Tencent Music Entertainment Group
Q4 2021 Earnings Call Transcript
Published:
- Operator:
- Ladies and gentlemen, good evening, good morning and thank you for standing by. Welcome to the Tencent Music Entertainment Group Fourth Quarter and Full Year 2021 Earnings Conference Call. Today, you will hear discussions from the management team of Tencent Music Entertainment Group followed by a question-and-answer session. Please be advised that this conference is being recorded today. Now, I will turn the conference over to your speaker host today, Chief Strategy Officer, Mr. Tony Yip. Please go ahead, sir.
- Tony Yip:
- Thank you, operator. Hello, everyone and thank you all for joining us on the call today. TME announced financial results today after the market close and 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. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent update. Next, Mr. Ross Liang, our CEO and I, Tony Yip, CSO, will offer additional thoughts on our product strategies, operations and business development. Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. 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 by law. Please 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 IFRS 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 measure or other non-IFRS measures are not uniformly defined by all companies, including those in the same industry. With that, I am pleased to turn over the call to Cussion, Executive Chairman of TME. Cussion?
- Cussion Pang:
- Thank you, Tony. Hello, everyone and thank you for joining our call today. We concluded 2021 with resolute execution of our mutually reinforcing fuel engine content and platform strategy. As we strengthened our pan-entertainment content ecosystem and enhanced our content production and promotion capabilities throughout the year, we further diversified our business model, grew our market influence, and most importantly, tap on attracting and engaging users and holistically adjusting the needs of our major stakeholders. We are also committed to continuous product innovation through which we optimize users’ experience across our four pillars of music entertainment
- Ross Liang:
- Thank you, Cussion. Hello, everyone. Moving on to our platform strategy, in the fourth quarter, QQ Music, Kugou Music and Kuwo Music all released a major version upgrades, incorporating for refreshed product concepts, as well as optimized operations, UI design and technological innovation. We leverage the companionship like music embodies to invite users to listen, watch, sing and play, engaging them deeply in these four pillars of music entertainment. To bolster our listen pillar, we strive to provide a much good audio experience with innovative listen features and optimize the sound quality and the effects. The latest version of Weixin allows users to send the songs from the TME music library directly to friends on Weixin. Our Leap of Heart Weixin function, which has been adopted by more than 5 million users, enables one user to listen to songs and other users is listening to with simple one-click following. Furthermore, our interactive playlist can be joined, built and edit by multiple users. These cutting-edge functions allow user to break through the barriers of time and place, while dynamically integrating listen with social interactions. Technology is crucial component that the evolution is the listening experience we offer. We continue to optimize the smart recommendation feature on QQ Music to help users to discover high-quality music more efficiently as evidenced by 66% more music streams attributable to the future in the fourth quarter compared with the same period last year. Additionally, our patent audio processing technology delivers a cool multi-product function through which users can separate songs into adjustable tracks to create individualized listening experiences. We have also refined our vertical operations through Kugou Music’s scenario-based music, which targets users’ wellness needs such as fitness and sleep hygiene. Our sleep-inducing delta brainwave music has been streamed over 26 million times since its launch. Watch. Our second pillar adds another dimension to the user experience, making content more memorable. We satisfy the natural expansion of music users’ visual needs with video content, effectively improving the efficiency and accuracy of music discovery, while increasing user’s engagement levels. In the fourth quarter, QQ Music video content sustained its year-over-year growth of more than 100% in both unique visitors and video views. Furthermore, our musicians continuously benefit from our cooperation with Weixin Video Account in music promotion. We jointly launched the initiative as as a task-based model to incentivize indie musicians to produce original songs and video content in October and initiated a reward-based editing talent for the hit song, Love Love in December. Through our collaboration with Weixin Video Accounts, daily radio views of our musicians work uploads to Weixin Video Accounts reached 50 million by the end of 2021. Next, for the sing pillar, we introduced the in-room memberships and