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spk07: Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group 2021 Second Quarter Earnings Conference Call. Today you will hear discussions from the 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.
spk08: 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. An earnest release is now available on our IR website at ir.tencentmusic.com, as well as via newswire services. Today you'll hear from Mr. Kushan Pang, our Executive Chairman, who will start the call with an overview of our recent updates. He'll be followed by Mr. Ross Liang, our CEO, and Mr. Tony Yip, our CSO, who will offer additional thoughts on our product strategy, operations, and business development. Finally, Ms. Shirley Hu, our CSO, will speak before we open the call for questions. Please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Security Litigation Reform Act of 1995. These forelooking statements are based on management's current expectations and observations that involve known and unknown risk 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 these forelooking statements. All forelooking statements are expressly qualified in their entirety by the cautionary statements risk factors, and details of the company's filings for the SEC. The company does not assume any obligation to revise or update any following statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. Please also note that the company would discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards, and the company's earnings release and the filings 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. With that, I'm very pleased to turn over the call to questions. Executive Chairman of Tencent Music. Question, please.
spk11: Thank you, Melissa. Hello, everyone, and thank you for joining our call today. As we announced on July 26th, Tencent recently received an administrative penalty decision issued by the State Administration for Market Regulation of the People's Republic of China, the SAMR. We sincerely accept the decision and will continue to strengthen our operations in accordance with all regulatory requirements, drive innovation, and fulfill our social responsibilities. In compliance with the requirements of copyright license exclusivity, we will operationally focus on the dual five views of content and platform to deliver high-quality products and services to users and foster innovation. We have taken several important steps in this regard. Specifically, as Executive Chairman, I am responsible for enriching our content ecosystem, whether licensed or self-produced, as well as expanding our capability within the music industry to offer additional value services and solutions to artists and users. Our CEO, Ross, oversees our platform and product strategies and is responsible for further deepening TME's partnerships with Tencent's ecosystem. Ross will elaborate on this in a moment. We will continue to deepen our partnerships with hundreds of music labels to expand our licensing content coverage in alignment with the new requirements and work to provide more and better content offering to over 600 million music users through our multi-financed product portfolio. We are pleased to report that we have been consistently making breakthroughs in diverse music verticals, including new hits, Chinese ancient style, hip-hop, and music for gaming, movies, television programs, and variety shows, demonstrated by a comprehensive coverage of songs and particularly full coverage of hip-hop variety shows. We are also rising our profile among the younger generation by expanding cooperation with leading content IPs whose programs, such as the collection of Chinese ancient style, and the rapper's alliance. This has resulted in a sequentially increase in user engagement from young users. While bottling our offering of copyrighted music, we have also been working closely with our upstream value chain, artists, and other partners to create and produce more differentiated content. For example, we began to work extensively with Tencent across multiple businesses. Over the past few quarters, we partnered with prominent artists such as Jam, Deng Jiqi, Jackson Yi, and Yang Qianxi. and Angela Zhang, Zhang Shaohan, and co-produced over 2,000 chart-topping songs across gaming, film, literature, and comic categories. We also recently played a role in co-producing the theme song of the popular movie, Cliff Walker's , directed by a highly regarded Chinese film director. From creating the theme song itself to leveraging our talent pool, to bring a famous artist on board to perform the song, we are pleased to be able to contribute to this award-winning project. I'm also pleased to share our progress in cultivating and promoting indie musicians. During the second quarter of 2021, through the Tencent Musician Program, our roster of indie artists achieved a triple-digit year-over-year growth, with their song streams showing consistent increase both year-over-year and quarter-over-quarter. Musicians view us as a reliable partner, given our well-structured financial incentives, which for the first time included a revenue-sharing mechanism for the narrators and songwriters. They are also attracted by our efforts to pioneer enhanced copyright protection based on blockchain technology. helping indie musicians to uphold copyright without imposing financial burdens on them. On top of that, our attitude for cultivating Blockbuster on the Tencent Musician Program platform has grown significantly. For example, within three months of its release, we've collaborated cross-platform efforts from QQ Music, Google Music, and Google Music. The song, Coming in Late, 來時, by Da Yutong, accumulated more than 1 billion streams, and inspired numerous cover versions. In the future, we will start to build a closed-loop system for musicians' discovery and management through multidimensional support, including more financial reward, copyright protection, and education and training for musicians, all of which reflect our desire and determination to help musicians grow, and succeed. We have also upgraded our platform's promotional capability and further developed our artist and repertoire A&R capability. For example, we connected narrators and musicians with entertainment program producers and helped our musicians such as Sun Li Lai, Lai Mei Yun, Deng Song Jun, Lambert, and Mira Meng Ran enlisted and performed on top variety shows such as The Treasured Voice 2, Tianshi de Shengyin Di'erji, and Young Forever Season 2, Women de Ge Di'erji, providing them a new stage on which to shine. Finally, TME Live, our online-merged offline performance brand, continues to bring new opportunities to the company with a strategic focus on online channel promotion and monetization. On the online side, we host monthly concerts for top artists to include new interactive monetization features such as ticketing, VIP privileges, and merchandise to create a holistic and more immersive user experience for online live performances. On the offline side, TME Live is expanding its footprint with a plan to launch offline initiatives, including daily live performances in key cities, such as Beijing and Shanghai, in collaboration with the Tencent Musician platform and the local tourism industry. We are also working with Playhouse to organize weekly indoor music festivals, merging the offline party experience with rich online features. With our progress updated in content, I would like to pass the call to Ross, who will share more about our platform strategies. Ross, please go ahead.
