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Kuke Music Holding Limited American Depositary Shares, each representing one Ordinary Share
Q1 2022 Earnings Conference Call
5/26/2022
spk00: Good morning and good evening, ladies and gentlemen. Welcome to Cooke Music Holding Limited first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. We'll 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 Cooke Music Holding Limited. Please go ahead, ma'am.
spk02: Thank you, Operator. Hello, everyone. Welcome to our fourth quarter 2022 earnings call. On the call with me today are Mr. He Yu, founder, chairman, and CEO, Ms. Patricia Sun, president, and Mr. Tony Chen, chef of KUKA. Mr. Yu will share with you 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, will 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 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 and risk factors included in the company's filings 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 the conference call will be available on KUKA Investor Relations' website at ir.kuka.com. You can check out our full earnings release on our website as well. It's now my pleasure to introduce Mr. He Yu, founder, chairman, and CEO of KUKE.
spk04: Thank you, Jen. Good evening and good morning, everyone. Thanks for joining us and welcome to our first quarter 2022 earnings call. Before sharing our Q1 financial highlights, I'd like to talk about the fundamentals of our strategy. First is our immense focus on classic music service as demonstrated by Cooke's vision. We aim to expand the influence of classic music in China and throughout the global community. Our business segments include licensing and subscription services. smart music learning solutions, live music event service, and new initiatives such as NFT technologies. These business segments are built upon the strong foundation of our classic music service. Second is embracing the growth of China according to the latest 2022 RFPI reports. The Chinese recorded music market grew by 30.4% in 2021, which is above the average global growth of 18.5%. This puts China being one of the fattest growing markets to No. 6 in terms of total recorded music revenues. And No. 3 in terms of streaming revenues. Of the global music markets, respectively. As Naxos' business partner in China, we believe the Chinese market has great potential for growth due to its large population base of classic music. Through the expansion of Cook's and Naxos' expertise, we will continue to unlock such potentials and share the charm of classic music with all music lovers in China. Third is expanding our global presence. On the one hand, we are working ever more closely with Nexus to enhance our relationship with artists and performers around the world. On the other hand, we have also developed multiple initiatives to grow our global presence. Fourth is cultivating technology. KUKA is a company that thrives at the intersection of art and technology. We embrace innovations to advance the development of the entire industry. This could be demonstrated by our recent investment in Kolo, an NFT platform for classic music in the metaverse. Now, let me turn the call. Over to our president, Patricia, to share with you more details on each business segment.
spk03: Thank you, Mr. Yu. Good morning and good evening, everyone. Now turning to the performance of our business segment. With regard to our classical 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 2.9 million, which include 2 million tracks of traditional classic music and 363,000 tracks of jazz, world, folk, and other genres of music. These contents in aggregator cover approximately 2,000 different types of musical instruments played by 97,000 musicians from 266 countries and regions. In addition, our content library also contains over 1,000 video titles, 465,000 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 repertoires of classical, jazz, world, folk, and traditional Chinese music recordings that span from medieval to contemporary. In the first quarter, with KUKA's strong and ever-growing classical music content, our institutional subscribers increased to 809 across China. In addition to larger number of subscribers, The increasing adoption of live screen display in various commercial scenarios and at home has resulted in strong demands for long-form videos, which usually comes along with higher contract value. In addition, people working from home as a result of pandemic also boosts the demand for streaming of long-form videos. We are now investing and purchasing more long-form videos, including opera, live concert, ballet, documentary, mouth class, and international competition, live streaming to capture the growth opportunities in the market. And we believe these market trends and dynamics should further drive the performance of our classic music licensing and subscription segment in the future. Next, I would also like to share with you our business updates associated with Naxos. In April, KUKA and Naxos announced to joint sponsor the 10th France Classical International Violin Competition, Austria's most important violin competition. As it's known to all, classic music is the universal language of mankind. Through sponsoring some of the most renowned music events across the world, KUKA continues to expand the influence of classical music in the global community and to promote KUKA brand internationally. Going forward, KUKA will sponsor, promote, and monetize increasingly more international competitions. In terms of our smart music learning solution segment, despite the hand-wings in a challenging environment for education business, we have prioritized establishing deep-rooted collaboration with public schools and kindergartens since the fourth quarter last year with an aim to further enhance our revenue streams through providing high-quality smart music learning solutions to the underserved market of art and music learning in China. For the first quarter, revenues from public school became our main revenue growth contributor in the smart music learning segment. For our live music event segment, revenue in the first quarter reached 13.8 million RMB, mainly driven by income from the marketing, planning and execution services for live music events in China. With that, I will pass the call over to our CFO Tony, who will walk you through our financial details for the first quarter.
