Tencent Music Entertainment Group

Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group 2020 fourth quarter and full year earnings conference call. Today you will hear discussions from management team of Tencent Music Entertainment Group, followed by a question and answer session. Please be advised that this conference is being recorded today. Now I will turn the conference over to your speaker host today, Ms. Millicent T. Please go ahead, ma'am.

Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. Tencent Music announced its quarterly financial results today after the market closed. And any release is now available on our IR website at ir.tentamusic.com, as well as via Newswire services. Today, you will hear from Mr. Kashin Pang, our CEO, who will start the call with an overview of our recent achievements. to be followed by Mr. Tony Yip, our CFO, who will offer more details on our operations and business development. Lastly, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Please note that this call might contain follow-up statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These follow-up statements are based on management care expectations and observations that involve known and unknown risks, uncertainty, and other factors not under the company's control, which may cause actual results, performance, or achievement of the company to be materially different from the results, performance, or expectations implied by these following statements. All following statements are expressedly qualified in their entirety by the cautionary statement, risk factors, and details the company's filing to the SEC. The company does not assume any obligation to revise or update any policy statements as a result of any new information, future events, changes in market conditions, or otherwise, except as required by law. Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reporting under the International Financial Reporting Standards in a company's earnings release and filing for the SEC. You are reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure, and other non-IFRS measures are not uniformly defined by all companies, including those in the same industry. Now with that, I'm very pleased to turn over the call to questions.

Thank you, Melissa. Hello, everyone, and thank you for joining our call today. 2020 was an extraordinary year with the pandemic impacting all walks of life and the macroeconomy. Yet, it also brought opportunities, expediting internet penetration, causing a paradigm shift in online content consumption, and presenting potentials for online concerts. The past year, we demonstrated strong resilience and agility, a commitment to investment in content, technologies, and people, as well as innovation in new products and services, solidifying our position as China's leading music entertainment platform and allowing us to build a strong foundation for our music content ecosystem. We close 2020 on a very strong note and excited about our next phase of growth along our journey to evolve into an all-in-one online music and audio entertainment destination in China. First and foremost, in the fourth quarter of 2020, both our financial and operational performance were solid. In particular, our online music services maintained its momentum, registering 29% year-over-year growth in revenues, up from 26% in the third quarter. Specifically, subscription revenues increased by 42% year-over-year. This outstanding performance was driven by 40% year-over-year growth of paying users, fueled by our effective payroll strategy, diversified bundle membership offering, as well as continuous rising user retention rate. With 56 million online music paying users, a paying ratio of 9%, up from 6.2% a year ago, we finished 2020 ahead of the curve and are confident that this success will continue in 2021 and years to follow. For non-substitution revenues in the fourth quarter, we are pleased to report that We recorded triple-digit year-over-year growth from advertising for two consecutive quarters. This impressive growth was driven by increasing ad inventory and improving eCPM across our music application portfolio. In the form of splash screen ads and banner ads, we plan to continue developing our overall brand awareness to engage a broader array of advertisers. by initiating more creative advertising products such as immersive video ads, reward ads, and audio ads. Looking into 2021, as we continue to leverage our in-house and Tencent's renowned advertising strength and capabilities, we expect another year of strong growth from advertising. Moving next to content, our continued investment in procuring and developing content has provided our users with a rich, diverse, and endless choice of entertainment, which has been a key driving force behind our success. Apart from comprehensive coverage through category expansion and deepening penetration to further captivate the young demographic, we continue promoting and pursuing trend-setting genres from trend predictive models to content procurement and promotion. We have significantly increased our copyright coverage in new content, which has contributed to the increasing engagement of our users. In the fourth quarter, our partnership with leading rap music labels, such as Ghost and 404 Rapper, resulted in more rap music streamed by younger users as compared to the beginning of 2020. We also made notable breakthroughs in Chinese ancient-style music, total streams for which reached over $100 billion on our platform in 2020. We also made significant progress in cultivating and promoting original music, Let me provide just a few examples. First, the scale of our Tencent Musician platform expanded rapidly. In the fourth quarter, the number of participating indie musicians on the platform grew over 100% year over year, an outstanding rate in the industry. In particular, the number of exclusive indie musicians was 14 times of that in the same period a year ago. showcasing the recognition by indie musicians of our capabilities in promotion, platform support, and well-designed incentive programs. Second, the number of original songs uploaded reached over one million on Tencent Music musicians' platform by the end of 2020, doubling