Yahoo Finance Tencent Music Entertainment Group (NYSE:TME) Q4 2023 Earnings Call Transcript
Tencent Music Entertainment Group (NYSE:TME) Q4 2023 Earnings Call Transcript March 19, 2024
Tencent Music Entertainment Group beats earnings expectations. Reported EPS is $1, expectations were $0.13. Tencent Music Entertainment Group isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Millicent Tu: Good evening, good morning and welcome to Tencent Music Entertainment Group's Fourth Quarter and Full Year 2023 Earnings Conference Call. I'm Millicent Tu, Head of IR at TME. We announced our quarterly financial results today before the U.S. Market opened. An earnings release is now available on our IR website and via Newswire services. Today, you will hear Mr. Kar Shun Pang, our Executive Chairman; and Mr. Ross Liang, our CEO, who will share an overview of our company's strategies and business updates. And then Ms. Shirley Hu, our CFO, will discuss our financial results before we open the call for questions. Before we continue, I refer you to our safe harbor statements in our earnings release, which applies to this call as we'll make forward-looking statements.
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 IFRS in the Company's earnings release and filings with the SEC. At this time, all participants are muted. After management's remarks, there will be a Q&A session. And please be advised that today's call is being recorded. With that, I'm pleased to turn the call over to Kar Shun, Executive Chairman of TME. Kar Shun?
Kar Shun Pang: Thank you, Millicent. Hello, everyone, and thank you for joining our call today. 2023 marked our official transition at TME, as we remained dedicated to driving growth and prosperity across our music ecosystem while compiling the development of the entire music industry. Notably, our subscriber cost supplies with the 100 million milestone in 2023. We added 18.2 million subscribers for the full year, up from 12.3 million in 2022, a compelling testament to our content leadership, platform value, and high quality user experience. These streams grow consistent growth in music paying users and per user spend, anchoring our subscription revenues accelerating year-over-year growth throughout the year. In particular, in the fourth quarter of 2023, online music record faster than expected revenue growth.
Paying users and ARPPU rose by over 20% year-over-year to RMB107 million and RMB10.7 respectively. These results mitigate the top-line headwinds from the social entertainment business and reasonably contributed to a lift in net profit for the quarter and the full year. Entering 2024, we are also seeing strong momentum in subscriber growth in the first quarter. Such solid performance was driven by our powerful content and platform dual engines. Now, I'd like to share this aspect of our content development efforts during this robust sustainable growth. First, by leveraging and deepening partnerships with domestic and international record labels. We consistently reinforce our competitive edge with an ever growing selection of copyrighted music.
As a result, by the end of 2023, we had over 200 million music and audio tracks on our platform. In addition, self and co-produced content further differentiated our offerings, increasing our popularity among users. Lastly, our rich foundation of content and relationships with label partners empowered us to capture diverse opportunities across the user industry, amplifying content's value. Let me walk you through some concrete examples. On content coverage and appeal, we recently renewed our multiyear partnership with Universal Music Group, UMG, to bring users ongoing access to response and growing music catalog as well as a notable sound quality upgrade with music streaming in Dolby Atmos and high definition formats. Taylor Swift's recorded out, we recorded album 1989, Taylor's version.
Top the all charts in the first week of its release on our platform in October. We also capitalized on this success and further promote the fan engagement with a series of customized interactive song guessing contest. In addition, we renew the collaboration with Pickup Records. The record label for renowned that still legend of Phoenix, deepening cooperation across head start song releases, physical albums, and various others artist related services. We further enhance our content appeal and leadership across Pop, Rock, and Chinese ancient style music genre, allowing us to better attract and retain young users. Next, on differentiated content offerings through in-house and collaborative creation. For mid to long tail music content, we leveraged our wealth of multifaceted resources to enrich our offering and promote its prosperity.
As of the year of 2023, over 480,000 Indian musicians had contributed over 3 million songs across multiple genres on Tencent Musician platform. By providing comprehensive music training programs and other support, we effectively adopted their creativity and nurtured their music careers. To accumulate our music access in different genres, we are partnering collaborations with our strategic partner's artists. For these more mature artists, we push their popularity and their clients' career through increasingly tailored support. For example, this quarter, we assisted Jess Singer, Liu Le, with her EP production and release, greatly rising her profile and strengthening the fan artist relationships. Our in-house and collaborative content continue to grow from string to string.
