our efficiency in content curation and personalized recommendation.

In addition to listening habit-based recommendation by analyzing audio features with deep learning and by using data mining to screen songs in our library, we can better curate content for different target user groups. Such efforts have resulted in improved user experience. In the third quarter, average daily streams from personalized recommendations doubled from the same period last year.

Furthermore, the percentage of song saved, driven by personalized recommendation, also showed meaningful improvement, which is another reflection of the increasing effectiveness of our recommendations.

Similarly, on WeSing, millions of contents are generated by our users every day in our algorithm screen through new and existing content to create content most suitable for different user groups. The improved content curation and personalized recommendations have led to a 20% increase in both the streaming volume of UGC curated by our algorithms, as well as the number of user-to-follower conversion for these UGC creators.

We also made advancements in deploying data to help live streaming performers improve their ability to reach a broader audience. For example, we developed a machine scoring algorithm, which helps high-quality performers differentiate their ranking, and as a result, has helped more users discover these performance and increase user time spent.

In addition, with our pairing algorithm, we’re able to find and match more relevant and compatible live streaming performance, facilitating these performance to perform together or engage in a single to make the live streaming session more engaging, which in turn got us more appreciation and virtual gifts from users.

We are always on the lookout for innovative ways to improve user experience and meet all kinds of user needs to further strengthen our ecosystem. For example, our song recognition application called Floating Radar, [Foreign Language], enables users to – within seconds to recognize songs embedded in external short videos that they’re watching in third-party short video apps and serves as a gateway to attract incremental users back to the TME platform to listen to the full song when they’re consuming short videos elsewhere. Since the official launch of Floating Radar back in June 2018, we’re pleased to say that it is gaining more momentum as a very useful music tools.

In summary, we delivered strong execution for both our online music and social entertainment services by focusing on product enhancements and improved user experience through proprietary technology. Persistent focus on this type of overall deployment and improvement will be key to our sustainability to grow, both our platform’s popularity and financial performance.

With that, I’d like to turn it over to our CFO, Shirley, for a closer review of our financials.

Shirley Hu

Thank you, Tony. Hello, everyone. We delivered strong financial performance in the third quarter with our top line growth of 31%, along with solid operating margins and cash flow. Both our online music and social entertainment business achieved strong growth in the third quarter, driving our revenues to increase by 31% year-over-year to RMB6.5 billion.

Despite the decrease in sublicense revenues from other music service companies, our online music services revenue was boosted by the strong growth from user subscriptions and the sales of digital music albums. Revenues from online music services increased by 26% year-over-year to RMB1.8 billion.

During Q3, the number of our online music subscribers increased by 4.4 million from Q2, a record increase since 2016, when we merged with TMC. Revenues from music subscriptions were RMB942 million, an increase a 48% from RMB635 million in the third quarter of 2018.

The growth was mainly driven by the addition of premium content and our pay-for-streaming model and the continued improvement in subscriber retention rate. In addition to the strong growth in subscriber numbers, our subscriber ARPPU rose to RMB8.9 in Q3 from RMB8.6 in Q2, as more subscribers were attracted to our premium memberships.

During Q3, our revenue from sales of digital albums more than doubled from Q3 last year brought by new and repeat releases from top acts and the top TV shows. Throughout 2019, we have built up our platform as the go-to-destination for top artists to release their digital album and the fans to interact and support their idols.

Revenues from social entertainment services and others increased by 33% year-over-year to RMB4.7 billion, primarily driven by revenue growth in our online karaoke and live streaming services. We expanded the paying user base of our social entertainment services by 23.2% and increased ARPPU by 7.4% in Q3 of 2019, compared with Q3 of 2018.

Cost of revenues increased by 43% year-over-year to RMB4.3 billion. The increase was attributable to higher revenue show increase and content expenses. The increase in revenue-sharing fees reflected the growth in our social entertainment services.

