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Kuke Music Holding Limited American Depositary Shares, each representing one Ordinary Share
Q3 2021 Earnings Conference Call
11/29/2021
spk06: Good morning and good evening, ladies and gentlemen. Welcome to KUKA Music Holding Limited third quarter 2021 earning conference call. At this time, all participants are in a listen-only mode. We will be hosting a question and answer session after management prepared remarks. I will now turn the call over to the first speaker today, Ms. Jane Zhou, Investor Relations Director of KUKA Music Holding Limited.
spk04: Please go ahead, ma'am. Good morning and good evening, ladies and gentlemen.
spk06: Welcome to KUKA Music Holding Limited 3rd 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 prepare remarks. I will now turn the call over to the first speaker today, Ms. Jane Jo Vesta, Relation Director of KUKA Music Holding Limited. Please go ahead, ma'am.
spk09: Thank you, operator. Hello, everyone. Welcome to our third quarter 2021 earnings call. On the call with me today are Mr. He Yu, founder, chairman, and CEO, Ms. Patricia Sun, president, and Mr. Tony Chen, CFO of KUKE. Mr. Yu will share our views on the business model and strategic focus. Ms. Sun will review our business operations, and then Tony will discuss our financial results. Afterwards, we will take questions from the audience. Before we start, please note that this column contains forward-looking statements made pursuant to the safe harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, were achievements of the company to be materially different from the results performance or expectations implied by those forward-looking segments. All forward-looking segments are expressively qualified in their entirety by the cautionary segment 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 segments for selected events were circumstances after the date of this conference call. As a reminder, this conference call is being recorded. In addition, a live and outcast webcast of the conference call will be available on KUKE Investment Relations website at ir.kuke.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 KUKE.
spk03: Thank you, Jim. Good evening and good morning, everyone. Thanks for joining us and welcome to our third quarter earnings call. I would like to start by sharing our thoughts on the resilience in our business model and our core strength. In addition, I will share how we can leverage our capabilities and core classical music assets to survive in any macro environment. We founded Cooke in 2007 with the mission to deepen the impact of classic music and monetize our core music assets through digital innovation in China. With almost 15 years in operation, Cooke has become a leading provider of classical music content, licensing, subscription, and smart music learning solutions in China. with our ever-growing copyrighted classical music content library at the core. We keep exploring and expanding our operations and music content consuming services, supported by our three main business lines in licensing, subscription, smart music learning solutions services, and live music events. We generate licensing revenue by licensing our music copyrights to digital music service providers for digital streaming or downloads through their online platforms. Our subscription revenue is generated by providing customers access to music content databases through websites and mobile apps as well as from the sale of smart music devices. These two services deliver cash flows that perform well even during a downturn in the economy. More importantly, our licensing and subscription revenues contributed to nearly half of our total revenues, 49.6%. of total revenues in the third quarter. In terms of our core strength, our ever-growing copyrighted classic music content library continues to serve as the foundation of our business development. Our classical music content has always been one of our most valued assets, and maintaining and growing this classic music content library is at the core of our ability to drive growth and innovation. Knowing this, we established a deep-rooted cooperation with Naxos since 2006, making it our global strategic business partner and founding Naxos China together, the core business of which is to distribute and promote global classical music in China and build a border international stage for a new generation of Chinese musicians. Leveraging Nexo's ever-growing classical music content library, Cook has made great progress in music content operations and keeps improving the value and monetization efficiency of those core assets. 2021 was an eventful year with COVID and regulatory changes impacting various industries. Based on our views of the potential regulatory impact on our business, we believe the regulatory guidelines are likely to be positive for art learning as we continue to checking the operational situation this quarter. It is safe to say that the guidelines have no significant impact on our business development. In addition to our business partnerships with private kindergartens, we have begun exploring ways to work with public kindergartens, primarily in the middle schools, to further enlarge our customer base in light of the changing regulatory and macro environment. During the quarter, a portion of our sales team had already been allocated to target public kindergartens. It is worth noting that we have already had experience and effective food truck record in working with public educational institutions, such as universities. and libraries. We are convinced that these efforts will be helpful to our customer base, which will enhance our ability to promptly adapt to potential regulatory trends going forward. As one of the first classical music licensing and subscription service providers in China, we benefit from a significant early mover advantage in terms of our content offering. Brand reputation and the customer loyalty will remain true to our mission and dedicate ourselves to the development of classical music in China. In early October, we held a very successful 24th Beijing Music Festival with the theme of masters and celebrations, which served as a bridge for multidimensional dialogue between Chinese and foreign composers. Earlier this month, we also sponsored the 16th International Beethoven Piano Competition in Vienna's Golden Hall to celebrate Beethoven's 251st birthday. Additionally, Nexus China, our subsidiary, recently launched the production and the global release of the album of Ding Shan De's essential art sounds in association with Nexus. Leveraging our ever-expanding copyrighted music content libraries through our unmatched access to more than 900 top-tier record companies, including Nexus, we are confident in our ability to continue cultivating interest in classical music and foster demand for our overall classical music entertainment and learning solution services. So next, I will pass it over to our president of Cook, Patricia, to share more details in each business segment.
