Kuke Music Holding Limited American Depositary Shares (each representing ten (10) Class A Ordinary Shares)

Good morning and good evening, ladies and gentlemen. Welcome to KUKA Music Holding Limited Fourth 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 Zua, Investor Relations Director of KUKA Music Holding Limited. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to our fourth quarter and the full year 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 KUKA. Mr. Yu will share our views on the business model and strategic focus. Ms. Sun will then review our business operations. 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 Securities Litigation Reform Act of 1995. These forward-looking sentiments 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 result performance or expectations implied by those forward-looking sentiments. All forward-looking statements are effectively qualified in their entirety by the cautionary statement, risk factors, and the health of the company filing with the SEC. The company undertakes no duty to revise or update any forward-looking statements for selected events or circumstances of the date of the 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.

Thank you, Jen. Good evening and good morning, everyone. Thanks for joining us and welcome to our fourth quarter and full year 2021 earnings call. We finished the year of 2021 with strong financial resources. Our full year revenues reached RMB 302 million, representing an increase of 85.4% year over year. especially our copyrighted classical music licensing revenue reached an all-time high to RMB 88.2 million. We continue to make good progress on multiple fronts, including the copyrighted classical music licensing segment, the smart music learning solution segment, and our investment in NFT platform Kolo. With almost 15 years in operation, Cook has become a leading classical music consumption and learning platform, leveraging our rich copyrighted classical music content. At the core, we continue to explore and expand our operations. As we have mentioned in the third quarter's earnings call, our music learning solutions segment will place greater focus on working with public kindergartens, primary and middle schools to further diversify our customer mixing light of the current regulatory environment. Our smart music learning solutions segment continues to grow. contributing to over 50% of total revenue during Q4 and 40% of total revenue for fiscal year 2021. Looking ahead, we are confident in the growing demand for smart music education from public schools. our sales and marketing force for smart music learning solutions focusing on primary and secondary schools, which will prepare us to gain greater market share in this growing segment. As a leading classical music consumption and learning platform, we have full confidence in our growth outlook as China's budding classical music industry continues to thrive. as we continue to strengthen our core business. We are also actively pioneering new paths to enhance our monetization capabilities and our position across the value chain in the classic music industry. Recently, we invested in Kolo, which is a leading NFT platform for classic music. We will continue to focus on driving innovation in the classic music industry through technology and to create synergy with our ever-expanding classic music content library. Next, I will pass it over to our president of Cooke, Patricia, to share more details in each business segment.

Thank you, Mr. Yu. Good morning and good evening, everyone. Our fourth quarter results were marked with effective strategy execution and continued efficiency improvements across our business segments. With regard to our classic music licensing and subscription segment, we added nearly 1,000 pieces of content through the long-term support of our international strategic partner, Naxos. This brings our total number of music tracks to over 2.8 million, which includes 2 million tracks of traditional classical music and 354,000 tracks of jazz, wood, folk, and other genres of music. This content in aggregate covers approximately 2,000 different types of musical instruments played by 95,000 musicians. from 265 countries and regions. In addition, our content library also contains over 1,000 video titles, 427,000 spoken content tracks, and over 5,000 volumes of sheet music. Nexus, as the largest independent classical music content provider in the world, provides our content library with a wide range of standard and specialty repertoire of classical, jazz, world, folk, and traditional Chinese music recordings that span from medieval to contemporary. In the fourth quarter, with KUKA's strong and ever-growing classical music content, our institutional subscribers increased by 16 to 802 across China. Our licensing revenue in 2021 reached an all-time high of 88.2 million RMB, representing a year-over-year growth of 52%. The increase is primarily attributable to increased customer portfolio and contract amount, which is driven by deeper penetration of classical music in China. For example, With the increasing adoption of large screen display in various commercial scenarios and at home, the demands for classical music and in particular long-form videos are getting stronger. In addition to our core business development, we also want to share the development of Nexus China and Nexus. By the end of 2021, Nexus China, a subsidiary of KUKA, has produced a double-digit number of local productions, featuring some of the best Chinese composers and influential performers in the world, such as Stradivari Coupé's live recording from Shanghai Symphony Concert Hall and J-Chinese contemporary chamber music by Beijing Temporary Soulist. The release of these recordings exemplifies the widening path of bilateral communications of the classical music world from East to West. In January 2022, Nexos and its affiliated labels were listed in a total of five award categories presented by the 2022 International Classical Music Awards, one of the most influential classical music awards worldwide. The awards Nexos won included solo instruments, chamber music, symphonic music, contemporary and assault programs. In terms of our Smart Music Learning Solutions segment, The number of active students in private kindergartens totalled 32,424 during the fourth quarter, representing a year-over-year increase of 39.4%. Revenues for this segment in the fourth quarter reached 63.2 million RMB, representing a year-over-year increase of 52.8%. Since the fourth quarter, given the current regulatory environment, we slowed down the pace of private kindergarten partnership expansion and will prioritize establishing deep-rooted collaborations with high-quality kindergartens that maintain great operation efficiency. We are also allocating more resources to establish collaboration with public kindergartens, primary and secondary schools. Earlier this year, the company entered into an equity transfer agreement to acquire a team of marketing and sales personnel experienced in promoting smart music learning solutions to primary and secondary schools, aiming to meet the growing demand from public schools for smart music devices, teaching systems, and copyrighted music content. With a more diversified customer base, we are confident in growing our top-line performance as the overall market demand continues to thrive. For our live music event segment, the revenue of music event segment in the fourth quarter reached 39.3 million RMB, representing a year-over-year increase of 45.1%, mainly driven by revenues from the marketing, planning, and execution services for live music events in China and newly launched smart music learning hardware products. In Q4, we have also successfully completed the 24th Beijing Music Festival in October, the revenue of which has been fully recognized in the quarter. With that, I will pass the call over to our CFO, Tony, who will walk you through our financial details for the quarter. Thank you.

