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 fourth quarter and full year 2021 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, Chief Strategy Officer, Mr. Tony Yip. Please go ahead, sir.

Thank you, Operator. Hello, everyone, and thank you all for joining us on the call today. T&E announced financial results today after the market closed. An earnings release is now available on our IR website at ir.tensormusic.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. Next, Mr. Ross Liang, our CEO, and I, Tony Yip, a CSO, we offer additional thoughts on our product strategies, operations, and business developments. Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Please note that this call may contain forelooking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These four looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by these four looking statements. All four looking statements are expressly qualified in their entirety by the cautionary statements, risk factors, and details of the company's filings with the SEC. The company does not assume any obligation to revise or update any forelooking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. Please note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the IFRS in the company's earnings release and filings with the SEC. You're reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure, or other non-IFRS measure not uniformly defined by all companies, including those in the same industry. With that, I'm pleased to turn over the call to Khushan, Executive Chairman of TME. Khushan. Thank you, Tony.

Hello, everyone, and thank you for joining our call today. We conclude 2021 with resolute execution of our mutually reinforcing fuel engine content, and platform strategy. As we strengthened our Penn Entertainment content ecosystem and enhanced our content production and promotion capabilities throughout the year, we further diversified our business model, grew our market influence, and most importantly, kept on attracting and engaging users and holistically adjusting the needs of our music stakeholders. We are also committed to continuous product innovation, through which we optimize users' experience across our four pillars of music entertainment. Listen, watch, sing, and play. Ultimately, these initiative skills help both of our company and the music industry to achieve healthy development and prosperity. Empowered by our content strategy and compelling original content production, list licensing, operation, promotion, and monetization, we are expanding our efforts in augmenting the scale and fortifying the quality and competitiveness of our music catalog. To cultivate high-quality artists and songs and promote a flourishing original content ecosystem, we have been focusing on building a more effective set of original content production capabilities. We have led the industry in original content production and promotion by developing and implementing a host of advanced tools and technologies. Examples include our 5Sing platform, which provides an online community for narrators, songwriters, and musicians to pair, communicate, and trade. During the demo stage, our proprietary predictive model enables forecasting and data mining for songs with blockbuster potential by determining intricate user preferences and analyzing melody, lyrics, voice, and rhythms, which in turn makes original song production more cost-effective. Furthermore, we have developed a number of content promotion tools which integrate our internal and external promotion resources, providing a one-stop service to musicians. These advanced tools and technologies allow us to effectively identify and increase support for potential hits. Notable standouts include Lonely City, Gu Cheng, which stood for the number one spot in the charts within the Chinese ancient style category upon release. triggering a tremendous wave of buzz on social media with nearly 1 billion streams in the fourth quarter, as well as multiple songs pushing over 100 million streams in the same quarter, such as Painting String, Hua Lixian, Perfect Couple, 金玉良缘, Pretend I Had Been Married to Her, 当我娶过她, and I'm Not Andy Lau, 我不是刘德华, Deepening interaction with IPs in the broader Tencent ecosystem has also increased the influence of our original music. In 2021, TME joined the hands with 46 IPs in the Tencent and entertainment ecosystem across gaming, animation, literature, variety shows, film and television and more to produce and release 117 original songs. In the fourth quarter, we teamed up with the League of Legends to launch the industry's first e-sports music production bootcamp, ushering in the beginning of our long-term original content production cooperation with TJ Sports. Water crossover collaborations also produced a hit such as the film song from the acclaimed romance film B for Busy, Ai Qing Shan Hua, sung by Mao Bu Yi, which topped the various charts, and the theme song for the game House of Grimm, Mo Jin Wu Yu, sung by Angela Zhang, Zhang Shao Han. We also empower indie musicians by creating a spiritual home for them via our Tencent Musician platform. As