spk02: Thank you, Mr. Yu. Good morning and good evening, everyone. Our third quarter results were marked with strong demand recovery, ridiculous strategy execution, and continued efficiency improvements in every area of our business. We further grew our licensing and subscription revenues, which increased by 162.8% year-over-year to 41 million RMB in the quarter, mainly driven by our improved business synergy with Napsos, ever-expanding content library, and growing brand awareness. During the quarter, we continue to drive our process by leveraging improved images with Nexus, a world-leading classic music label as measured by the number of new recordings, its releases, and breadth of its catalog. Founded in 1987 by Claude Seaman, a Jalen Boone entrepreneur based in Hong Kong, Nexus has since transformed itself from a budget label into a global music powerhouse under the continued stewardship of missed payments. Today, Nexus boasts a range of downloading and streaming platforms, a significant catalog of multimedia products, a vast international logistics network, a recording engineering arm, a publications division, and a licensing department. As our largest content provider and important global strategic business partner, Naxos recorded many impressive achievements this year. For example, in early 2021, Naxos and its partners landed seven Grammy Awards, including Best Choral Performance, Best Contemporary Classical Composition, Best Classical Solo Vocal Album, Best Engineered Album Classical, Producer of the Year Classical, Best Chamber Music Small Ensemble Performance, and Best Classical Instrumental Solo. In November, our subsidiary Nexus China initiated the production and the global release of the album of Xing Shan De Essential Outcomes in Association with Nexus. As we further developed and leveraged our global strategic partnership with Nexus, we also made progress in expanding our content library. In the third quarter, we added over 80,000 pieces of content, bringing our total amount of content to over 2.8 million, which includes more than 2.38 million music tracks, 427,000 audio book tracks. In addition, the library also includes 4,000 hours of long-form concert videos, opera, and more. and over 3,000 pieces of digital sheet music. As a result of our expanded music offerings, our brand awareness has been richly enhanced and the number of our library subscribers increased accordingly. In the third quarter, we garnered interest from five new public libraries and had secured 11 different university and library customers by the end of the third quarter. In terms of our smart music learning solutions business, revenue in the third quarter reached 27.5 million RMB, representing a year-over-year increase of 8.4 times. As of September 30, 2021, we grew the number of our collaborating kindergartens to 5,161, from around 4,500 as of June 30, 2021. During the 12 months added September 30, 2021, we added 3,861 collaborative kindergarten to our network, increasing the number of active students over five, both from 5,862 a year ago to To better facilitate our services and improve our customer experience, we established an operation center in the city of Wuhan to provide training services to kindergartens during the quarter. Even as we continue our business expansion in private kindergartens, we are actively new monetization channels in public kindergartens, primary schools, and middle schools to enhance our revenue streams and further diversify our customer base in the light of the changing regulatory and macro environments. Considering the regulatory uncertainty and the global chip shortage, we proactively slowed our pace in launching services for new kindergartens during the quarter. The strategic shift may cause some near-term fluctuations in our top-line performance. As far as we can see, overall market demand remains strong. As we continue to unlock additional demand nationwide, we are confident that we can fulfill the backlog of orders in the quarters to come. For our live music event segment, revenue in the third quarter reached 14.2 million RMB, representing a year-over-year increase of 134 times. During the quarter, we provided planning and execution services for commercial performances to music groups. Thanks to the undeniable value of our classic music assets, we benefited from growing brand recognition and launched the highly successful 24th Beijing Music Festival in early October, the revenue from which will be fully recognized in the fall quarter. The festival spans across 16 days, celebrating this year's theme of masters and celebrations. We hosted audiences at the festival for 18 sets of performances across 20 main concerts. In confronting ourselves, a variety of genres including symphonic music, opera, vocal music, chamber music, percussion music, and orchestra field music. Beyond the exciting professional performances, 24th PMF also features children's concerts, music at noon concerts, mass classes, lectures, and other public events to appeal to a