Categories Earnings Call Transcripts, Technology

Tencent Music Entertainment Group (TME) Q1 2021 Earnings Call Transcript

TME Earnings Call - Final Transcript

Tencent Music Entertainment Group (NYSE: TME) Q1 2021 earnings call dated May. 17, 2021

Corporate Participants:

Millicent T. — Vice General Manager

Cussion Kar Shun Pang — Executive Chairman

Zhu Liang — Chief Executive Officer, Director

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Min Hu — Chief Financial Officer

Analysts:

Alex Yao — JPMorgan Chase & Co. — Analyst

Eddie Leung — Bank of America Merrill Lynch — Analyst

Alex Poon — Morgan Stanley — Analyst

Tian Hou — TH Capital LLC — Analyst

Alicia Yap — Citigroup — Analyst

John Egbert — Stifel Nicolaus — Analyst

Thomas Chong — Jefferies LLC — Analyst

Rob Sanderson — Loop Capital Markets — Analyst

Zhijing Liu — UBS — Analyst

Vincent Yu — Needham & Company — Analyst

Presentation:

Operator

Ladies and gentlemen, good evening and good morning and thank you, for standing by. Welcome to the Tencent Music Entertainment Group 2021 First Quarter Earnings Conference Call.

Today, you will hear discussions from the management team on Tencent Music Entertainment Group, followed by a question-and-answer session. For the benefit of all the participants on today’s call, please limit yourself to one question. And if you have additional questions, you can re-enter the queue. Please be advised that the conference is being recorded today.

Now, I will turn the conference over to your speaker host today, Ms. Millicent T. Please go ahead, ma’am.

Millicent T. — Vice General Manager

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

Today, you’ll hear from Mr. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent achievements. He will be followed by Mr. Ross Liang, our CEO; and Mr. Tony Yip, our CSO, who will offer more thoughts on our product strategies, operations and business developments. Lastly, 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 management’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 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 standard 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 in as alternative to the equivalent IFRS measures, and other non-IFRS measures are not uniformly defined by all companies, including those in the same industry.

With that, I’m very pleased to turn over the call to Cussion, Executive Chairman of Tencent Music. Cussion?

Cussion Kar Shun Pang — Executive Chairman

Thank you, Millicent, and hello, everyone, and thank you for joining our call today. Echoing the reorganization of the Tencent digital content ecosystem and expediting TME towards the next phase of development, we recently announced a change of leadership. As the Executive Chairman of TME, I will be responsible for setting our long-term strategy and TME’s overall coordination and management of the Board and also the company. I will also focus more on building the most comprehensive music and audio content ecosystem in China.

Also joining us on today’s call is Mr. Ross Liang, TME’s new CEO, who will oversee QQ Music, Kugou, Kuwo Music and the long-form audio business. Having worked closely with Ross for a number of years in the past, Ross and myself share the same vision in TME’s strategic goal. As the GM of QQ Music from 2014 to 2016 and one of the key members of WeSing’s founding team, Ross has a deep understanding of the nature of our businesses. A warm welcome of Ross, back to the TME family, and I look forward to working with him again, as we continue to execute our strategy and grow the business.

Since TME’s establishment in 2016, we have stayed true to our original aspiration of creating more value for users, musicians, the industry and society as a whole. We pioneered and defined a model benefiting for the long-term development of China’s music and entertainment industry. Our established and comprehensive services now include online music. online audio and social entertainment, positioning us as an all in one music and audio entertainment destination for hundreds of millions of users. We are not only great believers in upholding digital music copyright, but also strong advocates of effectively rising income levels for China’s indie musicians and cultivating China’s original music ecosystem.

We have been pushing the boundaries of the music entertainment ecosystem, committing to explore innovative ways to promote upstream content production. This has resulted in numerous chart-topping songs, originating from our platform, alongside our growing capabilities in artists incubation and additional channels for distribution and promotion. We also pioneered TME Live, which has earned a solid standing in the industry. Although the impact of the COVID-19 pandemic still lingers and some uncertainties remain, China’s music industry is thriving and focusing with a steadfast focus to create a one-stop shop online music and audio ecosystem, we will unite our efforts to drive the next phase of development for TME.

Moving to the quarterly discussions. In the first quarter of 2021, we achieved a robust performance with 24% year-over-year growth in total revenues, while hitting multiple milestones across the spectrum of our business. Net addition of music paying users reached a record high of 4.9 million in the first quarter, demonstrating our strong momentum and further inspiring us to unlock the value of music and elevated role in people’s lives. For our long-form audio business, we have also made significant breakthroughs with MAUs surpassing 100 million at the end of 2020 and MAU penetration crossing the 20% milestone in the first quarter of this year, making us one of the leading players in China’s online audio industry.

Our content ecosystem is becoming increasingly robust, dynamic and powerful. In the past quarter, we were very excited to see increasing user engagement on young users. Thanks to our broader offering of genres such as hip-hop, Chinese ancient style, and music for a wide range of entertainment including popular television programs, variety shows and online games through both licensing or self-production. Also in the hip-hop category, QQ Music launched the Rappers’ Alliance in January, attracting participation from both uprising and top-tier established rappers. By providing a stage to perform and shine, we held the Rapper [Indecipherable] a well-recognized music variety show in China. These efforts have brought increasing engagement on young users and on QQ Music. The penetration of young users among hip-hop listeners is more than 15 percentage points higher than their overall platform presence.