of the end of the fourth quarter, the number of indie musicians on our Tencent Musician platform reached 300,000. With the ongoing improvement of our end-to-end services from song production and domestic and overseas promotion, all the way to artist and repertoire development, incentive plans, performance resources, copyright protection, and career training, our Tencent Musician platform has become the platform of choice for many Indian musicians, especially young ones, further promoting the variety and diversity of our musicians' ecosystem. First, Tencent Musician Platform leverages powerful internal and external resources to provide musicians with a rich variety of artistic inspiration and creation scenarios. For example, in the fourth quarter, We cooperate with the Mercedes-Benz Music Creation Initiative She's Mercedes to encourage the use of music to record her stories. 340 groups of participating musicians composed 1,290 original songs through the Tencent Musician platform, highlighting female creativity in music. With multi-dimensional promotional capabilities, both on and offline, Tencent Musician platform has become a hotbed for hit songs. With the enthusiastically shared release of QQ Music's 2021 year-end music review, Fu Yi's song, Time Never Forgets, Shi Guang Tai Yang, for which we managed the entire production, release, and promotion process, achieved over 20 million first-day streams, setting a streaming debut record within the indie musician's category. We also recommend Flowers All The Way by Wen Yixing to multiple offline New Year's Eve performances hosted by influential TV channels, where it earned widespread accolades among listeners with its authentic story and inspirational theme. and topped the major music charts in the fourth quarter. Notably, daily streams exceed 15 million directly following these performances. Going forward, our Tencent Musician platform will carry on harnessing these advantages and ecosystem resources to foster a richer repertoire of original music and support more indie musicians. Alongside our music production initiatives, We have been enriching our content library to safeguard our comprehensive content offerings. Google has made Chinese ancient style a breeding ground for massive hits for its IP, new ancient rap, , by organizing singing competitions of music galas, launching music charts, and other on and offline activities in the fourth quarter. Hip-hop has become another value booster for our platform, and we are proud to have built a reputation among users and in the industry as a go-to destination to discover hip-hop music. Our QQ Music Records Alliance brand is deep in collaborations with hip-hop celebrities and record labels, which we augment with music contests, national live tours, and other events. In 2021, we helped the Chinese-English style and hip-hop artists and songs to reach a board-centered fan base, with more than 4,000 songs in these two genres combined to making their way onto various music charts. Turning to our live events offerings, in 2021, we upgraded TME Live to become an increasingly comprehensive performance platform. reinforcing our overall online and offline content ecosystem. For 2021, TME Live further strengthened its brand and escalated its industry influence by hosting a total of 56 live performances with captivating interactive and virtual experience. In fourth quarter, we organized online shows featuring a rich lineup of domestic and global , such as and Adele. Among these, was particularly innovative and rewarding, giving its embedded online payment and artist merchandise options. TME Live has also extended downstream to support the diverse development of our musicians. such as the fourth page, which has attracted approximately 10,000 Indian musicians, applicants, and has been widely followed on social media. We've helped our artists gain significant growth in streaming volume and fan base. By the end of the fourth quarter, 25 of our musicians had performed over 120 original works on TME Live, various offline stages. In the future, we expected to extend more offline events and festivals to up-and-coming musicians, expanding their influence and efficiency, promoting talent through high-frequency performances. As the leading music and audio entertainment platform in China, we have created trend-setting award ceremonies, such as the Tencent Music Entertainment Awards, TMEA, to present and reward the industry's best and brightest artists and their era-defining work. On December 11th, 2021, we hosted the third Stars Through the TMEA in Macau, featuring 46 groups of artists, including Jay Chou, Zhou Jialun, Mayday, Wu Yutian, Reni Liu, Liu Ruoyin, Cai Shikun, Teens in Time, Xu Laichao Lantuan, and Zhuge Xie, Xie Jichen, as well as a successive play of 58 hits. By combining our promotion powers with other Tencent resources, we set an audience record with over 10 million views, far more than the previous two TMEAs. With that, I conclude the update on our progress with content. Now I would like to turn the call over to Ross, who will share more about our platform strategy. Ross, please go ahead.