the number compared with a year ago. Numerous original blockbuster songs was incubated on the Tencent Musician platform, such as Story of the Wanderer by Ruby Hua , with over one billion streams within three months of its launch. Our industry influence was significantly amplified by Wang Qi, was enlisted by CCTV's Spring Festival Gala. One of the world's most watched TV programs with more than 1 billion viewers for years. Performing his signature song, The Shepherd of Cock-a-doodle-doo, which has already gathered phenomenal popularity on our platform. These are great examples of what we can do. Losing our prestigious industry know-how, as well as in-depth insights and data mining abilities to foster and grow original music. Third, we are proud to share that during the past year, we have dedicated even more financially to this side of the business, which enabled over 60% of musicians to more than double their income. Such support will continue in 2021, contributing to a win-win situation for everyone. Finally, on our Tencent Musician platform, I'm very proud to say that we deeply care about diversity and we are doing our part to promote gender equality. Our support of female artists and musicians, traditionally a minority in the music industry, has led to female musicians accounting for nearly 40% of total artists on Tencent Musician platform as of the end of 2020. This is significantly higher than the industry average of around 20%, according to the 2020 China Musician Report. Our music content leadership has been further cemented by strengthening partnerships with leading music labels and artists. For example, recently and ahead of the schedule, we extended a multi-year strategic licensing agreement with Warner Music. and expanded our in-depth cooperation through forming a joint venture record label in China in future. We have confidence to continue to showcase new generation artists to music lovers, unlock intrinsic value of music in China, and keep contributing to the prosperity and development of the music industry. The next topic that I would like to discuss is the strategic importance of our long-form audio and our initial achievement during the first year of investment. Before going into details, I would like to outline the exciting opportunities the audio services market presents us with and how we can harness them to compete effectively and scale quickly. Firstly, this market has exceeded in China for a decade with no clear significant leader yet. Market penetration remains extremely low. Second, this fast-growing market has various potential natural synergies with online music entertainment, giving us a tremendous advantage over vertical players. According to third-party research data, The audio market in China is projected to reach a massive user base similar to that of online music streaming over the next few years. With our massive user base and the complementary nature of music and audio genres, we are able to seamlessly convert our music users to audio users, positioning us to emerge as a significant player while ultimately accelerating the penetration of online audio in China. Thirdly, our strategic alliances with prominent content partners such as the China Literature and other content collaboration within Tencent Online Entertainment ecosystem will continue to empower us to offer a wide range of content quickly. During the fourth quarter, the number of licensed titles was up by 370% year-over-year, covering a broad spectrum of audio categories, such as audio drama, Chinese comedy, parenting, and history, apart from the well-loved literature. Fourth, our two-pronged approach to integrating with our Muse applications as well as launching a standalone application is unique and allow us to effectively acquire users at low cost and scale up quickly. For example, we significantly increased our long-form audio MAUs penetration in the fourth quarter of 2020 to 14.8% from 5.5% in the same period of 2019. Such a hybrid model differentiates us from other players at home and abroad. Fifth, our recent acquisition of LACI Audio, which is expected to be consolidated in the first quarter of 2021, will become another driver that will help us forge ahead in the pursuit of growth in the years to come. Our view on long-form audio is strategic and long-term. We believe that investment in content whether licensed audio books or podcasting, PGC or UGC, we improve user time spent, user loyalty, and eventually revenue per user. This is evidenced by the 20% sequential increase in average daily user time spent in the fourth quarter. The DAU reached nearly 10 million at year end of 2020 and is on track to double by 2021. Over the past few quarters, we had a good start in monetizing our long-form audio business through effective bundled offerings with our existing music streaming services and attract pricing for standalone audio memberships. With increasingly enriched content and growing users, we will tap into the audio ads to unlock commercial value, which will boost our revenue. We consistently ask ourselves, What else we can do better to improve user engagement? In 2020, we further expanded our coverage of a broader set of music usage scenarios, integrating with smart speakers, in-car audio systems, TV, and making new roles in the profit performance market. Although not yet included in our reported online music MAUs, during the fourth quarter of 2020, smart devices enjoyed a solid year-over-year growth in user scale, providing additional channels for users to consume more content and interact with us. In summary, we achieved a solid progress across our full business spectrum in 2020 in terms of scale, industry leadership, content diversification, monetization, and innovation. In particular, our online music services with improving economies of scale and diversified revenue streams, achieved a high quality revenue growth and margin expansion throughout the year. In 2021, we expect the strong momentum of our businesses to continue and anticipate a faster revenue growth across the board compared to 2020. With that, now I would like to turn the call over to Tony who will discuss other highlights and important areas of focus for our business. Tony, please go ahead.