As another example in the first quarter, we worked with Tencent Games to create the highly praised theme song, Battle For Glory for PUBG Mobile, one of the most popular mobile games in the world. In 2021, as an essential component of Tencent’s platform and content group, we plan to strengthen and develop additional ways to collaboration with the broader Tencent ecosystem. Cultivating indie musicians is another strategic talent of us. In the first quarter, the scale of the Tencent musician program as indicated by the original songs uploaded, continued with industry leading growth. On a year-over-year basis, the number of artists on our Tencent Musician platform more than doubled to over 200,000. And the music streaming volume of Tencent musicians witnesses an the increasing share in our platform on a sequential and year-over-year basis. This demonstrates musicians’ trust in our promotional capabilities, platform support, incentive plans and other comprehensive services, as well as our ability to drive influence in the industry by successfully incubating and promoting hip original songs.

Tencent Musician platform also serve public welfare with its social influence. For example, we’ve cooperated with a leading logistic company using music to promote the utilization in the Southwest of China, namely Sichuan, Guizhou, and Yunnan Provinces. Also, we further expanded our content ecosystem to live concerts. TME Live celebrated its first anniversary in March this year. In just a year’s time, it hosted 60 live concerts for over 100 artists, with 18 billion social buzz, building and cementing TME Live’s strong industry influence as a brand. In 2021, we will innovate more interactive features such as ticketing, VIP privileges, reserve the camera and virtual gifting, to create a holistic and more immersive user experience that will get us one step closer to unlocking the massive value and market potential for online live performances.

Apart from music content, long form audio forms are core building block for us as we evolve into a leading all in one music and audio entertainment platform in China. We emerged as a key player in China’s fast growing long-form audio market. Firstly, we provide a broad spectrum of audio categories, expanding into diversified audio genres such as drama, comics, Chinese comedy, pay-stream, parenting, relationship and education among others. The consolidation of Lazy Audio in March further allowed us to gain access to an extensive library of high quality audio books. In the first quarter, licensed titles more than quadrupled year-over-year. We are also accelerating the addition of PUGC and UGC long-form audio content, bringing both professional and long-tail podcasting content to users. Our initial efforts have included QQ Music’s in depth collaboration with Xiaoyuzhou, a leading podcasting app in China. In February, QQ Music initiated the Ground Zero Podcast program, under which we aim to continue introducing various features and widening support to facilitate podcast creation.

Secondly, our adoption of a valuable two-pronged strategy evolves to unlock significant value from our music and standalone long-form audio applications. This approach allow us to leverage our massive music user base and nearly quadruple our long-form audio MAU penetration to 20% in the first quarter, compared to 5.5% for the same period last year. Long-form audio content also contribute positively to time spent per user. It inspires incremental listening of audio content in addition to music. And newly converted audio user stream even more music content than before, our standalone application launched in April, Lanren Changting to pioneer a well rounded visual and audio experience through comics, surround sound and bullet chats to offer an immersive and interactive user experience and aim to address the needs of heavy audio users.

Lastly, we commenced an ad-based monetization, which give us — our users easy access to a vast amount of high quality audio content. Users are able to gain membership privileges or title right by watching advertisement or completing certain task. We believe that such a model will not only be effective in scaling our user base quickly, but also unlocking additional monetization methods. China’s long-form audio market remains extremely underserved as compared to the online music and video market and we are eager to continue cultivating users’ listening habits, to ultimately accelerate the penetration of online audio in China.

Now, I would like to pass the call to Ross, who will share more about the strategy of our key business lines. Ross, please go ahead.

Zhu Liang — Chief Executive Officer, Director

Thank you, Cussion. Hello, everyone. I want to start off by saying how exciting and honored I’m to join TME as the CEO. I see tremendous trends under future upside potential in TME, particularly with its leadership, in driving industry growth as innovative business models and last but not least, is a remarkable team consisting of our talented group of people in the industry. I firmly believe that the pandemic has changed and continues to change the content distribution and also the interaction raising online music industry in China. And the TME from a position of strength is in the forefront of this paradigm shift, leveraging the growth momentum of the visualization and the socialization of music platforms.

We plan to launch the TME Radio account to further strengthen interactions between artists and the fans. There’s a significant upside to music-centric social activities through the completion of private dominance for music, musicians and both of music content promotion on each social platform. Maybe I’ll pull and streamline resources, enhance middleware and architecture sharing among all online music services to pursue R&D and the technology breakthroughs as we highlight cutting-edge technologies under innovate operation models, meaning able to provide a more immersive online karaoke and concert experience, making virtual reality as well as offline experience and [Indecipherable].

Our multi-products portfolio put us in a strong position to offer differentiated services for the diverse and the nuanced needs for users nationwide, with QQ Music cementing its position as a young and a trendy brand and Kugou Music serving a diverse user base by offering market version of customized for different verticals of [Indecipherable] and senior citizens. Kuwo Music will focus more on catering to users’ intrinsic demand of music streaming and providing superior experience with easy to use music streaming features.