Thank you, Kanshan. Hello, everyone. Moving on to our platform strategy. In the first quarter, QQ Music, Kugel Music, and Kugel Music all released a major version upgrade incorporating refresh product concepts as well as optimized operations, UI design, and the technological innovations. We leveraged the companionship that music embodies to invite user to listen, watch, sing, and play, engaging them deeply in these four pillars of music entertainment. To bolster our listen pillar, we strive to provide a masterful audio experience with innovative listen features and optimized sound quality and effects. The list version of Weixin allows users to send songs from the TME Music Library directly to friends on Weixin. Our leap of heart Yuexin function, which has been adopted by more than 5 million users, enables one user to listen to songs another user is listening to with a simple one-click following. Furthermore, our interactive playlist can be joined, built, and edited by multiple users. This cutting-edge function allows users to break through the barriers of time and place while dynamically integrating listen with social interaction. Technology is crucial component that is the listening experience we offer. We continue to optimize the smart recommendation feature on QQ Music to help users to discover high-quality music more efficiently, as evidenced by 66% more music streams. attributable to the future in the fourth quarter compared with the same period last year. Additionally, our patent audio processing technology delivers a cool multi-track function through which users can separate songs into adjustable tracks to create individualized listening experiences. We have also refined our vertical operations through Google Music's scenario-based music, which targets users' wellness needs, such as fitness and sleep hygiene. Our sleep-inducing data brainwave music has been streamed over 26 million times since its launch. First, our second pillar adds another dimension to the user experience, making content more visually memorable We satisfied the nature extension of music users' visual needs with video content, effectively improving the efficiency and the accuracy of music discovery while increasing users' engagement levels. In the fourth quarter, QQMusic's video content sustained its year-over-year growth of more than 100% in both unicorns, visitors, and video wheels. Furthermore, Our musicians continuously benefit from our cooperation with video accounts in music promotion. We joined the initiative as a task-based model to incentivize indie musicians to produce original songs and video content in October, and initiated a reward-based editing challenge for the hit song, Love Love, in December. Through our collaboration with Vision Video Accounts, daily video views of our musicians' work upload to Vision Video Accounts reached 50 million by the end of 2021. Next, for the theme pillar, we introduced the in-room membership and added new video accounts and casual games such as Karaoke Farm, Ge Fang Nong Chang, and Karaoke Town, Ge Fang Xiao Zhen, to the latest version of We Sing Online Karaoke Room to make the overall karaoke room experience more fun and socially engaging, leading to a growth in karaoke room audience time spent in the fourth quarter. We also introduced an online service model featuring on-demand work which effectively mobilizes the karaoke KOLs on the platform and rewards their same talent. Finally, we launched our elder care mode, Guan Huai Mo Shi, designed to address the seniors' unique needs with bigger funds. cleaner UI design, and more relevant content. The fourth and final pillar of our comprehensive entertainment offer is play, which we expect will unlock an entirely new class of virtual interactions on TME's platform. In the fourth quarter, we launched China's first virtual music playground, TME Land, and hosted its first online music festival on New Year Eve in a 130,000 square kilometer virtual setting. Participants flocked to the event to party virtually with their friends and world-renowned DJs such as Westphal, Lumin, and Dexter King in the form of brand new 3D avatars. We also recently released QQ Music's Mpads and Google Music's Music Apps to provide companionship to our music users. Millions of users have already adopted their virtual pads, demonstrating their song's popularity, particularly among the young demographic. Leveraging our ongoing connections with Tencent ecosystem, and the resulting broad promotion capabilities. We attract a wide group of users and encourage them to enjoy our music and the video content through efforts including but not limited to. First, we partner with Weixin Video Account to livestream May Day's New Year's Eve Concert by PME Live. which captivated a total of 14 million viewers in the Tencent ecosystem. Second, we cooperated with Tencent Games on the debut of Ethan Chang's Lonely World, Gu Yongzhe, the Chinese theme song for the animation Arcane, League of Legends, 英雄联盟,双城之战. It was streamed more than 400 million times in the fourth quarter, reaching number one on multiple music charts. Third, during the release of Tencent Video's hit drama, Snow Stride, TMI's long-form audio offers of the same title were played 1.4 million times daily. With the quarterly growth, right over 500% during the first month of the show season. In 2022, TME will keep on strengthening its collaboration with Tencent's IP ecosystem and utilizing their methodology in promoting more case. As we continue to bring in our users and create a diversified content and tools, long-form audio has proven itself to be an effective complement to our portfolio of music apps. In the same way as we cultivate original music content, we are building a closed-loop system for podcasters, with the initiatives spying content production, promotion, and monetization. Among our podcasters, There are eight that have achieved the milestone of 100 million cumulative streams, demonstrating the power of our podcaster ecosystem, including podcaster Miss Dear, Xiao Lu Jie Jie, bedtime story books, Wan An Gu Shi He Zi, a child-topping children's book noted for its entertainment and educational value, On the content production front, we co-create Xiao Guo, the first-ever audio variety talk show, Don't Stop, Talk Show, Biao Ting, exploring the boundaries of audio talk shows to further expand our reach in the audio market. As we continue to cultivate our vibrant podcast ecosystem and expand production to enrich our differentiated long-form audio content offering, in the fourth quarter, long-form audio MUs exceeded 150 million, representing 65% year-over-year. growth, year-over-year growth, and its DAO increased by 86% year-over-year. Last but not least, we are committed to fulfilling our social responsibilities. In the fourth quarter, we implemented multiple charity initiatives, including the release of hearing inaudible music. a charity album recorded with a low-frequency song for people with mid- and high-frequency-faring impairment, as well as our 2021 Little Red Flower Music Season campaign, in which more than 500 musicians participated to compose 2,300 songs for charity. Working hand-in-hand, our platform and dynamic content Strategic progressing creates a substantial force, immersing our users in a comprehensive music and entertainment experience that covers our platforms, programs, and the latest innovations. With that overview, I'd like to pass the call to Tony to reveal our business operations. Tony, please go ahead.