Thank you, Kushin. Hello, everyone. Apart from the key developments discussed by Kushin just now, I will provide additional highlights for our online music services before I move on to the discussion of our social entertainment services. During the fourth quarter, core users are increasingly engaged with our platform. Despite the sequential decline in music MAUs, average daily time spent per user has increased. This is a result of our concerted efforts to enrich both music and audio content offering, as well as the launch of innovative product features and services for Putin community and TME Live. Next, I will elaborate more on these efforts. First, as a pioneer in the music fan-based economy, Our digital album performance continued to create new milestones, becoming a vital distribution channel for musicians, further distancing ourselves from peers in terms of promotional capabilities. In the fourth quarter, we released many digital albums, such as Volume.4 by Lu Han, a well-known trendsetting male singer, The Album by Blackpink, a top Asian female band, and In My Thoughts by Zhang Yunlei, a rising star as a singer and a Chinese comedian. JJ Lin made three digital releases on our platform, including his 14th album, Drifter, Like You Do, which topped multiple music charts on the first day of its release. To explore new opportunities in the dynamic market, we continue to transform and innovate a fan-based economy in China's music industry. In 2021, we will continue to push the boundaries of our fan idol connections and lead industry innovation in areas such as digital album, virtual benefits, fan meetings, offline events, and merchandise sales. Second, In our relentless pursuit of enhancing the user experience, we continuously upgrade our products with music as our home ground to make online music services more social, visual, and personalized. In July 2020, we introduced Putong Community in QQ Music, through which we foster cultural communities with youthful and trend-setting content and interactions. We have continued to make it more interactive and appealing, which has led to consistent increases in DAU penetration rate and user retention in the fourth quarter. Our effort also brought resounding endorsement from younger users, with users in the teens and early 20s accounting for a larger proportion of Putong community users, higher than their presence in QQ Music. In December 2020, QQ Music successfully held Boom Boom Award, a forum that encouraged young people to vote on what was popular in 2020, and offered a glimpse into their views on future trends. It attracted interactions from home and abroad, generating 2 billion instances of social media buzz, driving active users in the Putong community to a record high. Fans Club fans said, A new community-focused channel introduced by Google Music in the second quarter of 2020 also received strong recognition, particularly among young users. This is evidenced by more than half of fan club users being in their teens and mid-20s, with total user time spent increasing 15% sequentially during the fourth quarter. When it comes to video enrichment, we continue to transform the conventional experience of music streaming. Google Music created a video-based music product by pioneering embedded MVs on music streaming page, further catering to the needs of users for consuming music videos and bringing in a more immersive audio-visual experience. As a result, on a sequential basis, DAUs for embedded MVs on streaming page grew over 70%, and daily total time spent increased by 88%. With tens of millions of songs available to be streamed, we continue to leverage our proprietary user insights and data analytics to provide users with more personalized experience, which has led to a sequential increase in the proportion of streaming volume driven by recommendations. Technologically, we continue to shine. In the world-renowned Mirix, global song recognition technology competition in 2020. Google Music was the winner in the audio fingerprinting category, while Q2Music's predictive model broke multiple world records in the area of patents for prediction. Aided by these technologies, we are able to improve our predictive capabilities on the popularity potential of music before a wide-scale promotion. And in the fourth quarter, we successfully discovered and promoted chart-topping songs such as Wrong Headed, Zhi Mi Bu Hui, and Swallow Never Rests, Yan Wu Xie. Now, let's turn to our social entertainment services, which in general maintain a steady performance in the fourth quarter. While live streaming business continued to recover healthily post-COVID-19, WeSing delivered faster growth thanks to product enhancements to improve its competitiveness and monetization efficiency. First, let me discuss our online karaoke services. The year 2020 presented WeSing with challenges and opportunities. To take up and respond to competitive pressure, we refocused and made effective adjustments to enhance WeSing's core and differentiated services that are music-centric, and socially interactive, creating a fun and engaging platform that provides the best online karaoke experience. We are pleased to see WeSync's MAU bottom out during the fourth quarter, and user engagement has improved as active users increased in November, December, compared to September, October, and are turning increasingly loyal on WeSync platform. making a good start going into 2021. Our fresh UI design and short-form video recommendation feed on the homepage rolled out in September 2020 continue to gain traction. To lower the entry barrier and improve performance of recordings, we continuously enhance audio and video recording tools, including multi-genre remakes, 多曲風 remix, and auto-tune remakes, making it simpler and more fun to create and publish recordings. Both number of users published videos and penetration rate of publishing recordings improved sequentially in the fourth quarter. These efforts boosted content consumption as well as user engagement, which in turn enhanced the virtuous cycle of content generation and consumption. Besides, Our Friend Karaoke Room has brought the offline karaoke experience online for families and friends to enjoy real-time interactions and facilitate tighter social connections. Leveraging the social power of music, Friend Karaoke Room maintained its uprising momentum and led to a significant increase in user penetration and user time spent of online singing rooms in the fourth quarter. As a result of this operational focus, WeSync has recorded improving average daily user time spent, the bottoming out of MAUs and improved monetization efficiency, setting a solid foundation for strong growth in advertising. Our music-centric live streaming services deliver healthy operating metrics. Besides active performance, our robust content offering, effective and targeted operational initiatives and personalized recommendations helped drive sequential improvements in user retention in the fourth quarter of 2020. We're also pleased with the increasing user engagement as we rolled out diversified live streaming content and attractive performance in categories such as ACG, Chinese ancient style, and gaming. In the fourth quarter, QQ Music live streamings continued to scale up attracting popular musicians joining the platform, and more interactive features added to facilitate social interactions. We are confident that such strong momentum will continue into 2021 and contribute more to our overall growth. As users' needs continue to evolve, we are constantly looking for new business opportunities and actively pursuing new drivers for our next phase of growth through building an innovative online merch offline performance ecosystem. For TME Live, there are a few exciting developments. As of the end of 2020, we successfully hosted more than 50 online live concerts of different styles and genres. In the fourth quarter, TME further expanded its brand's audience by holding 25 live performances for a wide range of influential musicians, from both home and abroad. In 2021, we will cultivate a comprehensive performance pipeline to enhance our support of musicians and expand TME Live's coverage beyond pop artists and provide a stage for a wider range of musicians to display their talents. As TME Live continuously increases popularity and brand awareness, we are attracting rich pipelines of sponsorship to unfold long-term monetization potential. In addition, we successfully hosted the second annual Tencent Music Entertainment Awards, TMEA, ceremony in Macau on January 23, 2021. Within a short 48 hours, it generated 66 trending social media topics, attracting cumulative page views of 18.5 billion across the Internet. the awards should serve to cultivate and promote high-quality music content to the public, as well as highlight the cultural virtues of the Chinese music market, benefiting the industry, artists, and users alike. In conclusion, we're pleased with the well-rounded progress that we have achieved, and 2020 was a year defined by our evolution into an all-in-one online music, and audio entertainment destination in China. With a strong existing foundation, increasingly diversified growth engines, and a commitment to long-form audio investment and a future potential, we are confident and look forward to our next phase of exciting growth in 2021 and the years to come. And with that, I would like to turn it over to our CFO, Shirley Hu, for a closer review of our financials.

