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Kuke Music Holding Limited American Depositary Shares, each representing one Ordinary Share
Q1 2021 Earnings Conference Call
5/21/2021
spk06: Good morning and good evening, ladies and gentlemen. Welcome to KUKA Music Holding Limited first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. We will be hosting a question and answer session after management's prepared remarks. I will now turn the call over to the first speaker today, Ms. Jane Zuo, Investor Relations Director of KUKA Music Holding Limited. Please go ahead, ma'am.
spk02: Thank you, Operator. Hello, everyone. Welcome to our first quarter 2021 earnings call. On the call with me today are Mr. He Yu, founder, chairman, and CEO, Mrs. Patricia Sun, president, and Mr. Tony Chen, CFO of KUKA Music. Mr. Yu and Mrs. Sun will review our business operations first, and then Tony will discuss our financial details. Afterwards, we'll take questions from the audience. Before we start, Please note that this call may contain forward-looking statements made pursuant to the safe harbor provision for the Private Security Instigation 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 those forward-looking statements. All forward-looking statements are expressively qualified in their entirety by the cautionary statement, risk factors, and the health of the company's filing with the SEC. The company undertakes no duty to revise or update any forward-looking statements or selected events or circumstances after the date of this conference call. As a reminder, this conference call is being recorded. In addition, a live and archived webcast of conference call will be available on KUKA Investor Relations website at ir.kuka.com. You can check out our full earnings release on our IR website as well. It's now my pleasure to introduce Mr. He Yu, founder, chairman, and CEO of KUKA Music.
spk07: Okay, thank you, Jen. Good evening and good morning, everyone. Thanks for joining us, and welcome to our first quarter earnings call. In our first quarter, we maintained a strong revenue growth as we adapted to educational policy changes. Our total revenue grew 85% year-over-year to RMB 11.3%. by our smart music education business, which increased 7.9 times from the same period last year. This shows our ability to adapt to the market trends, improve our technology, expand our educational content and digital assets, and maintain our deep relationships with good world famous music labels and publishers. So let me tell more about current industry environment and its impact on our business. 2021 is a year of economic recovery. As more students back to school, our smart music education business continues to benefit from growing demand in this expanding market. At the end of the first quarter, we had over 11,000 cookie-smart pianos in the classrooms of over 2,500 kindergartens with over 38,000 paying students using our cookie systems. In addition to the economic recovery, government policy will create more demand for music education services. China's Ministry of Education has a new directive for primary school and secondary schools to upgrade their lessons to provide more arts education for students. As a result, music classes will need to provide better resources to combine music knowledge with the general introduction of instruments. This gives us an opportunity to provide better music education services with our advantage in technology, music licensing, and deep industry partnerships. We expect the music education segment to be an important growth driver for our going forward. Next, I will pass it over to our president of Cook Music. Patricia will give more highlights.