Thank you, Ross. Hello, everyone. In terms of operating results in the fourth quarter, Our online music MAUs were 615 million, representing a 1% year-over-year decline, primarily due to churn of our casual users just served by other pan-entertainment platforms. In the fourth quarter, our IoT services achieved year-over-year MAU growth of 39%. The growth was primarily attributable to our diverse content and our broad variety of smart IoT devices. which continue to enhance our ability to roll out and promote new music content. Despite the impact on advertising and digital album sales from industry headwinds, our online music revenues maintain sustained growth in the fourth quarter, mainly driven by continuous growth in subscriptions. With a net ad of 5 million during the fourth quarter, paying user penetration reached 12.4%. At the same time, user retention remained largely stable. Advertising revenue growth moderated and was negatively impacted in the fourth quarter due to industry adjustment. Meanwhile, we continue to devise creative ad solutions to serve brands' diverse needs, such as the branded playlists launched in the fourth quarter. We will continue to innovate our product portfolio and diversify monetization models to better serve users and artists. Along this line, we launched the artist subscription, and add-on subscription, giving users access to customized video and audio content and other privileges from specific artists while helping artists grow a dedicated hardcore fan base. Moreover, in the fourth quarter, we introduced Putao Mall, Putao Shangcheng, to retail items from a growing lineup of collaborative artists. Sought-after items in the fourth quarter included Jay Chow, Zhou Jialun's limited edition action figure, Music King Chow, as well as Roy Wang, Wang Yuan's physical album, Summertime, Xia Ye Le. which sold 260,000 physical copies, setting a new industry record and fulfilling fans' increasing desire to collect physical albums. Throughout 2021, we increased our efforts to build communities at the forefront of trendy culture and strengthened our brand image with a youth-oriented portfolio of products and campus and college campus initiatives. Our pioneering app Bo Dian music is particularly popular among the younger generation. We upgraded Bo Dian to version 2.0 in December 2021, which features a fresh and sleek UI design and allows listeners to swipe through video-based music content with a smart recommendation function. To meet Gen Z's demands, we also developed a number of on-campus initiatives such as VOLA Campus , a record label for campus musicians, and our on-campus campaign, 2021 Campus Voice , with which we discovered promising campus musicians, such as and JCTX , together with their chart-busting original songs. Now let's turn to our social entertainment services. MAUs and paying users were lower quarter over quarter amid increasing competition and changing macro environment. While rolling with the ups and downs inherent in this environment, we are working on continued product innovations and building more verticals in social entertainment. For WeSing, which has singing at its core, We are establishing a content generation ecosystem that makes user participation easier and more fun. We now provide users with a virtual stage background and avatar for video recording, as well as the option to create a personalized short video by simply recording the voices with a semi-finished video supplied by WeSing. We also improved course functionality to allow even the shyest user to join a course while retaining the anonymity by not displaying the face. This simplified creation process has led to an improved video publishing rate and increased user enjoyment in the fourth quarter. In terms of our international expansion efforts, we entered into a definitive agreement in March 2022 to acquire a controlling stake in M&E Mobile Limited. which currently operates Japan's leading karaoke app, Pokekara, to enrich our karaoke experiences as well as broaden our reach in international markets. For our live streaming services, in response to increasing competition, we plan to heighten our focus on differentiating content offering by expanding our audio live streaming content, cultivating talented music broadcaster, hosting cross-platform events, and enriching our virtual interactive product offerings. We are utilizing our live streaming platforms to provide our musicians with a starting point for their careers while presenting us with options for talent discovery and cultivation. QQ Music live streaming is giving more and more musicians a voice and a stage through audio live streaming, evidenced by the consistent quarter-over-quarter growth in the number of streamers and users. In 2021, a total of 12,000 musicians live streamed on QQ Music live streaming platform. Meanwhile, Google Live is building a professional training ground for talented live streaming hosts with high potential by mapping out customized career solutions for them. In the fourth quarter, musicians discovered by Kugel Live released 64 new songs with over 1 billion total playbacks combined, including Wen Yixing's Flower All The Way, Wen Yixing's Yilu Shenhua, Fan Ru's Time Please Slow Down, Fan Ru's Shijian Ni Man Zhou. The power of our platform and ecosystem was also showcased in our Tencent Music Live ceremony, TMLC, the industry's first integrated cross-platform live streaming competition event. It brought a double-digit increase in traffic to our live streaming platforms, generated a new record of 630 million social media views. While traditional live streaming is facing challenges, we believe the metaverse reimagines a new era of interactive entertainment. In addition to the virtual playground, TME land, and virtual pets we just mentioned, virtual idols are another area where reality is increasingly merged with fantasy. Shanbao, our self-created Chinese ancient-style virtual idol, was successfully adopted in a wide range of cross-field use cases in the fourth quarter, including collaborations with popular games, emoji and sound emoji packages, conference hosting, offline performances, and more, showcasing the viability of virtual IP monetization. In summary, our effective, growing, dual-engine content and platform strategy puts us in the driver's seat for the music industry's sustained prosperity as we continue to engage and stimulate users while satisfying our stakeholders' multifaceted needs. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.