diverse array of audiences. In addition, We co-sponsored the 16th International Beethoven Piano Competition with Naxos. The competition is Austria's oldest international piano competition and ranks among the most renowned music competitions today. Founded more than 50 years ago, it is hosted by the University of Music and Performing Arts in Vienna. On November 6th and 7th, we completed the initial screening of the final round of the 16th National Beethoven Piano Competition in five cities across China and adapted the screening into content for cinemas. This unique classical music content is sure to inspire future generations of Chinese pianists. By leveraging our strong position in classical music and our synergies with Nexus, we will continue to create and deliver innovative viewing and listening experiences through enriched content for our customers. During the third quarter, we leveraged our core assets in copyrighted classic community content and our operating capabilities to drive growth for our three main business lines. We also proactively engaged various potential customers to further diversify our revenue to respond to the potential change in the regulatory and the macroeconomic environment. We are convinced that this effort will help us further solidify our market leadership going forward. With that, I will pass the call over to our CFO, Tony Chen, who will walk you through our financial details for the quarter.
spk10: Thank you.
spk04: Thank you, Patricia. And hello, everyone.
spk07: Before we start our detailed financial discussion, please note that we will present non-IFRS measures today. Our non-IFRS results exclude certain non-cash expenses, which are not part of our core operations. Details for these expenses can be found in the reconciliation table on our press release. Please note that unless otherwise stated, all financial numbers we present today are for the third quarter of 2021 and are in RMB terms. All comparisons are on a year-over-year basis unless otherwise stated. During the third quarter of 2021, our revenue increased by 343.6% to $82.7 million from $18.6 million in the prior year period. This increase was driven by revenue growth in all three of our business segments. Our licensing and subscription revenue in the third quarter was $41 million compared to $15.6 million in the prior year period. The increase was mainly due to an increase in licensing agreements secured during the quarter. Revenue from our smart music learning solutions business increased by 8.38 times to $27.5 million from $2.9 million in the prior year period. mainly due to a robust growth in both the enrollment of kindergarten students and sales of our smart music learning solutions. Revenue from our music event business also increased by 134 times to $14.2 million as we began providing performance services to orchestras in China earlier this year. Total cost of sales increased by 342.6% to $29.6 million, in line with the increase of our revenue. Growth profit was $53.1 million, representing an increase of 344.1% from $12 million in the same period last year. Growth margin remained stable at 64.2% for both the third quarter and the prior year period. Operating expenses were 72.4 million compared to 19.9 million in the prior year period. Selling and distribution expenses were 15.7 million compared to 7.4 million in the prior year period, mostly due to an increase in distribution expenses associated with increased sales of our smart music learning solutions. Meanwhile, administrative expenses were 32.7 million compared to $11.8 million in the prior year period, mainly due to an increase in share-based compensation expenses and research and development expenses. Operating loss in the third quarter was $20.8 million compared to $9.5 million in the prior year period. Our loss for the period was $24.4 million compared to $12.3 million in the prior year period. and non-IFRS profit was $20.5 million compared to non-IFRS loss of $8.9 million in the same period of 2020. Basic and diluted loss per ADS were both 0.83, and basic and diluted non-IFRS profit per ADS were both 0.7. Moving on to our balance sheet and liquidity, as of September 30th, 2021, we had a total of $105.3 million in cash and cash equivalents. Full-year 2021 revenue is expected to be between $300 million and $250 million. After analyzing and taking into account the impact of COVID and higher hardware costs due to the global chip shortage, we're taking preemptive actions to slow down the pace of our new kindergarten deployment to balance our business growth decrease risk exposure, and improve cost control. Furthermore, we've also begun exploring ways to engage public kindergartens and schools to enhance our revenue streams and further diversify our customer base in light of the changing regulatory and macroeconomic environment. We're confident that doing so enhances our competitiveness and strengthens our resilience This concludes our prepared remarks for today. Operator, we are now ready to take questions.