spk00: Thank you, Mr. Yu. Good morning and good evening, everyone. I would like to take this opportunity to elaborate on some of the benefits of our business in the first quarter. Licensing and subscription revenue in the first quarter decreased by 14.5% year over year, mainly due to certain impacts of the pandemic during 2020. In order to lay a stronger foundation for our future growth, we are restructuring our customer base and distribution networks to further boost overall growth We continue to invest in research and development and make advancements in our technology. This allows us to not only deliver an improved experience to our customers, but also generates notable cost savings. We recently completed improvements on our end system design for our cookie kindergarten piano classrooms. This new microserver has simplified installation to the point that our customers no longer require on-site installation. It also reduced the necessary hardware and generated noteworthy classroom cost savings. Meanwhile, we continued to expand our education curriculum and digital assets to grow our scope of services. During the first quarter, we completed development on our cookie class curriculum for the second year of King's Garden. We also formed strategic alliances with many local publishers to strengthen our catalog of digital sheet music resources for our cookie students. We are also working hard to establish partnerships to help expand our curriculum to cover topics including music literacy, history, theory, culture, and more. In our view, our vast music catalog is an incredible resource for us to leverage for our education services growth. We continuously evaluate these existing assets in addition to adding new assets for use in our educational services. we completed the localization and the digitization of my first piano book, one of many books from the globally best-selling My First Music book series published by our partner Naxos. Through this digitization, we are able to provide some of the world's leading music education resources to our classrooms all across China. Leveraging our long-standing partnerships with world-renowned music labels and publishers provides us with the advantages we need to provide world-class educational resources and music content. Our partnership with Naxos is one such strategic partnership. In March, five different awards at the six third annual Grammy Awards were awarded to winners from the Naxos family including best choral performance, best contemporary classical composition, and more. This level of recognition from one of the world's most influential bodies in the music industry signifies the quality and potential of our digital content assets and resources. For our online master class program, we established partnerships with two of the world's most influential masterclass content providers, The Car and iClassical Academy, both of which have links to many of Europe's most renowned conservatories. This online masterclass series provides students with access to world-class soloists and artists across all instrument segments. With international travel on hold due to the pandemic, This creates an opportunity for students to get internationally recognized educational resources without ever having to leave their home. For our live performances business, we are currently working on several very exciting projects in our BMF pipeline. Partnering with Beijing Music Radio, we are jointly launching a new lunchtime concert series. This concert series will be broadcast at noon and aims to make live music more accessible to the public. The musicians at the Raptor have been carefully selected to achieve the goal of eliminating classical music stereotypes and drawing new audience through a trendy and elegant format. We have another project in pipeline and negotiation with well-recognized online platforms, which we will provide more details for as soon as agreements are finalized. In summary, we continued to make advancements in our technology, accumulate premium quality content, expand our education services scope, and build up our world-class partnerships. This has positioned as well to capitalize on directly expanding music education services industry and continued economic recovery. Looking forward, we will continue to uphold our mission of enriching people's lives by amplifying the impact of classical music in China. With that, I will pass the call over our CFO, Tony, who will walk you through our financial details for the quarter.
spk08: Thank you Patricia and hello everyone. Before we start our detailed financial discussions, please note that we will be presenting non-IFRS measures today. Our non-IFRS measures results exclude certain non-cash expenses which are not part of our core operations. Details of these expenses can be found in the reconciliation tables on our press release. Please note that, unless otherwise stated, all financial numbers we present today are for the first quarter of 2021 and are in RMB terms. All comparisons are on a year-on-year basis unless otherwise stated. Our revenue increased by 85% to $11.4 million from $6.2 million in the same period of 2020. This increase was mainly driven by revenue growth from smart music education services. which saw a significant increase in student enrollment as we accelerated the expansion of our kindergarten education services. As a result, revenue from our smart music education business increased by 786.9% to 6.8 million from 0.8 million in the same period of 2020. Our licensing and subscription revenue in the first quarter was $7.6 million compared to $5.4 million in the same period of 2020. This decrease reflected the restructuring of our customer base and distribution networks in response to the impact of the COVID-19 pandemic during 2020. Total cost of sales increased by 72.8% to $8.2 million in line with our revenue growth. Growth profit was 3.2 million, representing an increase of 125.8%. And growth margin improved to 28.2% from 23.1% in the same period of 2020. The improvement in growth margin was mainly due to our enhanced bargaining power, which allowed us to secure better terms with upstream content providers. Operating expenses were $49.3 million compared to $42.6 million in the same period of 2020. Selling and distribution expenses were $7.3 million compared to $3.2 million in the same period of 2020, mostly due to an increase in promotional activities for the expansion of our kindergarten education services. Meanwhile, administrative expenses were 40.4 million compared to 19.7 million in the same period of 2020, mainly due to an increase in the share-based compensation expenses. Operating loss was narrowed to 37.1 million from 39.7 million in the same period of 2020. Our net loss for the period narrowed to 37 million from 37.4 million in the same period of 2020. and non-IFRS loss was narrowed to 15.6 million from 15.9 million in the same period of 2020. Basic and diluted loss per ADS were both $1.29, and basic and diluted non-IFRS loss per ADS were both 0.54. Moving on to our balance sheet and liquidity, As of March 31st, 2021, we had a total of RMB 232.1 million in cash and cash equivalents. Given the favorable market environment for music education services, we will continue to expand the segment to address the rising market demand by leveraging our leading content library, differentiated technology, and effective partnerships. As we continue to make investments in our technology and content assets, we will also maintain active dialogue with our partners to explore new opportunities for expansion. We believe that our focus on expanding the varieties and capabilities of our world-class music education services and digital assets will benefit the sustainable development of our financial performance over the long term. This concludes our prepared remarks for today. Operator, we're now ready to take questions.