Thank you, Tony. Hello, everyone. Let's now discuss our results from a financial perspective. In the fourth quarter of 2020, our online milk services continued its outstanding growth trajectory, particularly in musical subscriptions and advertising. While social entertainment business continued its health growth, despite economic uncertainty and the changing competitive environment, Our total revenues for Q4 2020 reached RMB 8.3 billion, up 40.3% year-over-year. In Q4 2020, our milk subscription business continued to grow rapidly with revenues of RMB 1.6 billion and the year-over-year growth of 42%. As a result of user retention improvements and effective paywall strategy extraction, Paying users grew 40% while monthly art remained relatively stable year over year, as we are dedicated to high-quality user growth and protect the value of music in the industry. Advertising is our key strategy. During the quarter, we continued to increase the availability on our platforms, enhance product quality for our advisors, improve efficiency as algorithm improves and expand our sales force. As a result, our advertising revenues were more than doubled year-over-year for the second consecutive quarter. Consequently, our online mix revenues reached RMB 2.8 billion this quarter, up 29% year-over-year. Social entertainment services and other revenues were RMB 5.6 billion up 8.2% year-over-year, primarily due to growth from online call OK. Social and template monthly up increased 26%, while paying users dropped 14.3% on a year-over-year basis. Significant growth of our ad business and annual dollar events both contribute to up increase this quarter. As discussed last quarter, we have always been focused on monetization improvement. In Q4 2020, our advertising revenues continued to grow, while number of paying users increased sequentially, leading to overall monetization improvement on the platform. Growth margin was 32.4% in Q4 2020, which was unchanged sequentially and down 1.3%. compared to last year. The year-over-year decrease was primarily due to increased investments in new products and accounting offerings, such as long-form audio, that are still ramping up in terms of revenue generation, and increased revenue-showing fees to strengthen our platform's competitiveness. Online web services continue to positively impact our overall margin. Moving on to operating expenses. Total operating expenses for Q4 2020 were 1.7 billion and was 20% as a percentage of total revenues as compared to 90% in the same period last year. Selling and marketing expenses were 373 million, up 15% year over year. The increase was due to higher promotional spending and the user acquisition expenses to strengthen our products competitively and certified our advantage in music-centric live streaming. Higher costs associated with annual Gala events, such as Putong Community Event, Waysing Gala, also contributed to the increase. General and administrative expenses were on B, $906 million, up 21% year over year. The increase was driven by increased investment in R&D for product enhancement and technology innovations, such as long-form audio, racing international versions, brand car okay room, that all leading to higher employee-related costs in R&D. Our effective tax rate for Q4 2020 was 5.5%, decreased from 9.3% last quarter, As some of our operating entities in China became qualified for certain tax benefits this quarter, and the cumulative impact was recorded in Q4 2020, our effective tax rate for full year 2020 was 9.8%. Our net profit attributed to equity holders of the company was RMB 1.2 billion. Non-RFIS net profit attributed to equity holders of the company was RMB 1.3 billion, and the non-RFIS net profit margin was 16.4%. Before year 2020, our total revenues were RMB 29.2 billion, up 14.6% year over year. Net profit attributed to equity holders of the company on the RFIS and the non-RFIS were RMB 4.2 billion, and RMB 5 billion respectively. As of December 31st, 2020, our combined balances of cash, cash equivalents, and term deposit were RMB 28.9 billion, representing an increase of RMB 1.2 billion from Q3, which was primarily driven by cash flows generated operations. Looking forward, we continue to be optimistic about the future of the broader music and audio industry. We are confident in overall ecosystem and product pipelines that we are building in the long run. We'll keep focusing on new products and the future, as well as monetization improvements on our platforms, while maintaining core company investments. Advertising is always our key strategy, and we will keep improving, add product quality effectively. Additionally, we are investing proactively on long-form audio and are excited that the lazy audio joined us, which will further accelerate our long-form audio business development. This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. For the benefit of all participants on today's call, please limit yourself to one question, and if you have an additional question, you can re-enter the queue. Your first question comes from Eddie Lung from Bank of America. Please go ahead.