spk10: Thank you, Cassius. Hello, everyone. Since I became CEO in April, my focus has been on strengthening our platform's competitiveness and funding new ways to serve our users better through visualization, socialization, and community building. Over the past few months, we have made good progress on this front. With respect to visualization, we are applying shared middleware and architecture, which is crucial to further enhance video content offering cross-over platforms. Kugoo Music continued to enrich embedded MVs on its streaming page, and we are pleased to see that its DAO penetration is increasing quarter over quarter. Kugoo Music just launched a new version featured in Immersive Feeds in August. with expanded user case and more diverse content. We anticipate this effort will increase video views and the amount of time spent by users on our platforms. Our socialization and community building efforts include several new initiatives, all of which are still work in progress. One, we are upgrading the synchronized listening feature in QQ Music to encourage interaction among friends. Two, we recently launched PlutonPlanet, which connects the user with a common taste in music more efficiently through target matches to inspire a connection among strangers. Three, we are upgrading online karaoke rooms to make online things more fun and social engaging. The new version will offer a broader series of online things experience, including different party sites, ranging from solo and duet to small and large groups, as well as catering to different needs, such as singing on demand, singing along on demand, singing practice, inter-room PK, and cross-room activities. Four, we will soon launch a virtual live streaming room to provide a new entertainment experience, comparing metaverse and live streaming. In the future, We will expand Metaverse live streaming to more use cases, provide richer interaction opportunities and more imaginative virtual reality experience. We have also made progress in partnering more closely with broader Tencent ecosystem, another strategic more sporting our long-term success. During the second quarter, we depend on collaboration with video account. This is an important step for us to, one, enrich the music video content on both TME platforms and the video account. Two, leverage to expand our promotional capability. And three, with the location of video traffic to TME platforms, enhance private domain traffic and interactions to increase room for modernization in the future. As a first step, recently QQ Music for the first time joined force with Weixin Video Account and presented Elegant Summer Live, an online event featuring well-known musicians and bands. Our next step will be strengthening the interactions between artists and users by cultivating private domains for musicians, which in turn will improve music content interactions on each of our platforms. We further harnessed the vision for social networks to boost user engagement and music-focused collaboration. First, QQ Music launched a new feature which allows users to update their vision status with the songs they are listening to, making sharing more dynamic and fun. Users can now customize their machine-written tones with selected music from Tencent Music. Third, by leveraging machines' translation AI technology, QQ Music now supports high-quality translations of English songs into Chinese. Last but not least, we worked with Tencent Video to enhance exposure of video content. For example, Within two weeks of release, a well-known Chinese singer Li Jian's newly released album, Forget Yourself, Forget Time, Wu Shi Wu Ke, received half a billion social buzz, and its title track topped the QQ music chart. We look forward to sharing more examples in future quarters. Long-form audio is an effective complement to our music products and content portfolio and value-added to user engagement. During the second quarter, we restructured this business unit to further streamline our two-pronged product strategy. We continued to enrich our license titles and accelerated our path in adding podcasts for content diversification. As MBA Chinese As NBA China's official strategic music partner, we have cultivated an NBA podcaster ecosystem, attracting a broad range of sports fans looking for new and creative ways to enjoy sports content. With this improvement, long-form audio M.U. grows over 90% year-over-year in the second quarter. As one of our industry-leading innovators, We launched an NFT digital site platform based on blockchain technology. We will seek to offer more tools for artists to active users, broader exposure, and unlock monetization opportunities. In conclusion, there is still a lot of work to be done, but we have made a good start and have a clear line of vision ahead. Now I would like to turn the call over to Tony to discuss business highlights and the important area of our focus. Tony, please go ahead.