added new video accounts and the casual games, such as karaoke to the latest version of WeSing online karaoke room to make the overall karaoke room experience more fun and socially engaging, leading to a growth in karaoke room adding time spent in the fourth quarter. We also introduced an online service model featuring on-demand vocal accompaniment, which effectively mobilized the karaoke KOLs on the platform and reward their sing talent. Finally, we launched our eldercare mode designed to drive the seniors’ unique needs with speaker phones, cleaner UI design and a more relevant content. The fourth and the final pillar of our comprehensive entertainment offer is play, which we expect will unlock an entirely new class of virtual interactions on TME’s platform. In the fourth quarter, we launched the China’s first virtual music playground, TMELAND, and hosted its first online music festival on New Year’s Eve in 130,000 square kilometers virtual party. Participants flocked to the event to party virtually with their friends and world-renowned DJs such as in the form of brand new 3D Avatars. We also recently released the QQ Music’s M-PETS and the Kugou Music’s Music Elf to provide companionship to our music users. Millions of users have already adopted the virtual packs demonstrating their song’s popular rating, particularly among the young demographic. Leveraging our ongoing connections with strengthened ecosystems and the resulting broadened promotion capabilities, we attract a wide growth of users and encourage them to enjoy our music and video content through efforts, including, but not limited to, first, we partnered with Weixin Video Accounts to live stream Mayday’s New Year’s Eve concert by TME Live, which captivated a total of 14 million viewers in the Tencent ecosystem. Second, we also recently released saw Tencent Games on the debut of Eason Chan’s Lonely Warrior, the Chinese theme song for the animation Arcane
- Tony Yip:
- Thank you, Ross. Hello, everyone. In terms of operating results in the fourth quarter, our online music MAUs were RMB615 million, representing a 1% year-over-year decline, primarily due to churn of our casual users should serve by other pan-entertainment platforms. In the fourth quarter, our IoT services achieved year-over-year MAU growth of 39%. The growth was primarily attributable to our diverse content and our broad variety of smart IoT devices, which continue to enhance our ability to rollout and promote new music content. Despite the impact on advertising and digital album sales from industry headwinds, our online music revenues maintained sustained growth in the fourth quarter, mainly driven by continuous growth in subscriptions, with a net add of RMB5 million during the fourth quarter, paying user penetration reached 12.4%. At the same time, user retention remained largely stable. Advertising revenue growth moderated and was negatively impacted in the fourth quarter due to industry adjustment. Meanwhile, we continue to devise creative ad solutions to serve brands’ diverse needs, such as the branded playlist launch in the fourth quarter. We will continue to innovate our product portfolio and diversify monetization models to better serve users and artists. Along this line, we launched the artist subscription, , an add-on subscription giving users access to customized video and audio content and other privileges from specific artists while helping artists grow a dedicated hardcore fan base. Moreover, in the fourth quarter, we introduced to retail items from a growing lineup of collaborative artists. Sought-after items in the fourth quarter included Jay Chou’s Limited Edition Action Figure, Music King Chao, as well as Roy Wang’s physical album, Summertime, which sold 260,000 physical copies, setting a new industry record and fulfilling fans increasing desire to collect physical albums. Throughout 2021, we increased our efforts to build communities at the forefront of trendy culture and strengthened our brand image with a youth-oriented portfolio of products and campus – and college campus initiatives. Our pioneering app, Music is particularly popular among the younger generation. We upgraded to Version 2.0 in December 2021, which features a fresh and sleek UI design and allows listeners to swipe through video-based music content with a smart recommendation function. To meet Gen Z’s demand, we also developed a number of on-campus initiatives such as , a record label for campus musicians. And our on-campus campaign, 2021 Campus Voice, with which we discovered promising campus musicians such as JoSAA and JCTX together with their chartbusting original songs. Now let’s turn to our social entertainment services. MAUs and paying users were lower quarter-over-quarter amid increasing competition and changing macro environment. While rolling with the ups and downs inherent in this environment, we are working on continued product innovations and building more verticals in social entertainment. For WeSing, which has singing at its core, we are establishing a content generation ecosystem that makes user participation easier and more fun. We now provide users with a virtual stage