In addition, we introduced the more professional-generated content into our social entertainment platform through talent agencies and shared a portion of our revenues with this agency. The increase in content expenses was mainly attributable to the increased market price and amount of licensed and the produced music content.

Our gross margin was 34% in Q3 2019, included 132.9% in Q2. Overall gross margin decreased year-over-year. As we increase our content investments, we were able to stimulate improve operating efficiency. In addition to strong growth from our online music business, also subject to increase our gross margin.

Now, let’s turn to our operating expenses. We have seen improvement in operating leverage on a year-over-year basis. Overall, our total operating expenses increased by 26.6% year-over-year to RMB1.2 billion. Operational expenses as a percentage of total revenue improved to 19% with Q3 2019 from 19 7% in Q3 2018.

We increased spending on growing our user base and promoting our brands on the content in the third quarter. Selling and marketing expenses for Q3 2019 were RMB570 million, representing an increase of 19.1% year-over-year. We continue to expand our workforce during the quarter, which we believe is an efficient investment and is crucial for expanding our leading edge in products and technology.

General and administrative expenses increased by 32.6% year-over-year to RMB720 million in Q3 2019. Our effective tax rate was 12.4% in Q3 2019, compared to 8.1% in Q3 2018. The increase was mainly due to the change in the preferential tax rate of certain subsidiaries.

As a result of foregoing, our net profit attributable to equity holders of the company was RMB1 billion and our non-IFRS net profit was attributable to equity holders of the company was RMB1.24 billion. Our non-IFRS net profit margin was 19% in Q3 2019.

As of September 30, 2019, our combined balance of cash and cash equivalents and term deposits amounted to RMB21.1 billion, an increase of RMB1.3 billion from RMB19.9 billion as of June 30, 2019. The increase in the balances was primarily due to cash flow generated from operations of RMB1.4 billion.

Overall, we achieved strong growth across our online music and social entertainment business brought by the strength of our products and the premium content offering. Our investments in premium content has not only brought in some financial returns, but also solidified the leadership of our platform.

In the coming quarters, we will stay focused on strengthening the synergy between our music platform and the social entertainment platform and continue to invest in long-term growth initiatives.

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

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. Our first question comes from Eddie Leung with Bank of America. Please go ahead.

Eddie Leung

Hey, good morning, guys. Thank you for taking my questions. Just two quick ones. The first one is about the fourth quarter basis trends. As we head into the end of the year, just wondering if you could give us more color on the two major segments in fourth quarter? And then related to that, you remember, in fourth quarter 2018, there were high sales in marketing expenses quite significantly higher than third quarter last year. So wondering whether this year, we would also see some promotional events in the fourth quarter?

And then secondly, I remember you guys mentioned about content costs increase, half of it driven by market prices. So could you share a little bit more color or not the increase in content costs related to market prices? Are we seeing more competition for content? If so, from which types of companies? Thank you.

Cheuk Tung Tony Yip

Hi, Eddie. Let me address your first part of the question and then I’ll let Shirley address the later part of your question. As we mentioned before, we don’t – while we don’t provide specific guidance, to stay very focused on the long-term growth, I think, directionally from a revenue perspective, we expect our online music revenue to grow at a faster pace on a year-over-year basis in the fourth quarter compared to the third quarter. And that’s mostly driven by the trend of continued acceleration in growth in the subscription revenue within music.

And then in terms of social entertainment revenue, we expect the growth rate in the fourth quarter to be in line with the third quarter. Now we recognize that, that may be slightly below, where we previously thought it would be. And that’s primarily because of increasing competition that we’re facing with the short video platforms. And so what that translates to is that overall, from a total revenue perspective, Q4 total revenue growth on a year-over-year basis should be slightly better than what it was in Q3.

Shirley Hu

For the two questions. For sales expenses, we think last year, we do some IPO, so the expense will be very high. And for next quarter, we think compared to the Q2, our sales expenses will a little increase, but the growth rate will be low – will be lower than the growth rate of revenue. And for the – our operating expenses, we think compared to the Q4 2018, the percentage of total revenue will be lower than last year.