Okay. Thank you, Patricia. Hello, everyone. Before we start our detailed financial discussion, please note that we will present non-IFRS measures today, and our non-IFRS results include certain non-cash expenses, which are not part of our core operations. Details for 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 for the fourth quarter and full year of 2021 in R&B terms. All comparisons are on a year-over-year basis unless otherwise stated. During the fourth quarter of 2021, our revenue decreased by 3.2% to $123.8 million from $128 million in the previous year period. Our licensing and subscription revenue in the fourth quarter was $21.3 million compared to $46.4 million in the prior year period because certain contracts that were supposed to be renewed in the fourth quarter were renewed in the third quarter instead. Revenue from our smart music learning solutions business increased by 15.8% to $63.2 million from $54.5 million in the prior year period. mainly due to the increase in number of partnered kindergartens and subscribing students. Revenue from our music events business also increased by 45.1% to $39.3 million, driven by revenues from marketing, planning, and execution services for live music events in China, and newly launched smart music learning hardware product. Growth profit was $66.8 million decreased from 102 million in the previous year period. Growth margin was 53.9% compared to 79.7% in the same period of 2020. By segment, the growth margin of smart music learning solutions was 67.6% compared to 76.5% in the same period of 2020, mainly due to the increased sales of lower growth margin of smart music learning hardware product. The gross margin of classical music licensing subscription was 52.7% compared to 108.5% in the same period of 2020, mainly due to change of profit sharing policy with music content provider. The gross margin of live music events decreased to 32.8% from 36.8% in the same period of 2020. mainly due to the increased expenses in the performance and marketing services provided to music groups in China. Operating expenses were $47.1 million compared to $49.7 million in the prior year period. Selling and distribution expenses were $37.6 million compared to $8.8 million in the prior year period. The increase was primarily attributable to increased spending to promote our brands and products. Meanwhile, administrative expenses were $21.6 million compared to $23.3 million in the prior year period. Impairment losses on financial assets in the fourth quarter of 2021 decreased to a minus $13.9 million from $17.6 million in the same period of 2020. mainly due to the settlement of overdue accounts receivable. Operating profit in the fourth quarter was $18.5 million compared to $55.8 million in the prior year period. Our profit for the period was $16.8 million compared to $44.2 million in the prior year period. And non-IFRS profit was $14.3 million compared to non-RFR's profit of $84.5 million in the same period of 2020. In the fourth quarter of 2021, basic and diluted loss per ADS were both $0.54. Basic and diluted non-RFR's profit for ADS were both $0.49. Moving on to our balance sheet and liquidity. As of December 31st, 2021, we had a total of $59 million in cash and cash equivalents. With solid cash position and improvement in financial results, we remain confident that we're on the right path for accelerating the growth. For the full year 2021, revenue increased by 85.4% to $302 million from $162.9 million in 2020. among which our licensing and subscription revenue increased by 39.1% to $106.5 million from $76.6 million in 2020. Smart music learning solutions revenue increased by 108.8% to $118.1 million from $58.1 million in 2020. Live music events revenue increased by 181.2% to 77.4 million. Total cost of sales increased by 191.7% to 129.1 million. Gross profit in 2021 was 172.8 million compared to 118.6 million in 2020. Growth margin in 2021 was 57.2% compared to 72.8% in 2020. Total operating expenses in 2021 were $228.4 million compared to $126.1 million in 2020. Selling and distribution expenses were $73.6 million compared to $25.8 million in 2020. Administrative expenses were $132.2 million compared to $65 million in 2020. Operating loss in 2021 was 47.9 million compared to 3.1 million in 2020. Our net loss in 2021 was 56.1 million compared to 15.2 million in 2020. And non-IFRS profit was 37.5 million compared to 49.5 million in 2020. In 2020, Sorry, in 2021, basic and diluted loss per share were minus $1.96 and $1.94. Basic and diluted non-IR virus profit per ADS were $1.28 and $1.27. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're 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'll pause momentarily to assemble our roster. Our first question comes from Tong Wang from Tiger Brokers. Please go ahead.