background and avatar for video recording, as well as the option to create a personalized short video by simply recording the voices with a semi-finished video supplied by WeSing. We also improved core functionality to allow even the shies user to join a course, while retaining the anonymity by not displaying the face. This simplified creation process has led to an improved video publishing rate and increased user enjoyment in the fourth quarter. In terms of our international expansion efforts, we entered into a definitive agreement in March 2022 to acquire a controlling stake in M&E Mobile Limited, which currently operates Japan’s leading karaoke app, Pokekara to enrich our karaoke experiences as well as broaden our reach in international markets. For our live streaming services, in response to increasing competition, we plan to heighten our focus on differentiating content offering by expanding our audio live streaming content, cultivating talented music broadcaster, hosting platform events and enriching our virtual interactive product offerings. We are utilizing our live streaming platforms to provide our musicians with a starting point for their careers, while presenting us with options for talent discovery and cultivation. QQ Music Live streaming is giving more and more musicians, a voice and a stage through audio live streaming, evidenced by the consistent quarter-over-quarter growth in a number of streamers and users. In 2021, a total of 12,000 musicians live streamed on QQ Music live streaming platform. Meanwhile, Kugou Live is building a professional training ground for talented live streaming hosts with high potential by mapping out customized career solutions for them. In the fourth quarter, musicians discovered by Kugou Live released 64 new songs, with over 1 billion total playbacks combined, including Wen Yixin’s Flower All the Way, Wen Yixin time, Please Slow Down . The power of our platform and ecosystem was also showcased in our Tencent Music Live ceremony, TMLC, the industry’s first integrated cross-platform live streaming competition event. It brought a double-digit increase in traffic to our live streaming platforms generated a new record of 630 million social media views. With traditional live streaming is facing – while traditional live streaming is facing challenges, we believe the metaverse reimagines a new era of interactive entertainment. In addition to the virtual playground TMELAND and virtual pets we just mentioned, virtual idols are another area where reality is increasingly merged with fantasy. our self-created Chinese ancient style virtual idol was successfully adopted in a wide range of cross-field use cases in the quarter, including collaborations with popular games, Emoji and packages, conference hosting, off-line performances and more, showcasing the viability of virtual IP monetization. In summary, our effective, growing deal engine content and platform strategy puts us in the driver’s seat for the music industry’s sustained prosperity as we continue to engage and stimulate user while satisfying our stakeholders’ multifaceted needs. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.
- Shirley Hu:
- Thank you, Tony. Hello, everyone. Next, I’ll discuss our results from a financial perspective. In the fourth quarter of 2021, our online music service revenues continued to grow, driven by rapid growth in music subscriptions. Social entertainment business were negatively impacted by competition and the changing macro environment. Our total revenues for Q4 2021 were RMB7.6 billion, down by 9% year-over-year. Our online mix revenues were RMB2.9 billion this quarter, up 4% year-over-year. In the fourth quarter of 2021 music subscription business continued to grow rapidly with revenues of RMB1.95 billion and a year-over-year growth of 24% as we benefited from expanded sales channels and paying user loyalty due to high-quality content and services we provide. Online music paying users grew to 76.2 million, up 36% year-over-year, representing a 5 million net add sequentially. Monthly ARPPU was RMB8.5 this quarter, compared to RMB9.4 in the same period last year as we offered more effective promotions to attract users and cultivate their revenue to pay for music. Revenues from advertising dropped on a year-over-year basis as our advertising business continued to be negatively impacted by industry adjustment, but increased sequentially due to seasonality. We have taken several steps to mitigate the impact, such as enhancing product quality, adding more creative added solutions like branded playlist and to partner more closely with Tencent to reach more advertisers. These initiatives will bear fruit over time and mitigate short-term headwinds, and we remain positive about our advertising business in the long run. But license revenue and the sales of digital album also dropped on a year-over-year basis and sequentially. Social entertainment services and other revenues were RMB4.7 billion, down by 15% year-over-year as we face the intense competition from other pan-entertainment platforms and a changing macro environment. To adapt to the challenging environment and