Cheuk Tung Tony Yip

And then in terms of your last question about the market price for licensing, as you will know, reasonably expect, content price always goes up. But given the rapid pace of growth of our music subscription revenue, we’re actually very pleased to say that at the current pace of growth of our music subscription revenue, it’s definitely outstripping the rate of growth in terms of the content price.

Cussion Kar Shun Pang

One more point I would like to add is, since then, we are also heavily investing in the technology that can help us to do the content. distribution in a more efficient way. So we are going to – since we have the largest number of songs lively in the market right now, you get the best use of the content that we have on hand and also, we will also help us to do a better work in future.

Eddie Leung

Thank you, Kar. That’s helpful.


Our next question comes from John Egbert with Stifel. Please go ahead.

John Egbert

Great. Thanks for taking my question and congrats on the strong results. The acceleration in paid users and conversion was impressive. Can you talk about some of the key product initiatives driving increase retention, as well as some of your efforts benefiting the top of funnel growth? It sounds like your partnerships with universities benefit attractions with younger demos, in particular, would love to hear more about that strategy and how that’s evolved.

Cussion Kar Shun Pang

Okay. Thank you for your questions. Yes, we have – our online music service continued to deliver really good results in this quarter. And first of all, I think that the most important point is demonstrating that our users is building. We don’t want to pay for the high -quality of content, and the retention rate of our music services keep improving.

From the operational point of view, I think, we continue to enhance our content offerings and also provide a better user experience to our users. In addition to, especially this next year, we will continue to expand the content behind the streaming paywall to gradually grow from the high single-digit level into 2019. And we will also add more online and offline privileges to our monthly subscription plan.

Social marketing programs like bundling with other monthly subscription service of the Tencent ecosystem will also be continued to execute. We strongly believe that the paying ratio of our online music service will continue to grow in a healthy manner.

Regarding the some of the younger generation users that you mentioned that this is also a very key and important area that we are going to focusing on. During the presentation that we just talked about, frankly speaking, we think that the fan-based economy is going to be one of the very important driver for our business forward.

So we will continue to put in more efforts in this area. And examples that we have already talked about, like the Jay Chou, Taylor Swift and also the R1SE example, demonstrating all of the different artists, no matter they are the top key artists, domestic artists or international artists, or even the rising star for the future also having really encouraging results from our digital album sales. So all the key drivers of us and we are demonstrating that the young generation really like this kind of idea and we will continue to put in more efforts in this.

Cheuk Tung Tony Yip

And also let me clarify sometimes a point that’s misunderstood by the market is about the Jay Chou digital albums. In the sales period, the Jay Chou actually helped our digital album revenue as opposed to the music subscription revenue, because only users who bought the digital album are able to listen to the song, not even the monthly subscribers for the time being.

Right after the promotional period – after the sales period of the digital album, then the song falls into behind the paywall. And then, from that moment onwards, the subscriber will then be able to enjoy the song after being a subscriber. So at the – in the third quarter, the Jay Chou album launch helped out digital album revenue, but has not been a big contributor to our subscription revenue. And we expect that to contribute over time.

John Egbert

Great. Thank you.


Our next question comes from Alex Yao with JPMorgan. Please go ahead.

Daniel Chen

Good morning, management. This is Daniel, calling on behalf of Alex Yao. My first question is on your music subs ARPPU, it actually shows a very short sequential growth, 3.5% this quarter. So wondering what’s the main rationale behind and how should we think about the trend in the future quarters and our main measure to increase the music subs ARPPU in the future?

My second question is regarding the paywall. So we have had some content in the paywall in recent quarters, such as Jay Chou, Eason Chan, et cetera. But we noticed most label contents are still not in the paywall yet. Could management give us some color on our plan to put music in the paywall in the next one to two years? Thanks.