spk05: Thank you, Ross. Hello, everyone. Online music mobile MAUs were 623 million in the second quarter. Despite some churn of casual users resulting in a year-over-year decline, MAUs were up slightly on a sequential basis. In terms of user engagement, core music users have become more engaged with our platform as total user time spent was up year over year and quarter over quarter. In addition, paying users become more active on our platforms after they have subscribed to our service when compared to before they subscribed, which means as our paying user base grows, not only does this improve our overall monetization, the level of engagement on our platform coming from this core group of users also increased. We continue to expand our scope of services to the IoT market. As a result, our IoT MAUs recorded a year-over-year growth of 43% during the second quarter. As a new music content consumption channel, IoT enhances our ability to effectively roll out and promote new music content to a wider audience in a broader set of use cases in users' daily lives, making our services more ubiquitous and more convenient to our users. We're pleased to report that growth momentum in our online music services continued into the second quarter. As a result of effective marketing and continued progress in adding high quality music content into the subscription plan, the number of paying subscribers to our online music services grew to 66.2 million, with record high net ads of 5.3 million paying subscribers during the quarter. Our paying subscriber ratio grew to 10.6% in the second quarter, up from 7.2% during the same period last year. On a year-over-year basis, user retention continued to improve and average revenue per paying user remained healthy, reflecting users' growing willingness to pay for high-quality music content. Advertising revenues delivered robust year-over-year growth rate in the second quarter. Ad revenue benefited from an expanding pool of advertisers from a variety of industries, increased ad inventories and eCPM on a year-over-year basis, as well as optimized ad display. However, growth in the second quarter was lower than our expectation as they were impacted by regulatory guidance on app launch, splash screen ads to improve user experience. we will continue to improve the user experience of our ads to comply with the guidance, and we'll also invest in new ad formats to meet the needs of diverse advertisers. Turning to our online music products, we further refined product positioning within our multifaceted portfolio. For example, we further bolstered QQ Music's image as a young and trendy brand. First, We continue to add popular and trendy content to meet the younger generation's demand for Chinese-Asian style music, hip-hop and ACG genres, as well as music within variety shows. Second, we deepened our presence into schools and college campuses through online and offline activities such as on-campus competitions and graduation ceremonies. Notably, The 2021 QQ Music graduation concert spurred nearly half a billion social buzz. Third, our new functions such as synchronized listening and Putong Planet will further boost interactions among users. Finally, as our Putong community has become a cultural hotspot for young users, we are attracting more artists such as Kun, Caixi Kun, a pop star who just released his new album, Unknown, Me, on our platform. Switching gears to our social entertainment services, both MAUs and paying users declined quarter over quarter due to intensified competition with other pan-entertainment platforms. In response, Ross elaborated earlier regarding our areas of focus to strengthen our competitiveness, and we look forward to sharing more progress in the future. For WeSing, in addition to the new WeSing initiative that Ross just laid out, during the second quarter, we adopted technology to include an immersive chorus accompaniment sound effect to mimic a large-scale graduation ceremony, as well as multi-dimensional scoring system to sharpen our recording tools. These improvements have led to a more enjoyable user experience while recording songs, which in turn spurs increased engagement among users. For our live streaming services, amidst increasing competition, we will steadily embrace the latest industry guidance and remain firmly committed to promoting a healthy and sustainable ecosystem for our users and performers. In this regard, during the second quarter, we continue to make progress with contributions from QQ Music's live streaming and category expansion adding thrust to our efforts. With a dedicated tab fueling additional traffic within QQ Music, QQ Music's live streaming recorded solid growth and is on track to further scale up into the second half of 2021. In terms of category expansion, Kugel Live continued expanding its exposure in the Chinese ancient style category with 33 themed events launched in the second quarter alone. One highlight for our live streaming is that we introduced our first cross-platform live streaming event to extract operational synergies across TME's live streaming platform. In June, Kugel Live and WeSing announced jointly hosted their first cross-platform competition, giving live streaming performers broader exposure to both platforms and an effective way to tap into a new audience base, effectively increasing the vibrancy of both platforms. This resulted in significantly higher revenue for participating hosts during the event, attracted more paying users to participate, as well as more first-time paying users to send virtual gifts for the first time. Moving forward, we plan to replicate the successful events into new cross-platform opportunities. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.