stabilize revenue still, we have differentiated our content offering by expanding our audio live streaming and enriched our virtual interactive product offerings, such as TMELAND. We are also expanding our international footprint for our WeSing business as discussed earlier. Gross margin in Q4 was 28.8%, down by 3.6% year-over-year due to the following factors. First, gross margin for WeSing declined, as we increased revenue showing ratio during the year. Second, given the continuous growth in music subscription revenues, our revenue mix shifted with revenues from online music, which generally have a lower gross margin, accounting for a higher percentage of revenue. Third, revenues from audio live streaming, whose gross margin was related below, also grew and accounted for a higher percentage of revenues. In addition, increased investments in new product and content offerings, such as long-form audio, also impacted the margin. Now moving on to operating expenses. Total operating expenses for Q4 2021 were RMB1.8 billion or 24% as a percentage of total revenue as compared to 20% in the same period last year. Selling and marketing expenses were RMB750 million, down by 3% year-over-year. During the quarter, we continue to make efforts in managing external channels is facing and better utilizing our internal traffic. Excluding the impact from TME event of 2020 was held in Q1 2021. Selling and marketing expenses would have dropped even more. General and administrative expenses were RMB1.1 billion, up by 18% year-over-year, driven by a higher number of employees in R&D as we invested in product enhancements, technology innovation and more diversified product offerings. Excluding the impact of publicly RMB66 million from the acquisition of Lazy Audio, G&A would have increased by 10% year-over-year. Our effective tax rate for Q4 2021 was 11.5%. Our net profit was RMB577 million and the net profit attributable to active holders of the company for Q4 2021 was RMB536 million. Non-IFRS net profit was RMB873 million, and the non-IFRS net profit attributable to active holders of the company was RMB832 million. Non-IFRS net profit margin was 11.5%. As of December 31, 2021, our combined balance of cash, cash equivalents, term deposits and short-term investments were RMB24.7 billion, representing an increase of RMB236 million from Q3 2021. And in March 2022, we won the bid to acquire certain land use right in Shenzhen at RMB1.05 billion, and the first half of the consideration was already paid. Next, I’ll briefly discuss our performance for full year 2021. Our total revenue for 2021 were RMB31.2 billion, up 7% year-over-year. Revenues from online music services were RMB11.5 billion, up 23% year-over-year to which music subscription revenue is a large contributor. Our music subscription business grew rapidly throughout the year with annual revenues of RMB7.3 billion and a 31.9% annual growth rate. Revenues from social entertainment services declined slightly by 0.1% year-over-year, given the increased competition and the changing macro environment. Net profit attributable to actors of the company under IFRS and non-IFRS was RMB3 billion and RMB4.15 billion, respectively. Finally, I’ll close my prepared remarks with some comments on outlook for 2022. In 2022, our core music business, partially music subscription and advertising, are expected to grow and reach operating regimen for full year 2022. We are taking various actions to improve ARPPU and expect to see a slow recovery in 2022. Additionally, we are totally controlled on content costs with increased requirements on our ROI. For social entertainment services, with challenges from competition and changed market environment, we are tightening our cost controls and adjusting revenue sharing ratios to maintain healthy gross margin, while keeping revenue scale. Furthermore, from company-wide, we are focusing on our core business and are taking actions to control high comp and the relative costs, improve high count efficiency and closely monitor ROI to reach to each channel for marketing expenses. Finally, under the overall market environment, we continue to invest mindfully in new products and services, including long-form audio and international business, with a focus on investment returns and the future growth potential. This concludes our prepared remarks. Operator, we are ready to open the call for questions.
- Operator:
- Our first question comes from Eddie Leung with Bank of America. You may now go ahead.
- Eddie Leung:
- Good morning and thank you for taking my questions. We noticed the user base declined sequentially in the fourth quarter. So just wondering heading into first quarter 2022 given the current COVID situation aspect, could you share with us the traffic trend you are seeing? And then more similar to that, could you also talk a little bit about the traffic or usage, not just the user base, but for example, the number of streams, the time spend of users in 2021 despite the slow growth of your user base? So, just wondering if all these features and content development on the platform have any impact on the usage of the existing users? Thank you.