Cussion Kar Shun Pang

Okay. Thanks for the questions, Daniel. And right now, we focusing on promoting the premium monthly VIP packages. And the result is encouraging, which helped to drive the ARPPU up. But on the other hand, since the paying user conversion is still our top priority, we expected a flat to slightly increase in the online music ARPPU in the coming quarters.

Regarding the paywall that you mentioned about, we were going to continually add in more content behind the paywall. Right now, we’re just in the high single digits and we will continue to add on top of this, and – but we are going to do it in a gradually manner. And – but we are receiving really encouraging results, especially by the strong result of our monthly subscription and we have the confidence that people is willing to pay for the high-quality content.

Shirley Hu

About the ARPPU increase, we think, naturally, it means we capture our users and get good feedback. Yes, they all think our premium content have a big price. So this quarter, we reduced our promotions and only promotion on VIP, premium VIP, saw the ARPPU increase. And the second, our automatic renew package has its price to increase up, so that’s all why our ARPPU increased and our subscribers also increased.

Daniel Chen

Thank you very much.

Heather Diwu

Our next question, please.

Cussion Kar Shun Pang

Thank you.


Our next question is from Rob Sanderson with Loop Capital. Please go ahead.

Rob Sanderson

Yes. Thank you. A couple of questions on, just wanted to ask your view on advertising as a source of monetization going forward, both in the online music segment, but especially interested in the advertising opportunities within your social entertainment properties. And then along those lines, it’s clear that digital platforms are becoming more and more important in a more powerful, in a promotion of artists and marketing of artists. How do you view opportunities like the sponsored recommendations that Spotify recently announced?

And I understand China’s digital music ecosystem is quite different than the U.S. and Europe. But can marketplace concepts like this be successful at this stage of development, or are these more later-stage ideas and driving adoption of paid music in a subscription model is more of a singular focus for the time being? Any color there would be helpful? Thank you.

Cheuk Tung Tony Yip

Okay. So in terms of the advertising opportunity, actually, I think we mentioned this a couple of quarters back. We actually see there to be a massive opportunity in terms of advertising potential, not only just within our social entertainment services, but probably more so in the online music services. And that’s because within online music, we have a much larger user base with a very long time spent.

And as you probably would know, if you compare our, product experience with our Western peers, free users still not subject to as many ad blockage, in fact, a very, very low ad load at the moment. And so that has a lot more room for it to run.

And then in terms of the second question about whether we see marketplace as something that will work in China. Look, I think, we haven’t spent a lot of time talking about it. But we actually think there’s room for the marketplace model to work in China as well.

In fact, the Tencent musician program is – it follows a similar concept, which is our effort to promote more independent artists to go mainstream by giving them much easier access to our large user base, providing programs for them to improve their music, helping connect them with the right mentors and music labels to work with, as well as helping them promote and monetize the music on to our platform. And so that’s also part of our industry value chain strategy to extend beyond just the recommendations and more towards the indie musician market.

Cussion Kar Shun Pang

Yes. And also, as we always talk about, in TME, we want one to make music ubiquitous to our users. So we cover many different use cases. For the advertising, I think, especially in the entire audio systems, or the smack stickers, and all other scenario that we are currently – we have a number of very successful business partners with those manufacturers and service providers. So I think that we will also provide other audio-based advertising opportunity for us in the future.

Rob Sanderson

Thank you, Kar Shun and thank you, Tony.

Cheuk Tung Tony Yip

Thank you.

Heather Diwu

Next question, please.


Our next question comes from Wendy Chen with Goldman Sachs. Please go ahead.

Wendy Chen

Hi. Thanks management for taking my question and congratulation on the solid subscriber growth. My question is related to our next quarter color that’s given by Tony. It’s a great relief to see that our subscriber growth momentum is continuing. And if we see the ARPPU is, let’s say, relatively stable. I assume majority is contributed by the subscriber growth.