spk02: Thank you, Tony. Hello, everyone. Next, I'll discuss our results from a financial perspective. Our total revenues for Q2 2021 were unbeaten, 8.3 million. up 16% year-over-year, driven by strong growth in online music services, particularly in music subscriptions and advertising. Our online music revenue were RMB 3 billion this quarter, up 33% year-over-year. In the second quarter of 2021, our music subscription billings continued to grow rapidly with revenues of RMB 1.8 billion and a year-over-year growth of 6%. 36%, net sales of paying users number were 5.3 million in Q2 2021, up 41% year-over-year, which set a new record high for quoting net sales of paying users. This was resulted from our continuous improvement in products and content, expanded sales channels, and effective marketing campaigns. Monthly ARPPU was only 9 this quarter, compared to only 9.3 in the same period last year, as we offered more effective promotions to drive rapid growth in paying users this quarter. Our Q2 advertising revenues had strong growth year over year, but it was lower than our expectations, as they were negatively impacted by a new guidance on splash ads issued by regulators to protect the user experience. The year-over-year growth was mainly because we partnered more closely with Tencent and provided side advertising solutions to serve our customers, leading to increased ad reliability, enhanced efficiency, and improved eCPM. To comply with the new guidance and mitigate its impact on our revenues, We are directing more resources to explore new advertising formats, such as streaming page pop-ups and a flip page, and other innovative products to meet the needs of diverse advertisers, which may take time to bear fruit. Social entertainment services and other revenue were unbeaten, 5.1 billion, up 7% year-over-year. primarily driven by growth in revenues from QQ live streaming. Facing the competition from other entertainment platforms, we are making efforts in returning existing and attracting new performers and improving efficiency in redirecting traffic from multi-platforms to live streaming platforms. We are also revamping product filters and exploring more diversified initiatives to maintain steady revenue scale in social entertainment services. Additionally, advertised revenue on raising platform contributed to year-over-year growth. However, we observed the growth was slowing down, as the business was also negatively impacted by the new guidance issued by regulators, as discussed above. Growth margin was 30.4% in Q2 2021, down 0.9% year-over-year. due to increased revenue-sharing ratios for racing to strengthen our platforms' competitiveness, as well as increased investments in new product and content offerings, such as long-form audio. Now moving on to operating expenses. Total operating expenses for Q2 2021 were RMB 1.7 billion and was 21% as a percentage of total revenue. as compared to 19% in the same period last year. Selling and marketing expenses were on the $669 million, up 16 year-over-year. The increase was due to higher user acquisition expenses and the promotional spending on new products, such as long-form audio, to enhance our product's long-term positioning. General and administrative expenses were on the $1 billion, up 39% year-over-year, driven by a high number of employees in R&D, as we invest in product enhancement and technology innovations. For example, we are applying the share-the-meat waiver under agriculture, and we recently launched PlutonPlanet and will soon launch WeThink virtual live room. Additionally, post-acquisition awards and share-based compensation expenses for previous management team, and amortization of intangible assets, addressing from the accretion of lazy audio of approximately 6 million also contributed to higher general and expenses this quarter. Taking up the impact from the accretion of lazy audio, G&A would have increased 30.1% year over year. tax rate for Q2 2021 was 11.5%. Our net profit was on B, 871 million, and the net profit attributable to equity holders of the company was on B, 827 million. Non-office net profit was on B, 1.16 million, and the non-office net profit attributed to equity holders of the company was on B, 1.25 million. 1.2 billion, non-advanced net profit margin was 14.5%. As of June 13, 2021, our combined balances of cash, cash equivalents, term deposits, and short-term investments were RMB 26 billion, representing a decrease of RMB 1 billion from Q1 2021, primarily driven by payment for stock repurchase. Cash generated from operating activities had a positive impact on the combined balances. Looking forward, we'll expand our investment in self-productive content and a constant utilization program to foster innovation for multi-development of the online music streaming industry, along with other industry participants, and better serve our music users. Furthermore, we will keep focusing on new products, such as long-form audio and revamping existing product filters for our long-term health growth. This concludes our prepared remarks. Operator, we are ready to open the call for questions.
spk07: 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. And to withdraw your question, please press star then two. For the benefit of all participants on today's call, please limit yourself to one question. And if you have additional questions, you can re-enter the question queue. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Alicia Yap with Citigroup. Please go ahead.
spk03: Hi. Good morning, management. Thanks for taking my questions. I wanted to follow up on management remarks regarding these potential business operation impact that you're expecting post the regulatory fine. Would that be more on the subscription trend that you're expecting, or is it more on the difficulty to convert more future paying users? and what kind of offsetting measure in your mind that you plan or have done to minimize the impact? Would it be possible to push more on the freemium model with higher online ad revenues potential? Thank you.
spk05: Thank you for your question. I'll take the first part of the answer and then perhaps other from management can add. I think, as you know, towards the end of July, there was a penalty decision by the regulatory authorities, you know, pursuant to which, among other things, we have to implement a rectification plan to terminate exclusive music copyright licensing arrangements within 30 days from the date of that decision. We sincerely accept that decision and are committed to complying with all the requirements fully and in a timely manner. While the decision will have an impact on our music business, it is worth noting that all the music that has been available on the platform will continue to be available on the platform to our users, and we'll focus on strengthening the our operations in accordance with the regulatory requirements. We'll also focus on better serving our users through product innovation, which Ross and Kashin has elaborated on. And we'll also focus on fostering the healthy development of musicians and the music industry as a whole. Let me pause there and see if others in management have other things to add.
spk11: Yeah, I just would like to add this. Alison, thank you for your questions. And I think that one of the key competitive edge of PME is we imply the dual-firewall strategies, which means that we do not just have the music platform, but again, as we mentioned, we also is committed to continue to develop our content ecosystem, which will make us to be in a more long-term healthy development and create value for our users. As you mentioned, frankly speaking, we definitely will follow the decision by the regulators, and we will comply on it in a timely manner. And also, we are seeing that it do have some impact on our operational day-to-day operations, but I don't think that is going to have too much impact on our, for example, driving our online subscriptions. As you see, I think we are still in a really good momentum because the users have been educated, and they really see the value of music, and they are willing to pay for music as long as we are providing high-quality content to them. So we still have the confidence that our online music services will be driving in a healthy manner. And also, as I mentioned, we continue to extend our footprint and working together with different industry partners, especially on the content creation side. Not just the upstream for the content production, but we are also doing the downstream, which are organizing more and more like the online and offline music concerts And this is not just a regular consensus, but we also have some creativities and new features for the online interaction with the users. So I think that all of this, the dual-buy strategy will help us to continue to create value for users in the long term.