spk05: Thank you, Patricia, and hello, everyone. Before we start our detailed financial discussion, please note that we'll be presenting 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 tables on our press release. Please note that unless otherwise stated, All financial numbers we present today for the first quarter of 2022 are in RMB terms. All comparisons are on a year-over-year basis unless otherwise stated. During the first quarter of 2022, our revenue increased by 128.8% to $26.1 million from $11.4 million in the prior year period, amount of which Our licensing revenue increased by 275.8% to RMB 1 million from RMB 0.3 million in the same period of 2021 due to the larger client base. Subscription revenue decreased slightly to RMB 3.4 million from RMB 4.3 million in the same period of 2021, mainly due to the decrease in sales of hardware products. Revenue from smart music learning solution segment increased by 9.4% to RMB 7.5 million from RMB 6.8 million in the same period of 2021. Specifically, smart music learning solution sales revenue increased by 183.1% to RMB 1.2 million from RMB 0.4 million in the same period of 2021, mainly due to increased sales, of smart music learning products to public schools in the first quarter of 2021. Smart music learning solutions subscription revenue from kindergarten students decreased by 1.6% to RMB 6.3 million from RMB 6.4 million in the same period of 2021 due to the contraction of private kindergarten businesses in 2021. Most importantly, total live music event segment revenue increased to RMB 13.8 million, driven by the substantial increase in live music event service revenue in the quarter. In addition, the total one-time disposal of obsolete inventory revenue was RMB 0.4 million as a result of the contraction of private kindergarten business. In the first quarter of 2022, our gross profit was $0.2 million, decreased from $3.2 million in the same period of last year. Gross margin was 0.7% compared to 28.2% in the same period of 2021. By segment, the gross margin of classical music licensing and subscription revenue was minus 10.3% compared to the positives 52.4% in the same period of 2021. Specifically, the growth margin of classical music improved to a minus 192.3% from negative 481.2% in the same period of 2021, mainly due to the year-over-year revenue growth in the quarter. The growth margin of classical music subscription decreased to 45.2% from 86 points in the same period of 2021 due to the decreased revenue and higher amortization cost of royalty payments. The gross margin of smart music learning solution segment was a minus 3.1% compared to a positive 23.2% in the same period of 2021. Specifically, the gross margin of smart music learning solution sales rose to 35.8% from 28.8% in the same period of 2021 due to increased revenue from the business. The gross margin of smart music learning solution subscription from private kindergarten students was minus 10.1% compared to a positive 22.9% in the same period of 2021 due to the higher depreciation cost as a result of the strategic contraction of the private kindergarten subscription business. The gross margin of live music event segment was 12%, mainly due to the increased revenue from the live music event service in the quarter. Moving on to the operating expenses, the total operating expenses in the first quarter of 2022 decreased by 18.9% to RMB 40 million from RMB 49.3 million in the same period of 2021, among which Selling and distribution expenses in the first quarter of 2022 increased by 14.4% to RMB 8.3 million from RMB 7.3 million in the same period of 2021. The increase was mainly due to the increases in the number of employees and therefore the salaries and wages. Administrative expenses in the first quarter of 2022 decreased by 38.9% to RMB 24.7 million from RMB 40.4 million in the same period of 2021 due to the one-time listing expenses and higher stock-based compensation costs that occurred in the first quarter of 2021. Impairment losses on financial assets in the first quarter of 2022 increased to RMB 6.6 million from RMB 1.6 million in the same period of 2021. This was mainly due to the increased impairment losses on accounts receivable. Operating loss in the first quarter of 2021 was RMB 36.6 million compared to operating loss of RMB 37.1 million in the same period of 2021. Our net loss was RMB 35 million compared to RMB 37 million in the same period of 2021. And non-IFRS net loss was RMB 17.1 million. compared to non-IFRS loss of RMB 15.6 million in the same period of 2022 and 2021. In the first quarter of 2022, our basic and diluted loss per ADS were both 1.18. Basic and diluted non-IFRS loss per ADS were both RMB 0.58. Moving on to our balance sheet and liquidity. As of March 31st, 2022, we had a total of 41 $1.7 million in cash and cash equivalents. With solid cash position and improvement in financial results, we remain confident that we are on the right path for accelerating the growth. This concludes our prepared remarks for today. Operator, we are now ready to take questions.
spk00: Thank you. 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. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Brian Lee from AMTD Group. Please go ahead.
spk07: Hey, hello. Hi. Thank you for taking my question. I have two questions here. The first one is we noted that your gross margin declined in first quarter. So could you please give us more color on this? And what's your guidance for the gross margin of this year? And then the second one is there's a rapid growth in revenue from sales of smart music learning solution segment on Yale Young Base. So can we expect that growth to be sustainable in following quarters? And the revenue from the licensing also rose significantly. And it was a key driver behind. Thanks.