We also established a tighter and streamlined collaboration with Tencent’s stronger product portfolio to enhance music content promotion. By working more closely with other Tencent ecosystem, we will follow the interactions between music and the social platforms, innovate content production and artists incubation with digital content platforms and promote the development of long-form audio, leveraging our partnership with online literature trial forms. We are dedicated to finding things of power of music. We are opening up more monetization opportunities. Meanwhile, also deciding up on efforts on international expansion and have appointed the Group Vice President Dennis Hau to lead this effort. Dennis was previously in charge of the operations and the management of QQ Music. Under his leadership, QQ Music successfully launched the Putong Community to enhance social interaction between music fans and their idols, developed industry leading music discovery prediction technology and substantially transferred promotion capability for trending hip music. With the support of Dennis and a deep bench of senior managers and leveraging my prior experience with QQ Music and WeSing, I will personally take up on a more active role in driving the growth of QQ Music and WeSing. I look forward to working in close partnership with Cussion and side by side with other TME management members, staying laser-focused on efforts to enhance product features and services to elevate the user experience.

Now, I would like to turn the call over to Tony, who will discuss the business highlights and important areas of focus. Tony, please go ahead.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Thank you, Ross. Hello, everyone. I’ll first talk about the key operational and financial performance during the first quarter. Online music services growth rate continued to accelerate for two consecutive quarters. We delivered another strong quarter for subscription business, with a record high net adds of 4.9 million online music paying users. The strong subscriber growth was primarily driven by better content offering, effective marketing campaign and improving retention rate.

We also made notable progress in advertising within online music services. Advertising revenues more than doubled year-over-year in the first quarter for the third time in a row, as we benefited from an increasing number of advertisers from various industries attracted to our platform, as well as triple-digit year-over-year growth in ad inventory and double-digit year-over-year eCPM growth. We also continue to innovate with advertising products to further tap into the growth potential for advertising. In 2021, we are focusing on developing creative advertising solutions and enhancing in-house capabilities to further boost our advertising revenues and complement subscription models.

Online music mobile MAU were 615 million in the first quarter. While there were some churn of casual users resulting in a year-over-year MAU decline, our total music user time spent was up year-over-year, demonstrating the increasing engagement of our core users. In terms of expanding our services beyond the mobile phone, we continue to broaden our services to Internet of Things, IoT space and find more and better ways to interact with our users. Opportunities arising from the IoT market are exciting and we are actively expanding used cases for users to enjoy all our services. We will continue to solidify our leading position through extensive cooperation with mainstream automakers, smart speakers, television and other connected device manufacturers. In the first quarter, our IoT MAU was 69 million, representing an increase of 50% year-over-year. The IoT market will serve as the new distribution and promotion channel, as well as serving as a potential additional driver for future subscription growth.

Moving to visualization and socialization. Our concerted efforts to enrich both music and audio content offering as well as enhanced innovative features and services such as music community and video content have helped us gain higher mine share among our users, illustrated by a 10% year-over-year increase in average daily time spent for mobile users in the first quarter. For Putong Community, we introduced more social themes, such as synchronized music and podcast listening, video and constant watching, as well as improved private messaging, catering to our users’ needs for interactive social connections. As a result, DAU penetration and retention rate of Putong Community both increased steadily. Kugou Fans Club, another community on our platform has also drawn many leading artists, labels and content IPs. Highly rated and domestically produced animation series, Scissor Seven Wu Liuqi is a recent example. Fans Club is becoming a well loved destination for young generation, evidenced by an increasing proportion of young users and its time spent per user increased sequentially in the first quarter.

Now let’s turn to our social entertainment services. In the first quarter, we delivered solid performance. Both online karaoke and live streaming delivered steady year-over-year growth. Our strategic shift to focus on monetization efficiency gain has continued to lead to strong advertising revenue growth for WeSing. QQ Music live streaming gathered further momentum during the quarter and we are on track to scale it up over the course of 2021. Social entertainment MAU improved quarter-over-quarter to 224 million, as user base of QQ Music live streaming ramped up and our efforts to invigorate content ecosystem and enhance social attributes for WeSing took place. Paying users of social entertainment services also sequentially recovered to 11.3 million in the first quarter, by 4.6%.

Our online karaoke services strengthened its core singing and entertainment functions, with material improvement in monetization through advertising. Our concerted efforts to make the experience more immersive and fun through video enrichment, personalization and community resulted in sequential improvement in users’ willingness to sing and record and further content distribution, driving an increase in average daily time spent within WeSing, and also daily active users bottoming from the last quarter.

With a dual approach in splash screen ads and news feed ads, advertising revenue for WeSing more than doubled year-over-year in the first quarter, making it a more meaningful revenue stream of WeSing. For the remainder of 2021, we expect strong advertising revenue growth to continue and become an important top line driver for social entertainment services.

For music centric live streaming services through efforts such as full screen live streaming and category expansion of content in ACG, gaming, Chinese ancient style and dancing, we maintained a healthy interactive ecosystem as evidenced by steady quarter-over-quarter improvement of retention rate for performers and our users. The closed loop ecosystem between online music and music centric live streaming have been demonstrated by higher streams of Chinese ancient style during the quarter. Inspired by the increasing trend of this genre on our online music services, Kugou Live hosted the live show of Chinese ancient style for today, [Foreign Speech] for more than 80 groups of Chinese ancient style singers, further integrating Chinese traditions with a modern twist. This show in turn led to a 17% higher streams of music by the participated singers during the days of this event.

In conclusion, we picked up 2021 with a firm step forward in our evolution into an all in one online music and audio entertainment destination in China for users and artists.