spk06: Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We pause for just a moment to allow everyone an opportunity to signal for questions. We take our first question from Mr. Brian Lee with EMTD Group. Your line is open. Please go ahead.
spk04: Hello. Hello, can you hear me?
spk00: Yes. Oh, hello. Thanks for taking my question, and I have two. First is about your strategy. We noticed that many peers, including WMG, are looking into new opportunities to engage with innovative technologies such as Metaverse and NTFs and many others. Do you have any plans on that front, and how will you maintain your competitiveness with these emerging opportunities? That is the first one. The second one is regarding your four-year revenue guidance. The four-year revenue guidance was no less than RMB 400 million in the last few quarters. But now in Q3, you have just adjusted the guidance to below between 300 and 400 million. So what are the factors or trends driving the guidance down? So, and could you give us more details about which business now are you projecting less growth in this quarter than previous quarter? Thanks.
spk10: Thank you. This is Patricia. I will take your first question and answer your first question.
spk02: The core focus business is using copyright and we also empower our business with technology. And we are constantly watching for trends and new developments in tech for the music industry. Actually, in October of 2019, Beijing Music Festival, one of our live performance segments, had already launched an experiment virtual reality opera. It is called AIDS. It is a one-person opera, but with experimental virtual reality technology, which applied VR technology to live musical events. We are also exploring how to deliver the next generation experience for live music events, which may allow remote audiences to participate in rehearsals through VR technology and immersively enjoy extra performances, delivering unforgettable and engaging live performance experience to our remote audience. And we also believe that throughout these new developments, copyright will always be our company's competitive edge and also our advantage. Be it in the metaverse or for NFT, now digital assets is We believe that audio and visual content will be seamlessly integrated first. So we are anticipating these new technologies to bring about revolutionary developments and opportunities in the music industry. And we are actively exploring these new developments and should disclose our respective business strategies and action plans at the appropriate time in the future. Thank you.
spk07: Okay, so I will take the... Yes, I'll take the second question regarding the revenue guidance. Yes, our previous revenue guidance was no less than 400 million RMB. And in this quarter, we have revised our guidance to between 200 million to 250 million renminbi. This is in light of the rising hardware costs due to the global chip shortage. So we're taking the preemptive action to decrease risk exposure and also balance our business growth. And also, this is an act to improve cost control by slowing down the pace of our new kindergarten deployment for our smart music learning business. So with this new strategy, the deployment of smart music learning businesses will not be as fast as we expected at the beginning of the year.
spk04: Therefore, we have adjusted our full year guidance accordingly.
spk00: Okay, thank you. Very clear.
spk07: Okay, thank you, Brian.
spk00: Okay, thank you, thank you. Thank you, very clear. Thanks for the management.
spk04: Thank you.
spk06: If you find that your question has been answered, you may remove yourself from the queue by press star two. We take our next question from Dong Dong with Reversical Investment. Your line is open.
spk04: Please go ahead. I'm so sorry.
spk06: Mr. Dongdong already removed himself from the queue. We move to Ms. Lex Zhang with Kohai Investment. Your line is open. Please go ahead.