spk10: Thank you. Yeah, we're also in discussion with Tencent Video
spk05: to cooperate in the area of joint subscription. That's a work in progress, and we'll update everyone in the next quarter.
spk03: Thank you. Next question.
spk07: The next question will come from Alex Poon with Morgan Stanley. Please go ahead.
spk01: Thank you, management, for taking my question. My first question is regarding the exclusive contents Could management share roughly how much streaming volume overall and behind the paywall is driven by exclusive content and what is the percentage roughly from independent musicians at this moment and how would this mix change over time? That's my first question. My second question is regarding user acquisition. Because from now on we won't have, we will have less exclusive license contents. Do we expect we will spend more on user acquisition? And how much right now we are spending on acquiring new users? And apart from CAC, just in marketing, do we have to increase more discounts and to attract new users? such that how will our music ARPU trend in future? Thank you very much.
spk05: Hi, I'll answer the first part of the question, and then regarding acquisition costs in ARPU, Shirley can address that. We historically have not disclosed the exact percentages of streaming share relating to various types of content, but we do historically have exclusive content on the platform and also as part of the subscription plan. Although it's also worth noting that there is a fair amount of non-exclusive content within the subscription plan also. And then specifically with regards to the indie musicians streaming share, that has been growing steadily over time. And, you know, we intend to continue to grow that over time as more and more musicians join our Tensa Musician platform and we're committed to supporting the development. And, you know, as more and more of them join to the platform, you know, we are able to discover and work closely with the promising new talents to be able to jointly create music together. So I think that brings new opportunities for us in the content creation area as well. And then in terms of how it affects our subscribers, I think it's important to note that the users have been educated over a long period, over a number of years, to subscribe to a music service. It is a fairly consistent monetization model across the industry. And from a regulatory standpoint, We believe the regulators are also keen to promote the overall healthy development of the music industry and having a viable and long-term monetization model is an important part of that. And so I think we will continue to focus on delivering high-quality products and service to users through the dual flywheel of content and platform that Kashin and Ross mentioned. And as we add more quality content, whether it is licensed or whether it is co-produced or perhaps going forward, there may be increasing self-production as well. You know, we'll be adding more high-quality content into the subscription package and as well as more privileges behind the subscription plan to make it an attractive offering to grow the user base. And As of Q2, we continue to see healthy growth in our net ads, which recorded a record high net ads in the second quarter, as well as we continue to see a healthy improvement, a continuous improvement in the retention rate for our subscribers.
spk11: Yeah, Alex, thanks for your questions, and I would like to add a little bit more color regarding the Tencent Musician program. I think we have been doing really good work since we launched the Tencent Music Program back in 2017. So after four years of hard work, I think that we have achieved very remarkable results. And we are seeing that it's not just in terms of the quality of songs or the number of songs that have been distributed through our platform, but I think that we are really creating value for the musicians and the music creators. Like, for example, the IP right protection. We also have developed an open platform which can help our users and also the musicians to distribute and register their music with us. And then we help them to distribute through the Tencent ecosystem and also other outside channels as well. Besides, we also try to focus on helping the musicians. They are not on their own. We try to do some collaboration between the narrators and also other professional producers as well. So we try to bring them all together. And the most important thing is to continue to produce high quality music. So this is very important that we will continue to do. And also, we are always focusing on creating value for the musicians as well. We want them to do their hard work and be rewarded. So we also have continued to enhance our revenue sharing and reward system, which let our younger generation musicians continue to make a living on our platform. And after the four years of hard work, we have been achieving a lot, and I think that we are in really good progress. And also, the last blog piece I would like to mention is the TMB Live. Since we have this kind of online and offline concerts and music festivals, we can also let our Tencent musicians to start to participate in the TMB Live event as well, and also in our live events like the online broadcast as well. So there's a lot of things that we can work, and this is strongly believing that this is one of the key opportunities competitive advantage of TME as a total ecosystem that we build for our users and also the music creators. So I hope that this answer will help your questions.
spk10: It can be divided into two aspects. First of all, in terms of the platform, we have now formed a layout that is more consistent with the music platform. In addition to Kugou, Kuo, and Q-music, we have now also released the music of the podcast, 2496, Kugou's large version, Kugou's concept version, and Mo-music, which are set up for the elderly and users who are more advanced in music consumption. Basically, it forms a more comprehensive effect. On the two biggest platforms, Kugou and QQ Music, we still have to dig into the video community and social media. Because these are more focused on the PJC and UJC. Kugou has just released a new mode to create a video interaction between ordinary users. Qo音乐也会继续在普通视频化方面去来去强化自己的这个独特的UJC的内容,这样的话能够更好地去形成自己音乐APP的一个独立的优势去拉动我们的新的用户. About app for online music. Oh, sorry. Tommy, Tommy. Please. Sure.