So just wondering what action or management have been taken to sustain the subscriber growth into the next quarter or potentially that accelerate? And if I may on the subscriber growth in this quarter, can management shed some color on how much of this is contributed by pay-for-streaming business model for Jay Chou, tell us with premium content, et cetera versus the campaign we have done?

And very lastly, on the social entertainment. We see that in the third quarter, it seems the MAU growth has been relatively muted compared to last quarter only 3 million and also ARPPU have seen a sight Q-on-Q decrease despite this is a peak summer season. So just wondering, is there anything in this quarter particular that result in gradually weaker social? Thanks?

Cheuk Tung Tony Yip

Sure, Wendy. You mentioned Jay Chou, again. Once again, Jay Chou is a fantastic partner of ours and we really appreciate the opportunity with working with him on releasing his digital album. But like I said, he now actually helped with our digital album revenue in Q3 and the music actually isn’t behind the paywall for subscribers within Q3 yet. And so over time that effect would play out.

And then in terms of what the company has done to drive music subscription, it’s our efforts to continue to improve our retention, as well as pay-for-streaming pays off. For example, we continue to attract subscribers with our premium content offering, that is the most high-quality and comprehensive in the market.

Our personalized recommendation provides the right content that users like. And as a result, giving them more chance and increased likelihood for them to be willing to pay for it, our initiatives to promote a higher adoption of our auto renewal subscription program, as well as our paywall pay-for-streaming strategy that Kar Shun mentioned, which started beginning of this year with zero percent of our content being behind a paywall. And now, we expect it to reach high single-digit percentage and by year-end. So all these efforts will contribute to the paying subscriber growth.

And then in terms of the social entertainment, it is facing increasing competition from short video platforms, which is capturing an increasing percentage of user time spent. And as a result, this has started to impact the MAU and revenue growth pace. And to address this, in addition to the growth initiatives that I mentioned in the last quarter, we will be further stepping up our investment in the user growth plan within the Social Entertainment segment, which entails a fairly comprehensive program, such as penetrating younger demographics, partnering with schools and universities and offline singing competitions, partnering with movie studios, television studios and game studios to campaign around original theme songs that are released with these topical hit content and a popular amongst the younger demographics will also be – while we’re not a short video platform, but we will also be providing more and better quality short video content to fulfill our users’ need for music-centric short videos.

So that they consume music centric short videos within our platform. And to this end, we have the benefit of being able to leverage Tencent’s vast amount of short video content that are already available within the Tencent ecosystem.

And finally, given WeSing, WeSing’s biggest strength is social network. We will be setting up investment in expanding its social network. And so over the coming quarters, user will continue to see a lot more new features that help them better connect with new friends and discover new people with similar interests. And we’ll make it easier for users to, for example, join a singing room or sing to lead or engage in a group chat or enrich in the number of things they could do, while they’re in a singing room or conducting a group chat all those things to make it a more social experience and to broaden the social network.

So all in all, we’re confident that user growth will return over time as we execute all these growth initiatives that I discussed. And also – and all this is just on the domestic front, by the way, in terms of our overseas growth initiatives, we think continue to do extremely well, as I mentioned, ranking number one in Philippines and number two, in Indonesia, Thailand and Malaysia.

And having said all this, it’s important not to lose sight of the fact that our social entertainment revenue continues to grow at 33% pace this quarter and our online music business continue to do extremely well with a continuation of the accelerating growth trend.

Shirley Hu

And in Q4, we believe our momentum of growth subscriber will continue and ARPPU will be stable compared to the Q3.

Wendy Chen

Great. Thank you very much.


[Operator Instructions] Our next question comes from Zhijing Liu with UBS. Please go ahead.

Zhijing Liu

Hi, management. Thank you for taking my question. I have only one question is that, online video companies has mentioned possibility of price hike in 2020? Do you have similar plans for next two years? Thank you.

Cussion Kar Shun Pang

I think that is not our key focus to higher price at this moment. We just keep trying to drive the paying ratio is going to be our top priority, because it takes time to educate the user. And once they started to pay, we have confident that they will continue to be proven that our retention rate right now has been keep improving. And I think that we still have a long room for growth independent ratio. So this is going to be our priority.