- Tony Yip:
- I’ll take a first crack, and then perhaps Ross can also supplement. In terms of our online music MAU, we saw a slight decline by 1% in the fourth quarter on a year-over-year basis, primarily as a result of a churning of some of our casual users, served by pan-entertainment platform elsewhere. But I think it’s important to note that within the mix of that music MAU, QQ Music actually saw a year-over-year increase in its MAU, whereas Kugou Music and Kuwo Music saw a bit of a decline. And the reason for that difference is because QQ Music is the first flagship app to fully and completely implement our four pillars of music entertainment experience
- Ross Liang:
- Tony Yip:
- Thank you, Ross. I’ll do a brief translation. So Ross is talking about the main challenges facing our MAU with respect to Kugou Music, primarily because of the long history of the app. And it has more room for improvement. In particular, this year, we’ll focus on smart recommendation, better operations amongst our music catalog, expanding into more vertical scenario-based listening such as exercising and sleeping scenarios, focusing more on Gen Z, younger demographics. And with all these initiatives, we hope to stabilize the MAU decline and overall, with QQ Music starting to see growth, in particular, around its iOS user base given this improving brand image among the young demographics. We do expect this to be able to stabilize some music MAU for the rest of the year. Yes.
- Eddie Leung:
- Operator:
- Our next question comes from Alicia Yap with Citigroup. You may now go ahead.
- Alicia Yap:
- Hi. Good morning, management. Thanks for taking my question. I have a question, follow-up on the outlook. So in light of the latest macro and also the competition, any color management could share with us the latest business is trending – how the business is trending into the first quarter this year? And also over the course of 2022, any qualitative color how we should expect the online music growth rate and also the social entertainment revenue growth rate? And specifically, if you could also provide some color on the expectations for online advertising revenue growth this year. Thank you.
- Tony Yip:
- Okay. In terms of our outlook for Q1, we currently expect total revenues on a year-over-year basis to decline by around mid-teens. In particular, live streaming continue to face competition in a challenging macro environment. And secondly, we’re in the process of adjusting our advertising business model to embrace a changing environment and industry adjustments. And thirdly, former Massa licensing contracts have been renewed as non-Massa licensing contracts and these have an impact on sublicensing revenue falling away this year. In terms of full year 2022, we currently expect total revenue on a year-over-year basis to decline by around mid-single digit. While all the above factors also apply, we do expect to see a recovery from these factors in the second half. In addition, for the full year, we expect to be able to grow online music subscribers in terms of subscribers by approximately 20% on a year-over-year basis. That translates to an average quarterly net adds in online music subscribers to be between 3.5 million to 4 million. Now we understand the – I think we have to understand the cost that over the past 3 years. We have prioritized a growing subscriber base ahead of ARPPU. And as a result, we have seen some ARPPU decline. For example, in Q4, our ARPPU declined by 9% year-over-year. However, we continue to believe there is ample growth potential for subscription services over the long run, and that view remains unchanged. But as we plan ahead for this year, we want to focus not only on the quantity of the subscriber growth, but also on the quality of the over revenue stream. And so we will look to take a more balanced approach in growing subscribers as well as maintaining a more stabilized ARPPU. And we will also seek to supplement our subscription revenues with advertising revenues, both of which we expect to have ample long-term growth potential within our business despite short-term headwinds as it relates to advertising. And through a variety of cost management initiatives to improve efficiencies, we believe our non-IFRS adjusted net margin is expected to be in line in 2022 compared to 2021. In particular, as Shirley mentioned, as a result of very healthy growth in our core online music business, which is online music subscription and advertising, excluding long audio, we expect to continue to see an improving margin trend and achieve profitability at an operating profit level for the core online music businesses, excluding long audio.
- Operator:
- Our next question comes from Alex Poon with Morgan Stanley. You may now go ahead.
- Alex Poon:
- Thanks management for taking my question. My question is related to our overall net margin into 2022 and ‘23. Previously, because we have our live stream business, social and entertainment business, higher-margin business, growing slower than our music, there is a mix change and resulting into lower net margin. And how should we think about the trend in 2022, because just now, you also mentioned that we are controlling some of the revenue sharing ratio and headcount, etcetera. Can we see some stabilization in the decline in net margin some time in 2022? Thank you.