spk06: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Brian Lee with AMTD Group. Please go ahead. Sorry, Brian. Your line might be muted.
spk01: Oh, hello. Sorry. Sorry. Science management. Thank you for taking my question. My question is regarding on the revenue. I noticed that your revenue for the education segment has jumped by about eight times. So what's the main driver behind this? Thanks.
spk08: Okay, thank you, Brian. Yeah, revenue increased for the education segment for the quarter. We were working with more distributors during the quarter, and they brought in more kindergartners to work with us. And we put in more support for the kindergartens to recruit students and enroll into our music classes. So that's why the revenue increased significantly for the education segment for this quarter. So this year we'll continue to work with more distributors so as to continue to increase our service coverage in the market. And that will push a strong, I think, growth in the number of kindergartners and also the number of students enrolled. We're pretty confident for this year. Thank you.
spk01: Oh, thank you. Thank you.
spk06: Our next question will come from Clara Johns with Z Capital. Please go ahead.
spk03: Hi. Thanks for taking my question. This is Clara. So we observed that currently the live performances business is very focused on Beijing Music Festival that is held in October each year. Revenue and business seems to be very concentrated. Do you have any plans for the segment going forward to diversify?
spk00: Hello, sorry, could you please repeat it again? Because your sound is very low. Thank you.
spk03: Hi, can you hear me?
spk00: Yes, please.
spk03: Hello? Okay. Yes, please. We have observed that currently the live performance business is very focused on the Beijing Music Festival that is held in October each year. Revenue and business seems to be very concentrated. Do you have any plans for this segment going forward to diversify? Thank you.
spk00: Okay. During the 2019 Beijing Music Festival, a series of lunchtime concerts had been held in collaboration with local radio stations for live broadcasting. Since 2021, this concert series has transformed into an all-year program, featuring different artists at different venues, every month, maybe twice every month, or we will add more times in each month in the near future. Lunchtime concert itself is one step closer to the audience compared to the traditional concert setting, while the program is future designed to embrace a wider range of music, such as jazz, or work music, or maybe folk music and Chinese traditional music genres. This all-year running schedule of the concert series is no doubt an all-year ongoing marketing campaign for the BMF branding in general. Although the pandemic hit the performing arts business significantly last year, and BMF was able to adjust its strategies accordingly. In 2020, last year, Beijing Music Festival was featured with the launch of BMF's own application under the name of BMF Club that runs 24-hour non-stop classical music radio during the festival. The membership-based application provides a rich collection of audio and video programs for music lovers and also for professionals and art experts. By the end of the fourth quarter, The app has a rich collection of hundreds of audio programs with combination of audio and video content. So BMF also plays the role of content provider and license out these content and these audio programs to the third-party platforms in the near future. Thank you.
spk03: Thank you, Manish and team. I also have one more question. The company has issued a revenue target of a total of RMB 400 million this year. How was this target to be achieved this year? Thank you.
spk08: Okay. Yeah, we're targeting not less than 400 million RMB in revenue this year. It represents more than 100% growth from last year. The growth will mainly come from the music education business segment. As we have mentioned earlier, this year we are speeding up on the service coverage of smart music education services by working with more distributors and kindergartens. We're expecting more student enrollment as a result, and it will push up our revenue significantly this year. As for the licensing and subscription segment and live performances segment, they'll be relatively more stable this year, We'll try new forms of product or services for this segment to look for new growth engines. That's our response for the session. Thank you.