As a case in point, we had 10 songs showcased during China Media Group 2024 Spring Festival Gala. Our self-produced song she bobbing in the light, was once sent out. Such performances generated massive social buzz, pushing user engagement on our platform and greatly evaluating, quickly evaluating our national influence. Another notable example is our self-producer hit song, performed by our strategic partner artist, Hailiang Mu, and covered by our popular Chinese crosstalk performer, Yue Yun Peng. This song went viral, totaling over 1 billion streams on our platforms as of March this year. Last but not least, on maximizing content value through innovation, we scale up our live performance business through diverse events formats in 2023, capitalizing on the resurgence of offline music events.
We host a growing number of offline music tools, festivals and live house performances to meet strong demand. In the fourth quarter, we hosted worldwide last demanded DJ's Alan Walker's 6 city electronic music tour in China. During the tour, we facilitated unique offline merge online services encompassing interactive fan activities, artist merchandise, ticket sales, and performance management, which in turn boosted our industry influence. In the fourth quarter, we collaborated with high in net entertainment to launch a line of artist merchandise for K-pop fans such as 17 and 18's. Diversifying our offerings of content related roles in various formats. As a result, revenue from artist merchandise record a robust year-over-year growth. Moving on to our continued commitment to social responsibility.
In the fourth quarter, in collaboration with local government agencies, we conduct a series of music events to promote cultural and economic development in ethnic minority regions. For example, we partnered with Tencent Charity to organize the 2023 Shenzhen-Linzhi Music Festival, leveraging offline music performances to help rejuvenate the rural economy with increased tourism. These initiatives not only brought in music's reach geographically, but also expand its positive impact across the industries, maximize this societal value. In conclusion, we're excited about the vibrant growth of the music industry for the years to come. Our powerful content and platform dual engines underpinned by online music's relatively Tencent cyclical nature will enable us to capture more multi fenced opportunities in 2024 and beyond.
Now, I would like to turn the call over to Ross for more color on our platform development. Ross, please go ahead.
Ross Liang: Thank you, Kar Shun. Hello, everyone. Our laser focus on execution resulted in a year of solid music growth and efficiency gains. Our platform's strength, our insight into users and content and our dedication to innovation were crucial in achieving this success, all translating into enhanced music journeys for users. Now, I would like to elaborate on three areas we prioritize to enhance user's experience. First, we expanded the user's privileges. This included more industry leading song quality selections, rich song effects, more individualized players, new skins and additional interactive features. For example, we amassed China's largest Dolby Atmos music library, offering users a more immersive listening experience.
Currently, our Dolby Atmos music service is available on mobile, in car, and the PC platforms, enabling a higher quality music experiences across more comprehensive use cases. Furthermore, we hosted a dedicated online Amway premium event for Jay Chou's new singer, Christmas Star, promoting closer fun artist bonding and a deeper sense of community. Millions of viewers sign up for the event within 24 hours of the registration opening. We also launched an AI wise feature for this single to further boost user engagement. Thanks to these tailored activities and the features. We have recorded a total of over 100 million streams from tens of millions of users. Second, we deepened connections with users through major upgrades across smart device experiences.
QQ Music launched a significant upgrade on mobile and PC in December last year, offering customized user interfaces and music players. As part of Chinese Lunar New Year's offerings, we introduced an annual music reports feature that captures each user's unique music journey. Tens of millions of QQ Music users joined this annual review activity. This comprehensive report reflects the important personalized mutual bonds that we have built with users on a massive scale. They highlight how and when a user connected with us emotionally from special moments captured, artist favorite, story discovery, and the songs streamed to time spent. We also enhanced in car music entertainment services. For example, we recently upgraded QQ Music in car app for Tesla, bringing users a more intelligent interface with better recommendations.