spk08: Thanks, operator. Thanks for the presentation, management. Actually, I have two questions. The first one is regarding the margins, essentially. There has been a global supply chain disruption effect given the COVID situation, which affected many consumer companies, especially this quarter. And you also mentioned the global chip shortage situation. So how these effects from, you know, supply chain disruption, especially the chip shortage, affect your business? margins of the business, especially your learning solution business. The second question is regarding the number. So the numbers are solid, but I noticed that there's an increase in the selling and distribution expenses in Q3, while there's a slight decrease in revenue if you compare that to Q2. And do you have more colors on that situation? And also, I guess more importantly, how do you actually monitor your selling and distribution expenses? Thank you.
spk04: Okay. Thank you, Alex. Let me take your questions.
spk07: The first question about the supply chain disruption, that is going to affect our margins. Well, actually, in Q3, we have adjusted our development pace, as we have explained just now. So from this act, actually, we were able to maintain a gross margin level very similar to that of Q2. So that shows our ability to control costs and maintain margins. So you can be assured that we have a tight monitoring system on our margins. It's very effective, basically. So this is my answer to the first question. So the second question on the selling and distribution expenses. Selling and distribution expenses increased in Q3 mainly due to the increase in revenues from the licensing and subscription business and the smart music education business as compared to Q2. The overall slight decrease in the revenue in Q3 as compared to Q2 was mainly due to the decrease in revenue from live performances business. And this business usually does not incur a lot of selling and distribution expenses. That's why, good for all of you, you see this increase in selling and distribution expenses despite revenue being slightly decreased from Q2.
spk04: So, does that answer your question? Yes, indeed. Thank you. Thank you, Lex. Thank you.
spk06: We take our next question from Dong Dong, Reversical Investment. Your line is open. Please go ahead.
spk05: Hi, management. Sorry for the tech issue. I've got two questions. The first one, you have mentioned that you have slowed down the deployment of the private kindergarten in this quarter. So you know that we are approaching the year end now. I'm wondering how the market even looks like right now, and how is the progress of your engagement of public school so far? That's the first question. And the second question, how is your relationship with NASA right now? And going forward from this relationship, what kind of benefit do you think would be brought to the business of KUKA? Thanks.
spk10: Thank you. I will take these two questions.
spk02: The first one that demand from private kindergarten remains too strong, but as we discussed in earnings poll, even though government policies did not affect the arts and youth education sector, but we are taking a pre-active action to decrease our risk exposure, balance our business growth, improve cost control by slowing the pace of our new kindergarten development for our smart musical learning business in light of rising hardware costs due to the global chip shortage. So our current strategy is to slow down the development of new private kindergartens while actively monetize our existing private kindergarten network and also actively cultivate cooperative relationships with public kindergarten primary schools and secondary schools and as of the end of Q3 we were providing music excursion services to more than 700 institutional organizations including high schools and public libraries and we are highly experienced in working with public sector organizations. So this wealth of experience will strengthen our business development in the public school sector. This is the end of the answer of the first question. Regarding the second question, talking about the relationship between KUKA and Naxos, so we have a long-term strategic partnership with Naxos. And Nexus is our global strategic business partner and KUKA is Nexus business partner in China. This is a very close business relationship and we believe with this relationship can stable and maintain the current business while cultivating numerous new business together in future. Actually, in early November, Naxos and KUKA jointly sponsored the 16th International Play-Doh and Piano Competition, for which KUKA launched a cinematic screening in five cities across China of the competition for the first time. And Naxos and KUKA, we are also jointly planning to sponsor the International Freak Classical Violin Competition in 2022, the next year. And going forward, we believe there will be many more global business opportunities for collaboration with Naxos and more business opportunities in future between Naxos and KUKA. Thank you.
spk05: Thank you.
spk06: Thank you. As there is no further question, I will now hand the call over to the management for any closing remarks.
spk09: Thank you again for joining our call. If you have further questions, please feel free to contact us or request through our IR website. We look forward to speaking with everyone in our next Q4 call. Have a good day. Bye-bye.
spk06: This concludes today's conference. Thank you for your participation. You may now disconnect.
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