spk05: In terms of user acquisition from a platform perspective, our strategy continues to be a multi-product portfolio approach, whereby in addition to the three major music apps across Cuckoo Music, Google Music, Cool Music, as well as WeSing, we continue to incubate and expand our footprint into other segments with new products. And then within each product, the overall strategy is to focus on videoization, social, as well as community building. As an example, within Kugo, they've recently launched a new feature which allows users to upload and generate video content and also facilitate user interaction around those video content within the music app. And then similarly, QQMusic, launch an immersive full screen video feed, you know, to provide and enrich video content within the music platform. Through these measures, you know, we hope to acquire more users. Now, Shirley, please go ahead.
spk02: Yes, about the up of online music services, we expect that it will be stable in the future quarter compared to Q2. We will balance the promotion campaigns and the rapid growth of our subscribers. And we expect our subscriber numbers can have very good performance in next quarter.
spk01: Thank you, management, for sharing the full picture. Thank you.
spk07: The next question will come from Eddie Leung with Bank of America. Please go ahead.
spk06: Good morning. Just a question on gross margin. We notice a slight dip in the gross margin. So we understand that there could be a few reasons. For example, you guys expanding content In addition, we also know that from some other live streaming companies, the revenue sharing ratio to live streaming hosts in the industry could be increasing. And then finally, we also understand that there has been more long-form audio content. So could you give us a bit more color on the few factors, how they affect your gross margin and how should we think about it in the upcoming couple of quarters? Thank you.
spk02: About gross margin, you said that the reasons why our gross margin decreased in Q2, and in the next quarters, We expect the revenue sharing ratio for racing will be continuing to increase, and the investment on new products and content offerings, such as the long-form audio, will also be increased. So this is one aspect. And the second, we expect expect our social entertainment will be under pressure. So this business growth margin is generally higher. So the random mix shift from social to music, that will also be some negative impact on our growth margin. And for the exclusive license copy drive cost in the short term, we have not very clearly impact on our cost structure because we think that the label and the industry also need time to change their operational. So we believe the Cost structure will be stable in the near term. But in long term, we think that the cost structure of music will be changed from high minimum guarantee to revenue sharing. That will be positive on our growth margin. So in conclusion, we believe in the next quarter, our growth margin will be under pressure.
spk05: Perhaps I'll add a little bit more context behind that as well. I think in terms of the outlook for the full year, 2021, we currently expect the total revenue year-over-year growth rate to be approximately 10%, with online music revenue growth around 30%, and we continue to see healthy operating leverage coming through for online music. So I think, you know, within the online music business, you know, it continues to grow very nicely. While on the other hand, social entertainment revenue for the full year is expected to be roughly flat on a year-over-year basis due to the weakness in live streaming as well as the margin reinvestment that Shirley talked about. Now, within online music, We continue to expect strong year-over-year growth for subscription revenue with paying user net ads continuing the pace of between $4 million to $5 million per quarter. And then on the other hand, while ad revenue is expected to continue to see strong growth, as we mentioned in the prepared remarks, the growth rate is expected to be lower than previously expected. as that business is impacted by regulatory guidance relating to the launch ads in order to improve user experience. And then within social entertainment, the weakness we're seeing in live streaming is due to a combination of macroeconomic impact on paying users' spending behavior It's also a result of competition with short video platforms for users and for performers, and also a result of conservative adjustments we are making to the live streaming operations to comply with regulatory directions in the areas of content, safety, and tipping behavior. And therefore, I think taking all this into account, in terms of margin, we do expect The second half to see further pressure in the margin, you know, as a result of the upward cost pressure in terms of revenue sharing to live streaming performers, the weakness in revenues that have a higher margin in the past, and also reinvestments into new business and products.
spk06: Thank you.
spk07: The next question will come from Thomas Chung with Jefferies. Please go ahead.
spk09: Hi, good morning. Thanks, management, for taking my questions. My question is about our long-term business trend. Given that we are seeing softness in the second half, do we still stick to our long-term subscribers target? And then my second question is about Is there any taxation impact coming from the preferential tax rates that we need to think about in terms of the net margin side? And on that front, can management also comment about any data protection and privacy issues that we need to consider? think about in our music apps as well as on our advertising business. Thank you.