Kugou Music newly added the Viper 3D music library, to its in car offerings, especially optimizing audio performance in a closed cabin environment. Furthermore, we maintained our leadership in smart vocal coverage and recently renewed partnership with Li Auto. Last but not least, our technology infrastructure continued to play a vital role in content promotion, distribution and discovery. More accurate recommendations drove greater content consumption, effectively improving our user conversion and retention. We are pleased to share that in the fourth quarter, both QQ Music and the Kugou Music recorded another record high share of music streams from recommendations. Finally, AI. We continue to expand AIGC applications to enhance user experience and foster artist music creation while improving efficiency.
On the product side, we integrated AIGC into music streaming and creation as well as seeing and socializing, creating an increasingly intelligent and personalized music experience for users and the creators. For example, by enhancing QQ Music's AI enabled listening together feature with additional virtual DJs. If specializing in different music genres, we have made music discovery faster and more personalized. Furthermore, we launched an AI compensation tool in Venus supporting artists' music creation using their original text promos or rhythm clips. Lastly, we integrated our AI streaming function into Kugou and WeSing. Initial results suggest that the user are increasingly willing to pay for this function, as it enables easy creation of sound powers in market sales and the languages.
On the operations side, we are using AIGC to make our advertising more efficient and effective, employing us to a better target and convert users. We are also leveraging our aims to better promote and distribute new songs. They help us analyze songs' audio characteristics and identify the content that resonates most with users. To sum up, we will continue to leverage technology to achieve more efficiency gains in the future. Our dedication and passion for serving hundreds of millions of music users will further inspire us to deliver more compelling music entertainment experiences seamlessly across a broader range of user cases. With that, I will turn the call over to Shirley, our CFO for a deep dive into our financials.
Shirley Hu: Thank you, Ross, and greetings to everyone. I will now turn to our financial results. Our strong financial results for year 2023 reflected success in effective monetization for our music services and operational efficiency management with accelerating year-over-year growth in subscription revenues throughout the year. Our online music services delivered faster than expected revenue growth. We've largely mitigated the revenue decline in social and consumer service and others. IFRS net profit and the non-IFRS net profit were RMB5.2 billion and RMB6.2 billion respectively, up by 36% and 27% respectively on a year-over-year basis. In the fourth quarter of 2023, our total revenues were RMB6.9 billion, down by 7% year-over-year, primarily due to decline of revenues from social entertainment services and others.
Our online mix revenues in Q4 2023 increased by 41% to RMB5 billion on a year-over-year basis. This surge was driven by the strong expansion of our music subscription and the advertising business supplemented by an increase in art is the related merchandise sales. Delving deeper into our music subscription performance for Q4. Music subscription revenues reached RMB3.4 billion, which is a 45% increase year-over-year and a 7% rise sequentially. Our refined operation allowed us to expand our online musical paying user based while enhancing monthly ARPPU. The number of online music paying users expanded to 106.7 million, representing a 21% increase year-over-year with a quarterly net adds of 3.7 million users. The monthly ARPPU rose to RMB10.7, up by 20% year-over-year and by 4% sequentially, marking the segment's success quarter of growth and setting another record.
The continued growth in our paying user base was largely attributable to our enriched content offerings, enhance the member privileges such as industry leading sound quality selections, rich sound effects, more individualized players, new schemes and interactive product features such as in car investment and the interactive features for The Dark Plum Sauce, WeSing, Christmas Star. Our advertising revenue also had a strong growth year-over-year and sequentially, supported by our diversified product suite and innovation advertising formats. Advertising supported, advertising delivered strong performance this quarter as interest rate improved significantly. Additionally, the new [indiscernible] e-commerce sales event generated a higher demand for advertising and contributed to a sequential increase in advertising revenues.
Social and entertainment services and other revenues were RMB1.9 billion down by 52% year-over-year. This was mainly due to adjustments in certain live streaming, interactive functions and the most stringent compliance procedures. As we implemented several service enhancement and the risk control measures in the past couple of quarters. We continue to innovate for social entertainment service and have seen growth in advertising revenues and the VIP membership’s revenues this quarter. Our gross margin for Q4 stood at 38.3%, marking an increase of 5.3 percentage points year-over-year and an increase of 2.6 percentage points sequentially. Increasing user base together with higher monthly ARPPU, growth in advertising revenues as well as ramping up of our own content have enabled us to move to a healthier margin model.