Thank you, Tony. Hello, everyone. Next, I'll discuss our results from financial perspective. In the first quarter of 2021, our online microservice revenues continued to grow, driven by rapid growth in music subscriptions. Social entertainment business were negatively impacted by competition, and a changing macro environment. Our total revenues for Q4 2021 were RMB 7.6 billion, down by 9% year-over-year. Our online milk revenues were RMB 2.9 billion this quarter, up 4% year-over-year. In the fourth quarter of 2021, milk subscription business continued to grow rapidly with revenues of RMB $95 billion and a year-over-year growth of 24% as we benefited from expanded sales channels and paying user loyalty due to high quality content and services we provide. Online multi-paying users grew to 76.2 million, up 36% year-over-year, representing a 5 million net ad sequentially. Monthly ARPPU was RMB 8.5 this quarter, compared to RMB 9.4 in the same period last year. As we offered more effective promotions to attract users, and cultivated their willingness to pay for music, revenues from advertising dropped on a year-over-year basis, as our advertising business continued to be negatively impacted by the industrial adjustment but increased sequentially due to seasonality. We have taken several steps to mitigate the impact, such as enhancing product quality, adding more creative ad solutions like rounded playlists, and partnering more closely with Tencent to reach more advisors. These initiatives will bear fruit over time and mitigate short-term headwinds. and we remain positive about our advertising business in the long run. Subluxation revenues and sales of digital albums also dropped on a year-over-year basis and sequentially. Social entertainment services and other revenues were on the 4.7th inning, down by 15% year-over-year as we faced intense competition from other plan entertainment platforms. and a changing macro environment. To adapt to the changing environment and stabilize revenue skills, we have differentiated our content offerings by expanding our audio live streaming and enriching our virtual interactive product offerings, such as TME Land. We are also expanding our international footprint for our within business, as discussed earlier. Growth margin in Q4 was 28.8%, down by 3.6% year-over-year due to the following factors. First, growth margin for racing declined as we increased revenue sharing ratio during the year. Second, given the continuous growth in music subscription revenues, our revenue mix shifted with revenues from online music, which generally have a lower growth margin. accounting for a higher percentage of revenues. Third, revenues from audio live streaming, whose gross margin was relatively lower, also grew and accounted for a higher percentage of revenues. In addition, increased investments in new product and content offerings, such as long-form audio, also impacted the margin. Now moving on to operating expenses, Total operating expenses for Q4 2021 were RMB 1.8 billion, or 24%, as a percentage of total revenue, as compared to 20% in the same period last year. Selling and marketing expenses were RMB 730 million, down by 3% year-over-year. During the quarter, we continued to make efforts in managing external promotion channels effacing and better utilizing our internal traffic Excluding the impact from PMDA event, as the event of 2020 was held in Q1 2021, selling and marketing expenses would have dropped even more. General and administrative expenses were on the 1.1 billion, up by 18% year-over-year, driven by a higher number of employees in R&D as we invested in product enhancements, technology innovations, and more diversified product offerings. Including the impact of , RMB 66 million from the acquisition of lazy audio, GMA would have increased by 10% year-over-year. Our effective tax rate for Q4 2021 was 11.5%. Our net profit was RMB 577 million, and the net profit attributable to equity holders of the company for Q4 2021 was RMB 536 million. Non-RFIS net profit was RMB 873 million. And non-RFIS net profit attributable to ex-holders of the company was RMB 832 million. Non-RFIS net profit margin was 11.5%. As of December 31, 2021, our combined balances of cash cash equivalents, term deposits, and short-term developments were RMB 24.7 billion, representing an increase of RMB 236 million from Q3 2021. And in March 2022, we won't bother to accrue certain land use rights in Shenzhen at RMB 1.05 billion, and the first half of that consideration was already paid. Next, I'll briefly discuss our performance for full year 2021. Our total revenue for 2021 will be 31.2 billion, up 10% year-over-year. Revenues from online music services will be 11.5 billion, up 23% year-over-year, to which music subscription revenue is the largest contributor. Our music subscription business grew rapidly. throughout the year with annual revenues of RMB 7.3 billion and a 31.9% annual growth rate. Revenues from social entertainment services declined slightly by 0.1% year-over-year, given the increased competition and the changing macro environment. Net profit attributable to average holders of the company under RFIS and non-RFIS were RMB 3 billion and RMB 4.15 billion, respectively. Finally, I'll close my prepared remarks with some comments on Outlook for 2022. In 2022, our co-music business, partially music subscription and advertising, are expected to grow and reach operating break even for full year 2022. We are taking various actions to improve ARTPU, and expect to see a slow recovery in 2022. Additionally, we are tightening controls on content costs with increased requirements on RRI. For social entertainment services, with challenges from competition and the change in market environment, we are tightening our cost controls and adjusting revenue sharing ratios to maintain health growth margin while keeping revenue scale. Furthermore, from company-wide, We are focusing on our core business and taking actions to control high-count and related costs, improve high-count efficiency, and closely monitor AI to reach to each channel for marketing expenses. Finally, under the overall micro-environment, we continue to invest mindfully in new products and services, including non-form audio and international business. with a focus on investment returns and the future growth potential. This concludes our prepared remarks. Operator, we are ready to open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. 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-answer the queue. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Eddie Leong with Bank of America. You may now go ahead.