spk05: Okay. Thank you, Brian. I'll take these two questions. So for the first question, growth margin in the first quarter of 2022 decreased to R&B 0.2 million. from RMB 3.2 million in the same period of 2021. The decline was attributable to the one-time disposal of obsolete inventory and the increased monetization of royalty payments. We expect the gross margin to be normalized for the full year. So for the second question about the rapid growth, the revenue from smart music learning solutions sales increased by 183%. to RMB 1.2 million from RMB 0.4 million in the same period of 2021. This is mainly due to the increased sales of smart music learning products to public schools in the first quarter of 2022. And we believe the growth will be sustainable as we see stable demand from public schools. Revenue from licensing increased by 275.8% to RMB 1 million from RMB 0.3 million in the same period of 2021. This is spread by a larger client base as a result of growing demand for classical music in China and new use cases. For example, the increasing adoption of large screen display in various commercial scenarios and at home has resulted in strong demand for long-form videos. And people working from home as a result of pandemic also boosts the demand for streaming of long-form videos. We're now investing and purchasing more long-form videos, including opera, live concert, ballet, documentary, master class, international competition, live streaming, et cetera, to capture these growth opportunities in the market. So that is my reply to these two questions.
spk07: Okay. Thank you. Thank you. Very clear. Thanks.
spk05: Thank you, Ben.
spk00: The next question comes from Dick Chang from Kohai Asset Management.
spk06: Please go ahead. Hi. Thank you for taking my question. I have two questions today, with the first one being, Would you please elaborate on the strategies of working with public kindergartens and schools, and what's the latest development on collaboration with private kindergartens? That's the first question. And my second question is, could you please elaborate on your strategy of expanding your business in the global market? Yeah, that's our two questions. Thank you.
spk03: This is Patricia. I will take the two questions. The first one is about just strategists about working with public kindergartens and schools. So since the beginning of this year, considering the headwinds in the challenging environment for private kindergartens subscription business, we have focused more on providing smart music learning solutions to public schools, which is in line with the policy that encourages art education in China. Therefore, for the first quarter, we have been gradually scaling down the private kindergarten for Christians business, while the revenue from public school became the main revenue growth contributor in the smart music learning segment. So regarding the second question about our strategy of expanding business in the global market, I would say, firstly, KUKA has been working closely with our strategic strategic global business partner, Nuxos, to enhance our relationship with artists and performers around the globe and to expand the reach of classic music. As Nuxos business partner in China, we believe the Chinese market has great potential for growth due to its large population base and the currently lower penetration rate of classic music. The company will continue to unlock such extensions and share the charm of classic music with all music lovers in China. Regarding the content strategy, on one hand, we continue to invest in classical music copyrighted content by expanding collaboration with international music labels. During the first quarter, we have added full category long-form video content including opera, live concerts, ballet, documentaries, mass classes, international competitions, and doing live streaming to further enrich our classical music library and also capture the growth opportunity across the China market. On the other hand, we expanded online distribution on world's leading streaming platform for our self-production content of renowned Chinese artists and their works. For example, our self-production, The Sound of Nature, have been successfully distributed to the overseas market through ARC Label and Nexus Global Network. As such, we expect to gradually increase our global revenue from this business. At the same time, we will be committed to growing KUKA's global presence. As mentioned before in the script, in April, KUKA and Nexus announced to jointly sponsor the 10th Franz Klessler International Violin Competition, which will be held in September this year, which is also held in Austria, the most important violin competition. Classical music is known as a universal language for mankind. And sponsoring the most renowned music events across the world will help us to expand the influence of classical music in the global community and also promote KUKA, its brand, internationally. And going forward, the company will sponsor and promote and also monetize increasingly more international competitions. Meanwhile, we will also continue to explore new initiatives and global business opportunities. Recently, we started our investment in Colo, an NFT platform for classical music in the metaverse. We also embrace innovation to advance the development of the entire industry. And we firmly believe that the company, KUKA, is a company that will thrive at the intersection of art and technology. Thank you.
spk00: Thank you. Very clear. The next question comes from Tong Wang from Tiger Brokers. Please go ahead.
spk01: Hi, thank you. I have two questions, and the first one is, how's your latest cash position, and do you have any financing plans recently? And my second question is, we noticed an employment loss of an asset of RMB $6.6 million. Could you please explain this in detail? Thanks.
spk05: I'll take these two questions. For the cash position, as of March 31st, 2022, our cash and cash equivalents were RMB 41.7 million. We believe there are plenty of global M&A opportunities in the classical music industry, and when we see a desirable acquisition target, we might be thinking of obtaining finance accordingly. So it really depends on the situation. But currently, for the cash position, I think we're pretty sufficient right now. So for the second question on the impairment loss, the impairment loss were all related to accounts receivable in relation to smart music learning solutions business. So that is my reply for these questions. Thank you.
spk01: Thanks.
spk00: Thank you. Seeing no more questions in the queue, this concludes the call. Thank you, everyone. If you have any further inquiries in the future, please feel free to contact KUKA at ir.kuka.com. Thank you.
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