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

Min Hu — Chief Financial Officer

Thank you, Tony. Hello, everyone. Next, I’ll discuss our results from a financial perspective. Overall, we achieved outstanding growth in online music services, particularly in music subscriptions, and advertising revenues this quarter, and the continuing healthy growth in social entertainment business.

Total revenues for Q1 2021 were RMB7.8 billion, up 24% year-over-year. Our online music revenues reached RMB2.7 billion this quarter, up 35% year-over-year. Our music subscription business continued to grow rapidly in the first quarter of 2021, with revenues of RMB1.7 billion and a year-over-year growth of 40%. We had a record high net adds of 4.9 million in Q1 2021 and the paying users grew 43% year-over-year, driven by user retention improvements and higher new adds of paying users. Monthly ARPPU remained relatively stable year-over-year. This was resulted from our continuous improvement in product and content, expanded sales channel and efficient promotions. And we are very pleased to see that our efforts starting to bearing fruit and the value of quality music is increasing disconnect of our users.

In addition, on a year-over-year basis, our advertising revenue was more than doubled again for the third consecutive quarter due to increased ad availability and the eCPM improvements. We also enhanced our products to improve ad inflation and faster serve our customers. Over the past year, we have made various efforts in expanding and educating our customers for their [Indecipherable]. As a result, both our customer number and average spending per customer have expanded year-over-year.

Social entertainment services and other revenue were RMB5.08 [Phonetic] billion, up 19% year-over-year, driven by growth in revenues from live streaming and adverting services on our social entertainment platform. Social entertainment monthly ARPPU increased 36%, while our paying users jumped 2.4% on a year-over-year basis. Live streaming revenues had a relatively higher growth year-over-year, as we had a lower basis in Q1 2020 due to the impact from COVID-19 and adjustments to the active users. Additionally, our improved ad business model on social entertainment provided a more and better ad product on our platform, regarding the significant growth in ad revenues on our research and development platform.

Gross margin was 31.5% in Q1 2021, up 32% to year-over-year and down 0.8% sequentially. Year-over-year increase was due to rapid growth in subscription revenue and other testing revenues. Sequential decrease in gross margin was because of social entertainment revenues and advertising revenues were seasonally lower in the first quarter of 2021.

Now moving on to operating expenses. Total operating expenses for Q1 2021 were RMB1.6 billion and was 20% as a percentage of total revenue, as compared to 18% in the same period last year. Selling and marketing expenses were RMB672 million, up 40% year-over-year. The increase was due to higher user acquisition expenses to enhance our products’ long term positioning and spending related to our legacy TMEA event in general. The increase was also because we had a lower base in Q1 2020, as we reduced spending on used operation during pandemic. General and administrative expenses was RMB887 million, up 30% year-over-year, driven by higher number of employees in R&D as we invested in product enhancement and project innovation, such as long-form audio, raising international versions, content library technology.

Our effective tax rate for Q1 2021 was 11.5%. Our net profit was RMB979 million and the net profit attributable to equity holders of the company was RMB926 million. Non-IFRS net profit was RMB1.25 billion and the non-IFRS net profit attributable to equity holders of the company was RMB1.18 billion. Non-IFRS net profit margin was 15.8%.

As of March 31st, 2021, our combined balances of cash, cash equivalent, term deposits and short-term investments were RMB27 billion, representing a decrease of RMB2 billion from Q4 2020. The decrease in balances was primarily due to acquisition of Lazy Audio, investments in the consortium to purchase additional equity interest in Universal Music Group as well as the repurchase of ordinary shares. Cash generated from operating activities had a positive impact on the combined financings.

Looking forward, we’ll continue to invest in core content investment to further increase recognition of the value of quality music by our users and we’ll keep focusing on new product and features such as the long-form audio. We are optimistic about the future of the broader music and audio industry and are confident the overall system and product pipeline that we are building in the long run.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Alex Yao from JPMorgan. Please go ahead.

Alex Yao — JPMorgan Chase & Co. — Analyst

Good morning, management and thank you for taking my question. My question is on the regulatory environment. Can you comment on the recent news flow that you guys are being investigated by the regulator for anti-trust purpose and the worst-case scenario of the penalty could be involved, not only a fine but also a separation of the three music apps i.e. QQ Music, Kugou and Kuwo.

And then in addition to this, a news piece, can you guys talk about, what do you expect to change your operation in the next couple of years, given the tightening regulatory environment in the general Internet space? Thank you.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

In recent months, we have received increased regulatory scrutiny from relevant authorities and have been actively cooperating and communicating with the relevant regulators. At this point, we are not in a position to comment or predict potential outcomes of such dialog with the regulators, but we wish to say that we are committed to complying with all relevant laws and regulations, including those related to anti-trust. And as you know, the online entertainment industry is highly competitive and dynamic. Our goal is to deliver valuable products and services and provide more and more value add to our users to musicians, to the industry and to the society as a whole. And that will remain to be the case and we wish we’ll establish ourselves as a healthy force for the industry that is providing value add to the society as a whole. So I think that’s all we could say and comment on with regards to the regulatory developments at this stage.

Operator

Thank you. Your next question comes from Eddie Leung from Bank of America. Please go ahead.