spk05: I'll address most of that question, and then Shirley can talk a little bit about tax. Well, first of all, in terms of data protection, you know, we are committed to complying with the relevant regulatory requirements in the areas of data privacy and data protection. So I think that's an important priority within the company, and we continue to improve our operations to being compliant. And then in terms of long-term growth trend, we're confident that despite the short-term weakness in some of the business, specifically relating to live streaming, we're confident about the long-term trend of the business. And as I mentioned, the net ads for a subscription of between $4 million to $5 million per quarter continues. We expect that to continue. And I think it's worthwhile also coming back to our long-term strategy, which is the dual flywheels of content and platform, because that's the plan that we continue to execute on. With respect to content, our goal is to build the most comprehensive content ecosystem covering a broad spectrum of music and audio offering. And so on the one hand, we'll continue to enhance and broaden our cooperation with label partners to expand our content library. And while on the other hand, we'll also partner with upstream content partners, we'll partner with artists and indie musicians to co-produce differentiated content or even self-produce differentiated content. And then thirdly, you know, we'll continue to foster the development of indie musicians. You know, I won't elaborate there as Kashin has talked a lot about. And fourthly, we'll deepen our cooperation with Tencent Group in the area of content production with businesses like Tencent Video, Tencent Pictures, Tencent Games, China Literature, to co-produce music content together to better capture the full value of their existing IPs. In fact, we've already co-produced two dozens of chart-topping songs relating to games, movies, literature, comics, IPs, in cooperation with prominent artists such as Deng Zuchi and Yang Qianxi. And as we mentioned in the prepared remarks, a theme song of the popular movie is also a production from TME. So I think, you know, that's a comprehensive content ecosystem strategy that we pursue. And then within our platform, we aim to strengthen our core competence around music, audio, and social use experience. Specifically, as Ross mentioned, there are kind of four main areas. You know, number one, in the form of videoization, you know, we'll continue to enhance the video features across all of our platforms. And, you know, as an example, you know, we launched the video feed within QQMusic, an immersive full-screen video feed. And as a second example, you know, we will continue to deepen the cooperation with Racing Video Account. And then secondly, you know, we'll continue to emphasize on social and community building. And as an example of that, QQ Music launched the Pooltone Planet, a social feature that connects users with common music taste. And we also launched new features that allow users to update their wasting status, you know, using songs they're listening to. So there's also an opportunity for us to deepen our our cooperation in working in the area of social and community. And thirdly, long audio is a highly complementary content and service to our music users. And as we have seen in the past from the actual results, providing audio content to music users actually help increase the stickiness of the platform and increase the overall time spent. And provide a more attractive content across both music and audio, which is differentiated compared to other competitors in the industry. And then I think finally, we continue to operate a multi-brand and multi-product strategy. each product within the portfolio have its unique positioning that covers a unique user segment that has this very strong leadership in and will continue to sharpen the operational synergies that will extract across the platforms and R&D efficiencies that will extract across the platform through middleware architecture building. So I think that's the overall strategy that we intend to pursue, you know, and we're committed to executing on that.
spk02: About the tax rate, we think and believe that our ETR will be stable in the next quarters because we do not take into consideration of the professional tax rate companies are entitled to when calculating our effective tax rate until the application is approved. So that will be no impact on our net margin.
spk07: Got it. Thank you. The next question will come from Paya Mubei with Goldman Sachs. Please go ahead.
spk00: Thank you for taking my question. Shirley, you talked about how you move away from the current contract structure with the labels. Could you just generally speak about how you position on a competitive perspective versus the other company when MSGs are taking into account and how this is likely to evolve? That would be great. That's my first question. And second, the other company that was looking to go public, they talked about a social ARPU that was significantly above yours. Does that represent an opportunity for you? And if so, how would you exploit that? Thank you.
spk11: Yeah, I'll talk about the contract first. First of all, we would like to reiterate that we will strictly follow the direction of these and we will continue to renegotiate our license contract with our partners and change all of the exclusive contract into a non-exclusive contract. contract within a month. So we are now in the purpose to discuss the details with them. And as you know, it will also involve some of the a detailed discussion regarding the business term. So we are in the progress to talk about the details, and we really want to settle off in a timely manner. And also, in the other way, we are also talking to some of the other content partners that we do not have a contract with them before because they have some of the other exclusive contracts with other platforms. So we will be fully committed to bringing the best quality of music and continue to expand our music library for our users. Besides the licensed contents, we are also committed in doing our self-productions and co-production with our partners. And in terms of the margin side and in terms of the business side, I think that all of the co-produced or self-produced content will have a more secure margin. So this also will help us to continue to lower our content costs from this aspect. So, Shay, do you want to mention about the second part?
spk02: Okay.
spk11: The social entertainment app.
spk02: So, about the social entertainment app, We expect that we will be under pressure in the future quarters because we do some adjustment automatically by ourselves because we think the regulator will be tired on this part. So we will change our operational method and make the regulation this business more healthy in the future. So, and we believe if we can expand the users of our social entertainment platforms, such like WeThink platform, and our virtual karaoke room can be positive effect, that we can have a chance to increase our social entertainment up in next year. So we think we have many methods to increase this part, such as we can all the performers in our platforms such as Kalaoke and Kugou and Kuo. And we also can use our public dormant traffickers in Kalaoke platforms and build more more revenue on this part. So we believe in next year, our social entertainment revenues can be have a good performance and revenue can be stable. Yeah, it can be stable and a little increase.