- Tony Yip:
- Shirley, do you want to take that?
- Shirley Hu:
- Okay. We expect that the net margin in 2022 will be stable compared that in 2021. And for online music revenues continue to grow up as paying users increase and advertisement. So, paying users will increase 3.5 million to 4 million each quarter. We will balance between ARPPU and the paying users increase expected through the year 2022. Additionally, we are taking tightening controls to accounting cost to increase content investment ROI. The gross margin of online music will keep increase in 2022, and we expect that the music business will be breakeven at the operational level. And the social entertainment revenue will be under pressure in 2022, because the competition from other platforms and the macroeconomic factors. We will control the revenue showing ratio of WeSing, increase WeSing gross margin. Gross margin of live streaming business on Kugou and the Kuwo platform also will keep stable. And we expect that all deal stream and international businesses have quite good growth, but the revenue ratio of new business are higher than the video live streaming. They have the negative impact on gross margin. And in 2022, the one main reason for the pressure on the gross margin will be the revenue mix because no gross margin revenues, such as online music, audio live streaming increase gradually and the high gross margin revenue, such as live streaming decreased. And for the operational expenses, we will reach the requirement of RI marketing and sales expenses and cut the no potential profitable projects. And both our core business, controlled high count and related cost to improve the inflation of headcount. For the long-form audio, we will continue investing on this new business. We will try multiple ways to expand the monetization of long-form audio and control the content cost of long-form audio. We expect that long-form audio breakeven gross margin level. And so we believe when we take all these ways, our net profit margin will be kept stable in 2021 – compared to 2021. And in 2023, long-term, I believe we can increase our net gross – net profit margin, yes.
- Operator:
- Our next question comes from Charlene Liu with HSBC. You may now go ahead.
- Charlene Liu:
- Thank you for taking my question. Actually, they have already been asked. I am good now. Thank you very much.
- Operator:
- Our next question will come from Wei Xiong with UBS. You may now go ahead.
- Wei Xiong:
- Sure. Thank you, management. I just want to follow-up on the point of the online music user growth, because we have seen that number has consistently grow at the high end of your target for the past year. So, I wonder could you share what’s driving that very robust growth? And which channels do you see to have the most effective way in terms of acquiring new paying users? And in terms of paying ratio because we have against a target of 20% growth this year, is there a target of the paying ratio if we look at longer term and what kind of the ceiling that we are looking at here? Thank you.
- Tony Yip:
- Yes. In terms of driving our long-term growth in the subscriber base, there are actually many tools that we can leverage. Obviously, providing premium content and attractive content and also providing an over high quality of service to our subscriber base is very important. And this includes content. These include privileges that users are able to access to, and privileges include maybe unique access to digital albums or unique contents that are offered by TME Live. In addition, we are actively expanding multiple channels and also exploring joint membership partnerships with external parties and also with internal opportunities. For example, we do cross-selling campaigns between music subscription and long-form module. And we also do joint campaigns with external parties as well. And then in addition to that, as our IoT business reach a large enough scale and continue to grow at a fast pace, the subscription for IoT device could also act as an effective cross-marketing campaign for us. And then finally, price promotion periodically are also an important driver. Now, as I mentioned, I think it’s important to see that the context of the very strong growth over the past few years is obviously we – is all of the things that I have mentioned. And we focus, we prioritize more on the subscriber growth over the past 3 years over ARPU. And we are at a stage where we think the whole industry will benefit, not just TME, by focusing more on the quality of service and less on price promotion. And thereby, we see a lot of value in music subscription services that users will learn to appreciate over time. And this approach would help us to lay a stronger foundation for the long-term as well, which is why we seek to strike a better balance between subscriber growth and ARPPU growth.
- Cussion Pang:
- We will be also focusing on the advertising based business model as well.