spk03: Okay, thank you. Thank you very much.
spk06: Our next question will come from Yuji Fung with River Circle Investments. Please go ahead.
spk05: Hello, thanks for picking up my question. My question is currently the regulatory environment in Thailand is changing in a direction that's not very favorable to education companies as the Education Department of Thailand is limiting the provision of extracurricular classes that are widely available after school in order to promote and improve the mental health of students. So it seems a lot of education companies that were mainly focusing on traditional academic core subjects are now moving in the space of art subjects following the state's policy. So how is KUKA coping with the change in the regulatory environment and the increased competition? Thank you.
spk08: Okay, wow, this is a very thoughtful question. There are several aspects to this question. For the regulatory change, it's mainly related to classes that are provided outside of schools and are mainly focused on traditional core academic subjects such as languages, mathematics, and science subjects, etc. At the same time, the Ministry of Education or the Education Department is encouraging arts education in order to provide a more holistic and balanced education to students in China. So this change in regulatory environment, we believe, do not have a material impact on us because all our classes are provided inside the kindergartens as compared to the other classes that are provided outside. So our classes are not the direction of these new regulatory changes. And we focus on music education, so this is again an area that is being encouraged by the state. So overall, we don't see much impact on this area. As for the increased competition, we do see a lot of other education companies announcing or trying to get into this art education area. Well, but this is not easy, as most of them don't have the kind of copyrights like the leading music library, a huge collection of sheet music, or a large number of course materials to start with. And these are our core competitive advantages. So they also don't have the kind of ecosystem like the copyright business or live performance business to form an ecosystem like we do. But anyway, we welcome, we're happy to see that more operators are getting into this space so that together hopefully we can build a better market with more choices for the students and parents. But in fact, we have been approached by some education companies for potential cooperation discussions already. And we're open to all kinds of options. We're happy to discuss any kind of cooperation that would be mutually beneficial as long as it will benefit the industry and also benefit our businesses as a whole. That concludes our response to the question. Thank you.
spk06: Our next question will come from Karina Wang with Tiger Brokers. Please go ahead.
spk04: Hi. Thank you for taking my question. My question is the company has very matured and high-tech product and services. How would you plan your future technology development and the kind of resources that you will put into this area? Thanks.
spk08: Okay. We have a series of developments underway. For example, we are developing an AI system to provide adaptive music classes wherein the student will pick a main theme to start with, and then the system will compose a whole new musical piece according to this main theme, and according to this main theme and the student's skill level. As the student plays along on this new musical piece, the system initiates tracking and corrective functions to enhance the students' learning experience, and will generate and play accompaniment at the background to enrich the fun of learning this new musical piece. So it's a totally AI-facilitated learning process, and every time it's a new experience for the students. So we hope that this system will increase the students' enjoyment of the whole learning process. So this is one, and a few other AI systems that are developing. For example, one is about the spoken materials, audiobooks. The system will display scripts along with the spoken materials for our audiobooks so that it's easier for students to learn foreign languages. That's one. Another one will be using a combination of... The second one is about the EV entertainment system that will be using a combination of speed, location, time, and weather condition to automatically generate a playlist that fits these four dimensions for the driver or the passengers to enjoy music while on the journey. So another system that we're developing is a graphics detection technology that the system will monitor the posture and finger position of students while they're playing our smart pianos and issue corrective notifications accordingly. So this is another level of our AI system that on top of tracking the student's performance on the keyboard, we're also tracking their posture and correcting their finger positions. So we're enhancing the function of our smart music education system every day. That concludes our answer for this question.
spk03: Thank you.
spk08: Thank you.
spk06: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk02: Thank you again for joining us today. If you have any further questions, please feel free to contact us or request us through our IR website. Thank you, everyone. Have a good day. Thank you.
spk08: Thank you.
spk06: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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