spk10: Okay. Because Kugou, in our entire platform, Kugou's up is relatively high. Mainly, K-Ge's up is relatively low because our paid users are several million every day, which is considered a relatively light user. So what we are doing now is also a live platform that can make Kugou's up The ability to expand to cool my live broadcast with the whole people can sing to improve the corresponding live broadcast itself Some up value ability but this is of course for the whole people can sing in terms of the core or to increase the size of the user So up itself is not the most we are on the whole people can sing that platform is not the most we are pursuing a goal But it's also for but for efficiency and efficiency this is the most important thing is that we can put some relatively good experience can be adopted by the whole group Then the second thing is that we will We tried in the first half of the year The cross-border PK between the three major platforms This is not seen in the industry Just a PK model between a few platforms and a anchor OK.
spk05: So two points. First, you know, within the social entertainment ARPU, the Google live streaming ARPU is historically higher, you know, whereas the WeSing ARPU is historically lower. And, you know, within live streaming, you know, we are actively building a middleware architecture that leverages the Google capability onto WeSing live streaming so that we could improve efficiency. While the focus is more on the paying users for WeSing, through these middleware architecture building, we hope to extract increased efficiency and thereby should add some value to the overall revenue generation. Secondly, we pioneered for the first time in the industry recently a cross-platform live streamer PK competition across Google Live and WeSing. You know, specifically, you know, that happened in June where we hosted, you know, the first ever cross-platform competition. It gives the live streaming performers an opportunity to tap into the other platform's audience and thereby increase their exposure. And the result we've seen is a significant increase in the revenues of participating performers, as well as attracting more paying users to participate, even those that have never sent virtual gifts on the platform. They're attracted to participate for the first time. And so, you know, we hope to replicate that successful event into more cross-platform opportunities. And I'll also add that within, you know, social entertainment, Our plan specifically within WeSing is that we're undergoing a major product revamp to improve user retention. The revamp is centered around strengthening WeSing's core competence around singing and social interaction. WeSing will be upgrading the online karaoke room to make singing more fun and socially engaging. The new version of the karaoke room would offer a wider suite of singing features, from solo to duet to small group singing to large group singing, as well as to cater to allow the audience to pick the song they want the main singer to sing or allow the audience to sing along together with the main singer, as well as to enable cross-singing room interaction. WeSing would also... soon be launching a virtual live streaming room to pioneer a new entertainment experience that brings live streaming into a metaverse-like environment. And in the future, in that environment, performers can choose the avatar to perform their live streaming and interact with audience in this virtual setting. And so in the future, we'll expand this metaverse-like environment to more use cases and provide richer interaction opportunities and more imaginative virtual interactive experience. Thank you, Tommy.
spk07: The next question will come from Alex Yao with JPMorgan. Please go ahead.
spk04: Good morning, and thank you, management, for taking my question. Just a couple of quick follow-up on the previous questions. Number one, regarding the usage weakness on the social entertainment sites, are we losing the WeThink users, or these users are still on Google? We are losing their usage and time spent on the live streaming. activities on the platform. And number two, I think, Tony, you mentioned the revenue outlook for the social entertainment for the full year is flat, which implies the second half revenue will decline on a year-over-year basis. Can you guys help us understand the monetization weakness into second half? Because on one hand, you guys mentioned the increasing monetization efforts, such as core server TK initiative across the key live streaming platforms. But on the other hand, if I'm not mistaken, Shirley mentioned you guys are doing different strategies and moderating monetization on these platforms. Any color on the revenue weakness into second half for TK? social entertainment will be helpful. Thank you.
spk05: Sure. From our social MAU perspective, the year-over-year decline is across both the WeSing as well as live streaming. And the key reason for that is competition coming from other pan-entertainment platforms, such as short video. And we've talked about the action plans and the product revamp and the areas that we'll be doing to better retain users and reacquire the traffic. In terms of revenue weakness in the second half of social entertainment, the weakness, as I mentioned, is primarily relates to live streaming revenue weakness in the second half. That's a result of threefold. First, the macroeconomic impact on paying user spending behavior. And secondly, continued competition, specifically from, in particular, from short video platforms for users and also competition for performers. And then thirdly, we're also making conservative adjustments to the live streaming operations in order to comply with the stricter regulatory directions that we are facing as an industry overall. So I think the impact of these items obviously, you know, have a bigger impact. And, you know, we are mitigating these impacts through a number of measures that we talked about, you know, such as the cross-platform competition, such as the you know, new features and new product revamp that we're doing within social entertainment, but that would take time, you know, to fully compensate.
spk07: We are now approaching the end of the conference call. I would now like to turn the call over to your speaker host today, Ms. Millicent T., for closing remarks. Please go ahead, ma'am.
spk08: Thank you everyone for joining us today. If you have any further questions, please feel free to contact the IR team. This concludes today's call and we look forward to speaking to you again. Thank you and goodbye.
spk07: Thank you. Thank you everyone. Thank you.
spk08: Thank you.
spk07: This concludes today's conference call. Thank you for attending today's presentation. You may now disconnect.
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