Zhijing Liu

Thank you.

Heather Diwu

Next question, please.

Cussion Kar Shun Pang

Thank you.


Our next question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong

Hi, good morning. Thanks management for taking my question. I have a question about the regulatory environment. Can the company comment about how we should think about the the government speculations in the next few years that you may think of, if any?

And I have a quick follow-up about the competition from short-form video. Can management comments about why the competition from short-form video happened right now? And also, anything that you think they’re more differentiating than – that we are yet to catch up? Thank you.

Cheuk Tung Tony Yip

I’ll address the point about the competition first. I think, we’re starting to see more of the impact from competition, because both the short video platform and our social entertainment platform of very large scale. And, for example, with WeSing, not only is it a high penetrated within first Tier 1 and Tier 2 cities, but it also has a strong foothold in Tier 3, 4 and 5 cities.

And so as we see social video platforms extending their footprint into all tiers of cities, we’re increasingly seeing competition for user time spent as a result. And karaoke is one form of entertainment, short video is another form of entertainment. And in this sense, we’re also facing competition for share of time.

And then in terms of the regulatory environment, we are – obviously, I think, everyone are very focused on, the regulatory environment is increasingly being tightened. But nevertheless, we are fully committed to working very closely with the regulators to ensure the healthy development of the music industry.

And, in particular, our efforts in copyright protection has been very well recognized by the industry. And also we are very compliant in terms of the sublicensing requirements that are imposed on us. And so I think, from our perspective, we think the music is a slightly better operating environment compared to potentially other sectors.

Cussion Kar Shun Pang

Yes. You think they’ll be facing some of the competition on the short-form media platform, but I still think that for TME, the social entertainment service is still essentially far more competitive with this unique versus cycle of value creation. First of all, we can leverage on our use – user base and strong capabilities of our music platform and online karaoke platform, and we’ll be able to discover some of the young talents, help them and groom them to become the inspiring, aspiring performers in the future.

Quickly let me give you two examples. One of the stars, who is called iKON, who stars on our. WeSing platform has started his career in Kuwo and have driven over 14 million fans on our platform. And one of his popular song was ranked number one on our Yo! Bang music chart of TME. And also his two hit songs have recorded over 100 million streams on our QQ Music and WeSing platform.

And the other example is [indiscernible], who is also one of the well-known performer of Kugou live streaming platform and has actually successfully released the two hit songs with over 1 billion streams on our platform. So all of the key differentiators of our social entertainment services, and we are forming the future style of tomorrow and also we can – through all this kind of efforts, we can attract more users who love music to go to our platform to enjoy music.

Heather Diwu

Next question, please.


Our next question comes from Eileen [sic] [Ellie] Jiang with Macquarie. Please go ahead.

Ellie Jiang

Thank you management for taking my questions. I just have a quick question on the WeSing. So the management talked about our great performance in the overseas market. So how do we plan to monetize this overseas market in longer-term? Thank you.

Cussion Kar Shun Pang

Sure. Well, with WeSing at the moment, our focus is on expanding our user base and footprint, it’s still very early stage. We’ve only – it’s been less than a year since we started on this journey of international expansion.

But over time, as you would imagine, WeSing is very experienced in coming up with innovative ways of monetization, for example, virtual gifting, by having friends, send virtual gift to other friends, while commenting on their karaoke song recording, we have singing rooms, monetization that we talked about previously. They’re also UGC live streaming features. So all of those are applicable. But at the moment, our focus is on garnering a bigger use of footprint at this stage.

Heather Diwu

Next question, please.


Our next question comes from Alex Liu with China Renaissance. Please go ahead.

Alex Liu

Hi. Thanks management for taking the questions. Two quick questions here. First, when we’re talking about the constant cost trend heading into next year, how should we think about the company’s strategy on price negotiation in the next round of agreement renewal?