Hi, thank you for taking my questions. And this is Karina from Tiger Brokers. And I have two questions. And the first one is the gross profit margin in first quarter dropped from last year and the licensing and subscription business gross profit down to 59.3% from 108.5%. And the cookie business gross profit from the 70% 76.5% to 67.1%. Could you give us more color on the gross profit margin outlook? Thanks.

Hi, Tony. I have a discussion for you.

Yes, I'll take this question. In Q4 of our smart music learning solutions business, the gross margin decreased. It was mainly due to our strategy readjusting to focus more on working with public schools and newly developed AI speaker products. The gross margin of classical music subscription decreased to 14.5% from 271% in the same period of 2020 due to the change of profit sharing policy with music content provider. However, we're maintaining a confident view on growth margins going forward because we're expecting steady growth in our licensing and subscription business, as well as the number of paying students for our kindergarten lessons, as we solidify our collaboration and partnerships with more public schools and education institutions in China with our leading position. See if you have more questions.

Yeah, I have another question. Thanks. And the CUC recorded a net profit from $17.7 million in fourth quarter, while the four-year net loss was $55.1 million. How should we see CUC's overall profitability in the future? And is there any guidance that you can share?

Okay, we are optimistic in our overall profitability, as we have seen our core business steadily growing. In particular, our licensing revenue showed a promising upside, recording over 50% year-on-year growth in financial year 2021. And our smart music learning solutions business has also recorded over 100% growth. So we expect that the development of smart music learning business to be further fueled as we establish more in-depth collaborations with public schools. As a leading classical music consumption learning platform, we have full confidence in our steady growth outlook as China's budding classical music industry continues to thrive. So in the meantime, As we are leveraging our advantage in rich classical music content base to explore and invest more in technology-based business, including our incubation of Colo platform and newly launched blockchain business. We're expecting these businesses to further enhance our revenue stream in the future. So that's a reply to your question.

Our next question comes from Brian Lee from ANPB. Please go ahead.

Thank you. Thank you for taking my question. So I have two questions. The first one is regarding your classic music licensing business. We saw the revenue has been continuously increasing. So could you give more color on it? Thanks.

Okay. I will take this question. Our licensing revenue in 2021 reached an all-time high of 88.2 million RMB, representing a year-over-year growth of 52%. The increase in primary attributed to, on one hand, the deeper market penetration of classical music industry in China. On the other hand, KUKA's increasingly high brand awareness in the market. As of December 31st, 2021, the total content in KUKA's classic music library increased to more than 2.8 million, and the video content, such as console videos, opera, ballet, increased to about 4,000 hours. In the future, we believe that with the increasing adoption of large screen displays in various commercial scenarios and at home, the demand for classical music music and especially long-form videos are getting stronger, that Poco will continue to leverage its strong content base and to provide high-quality immersive digital enjoyment in classical music for our users. Thank you.

Thank you. I have a follow-up question. We noted that compared to the previous financial year of 2020, the revenue of your three business segments being all recorded significant growth in 2021. So could you help us understand the main reasons behind and how will the revenue contribution from this segment looks like this year? Thank you.

Okay, so I'll take this question. So first of all, let us do some recaps on the financial numbers that we just reported. For full year 2021, revenue increased by 85.4% to $302 million from $162.9 million in 2020, among which smart music learning solutions revenue increased by 108.4% to maybe $122.5 million. from $58.8 million in 2020. Specifically, smart music learning solutions subscription revenue from kindergarten students increased by 516.9% more than five times to remedy $30.7 million from remedy $5 million in 2020 due to the increases in the number of collaborating kindergartens. and subscribing students. Now, smart music learning solutions sales revenue increased by 70.6% to maybe 91.8 million compared to maybe 53.8 million in 2020 as a result of increased sales of smart music learning products. As for the licensing and subscription revenue, increased by 39.1% to RMB 106.5 million from RMB 76.6 million in 2020. So this increase, the licensing revenue increased to 88.2 million from 58 million in the full year of 2020. So the increase was mainly due to the increased customer portfolio and contract amount. Subscription revenue decreased slightly to $18.3 million from $18.6 million in 2020. The slight decrease was mainly due to the COVID disruption in 2020. So live music events revenue increased by 165.1% to around RMB $73 million. driven by revenues from the marketing and performance services of musical groups in China. So looking ahead, our business will continue to flourish as KUKA successfully leveraged its core assets of the ever-expanding copyright content. For the licensing and subscription segment this year, we expect to see steady growth and will source more long-form video content internationally and support more international competitions. For the smart music learning solution segment, we expect a year of steady growth, and we shall develop more collaborations with public schools to expand our customer base. For the live music event segment, we are going to organize more live events this year and are working with Shanghai Music Publishing House to market our new smart speaker box. So, overall, we expect steady growth in our business segment this year. So that concludes my answer to this question.

Thank you. Thank you. Very clear. Thank you.

Thank you. As there are no further questions at this time, I'd like to hand the conference back over to Jane Zuo for closing remarks.

Thank you, operator. In closing, on behalf of the entire management team of KUKA, we'd like to thank you again for joining this conference call tonight. If you have any further inquiries in the future, please feel free to contact us at ir.kuka.com. Thank you, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.