Good morning, guys. Thank you for taking my questions. We noticed the user base declined sequentially a bit in the fourth quarter. So just wondering, heading into first quarter of 2022, given the current COVID situation as well, could you share with us the traffic trend you are seeing? And then similar to that, could you also tell a little bit about the traffic or usage, not just the user base, but, you know, For example, the number of streams, time span of users in 2021, despite the slow growth of your user base. So just wondering if all these features and content development on your platform have any impact on the usage of the existing users.

Thank you. I'll take a first crack, and then perhaps Ross can also supplement. In terms of our online music MAU, we saw a slight decline by 1% in the fourth quarter on a year-over-year basis, primarily as a result of churning of some of our casual users served by Penn Entertainment platform elsewhere. But I think it's important to note that within the mix of that music MAU, QQ Music actually saw a year-over-year increase in its MAU, whereas Kugo Music and Kuwa Music saw a bit of a decline. And the reason for that difference is because QQ Music is the first flagship app to fully and completely implement our four pillars of music, entertainment, experience, Sing, watch, listen, and play to its full extent with more community features and social features and focus amongst the younger demographics. And so we're pleased to see that these initiatives are starting to bear fruit. And as we work towards streamlining and making more product enhancements along the same lines also to Kugle Music and Kugle Music, we are hopeful that we will see some improvements in the MAU throughout the rest of the year.

