Tencent Music (TME) requires more paying users to continue its strong Q2 performance

With over 1.4 billion people, China has a massive audience with a growing demand for music entertainment. Until recently, the music industry in China was relatively underdeveloped and highly fragmented largely due to deficiencies in copyright protection. Spending on music entertainment in China has been relatively low. Let’s see the performance of Chinese online music streaming company Tencent Music Entertainment Group (NYSE: TME).

MAU trends

For Tencent Music, the mobile MAUs of social entertainment services increased from 226 million in 2018 to 232 million in 2019, and the number of paying users of social entertainment services grew from 9.8 million to 11.6 million. Paying ratios of online music services and social entertainment services stood at 5.2% and 5%, respectively in 2019.

Answering a question on music MAU trends during Q2 earnings call, the management said that there was a mild year-over-year drop for music MAU in Q2. The company added that as the younger demographics started going back to school now they spent less time on music and karaoke, which resulted in the mild drop of MAU in Q2. Tencent Music expects MAU to see some growth in Q3.

Q2 highlights

Tencent Music’s revenue grew 17.5% year-over-year to RMB6.9 billion. Online music revenues were RMB2.2 billion, up 42% year-over-year, driven by music subscription revenues, digital album sales and advertising revenues, despite a decrease in sub-license revenues. Music subscription revenue jumped 65% to RMB1.3 billion.

On a year-over-year basis, paying users and ARPPU (average revenue per paying user) grew 52% and 8%, respectively, resulted from user retention improvements and effective paywall strategy execution. Both advertising revenues and digital album sales grew strongly. Advertising revenues continue to be an important growth driver for us.

Also read: Spotify (SPOT) Earnings: 2Q20 Key Numbers

Growth in digital album sales in this quarter was driven by new digital platform releases of few very popular artists. Social entertainment services and other revenues were RMB4.7 billion, up 9% year-over-year, driven by growth in online karaoke and live streaming services. Paying users grew 12% year-over-year. ARPPU decreased 3% year-over-year while increased 13% quarter-over-quarter as we continue to recover from COVID-19 situation.

In the second quarter, TME ramped up its long-form audio services. On the content side, the company added more iconic audio content, which was illustrated by a 300% year-over-year increase in the number of licensed titles. Tencent Music introduced a standalone long-form audio subscription plan during Q2. The company expects long-form audio to become a new growth engine for revenue diversification.

Looking ahead

Tencent Music expects advertising to be its third major revenue source behind subscription and live streaming. The company, which has been actively hiring to increase its team size, expects to continue the hiring in the second half. Tencent Music projects a ramp-up in advertising revenue next year.

Recent partnerships

On July 1, Tencent Music joined hands with Japan’s animation movie studio CoMix Wave Films. This deal allows TME to access 17 popular animated film soundtracks, which will augment the company’s offering.

The company recently completed a multi-year contract renewal with Universal Music Group. This partnership will be beneficial to both parties and create long-term potentials for them. This will also enable the companies to improve efficiencies and profitability, while unlocking market monetization opportunities for many years to come.

Risk factors

Recently, the President’s Working Group in the US had recommended the delisting of the US-listed Chinese firms. Answering a query on this, Cheuk Tung Tony Yip, Chief Strategy Officer said,

“The President’s and the White House actually have not come out with an official executive order as of yet as to what to do with that recommendation. So we do think it is premature to speculate on how that would evolve.”

When compared to its rival Spotify (NYSE: SPOT), Tencent Music’s paying users are less. Also, Spotify doesn’t face any regulatory headwinds.

Despite the usage of online music streaming is high in China, most of the users are willing to select free sources to listen to their choice of music. Within the people who are willing to pay, wants to spend very less. This has led to lower average revenue per user of Chinese music platforms.

Stock performance

TME stock, which hit a new 52-week high ($17.97) on NYSE in early July, has risen 28% since the beginning of this year. On Friday, TME stock ended up 3% at $15.01.

Also read: Tencent Music Q2 2020 Earnings Transcript