- Tony Yip:
- Yes. I think as Cussion mentioned, that’s right. At the same time, we – this approach will allow us to better manage between growing our paying subscriber and also maintaining our non-paying free user base, which is still a vast majority of our user base. And to be able to effectively generate monetization opportunity from the free user base, this approach will also give us more flexibility to adapt to a prospective competitive landscape. One example of the new ad monetization model, we are currently beta testing among a small group of users is that for free users, some of them have given an option to opt in to watch a video ad in exchange for being able to unlock the subscription service for a short period of time. So for example, if you watch a 30-second or 60-second ad, you might be able to unlock a 30-minute or 60-minute period where you can enjoy the subscription service. The benefit of that is we will be able to generate ad revenues from the free users that may otherwise be difficult to convert to subscribers. And after these users have had the taste of enjoying the premium subscription service, it may actually increase their conversion to become subscribers. So, that could help us grow advertising revenue and also help us over time increase the conversion amongst the free user base. So, it’s a good balance that allow us to manage.
- Cussion Pang:
- Yes, exactly. And we are also seeing the trend that when a user is going to pay for the monthly subscription or they are going to watching the ads and put in some of the ad efforts in order to get the right to enjoy the more premium content, they will be more active on our platform. So, we are seeing that we are continuing improving the overall quality of our users. And also, just like as you mentioned during the question session, we will also increase the stickiness of our users as well in terms of the usage of the content.
- Operator:
- The next question comes from Thomas Chong with Jefferies. You many now go ahead.
- Thomas Chong:
- Hi. Good morning. Thanks management for taking my questions. May I ask about our M&A strategies for this year? Given we have just closed a deal with a controlling stake for entity in Japan. And also just want to get a sense about how would the deal impact the Q1 revenue? And my second question is about, in the press release, we talked about coming back to Hong Kong by way of introduction. Just want to get a sense about our management in this regard and the timeline that we should be anticipating. And then my final question is about the social entertainment revenue. When should we expect it to be stabilized in the future? Thank you.
- Tony Yip:
- Sure. In terms of M&A, as we adopt a very prudent approach to, obviously, capital management. We are constantly on the lookout on attractive M&A opportunities. We are focused on strategic investment opportunities that provide synergies and that are complementary to our core businesses. And the recent acquisition of M&E Mobile Limited fits that criteria. They operate the leading online karaoke app, Pokekara in Japan. So, it plays very well into our experience in managing the world’s largest online karaoke product. And it also allow us to broaden our international footprint into Japan, which previously we do not yet have a presence. And then in terms of Hong Kong listing, to provide our shareholders with an additional trading venue and protection amid the changing regulatory environment, we have already commenced the process of pursuing a secondary listing in Hong Kong through a listing by the way of introduction. It is important to note that this is a direct listing without offering new shares. And the idea behind that is to allow shareholders to be able to enjoy the benefits of an additional listing without the impact of dilution. In terms of timing, obviously, I think we are working very hard, but we need to obtain a number of regulatory approvals, and we will continue to work very hard to move things forward in an expedited manner. And to the extent that we have major development, we will make the appropriate announcement. And then finally, around – with regards to social entertainment revenue trends, overall, first quarter, we still see some challenge. Seasonally, Q1 is always a difficult quarter because during the Chinese New Year holidays, so a lot of the live streaming hosts they go on holiday. And as a result, the revenue tends to be a bit weaker. In addition to that, there are changes to industry adjustments around taxation that effectively increased the cost of doing business for many of the live streaming hosts. So, some of them need to be adjust their activity levels. And overall, what we try to do is to stabilize the decline, and we believe Q1 will be a challenging period. But as we look forward into the rest of 2022, we do think that we will start to see some gradual recovery, referencing Q1 as a low base. And the initiatives we are taking to drive that recovery include continue us revamping of online karaoke room in WeSing. As we mentioned on the script, we are adding casual games such as Karaoke Farm and Karaoke Town to broaden our revenue streams. And in the last quarter, we also mentioned that we are enabling more inter-room and cross-room interactions. And all of this resulted in our recent online karaoke room revenue achieving a year-over-year growth in the fourth quarter even though the traditional live streaming revenue within WeSing recorded a decline. And then the second area of major initiatives to help drive the recovery is audio live streaming, which is a complementary use case to our core music listening experience, and we are seeing some strong growth in both user base and revenues, and it will continue to grow – we will continue to grow our audio live streaming business in China, as well as to leverage our expertise to expand our presence overseas and monetize through audio live streaming in our overseas products, such as WeSing, as well as our newly acquired Pokekara, as well as M&E product portfolios. QQ Music live streaming is also a flagship in terms of audio live streaming. We are seeing our revenue growing at strong-double digits at a year-over-year level. Users – performers revenues all continue to ramp up. And throughout 2021, we have attracted 12,000 musicians to live stream. It’s becoming a go-to-place for musicians to connect and interact with a fan base via live streaming. And we continue to expect a good double-digit year-over-year growth rate for 2022 for our audio live streaming. And yes. That’s it.