Hey, good morning, guys. Thank you for taking my questions. Two fairly quick questions. The first one is about the proportion of songs you guys have moved across the paywall. Do you feel we are reaching more of like a high level, which means going forward is increasingly less easy to move an incremental number of songs to the paywall? If not, why not? And then secondly, it's very interesting that you guys, I think, first time mentioned it about the user base on so-called Internet of Things devices, right? In-car audio, speakers, et cetera. So could you give us an idea whether these users are basically the same users on your mobile app, or are we addressing a different set of user bases? Thank you.

Thank you for your question, Eddie. In terms of paywall, at the end of 2020, we're just over 20% in terms of our streaming share of content that's sitting behind the paywall. And we actually don't see there to be a ceiling in the near term. And we continue to expect that by the end of this year, 2021, we continue to increase our paywall at a similar pace as the previous years. which would take us to just over 30% by the end of the year. We wanted to note that in the fourth quarter, our net ads deliver a very solid performance of over 4 million, 4.3 million net ads. And when we continue to expect our net ads to be strong, In particular, in Q1, we expect the net ads in Q1 to be even stronger than Q4, driven by a very successful paywall strategy and various marketing campaigns. In terms of your second question on IoT, there's actually a different user group. We see that majority of them are non-overlapping because it's a different use case. You know, people who listen to music on smart speakers or in-car, slightly different MAUs and DAUs compared to the music platform. So effectively, our IoT strategy is helping us broaden our user base. We note that while the online MAU saw a slight decline, which is mainly attributable to a higher churn of non-core users, But on the other hand, our core users actually increased their level of engagement on our platform. And by that, I mean if we look at the average daily time spent for our DAU, which is more representative of our core users, it actually increased year over year. And that's a result of all the products and enhancements that we've been investing over the past year, such as long audio, embedded MVs on streaming page, Pluton Community, TME Live, et cetera. And it's important to note that our reported music MAU figures do not include the IoT devices, such as smart speakers in car and smart TV. And the IoT devices MAU actually recorded strong double-digit growth year-over-year in the fourth quarter. And that presents additional opportunities for us, which we'll share more in the future.

Great. Next question, please.

Thank you. Your next question comes from Alicia Yap from Citigroup. Please go ahead.

Hi. Good morning, management. Thanks for taking my questions. My question is related to your long-form audio. Given the 15% penetration rate, could you share more detail regarding the user profile and any overlap of the existing music subscriber and also their content of interest? In relation to that, can you also elaborate the various monetization model that you plan to push more aggressive this year? Would that be more on the subscription or would that be more on the online app to drive the growth in 2021? Thank you.

Okay, thank you so much for your questions. Actually, the long-form audio is a very important strategy. Therefore, TMD, we are fully committed to invest in this area I think this is a very natural way for TME to doing it because we have a very strong competitive advantages compared to the other vertical player in the industry right now. First of all, we've seen that this is a very natural extension of music consumption because a lot of our music users nowadays, besides listening to music, they will be more easily to be extended their time and then listening to more audio programs. So this is very easy for us to convert our existing music users into the long-form audio users. So we will save the user acquisition cost in this aspect. Beside this, we are seeing that we have already set up a lot of content partnerships, especially with a very renowned company like the China Literature that we have already set up the strategic partnership last year. We're also starting to team up with other content providers in the industry as well, not just the professional content, but we are also extending our footprint into the podcasting and also other UGC and PEGC's area. The third point that I would like to mention is for the TME long-form audio strategies, we are taking the two-pronged approach, which is unique in the industry, which means that On one side, we are going to leverage our music application to have a long-form audio section on our apps. But on this other side, we are also launching out our standalone long-form audio application as well. And with the acquisition of the Lazy Audio team, the news that we announced last year, we actually further strengthened our strength on the standalone long-form audio side. So I think that this is a very unique strategy and make us to stand out from the competitions in the industry. Besides this, we also continue to pull in more financial resources. And also we have set up a core team to working on the long-form audio businesses. And I'm sure that in the year 2021, it's going to be another huge step for us. and by doing this we strongly believe in that the long-form audio will create long-term value to the entire group first of all it will increase as tony mentioned it will increase the user engagement because their time spent on a platform will be improving and also keep increasing because they enjoy more and more content from our from our platform secondly because of the Different monetization model that we have, for example, we have the premium content, monthly subscription model. We also have the advertising model as well. So we will further bring in other monetization opportunity for us and create strong revenue growth in the future.

Next, please. Thank you. Your next question comes from John Egbert from Stifel. Please go ahead.

Great. Thanks for taking my question. Advertising clearly has a ton of momentum. I think you each highlighted a few of the key drivers of recent strength there, but wondering if you could dig deeper into the runway for future advertising growth by maybe looking at the current state of your business there versus what you might think is possible in the next few years in terms of like ad coverage on your various services, ad load within the screens that you're actively monetizing today. potential for new ad formats to kind of change your capabilities? Anything worth calling out there?

Yeah, sure. Advertising grew at a very rapid pace of over 100% year-over-year for two consecutive quarters. And in the fourth quarter, advertising now accounts for the majority of the non-subscription revenue within online music, accounting for just over 50%. And this is all a result of the investments in the advertising technology and solutions that we've made in the last year, as well as leveraging Tencent Group's overall strong ad sales capabilities, which enable us to penetrate into an increasing number of advertisers. We also continue to see room for us to increase our ad load, There is more real estate on our various multiple platforms. You know, that provides us with ample inventory. And so far, our ad format has been rather homogenous to the traditional banner as well as splash screen. But as Kashin mentioned in his early remarks, we do intend to broaden our ad format into other ads such as audio ads, reward ads, as well as other And as a result, we expect such strong growth in advertising to continue for the near to mid-term.

Okay, next question, please. Thank you. Your next question comes from Alex Poon from Morgan Stanley. Please go ahead.

Good morning. Thanks for taking my question. I want to go back to the music subscription business. So I want to understand about the effectiveness of the paywall. You mentioned about just over 20% by end of last year. And last year, on average, roughly, we have added about $4 million per quarter. I want to understand about if we go from 20% to 30%, does this organic conversion would increase from $4 million to something, say, $5 million? would be faster than before and actually on top of paywall you have better user engagement, long-form audio, freemium model promotions, content, a lot of new tools that you can drive conversion. So try to understand just the first part of the organic effectiveness of the paywall going from 20% to 30% compared with the 10% to 20% and then these new drivers how much additional growth that can come from these new tools that can convert subscribers. Thank you.