Eddie Leung — Bank of America Merrill Lynch — Analyst

Thanks. Good morning guys. Just I would like to get insights on your plan to have a better integration among three music applications, as we get from some of the media news and any more color on the potential cooperation with other assets under Tencent? Thank you.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Sure. I think with regards to better cooperation within TME, as Ross mentioned in the early remarks, we plan to build a shared middleware, an architecture that is shared across the three music platforms to improve R&D efficiency, improve data efficiency, while at the same time, we’re finding the positioning of each of the music platform for different target audience. I think along the lines of QQ Music, we’ll continue to summon its position as the young and trendy brand and establish strong endorsement among young users. And then Kugou Music, we serve as a diverse user base by offering multiple versions of customized for different verticals of target audience, such as children or senior population. And then Kuwo will focus on a more intrinsic, more streamlined, easy to use music streaming service.

And then in terms of cooperation with the broader Tencent Group, as Ross also briefly mentioned, TME will strengthen the collaboration with the wider Tencent ecosystem. Examples could include Tencent’s — so using Tencent Social platform as a channel for better music content, distribution and promotion, working more closely with Tencent Maps for in-car use cases and joining forces with Tencent’s digital content platforms such as Tencent Video in areas such as music variety shows, fan-based community operations, long-form and short form video promotions and commercial membership partnerships, as well as a better search and discovery experience for music with the QQ Browser. And last but not least, of course, the deepening of the partnership with China Literature which we started last year.

Operator

Thank you. Your next question comes from Alex Poon from Morgan Stanley. Please go ahead.

Alex Poon — Morgan Stanley — Analyst

Thank you, management for taking my question. I have a question regarding long-from audio. Can you talk a little bit more about the time and investment needed to build the content library, then to become similar or even better than the existing industry leaders and in the following revenue ramp-up trajectory and the impact on margin of the overall company? Thank you very much.

Cussion Kar Shun Pang — Executive Chairman

Okay. Alex, thank you for your questions and I’ll try to answer it from a more business strategy point of view. And then, Tony and Sherly may add a little bit on the financial side as well. Regarding the long-form audio, definitely is a lot of exciting opportunity out here. We are seeing it as one of our core strategic moves, not just this year, we actually launched last year and this is also the first anniversary after we soft launched our new long-form audio platform. We are actually taking the two-pronged approach, so which means that we are not just promoting the long-form audios from our music applications, but also after the acquisition of the Lazy Audio, we merged with our core accounting and we formed another standalone long-form audio app that will help to pursue today the needs of our core audio users.

In terms of the content side, as we mentioned that we have a strong partnership with not just Chinese literature, but also most of the core leading long form audios, IP-based providers in the industry right now. Beside this, we also rolled out some platform and also the program to acquire the podcasting providers to go to our platform and started providing the services. So all of these, we will be doing simultaneously and we are in a really fast moving pace to acquire and also to have joined partnerships with different content providers as soon as possible.

One of the latest news that I would like to give and share with you is we’re also in the alliances with Xiaoyuzhou, who is a leading podcasting application in China nowadays. They are very energetic and young team and after having in-depth discussions with them, I think that we share the same vision and we have already rolled out joint partnership with Xiaoyuzhou on the QQ Music platform regarding podcast. So I think that we have a lot of exciting projects going on and we will continue to pull-in more resources, not just from a financial point of view, also from the company and structure reorganization, we have already formed a long-form audios business group and we have a dedicated team, not just from a technical point of view to lay out a good foundation, but we’re also working on the products and operations side as well.

And I’ll see whether my team have any additional comments regarding the resources of financials.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Shirley can address the margin impact on the long-form audio investments.

Operator

Pardon me. This is the operator. We have temporarily lost connection with the speakers.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Okay, no problem. I will carry on. So I think overall we do expect to see some margin pressure due to the investments in the content side for long-form audio as we step-up on the investment. However, we want to bear in mind of the long-term opportunity that is ahead of us, which to us is very exciting. We do think that while it is short-term margin dilutive, we do expect the long-form audio business to be long-term margin accretive, given the business models that we are planning to monetize them.

Cussion Kar Shun Pang — Executive Chairman

And we are going to monetize a full, not just the paying model, but we also have the advertising model as well. So a lot of people can start enjoying some of the paid content by — after competing some task or reading some of the — or listening to some of the advertisement. So actually I think that from a business model point of view, it’s more healthy and great help for us.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Okay, yeah.

Operator

Thank you. We now have the speaker back online.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Okay. Let’s carry on to the next question.

Operator

Thank you. Your next question comes from Tian Hou from TH Capital. Please go ahead.

Tian Hou — TH Capital LLC — Analyst

Good morning, management. Congratulations on a good quarter. So I have one question related to socialization. So it looks like Tencent Music has a set of the content like live. So I really want to know among all the products with the interconnection and also how do we develop socialization out of each product and among the products. That’s my question. Thank you.

Cussion Kar Shun Pang — Executive Chairman

[Foreign Speech] I think for music platform, our focus is going to [Technical Issues] the relationship between our friends and also building relationship with wider circle beyond friends.

[Foreign Speech] Okay. I mean for the areas of social connection among friends, given within Tencent, the major social platforms such as WeSing and QQ are very strong in that area. We will strive to provide easy to use tools, especially as an example, content creation tools, that make it easy for our users to create content, and also provide use cases for the users to share these content are created by this easy to use content creation tools within the social platforms of Tencent.