- Cussion Pang:
- Yes, regarding the M&A strategy, I would like to emphasize that our strategy is – it’s not just simply doing some of the financial investment, but rather, we would like to invest in the company that will be – have synergy to our core business. So, as an example that you pointed out regarding the Pokekara, which is really suitable to our overseas development on our WeSing platform. So, this is one of the projects that we will be looking forward. Besides the platform side, we were also focusing on some of the content investments as well. During the past 3 years to 4 years, we have been proactively involved in doing some of the joint production of the music content with many different music labels. We have also started to investing in some of the music labels as well, setting up JVs. So, I think that is also another example to show you that our M&A strategy is we want to build more synergistical business together with our core strategies. Regarding we have a very strong cash base, our cash reserve is around RMB25 billion in our company. So, I think that we will continue to get the best use of this as our advantages. And when the right opportunity come out, we are more than happy to do more investment in order to help the company grow and ensure our success in the long-term. But again, we will do it in a prudent way.
- Tony Yip:
- Operator, we have time for one final question.
- Operator:
- Okay. Our final question comes from Xueqing Zhang with CICC. You may now go ahead.
- Xueqing Zhang:
- Thank you. Thank you, management for taking the question. And my question is related to TMELAND. We launched TMELAND at the end of last year. And this quarter’s earnings conference call was also held at TMELAND. So, can management share more color about TMELAND? How does it help to develop our business and how does management see the music industry’s opportunity in the metaverse? Thank you.
- Tony Yip:
- Ross, would you like to add color?
- Ross Liang:
- Tony Yip:
- So, in terms of TMELAND is our flagship metaverse initiative into the virtual world. There are many use cases of TMELAND. The first is that we will be using it as an event hosting venue for special events, such as one that we hosted in the . There will also be special settings that are customized for particular artists. So, we will be partnering with more and more artists to develop special settings for him or her. We will also be hosting concerts – virtual concerts for these artists, some of them may be a virtual avatar concerts, whereby the artists are immersing into this environment through an avatar and performing through an avatar. Secondly, we will be applying the TMELAND technology into the online karaoke room as well as a virtual nightclub types of setting, which encourage users to interact with one another in this virtual setting. And therefore, extract new user engagement and monetization opportunities. Thirdly, going – looking ahead into 2022, QQ Music will see an upgrade with a metaverse feature, where user will have its own individual room where you can put your own music into that virtual room, friends can come and visit, you can listen to the music together, you could play instruments together. And for artists, we will be also opening kind of virtual showrooms for these partnering artists to display all of their albums in this virtual world, and users can come into this virtual showroom, listen to all their audio music under different audio effects. So effectively, what we try to do is create a parallel world that are in parallel to the current physical world and the current 2D environment, but there is a parallel 3D environment that can mimic the physical world as much as possible in a virtual setting. So, I think – thank you very much for all of your questions, and thank you for joining us today. Feel free to contact TME’s Investor Relations team if you have additional questions. This concludes today’s call, and we look forward to speaking with you all again next quarter. Thank you, and goodbye.
- Ross Liang:
- Thank you.
- Shirley Hu:
- Thank you.
- Operator:
- The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Other Tencent Music Entertainment Group earnings call transcripts:
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