Yeah, sure. Music subscription revenues obviously continue to deliver very strong growth at around 42% year-over-year. In particular, the paying users recorded strong growth at over 40% year-over-year. And the solid net additions of 4.3 million which brings the total paying users to 56 million, or 9% paying ratio, which is a substantial increase compared to just about 6% last year. In addition to the paywall strategy that we've mentioned, there are actually many other product investments as well as marketing campaigns that we've embarked on, which are starting to pay benefits. We continue to observe the retention rate of our paying users continue to improve. They've basically been improving every quarter since the first quarter of 2019, so for eight quarters now, which means that once we've converted a user from free to paying, they are actually remaining as paying for a longer period of time compared to before. And that's also helping us to improve the paying user. And we are able to achieve all this throughout 2020 while seeing an increasing trend in ARPU. So we are very optimistic in terms of our subscription growth. We expect Like I said, the net ads in Q1 to be stronger than in Q4. And I guess for the year 2021, we expected average net ads to be approximately between $45 million per quarter, which would be a strong growth driver to our overall business.

Next question, please.

Thank you. Your next question comes from Alvin Yao from J.P. Morgan. Please go ahead.

Good morning, Nathan. Thank you for taking my question. I have a follow-up question regarding your paywall strategy. Can you share with us how do you strike a balance between size of the paywall, paying ratio, and the platform users? Theoretically, you can achieve 100% of the paying ratio if you adopt an Apple Music type of monetization model, i.e., content is only paid available to paying subscribers, but that will probably come at a big cost in terms of the platform usage or platform MAU. While your current strategy is pushing the size of the payroll gradually while driving up the paying ratio, can you share with us philosophically how do you strike the balance and what are the key considerations to make you more aggressive or less aggressive in pushing the size of the paywall and over the longer term, what could be the equilibrium level of the paying ratio? Thank you.

Sure. There is a good balance that we do need to strike between our paywall strategy as well as the free user experience. At this point in time, we continue to see the paywall strategy to be very effective without substantially hurting the free user experience. However, we are investing in new monetization capabilities such as various forms of advertising to help us monetize the free segment of users that, for whatever reason, may be very difficult to convert to premium. And for those particular users, the monetization strategy isn't paywall. The monetization strategy for those users would be advertising. And perhaps we would provide them with advertising as a way for them to unlock certain benefits, which allow them to access a limited volume of songs behind the paywall. I think that's an example of how we could strike a good balance, you know, between free and paid users. Again, I think we continue to see the payload strategy to be very effective. We expect the pace of that strategy rollout to be in line with previous two years. And because of the various factors that we mentioned, we expect the net ads this year to continue to perform well of approximately $45 million per quarter this year, which is an increase compared to last year.

And one more point that I would like to add is, as we mentioned before, educating the user, saying that the music to have a value really takes time. But we are super excited because in the last two or three years, we have done a great job, and our users really treasure the music, and also they are willing to pay for it. But nowadays, when we are educating our users to buying a monthly subscription, they will have the perfect user experience. What I mean is they can enjoy all the songs, and they don't need to worry about which kind of songs that they can listen or which songs that they cannot. But at the same time, we are also providing other privileges to them. So besides listening to songs, as we mentioned, we also have the TME Live events that we offer. So, for our monthly subscribers, they will have some privileges. For example, in different special use experience in enjoying the TME Live event. So, this is all the things that we are keep evolving and keep innovating, and we are targeting to bring a new type of experience for the TME Live in this year. And also, it will help our VIP, which is a monthly subscriber, to have more privileges. Deciding this, we are also focusing on defense-based economy. So which means that if you are a monthly subscriber, you will also enjoy some of the privileges on defense economy as well. So all of this will be worked together. It's a total package. And let our users really think that being a monthly subscribing VIP, this is the right way to enjoy music and also all other different experience on our platform. We have been getting a really encouraging result by moving to the retention rate of our monthly subscription. It has already been continuing improving. So I think this is a really good signal to us, and we strongly believe that with the combination of putting the songs behind the paywall in a steady pace, together with the premium that I just mentioned, It will really make our subscription model and together with the advertising model as well, it will really work out together and bring a good healthy development of our revenue in the future.

Great. Next question please. Thank you. Your next question comes from Zijing Lu from UBS. Please go ahead.

My first question is how do you think about the timing for us to promote the freemium model of music apps? Do we see any potential risk of balancing user experience and competition on freemium model? Second, can you also share some colors on how long-form audio contributes to overall time spent of our music apps? Thank you.