Additionally, we have built win, win relationships with labels and artists and managed the content costs more efficiently using ROC approach. These efforts have collectively resulted in the increase of our gross margin year-over-year. Moving on to operating expenses, in the fourth quarter of 2023, they amounted to RMB1.3 billion representing 18.4% of our total revenues compared with 18.3% in the same period of last year. Selling and marketing expenses were RMB255 million down by 4% year-over-year. Our marketing strategy is ROI focused, where we allocate the budget towards eras with long-term growth prospects. We strategically curtailed expense for promotion channel fees associated with live streaming and increase expenses to promote our own content.
As our music service continue to grow rapidly, we will continue to spend on channel promotions for these areas. General and administrative expenses were RMB1 billion down by 8% year-over-year, primarily driven by low employee related expenses partially because we incurred expenses related to late audio acquisition in Q4 2022, but such expenses did not recur in Q4 2023. Our effective tax rate for Q4 2023 was 17.3% compared to 12.2% in the same period of 2022. This increase was primarily attributed to the accrual of withholding tax related to earnings to be remit by our PRC subsidiaries to offshore entities. For Q4 2023, our net profit and net profit attributable to equity holders of the company were RMB1.4 billion and RMB1.3 billion. Non-IFRS net profit and the non-IFRS net profit attributable to equity holders of the company were RMB1.7 billion and RMB1.6 billion respectively.
Our diluted earnings per ADS reached a record high this quarter at RMB0.83, up 15% year-over-year. Non-IFRS diluted earnings per ADS increased to RMB1, up 10% year-over-year. These results demonstrated our robust financial performance, enhanced operating efficiencies and the positive impact from our share repurchase program. As of December 31, 2023, our combined balances of cash, cash equivalents and the term deposits were RMB32.2 billion as compared with RMB31 billion as of September 30, 2023. This combined balance was also impacted by changes in the exchange rate of the RMB to USD at a given the balance sheet dates. Under the share repurchase program announced in March 2023, as of December 31, 2023, we had repurchased 25.3 million ADS from the open market for total cash consideration of US$175 million of which approximately US$72 million were repurchased in the fourth quarter.
Next, I'll briefly discuss our performance for full year 2023. Total revenues were RMB27.8 billion, down by 2% year-over-year. Revenues from online music service were RMB17.3 billion, up by 39% year-over-year. The increase was driven by strong growth in music subscription revenues and revenues from advertising services supplemented by growth in other music services. Our music subscription revenue were RMB12.1 billion, up by 39% year-over-year driven by growth in both paying users and the monthly ARPPU. Revenues from social entertainment service declined by 34% year-over-year due to adjustments in certain live streaming, interactive functions and a more stringent company as a procedures as we implemented several service and asset management and the risk control measures in the past couple of quarters.
Gross margin in 2023 was 35.3%, up by 4.3% year-over-year due to the reasons discussed earlier. Total operating expenses for 2023 were RMB5 billion, down by 10% year-over-year. Selling and marketing expenses in 2023 were RMB0.9 billion, down by 20% percent year-over-year, largely due to more efficiency, I focused the promotional strategies. General and administrative expenses were RMB4.1 billion down by 7% year-over-year primarily due to reduced employee related expenses including expenses related to Maize Audio acquisition and the expenses related to the Hong Kong secondary listing incurred in 2022. In 2023, we achieved the highest level of profitability in our company's history. Net profit and the net profit attributable to equity holders of the company was RMB5.2 billion and RMB4.9 billion respectively.
Non average net profit attributable to active holders of the company was RMB6.2 billion and RMB5.9 billion respectively. Finally, I'll conclude with some remarks on our outlook for 2023. We are excited about the growth of the music industry and remain dedicated to driving our growth across our music ecosystem. We will continue to focus on impacting monetization and operational efficiency while exploring new growth opportunities and expanding our pursuit of monetization towards such as customized artists, merchandise, concerts, etc. Additionally, we will continue to invest in high quality contents and original content productions, as well as new products and technologies such as AIGC. We are confident about the long-term health growth of the music industry and our company.
We remain focused on providing high quality investment returns for our shareholders. This concludes our prepared remarks. We are now ready to open the call for questions.
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