[Foreign Speech] Yeah. And we will aim to provide easy to use tools for content creation, to facilitate sharing and interaction among friends and families. These tools could allow quick sing along, it could provide a virtual room that is tailored for friends to enjoy and sing song and also provide an easy method for them to produce short video clips consisted of music and photos and make it easy for them to be shared — for these content to be shared on the Tencent social platforms.

[Foreign Speech] And in the area of social connection beyond friends to just users in general on the platform, we will be very focused on the interaction between idols and fans. We think that’s a very important community and it would be an important effort for us to focus on to broaden the idol and fan interaction and community as a way to increase music distribution and promotion.

[Foreign Speech] Yeah, there are many ways for us to enhance the interactions between fans and idols. TME video account something Ross mentioned earlier in the prepared remarks is an example. Putong Community is another example, as well as online concert with interactive features. We believe as we invest in these more social elements and methods for people to interact, we’ll be able to better monetize and capture the fan economy opportunities.

[Foreign Speech] In particular, Putong Community and Video account are of great importance to us. In particular within Putong Community, we’ve launched a virtual room and will be further enhancing that product feature, one that allows the fans together amongst within the virtual room to chat and to enjoy music together. We will also aim to provide better communication tools to facilitate communication and interaction between idols and fans.

[Foreign Speech] The most important of all is the TME video accounts and that’s an area where we will be looking to partner with WeSing. It is important for us to find ways for musicians to interact with the fans through a short video-based format. We believe in — by providing these tools, musicians can develop their private domain traffic within these TME video account and WeSing video account and thereby allow us to capture potential growth opportunity and commercialization opportunities.

[Foreign Speech] Okay, great.

Min Hu — Chief Financial Officer

Next question please.

Operator

Thank you. Your next question comes from Alicia Yap from Citi. Please go ahead.

Alicia Yap — Citigroup — Analyst

Hi. Good morning, management. Thanks for taking my questions. I have a question related to the advertising. So can management provide update in terms of the colors on the traction from the advertiser. For example, who are the major advertiser category and how is your ad load and e-CPM compared to the peers? Any pressure on the app pricing and ad inventories issues among the peers? Thank you.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Sure. Well, as you know, we recorded another strong quarter of advertising revenue growth of over 100% on a year-over-year basis and that’s driven by growth basically across the board in terms of inventory, in terms of sell through, ad units as well as in terms of unit pricing in the form of eCPM. And so we don’t at the moment see any bottlenecks in terms of inventory. For 2021, we do expect advertising to continue to achieve a very solid year-over-year growth. We’ll gradually be ramping up various additional advertising formats.

As Cussion mentioned, we have introduced ad monetization for long-form audio business, which is a innovative way that allow users who watch a video ad or complete certain tasks to gain access to what would otherwise be premium content that requires a pay subscription or pay per title. We think that’s a highly differentiated strategy, that will allow us to both grow the advertising business as well as surface of differentiation for our long-form audio business.

In terms of music, we mentioned in the past that we will continue to invest in new advertising format, which will serve as additional future growth drivers for music monetization beyond subscription. And then in terms of the advertise exposure we are seeing increasing number of advertisers being attracted to our platform, pretty much across the board, but you could expect the usual suspects in the form of top automakers, FMCG advertisers major brands, etc.

Operator

Thank you. Your next question comes from John Egbert from Stifel. Please go ahead.

John Egbert — Stifel Nicolaus — Analyst

Thanks for taking my question. The IoT disclosures were very enlightening, really strong MAU count and growth there. I was wondering if you could elaborate on the monetization strategy for IoT, for instance on the subscription side, is the paywall strategy expected to be the major driver of conversion among IoT users or do you have plans to maybe offer some paid features that uniquely provide value to IoT listeners that could encourage conversion? Among that group, I believe you had said in the past that the IoT users don’t always overlap with your Mobile MAU base. So I was just wondering a different set of subscription features might make sense there.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Yeah, that’s right. We are very excited with the growth of the IoT user base. As you could see, I think — if you look at our numbers and compare it to the industry sizing in terms of smart speakers or in-car systems or smart TV, it would be quite clear that we continue to be a early mover in that space and we have established a strong position within each of these verticals.

In the form of monetization, we’ll be looking at trying different approaches, with the overall principle of increasing the interactiveness between the mobile user and the IoT users, precisely because some of them are quite different. So we do want to leverage the IoT channels as a promotion and distribution channel, but also act as an effective channel to convert into subscription over-time. And that can also be done in a number of different ways. There could be stand-alone IoT subscription plans. There could also be a way to drive the mobile phone subscription. As an example, a user may require mobile phone subscription in order to gain access to the IoT subscription, that’s as an example. So we do see the growth and the size of the IoT user base serving as a future growth driver for our mobile music subscription going forward.

Cussion Kar Shun Pang — Executive Chairman

Yeah. And definitely, we will also have the advertising model as well, especially for the in-car scenario. A lot of people when you’re driving, I think this is a perfect environment for you to — listening to the music or other long-form audio content. And advertising is also going to be a really good monetization rate for us as well. So leveraging our technology platform and also the very targeted and personalized engine, I think that bring us to be in a better place to monetize through the IoT area.

Operator

Thank you. Your next question comes from Thomas Chong from Jefferies. Please go ahead. Thomas, do you have yourself on mute?

Thomas Chong — Jefferies LLC — Analyst

Hi, this is Thomas. Hello?