Sure. In terms of the timing, we continue to make investments in the various ad formats that leverage to monetize the free user base, in particular the segment that may be difficult to convert to premium. And that's ongoing. You see us talking about this in the last one to two quarters. We start to implement some of that as beta tests during this year. But in terms of the exact timing of when we will scale up in a larger sense, obviously we need to observe on how the adoption level and how the effectiveness level of that And then in terms of long-form audio, I think it's important to understand that there's a lot of natural synergies between music and audio. And just like in the radio era, users are very used to listening to both music and audio content together. And similarly, we actually see that dynamic playing out in online platforms. And so when we provide audio content to our music users, they don't switch off and listen less to music in order to listen more to audio. They actually end up increasing the total time spent. And therefore, it puts us in a very advantageous position in being the leading music platform going into audio. And with the addressable market expected to reach to a similar size of music users, you know, the large several hundred of millions in the next few years, we're very optimistic, you know, about the audio market, as Kassian mentioned. And that's why we actually think, you know, together with our content strategy within audio that Kassian talked about, our monetization strategy, as well as our two-pronged integrated music and audio app as well as stand-alone audio app strategy. I think all this would play very well to provide us with ample growth opportunity in the next few years.

Great. We'll run to the next question, please.

Thank you. Your next question comes from Easton Yu from Eden and Company. Please go ahead.

Hello. Thank you, management, for taking my question. So the first question is also on long-form audio. Just following up on that question, can management share some light on how these users' paying habits are compared to the music-only users? And I hear other analysts ask about our target penetration rate for the near-term for long-form audio. So do we have some number that we can share? And my second question is on the podcast. So does the company have a plan to sign creators for exclusive content in the podcast space? Thank you.

Yeah, in terms of target users for long-form audio, I think Kashin mentioned that we've reached about 10 million DAUs. And you could see that our MAU reached about 90 million by the end of last year. And we expect our user base to double by 2020 and 2021. So that's the near-term target. And by no means we're done. We actually think the total addressable market, as I just mentioned, is very, very large for audio market. You know, similar size to the music market in the high several hundred million in terms of scale. And that would play out over the next few years. And we also see there to be ample monetization opportunity. And it's different depending on the types of audio content. For example, audio books, which we've talked about in the past being the biggest content category within the audio consumption, that's obviously primarily driven a lot by subscription, right, chapter by chapter. And that plays very well in terms of synergies with our music subscription, because we could bundle our music subscription plan with the audio subscription plan. And on the other hand, there are other forms of audio content which are much more suitable for audio advertising. And so we're also seeing that play out. And as our MAU and DAU grow, we see ample opportunity in both of these two categories.

Mm-hmm. For the podcast content that you mentioned, actually we are also closely in talks with different content providers. I think there's a different tier of content that we try to bring into our platform. First of all, which is similar to what the strategy that Spotify is doing, they are also talking to some of the top tier actors or maybe podcasters. We are also in talks with some of them. Some of them may be from the news industries. and some of them is providing other content for more entertainment area. So the top tiers, we are in top. And we are also working on the long tail as well because our platform is really big. And I think that one of the competitive advantage that we have is we have different music platforms, like the QQ Music, Kugel, and Coolwall. And all of their target audience will be a little bit different in terms of their positioning. So they can tailor-make different kind of first of all the professional content or the user generated content according to the needs of their own audience. So I think that we are really open right now and having a lot of talks and especially heavily investing in the content side for not just the long form audio but also podcast as well.

Right. So we did end this question.

Please Thank you. Your next question comes from Vinnie Wong from CICC. Please go ahead.

Sorry, this is Vinnie Wong from HSBC. So my few questions here, very quick one. I just want to follow up with Shelly here in terms of the investment because I think in the previous two years we talked about that we are already investing a lot in video acquisition and also new form of business. So I just want to understand that how much of this initiative do we expect to see more meaningful revenue contribution into 2021? Just one question. And just one quick follow-up is in terms of live streaming. So we see some of your short video players have also been seeing that live streaming growth has also been softening from last year. for different reasons, right? But then if you look at into 2021, how do we position in live streaming? Because I think there are also, you know, if you look at like our pool, also paying ratio, there is something like, how can we maintain at a more competitive level in the live streaming business? And how do you see in 2021 this will change, given that this is still one of our most meaningful earnings driver? Thank you.

Sure. In terms of live streaming, I mean, social entertainment broadly, revenue grew by 8% year over year, you know, as a result of obviously a more difficult base effect comparison comparing to the pre-COVID Q4 last year, but also impacted by the lingering weakness in the macroeconomic situation, which affected the paying users' willingness to spend. However, On the other hand, you know, we are encouraged to see a continued recovery in our traditional Kugo Live and Kuo Live in an organic sense. And in addition, we're also broadening the content category to include ACG China Ancient Style, but also, you know, around music. And that's the key point because Even though you may be benchmarking us against other peers, but it's important to stress that our live streaming is differentiated. It is the most music-centric compared to other peers, and that continues to provide us with differentiation in terms of attracting performers as well as users. In addition to that, You know, we obviously have, we're very pleased to see the continued scale up in QQ music live streaming, which will continue to see an increasing contribution to our social entertainment revenue into 21, as well as we also encourage to see that we think DAU and MAU declined clearly bottom in Q4. and beginning to see a sequential growth in December, January, compared to September, October, for example. And so as a result, you know, as we look into the full year 2021, well, I mean, in terms of total revenue growth, we actually expect our total revenue growth to be growing at a faster pace at close to 20%, you know, compared to 2020's 14%. And that's a result of faster growth rate in both online music as well as social entertainment.