And secondly, just on the live streaming part of the business, we obviously see some competition. Just want to see how how this trend will impact the revenue growth trend into next year 2020? Any guidance would be very helpful? Thank you.

Shirley Hu

For the cost trend, we think we have a good sign on the music side, because we have seen that the cost increase reach is lower than our subscriber growth rate. That is a good news. And for the revenue sharing fees, we think maybe we will continue our trends in Q3. There is a little increase in the next quarter.

Cheuk Tung Tony Yip

And then in terms of 2020 outlook, I’m afraid that we have to reserve that for our discussion in the next quarter’s earnings call.

Alex Liu

All right. Thank you.

Heather Diwu

Next question, please.


Our next question comes from Tian Hou with – sorry with T.H Capital. Please go ahead.

Tian Hou

Yes. Good morning, management. Congratulations on a good earnings. My question is regarding your investment for the growth initiatives. So you mentioned overseas, you mentioned more pay – converting paying users, so many initiatives. I wonder how that’s going to impact your margin. And so that is the – my main question, how that’s going to impact your margin? Thank you.

Shirley Hu

We have captured all this investment in our cost. So we think we can continue to keep the gross margin stable in the next quarter. Yes.

Heather Diwu

Last one, please.


Our last question comes from Binnie Wong with HSBC. Please go ahead.

Binnie Wong

Hi, good morning, management. Thank you for taking the questions. So my question is actually on – if you look at the – on the conversion side, like if you look at the – actually on the conversion side of the user and also on the retention, because I think management has been mentioning that retention has been quite good.

Can you – were you able to give us some color in terms of like quantifying it, say, maybe the users that have been up? I just want to say, on the online video platform, they were sometimes commenting that, say, users that have been subscriber that have been signing off for the last 12 months. How many months have they been continuously be on? So I don’t know if there’s any metrics on retention you can comment on?

And then down the road is that, because we see also the nice growth in your social entertainment side, how do we leverage the user data that we – user profile that we get there? And then as management had mentioned that we are stronger in terms of promoting, like feeding the users with the songs that they want, right, so it’s about a better targeting. So I think that technology side is something that investors have been closely looking at. So color on these fronts would be great. Thank you.

Cheuk Tung Tony Yip

Sure. So while we don’t disclose the specific data in terms of retention rate, I think, by virtue of observing our growth trend in our music subscribers and the fact that it is continuing to grow at a faster and faster pace, that should give everyone the confidence that the retention rate are, in fact, improving in a very, very healthy pace. Otherwise, they wouldn’t – it wouldn’t be possible for us to grow the subscribers at such a healthy pace.

And then in terms of the data front, we have a massive amount of data on our platform, not just because we have a very large user base, but also because we have a very long operating track record. QQ Music and Kugou Music has been in operation for over 15 years. And so, over the – over time, we’ve accumulated a lot of information on particular listening preferences, music trends, and that’s on the user side.

And in addition, we’re also investing very heavily into analyzing data on the content side. There’s – the content curation that I talked about in the prepared presents early on this call, we’re able to help better curate the content that are suited to a particular target group. And thereby, we’re seeing a better, improved favored rates and improved listening volume of those groups of users.

And I’d also like to say that being part of Tencent, obviously, give us additional benefit of having access to their social graph. And you see that as a key feature on the homepage of the WeSing, where users are able to connect with their friends instantly, even if you’re just a new user onto the platform. And obviously, that gives us a lot of benefit in terms of understanding what the friend circles are listening to and what kind of content are more suited for that particular group of users.


We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Ms. Heather Diwu for any closing remarks.

Heather Diwu

Thank you, everyone, for joining us today. If you have any further questions, please feel free to contact TME’s Investor Relations team through the contact information provided on our website, or TPG, the company’s Investor Relations partner. This concludes today’s call, and we look forward to speaking with you again next quarter. Thank you, and goodbye.