Operator

Please go ahead.

Thomas Chong — Jefferies LLC — Analyst

Thank you. Hi, good morning. Thanks management for taking my questions and congratulations on a solid set of results. My question is about the 2021 and 2022 outlook. Given that I think last conference call, we have talked about the top line business trend and the quarterly net adds. Given the Q1 results, do we have any changes to our full year outlook? And on the investment side, co-side, should we expect 2022, we should see an easier comp and expect a margin expansion? Thank you.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

I’ll address the outlook with respect to top line and then Shirley can address the outlook with respect to margin. I think we’re very pleased with the Q1 results. As you could see, the music paying users surpassed the 60 million milestone, reaching 60.9 million, representing a 43% year-over-year growth. The net adds last quarter was also at a record high at 4.9 million. And our long-form audio business also achieved a number of milestones, exceeding over 100 million MAU by the end of the year and 20% penetration by Q1, which represent an MAU of 120 million, growing at 200% — over 200% on a year-over-year basis. So with that as a solid foundation, we expect the strength to continue with regards to music and long-form audio.

With respect to the total revenue, we do expect to achieve a year-over-year growth rate of mid to high teens for second quarter. In terms of online music revenue, we expect that to maintain year-over-year growth rate of around mid-30s. And that’s driven by continued strong subscription, which I’ve outlined and also a continued strong advertising growth. Well, social entertainment revenue, we expect that to grow at a reasonably healthy pace, driven by increasing contribution from QQ Music live streaming.

And then with respect to the subscriber and main music paying user numbers in particular, we said in the last quarter that we expect a quarterly net adds of between 4 million to 5 million on average per quarter for 2021. We expect that to continue to be the case, so no change. Specifically for the second quarter, we work towards achieving the high end of that range.

Min Hu — Chief Financial Officer

Okay. About gross margin, we expect our gross margin for full year 2021 to be slightly lower as a result of the following. First, we continue to have investor in long-form audio to build our solid content library, so that will be a negative impact on our gross margin. And two, our revenue sharing fees of social entertainment will be increased. There are two reasons, one, that the heavy revenue increase in live streaming has come from QQ live streaming. Net ratio of revenue will be the highest in our social platform because there is audio live stream remaining. And second, the revenue sharing ratio of WeSing will be gradually increased to in line with the industry level. So the revenue sharing will impact our gross margin. And the good news is that our gross margin for online music business, it has generally improved, and we expect it to keep improving over-time in this year, and because our music subscription revenue and the advertising revenue grows rapidly. And in all, in 2021, we think the gross margin is under pressure. And we hope in 2022, the meaningful revenue coming from long-form audio and new monetization model come from LTE and any other new monetization can be increased our revenue in 2022 that our gross margin will be coming back, yeah.

Operator

Thank you. Your next question comes from Rob Sanderson from Loop Capital Markets. Please go ahead.

Rob Sanderson — Loop Capital Markets — Analyst

Yes, thank you. A lot of my questions have been asked and answered, but I wanted to maybe go backwards into sort of revisiting the thoughts and expectations coming off the IPO. I know we’re a few years back, but let’s just — at the time, I think the thought was there was opportunity for the business to grow at 30% levels for a number of years going forward. And we just came off from a 15% growth year. We’re looking at around a 20% maybe growth year for this year ahead. And things have definitely changed. So obviously, lots of room for runway and growth in music subscriptions and long form audio and advertising and whatnot, but social entertainment side definitely seems fundamentally different. So is there still an opportunity for a 30% level type of growth down the road or changes on whether the opportunity set is fundamentally different or the competitive environment is fundamentally different on the social entertainment side? Just how should we be thinking about sort of the long-term opportunity to grow the business compared to what we may have thought 2.5 years ago in the IPO? Thank you.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Sure. Look, I think we should look at that question separately for online music and social entertainment. For online music, I think it’s fair to say that by and large, the business performance have somewhat exceeded expectation with the subscription growth faster than most people have expected and we continue to expect — continued strong growth for online music, as I mentioned, for the rest of the year. And that’s driven by very healthy uptake in net adds on a quarterly basis, which is driven by a combination of attractive content offering, driven by effective marketing campaigns for the subscription plan, advertising, which is increasingly an element and also IoT, which could act as a future growth driver, like I mentioned. And then advertising is another growth driver for online music that has been very strong, which we’ve talked about and we won’t repeat.

In terms of social entertainment, we have seen obviously, greater competition amongst pan entertainment platform that impacted the user base, in particular, WeSing. And we had to, over the past several quarters, embark on a number of product strategy shift and product upgrades, in particular, relating to enhancing the singing tools and the publishing tools to make it easier for our users to generate content and share it amongst their peers. And that has — we’ve seen some positive results in development on the back of those product strategy shift as witnessed by the stabilizing MAU on a quarter-over-quarter basis and which also applies to the WeSing and social entertainment MAU and DAU as well.

And live streaming continues to be a highly competitive sector. I think the industry is somewhat more mature now compared to two years ago with a large number of players entering live streaming, whether it’s short video platforms or others and we continue — and we also saw a big impact on the live streaming business as a result of the pandemic, which we are still gradually recovering from. So I think the key changes mainly relate to WeSing in terms of competition as well as live streaming.