Yeah, and also for the social entertainment side besides the live streaming, I would like to spend a little bit of time talking about the recent platform, the Chairman Taker. Actually, it's a very unique platform that TMU have and especially make us to stand out in the industry. In last year, I think that we are doing actually is an evolution and trying to make it to be more up to the current needs of the users. So what we are doing is actually I think that singing is still a very strong demand from our users. So we are focusing on making the singing experience even better than before. We lower the content production entry barrier and we create a lot of tools and helping our users to make their content better. and let them to share on the social platform. So I think that what we're doing is not just doing user engagement, but we are doing user interaction. This is very important. And besides, we are also bringing in the short form recommendation feed on the Jeremy Tago, the recent platform, which really allowing us to increase the people to consume more audio and video-based content. So I think this is some of the evolution that we have made and really make it overall the user base is really bottom out and we are seeing a positive trend in the early 2021. So I think that for the year to come, especially for the social entertainment side, besides all the live streaming development and also the revenue outlook, I think that the Trami Taker is also another platform that we will be strongly focusing on, and this is also the unique, very special platform that T&E have when compared to our competitors.

Okay. So in the interest of time, we'll take the last question, operator.

Thank you. Your next question comes from Thomas Chung from Jefferies. Please go ahead.

Hi, good morning. Thanks management for taking my questions and congratulations on a solid set of results. Just now we have talked about our thoughts about the 2021 revenue growth. May I also ask about how we should think about the margin side or how we should think about the trend in terms of expenses given that we also have a number of areas for investment. On that one, Can you also comment about our M&A strategies as well as the regulatory environment in China as we further expand our scale? Thank you.

Sure. Well, I'll first touch upon the regulation and M&A, and then I'll let Shirley take the marking question. In terms of regulation, we continue to maintain a very constructive relationship and a close working dialogue and relationship with the relevant authorities. Even when the relevant authorities issue any new rules, we're committed to work closely with them to comply with the applicable laws and regulations because our overall goal is to work towards promoting a healthy growth and development of the China music industry. And TMU has been in operation for 16 years, over 16 years, and we face multiple new regulations throughout our corporate life. And we are experienced in dealing with new regulation, and we are fully committed to comply with relevant authorities. And then in terms of M&A, as you can see, we recently announced the acquisition of LACI Audio, which is an integral part of our long-form audio strategy, which is highly strategic and long-term, which we're very committed to. You know, you see us continuously set up increasing amount of joint venture to venture into content development, you know, with our label partners. We set up, we announced that we would set up a joint venture with Universal, and then just today we're announcing that we're setting up a joint venture with Warner, and that's following a very successful JV that we've already had with Sony. And all these will lead us to continuously improving our content development and promotional capabilities, which is also very synergistic to our music platform and music distribution business. So we'll continue to explore M&A opportunities around our core music and audio platform, and we'll deploy capital in a disciplined manner.

Yeah, in terms of the M&A, I really think that is a really exciting journey for us because our theory is not just doing financial investment, but instead we really want to have a very strong business cooperation with our partners. As Tony mentioned, all the joint venture of music labels really works out. I remember that around three years ago when we talked about the first music label, JB, with Sony Music. We just bring it out, and then I'm so glad that we have the support of the three majors, and then Sony really joined hands with us. And nowadays, if you guys... recognizing that we are just rolling out a number of really good songs in these few days. Especially, we have a very close partnership with Tencent Games in rolling out the theme song for PUBG's first anniversary. And we actually rolled out the project together with some really renowned worldwide artists like the DJ Reham, And also with Jolie Insight, which is also another very popular female artist in Asia. So I think this is some of the, it started to bear the fruit. And so I think that this is something that really makes us feel excited because we are not just doing some financial investment, but instead we are creating wonderful music content that was widely accepted and being praised by the industry and also especially by our users. As we mentioned during the last quarter, we saw the announcement. We are also going to have another JV with Universal Music. The setup is now in really good progress. The management is on board already. And we have a different positioning for this music label. And I'm looking forward to creating more quick songs for the industry in the future. And today, we announced another joint venture, which is with One Music, I think. It will follow the footsteps and really make us to show that TME is really open, and we would like to team up with all the industry players in order to make this going to be a winning situation and create better content for our users. So this is very exciting for us. So maybe Shelly can talk about the margin time.

Okay, about the growth margin. In Q4 2020, our growth margin is 32.4%. That is relatively stable compared to that of Q3 and meet our expectation. In Q4, the rapid growth of subscription revenue and advertising revenue have a positive impact on our growth margin. And in Q4, we will provide the livestream gala. So we will provide more promotion activities and for the performers. So the revenue sharing of social entertainment is increased. In conclusion, the Q4 growth margin is stable. Looking forward to 2021, we expect the first growth of subscription revenue and the advertising revenue will continue to have a positive impact on our growth margin. And second, we will keep eye on the industry. We will control our revenue-sharing fees for social entertainment. So, except for these two points, we will invest more on our new products and new features, such as the long-form audio and the podcast ecosystem. In conclusion, in 2020, we will invest more on new products and pave way for our long-term growth.

And so just to close out, I think we're very pleased with this quarter's results with online music subscription revenue continuing its rapid growth. And we believe China's online music industry continues to be in a long-term secular growth trend. That would provide us ample opportunities in the future. And our outlook in 2021 remains very positive. We expect total revenue growth to accelerate compared to 2020, close to 20%, driven by faster growth rate in both online music and social entertainment services.

Okay. So thank you, everyone, for joining us today. This concludes today's call and we look forward to speaking to you again next quarter. Thank you and goodbye.

Thank you so much. Thank you.