Cussion Kar Shun Pang — Executive Chairman

Yeah, I would like to add a little bit more color on the long-term development of our entire business. As you mentioned during the IPO, we’ve mentioned about the online music and also the social entertainment. I think that you’re absolutely right that we are facing some of the challenging time in the social entertainment, especially for the live streaming side. But as again, we are growing extremely good, especially for the online music side. So in terms of the ratio of our total revenue, I think that the online music side is picking up, and also it’s going to be a long-term sustainable business for us. Besides the long — music and social entertainment, I think that after five years of running operation for TME, I think that right now, we are also expanding our footprint to the upstream and also the downstream, which will make us to be with the focus on to becoming — to building the ecosystem for the entire music industry in China. This is very important. So we have been putting in a lot of efforts in working together with news labels, content providers and we started to participate in content creation, which will may not be at this moment, we will have a very good reflect on our revenue, but in a more medium or long-term point of view, it would definitely drive more additional content side revenue for us in the future.

The second point, what I mentioned before, which is the TME Live, which we did a year ago. And this year at March, which is the first anniversary of us, I think we are so proud that the TME Live has helped us to really extend our footprint into the show business, which is not just a traditional offline concert event, but we have also opened the door for the online music concerts as well. And we will also help us have to have a lot of collaboration for the online and offline event in the future. So I think that this is also another new business initiation — incentive that can help us to drive additional revenue stream for us in the future. So for TME as a whole, we were seeing that after we have established five years ago, when we’re entering the next five years plan, I definitely seen that the world is — even — I think the future is brighter because we are not just having platforms only, but we have the upstream and downstream business. And together with the strong business team and all the technical team that we have, I definitely have the confidence in saying that TME is going to have the advantage when compared to our competitors when we are moving forward. So I hope I answered your questions.

Operator

Thank you. Your next question comes from Zhijing Liu from UBS. Please go ahead.

Zhijing Liu — UBS — Analyst

Thank you management for taking my question. I have one question. Aside of long-form audios penetration of music MAU at 20%, any further numbers on the daily time spent on this category? Thank you.

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Yeah. We are not in a position to disclose further details at the moment, but we are seeing healthy growth in the time spent metric. And what’s encouraging is that if we look at our stand-alone application within long-form audio, and traditionally, what we see is that the core users and the more heavy high-frequency users tend to over-time migrate to the stand-alone apps. We see very, very high time spent per DAU which is actually higher than the time spent per DAU for even our music apps. And that’s the nature of the content types because at the moment, China Literature — through our partnership with China Literature, we have a lot of online audio books. Obviously, with audio books, the time spent tends to be long. And as Cussion mentioned, we do plan to significantly broaden our content coverage within long audio to include not just audio books but to multiple genres; Chinese comedy, comics, drama, education as well as more PUGC and UGC podcast. And as we do that, I think the time spent naturally would come down a bit, but it will still be at a very healthy level across our stand-alone apps and as well as in our music apps.

Cussion Kar Shun Pang — Executive Chairman

Yeah. And also we are seeing that after we roll out the long-form audio content, more and more of our music users started to enjoy the long-form audio content and it will definitely drive their total time spent. And we are also seeing a good news is, it do not affect the time that they spend on listening to music or watching other music-related video content as well. So we are seeing that actually the long-form audio, you see it complements with the music side. So once the user started to enjoy some of the long-form audio, you definitely — you’re not just driving additional time spent on long-form audio, but also music as well. So this is a very good indication and proven that our direction is the correct one and this is also our competitive advantage because we have a lot of music users. And right now, the penetration is on the long form audio is just 20%. So I think that it will let us have a lot of room to grow in the future.

Millicent T. — Vice General Manager

In the interest of time, operator, we’ll take last question please.

Operator

Thank you. Your last question comes from Vincent Yu from Needham & Company. Please go ahead.

Vincent Yu — Needham & Company — Analyst

Thank you management. Thanks for taking my question. Can management help us break down the gross margin for the online music segments? What is the stand-alone margin for this business and how much a drag hit the long-form audio cause? Thank you.

Min Hu — Chief Financial Officer

About the gross margin for online music, we had increased improvement to the improvement rate in last quarters. And we expect in 2021, the gross margin of online music will be increased year-over-year. And for gross margin — how to track the cost of the long-form audio, we think that the library, the content is the highway factor to impact the gross margin because we cannot get the meaningful revenue at this stage because the long-form monetization — long-form audio monetization is at the very early stage. And we believe in 2022, the meaningful revenue coming naturally will be a reason to gross margin. Yeah.

Operator

Thank you. We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Ms. Millicent T for closing remarks.

Millicent T. — Vice General Manager

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

Cheuk Tung Tony Yip — Chief Strategy Officer, Head of Ultimate Music

Thank you so much.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

Hormel Foods (HRL) fine-tunes biz strategy to beat challenges. Is the stock a buy?

For consumer staples companies, rising inflation is probably turning into a bigger challenge than the virus-induced supply chain disruption and store closures. After bettering its position since the early months

HP Inc. (HPQ) stock research summary | Q3 2021

HP Inc has shown a strong performance in Q4 2021. In spite of remote working, HP has shown a strong demand for PC and printer. The company has beat Zacks

VMware Inc. (VMW) stock research summary | Q3 2021

In this era of digital transformation, the technology industry is seeing a rapid influx of innovative products and solutions that help businesses adapt to the fast-changing and complex environment. VMware

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top