We have three platforms. The biggest challenge for Google is its size. The biggest impact is on Google Music. Last year, QQ Music had a better user base, especially in iOS. It has a better growth. QQ Music has a better MAU, because it has a relatively young brand. Because Kugel is actually the longest business in our group. So in terms of brand and overall operation, it still has a lot of room for improvement. This is what we should say is the biggest challenge in music media in the future in 2022. Kugel will further strengthen the recommendation, strengthen the operation of its曲库 itself, and some of its own use in scene music. and to highlight their own characteristics. At the same time, we will also pay attention to the influence and penetration of Kugoo Music in our Z-Generation to provide better music content for young people. Through the establishment and optimization of this content, Kugoo will have a uh, uh, uh, Thank you, Ross. I'll do a brief translation. So Ross was talking about the main challenges facing our MAU with respect to Google Music.

primarily because of the long history of the app. And it has more room for improvement. In particular, this year, we'll focus on smart recommendation, better operations amongst our music catalog, expanding into more vertical scenarios-based listening, such as exercising and sleeping scenarios, focusing more on Gen C younger demographics. And with all these initiatives, we hope to stabilize the MAU decline And overall, you know, with QQ Music, you know, starting to see growth in particular around its iOS user base, given this improving brand image among the young demographics, we do expect this to be able to stabilize the music MAU for the rest of the year. Yeah. Got that.

Thank you. Our next question comes from Alicia Yap with Citigroup. You may now go ahead.

Hi. Good morning, management. Thanks for taking my questions. I have a questions follow-up on the Outlook. So in light of the latest macro and also the competition, any color management could share with us the latest business is trending, how the business is trending into the first quarter this year. And also over the course of 2022, any qualitative color, how we should expect the online music growth rate and also the social entertainment revenue growth rate. And specifically, if you could also provide some color on the expectation for online advertising revenue growth this year. Thank you.

Okay. In terms of outlook for Q1, we currently expect total revenues on a year-over-year basis to decline by around mid-teens. In particular, live streaming continues to face competition and a challenging macro environment. And secondly, we're in the process of adjusting our advertising business model to embrace changing environment and industry adjustments. And thirdly, Former master licensing contracts have been renewed as non-master licensing contracts, and these have an impact on sub-licensing revenue falling away this year. In terms of full year 2022, we currently expect total revenue on a year-over-year basis to decline by around a single digit. While all the above factors also apply, we do expect to see a recovery from these factors in the second half. In addition, for the full year, we expect to be able to grow online music subscribers in terms of subscribers by approximately 20% on a year-over-year basis. That translates to an average quarterly net ads in online music subscribers to be between three and a half to four million. Now, I think we have to understand the context is that over the past three years, we have prioritized a growing subscriber base ahead of ARPU. And as a result, we have seen some ARPU decline. For example, in Q4, ARPU declined by 9% year over year. However, We continue to believe there is ample growth potential for subscription services over the long run, and that view remains unchanged. But as we plan ahead for this year, we want to focus not only on the quantity of subscriber growth, but also on the quality of the overall revenue stream. And so we look to take a more balanced approach in growing subscribers, as well as maintaining a more stabilized ARPPU. And we will also seek to supplement our subscription revenues with advertising revenues, both of which we expect to have ample long-term growth potential within our business, despite short-term headwinds as it relates to advertising. And through a variety of cost management initiatives to improve efficiencies, We believe our non-IFRS adjusted net margin is expected to be in line in 2022 compared to 2021. In particular, as Shirley mentioned, as a result of very healthy growth in our core online music business, which is online music subscription and advertising, excluding long audio, We expect to continue to see an improving margin trend and achieve profitability at an operating profit level for the core online music businesses, excluding long audio.

Our next question comes from Alex Poon with Morgan Stanley. You may now go ahead.

Thanks, Threat Management, for taking my question. My question is related to our overall net margin into 2022 and 2023. Previously, because we have our live streaming business, social entertainment business, higher margin business growing slower than our music, there's a mix change and resulting into lower net margin. And how should we think about the trend in 2022 Because just now you also mentioned that we are controlling some of the revenue sharing ratio and headcount, et cetera. Can we see some stabilization in the decline in net margin sometime in 2022? Thank you.

Okay. Shirley, do you want to take that?

Okay. We expect net margin in 2022 will be stable compared net in 2021. And for online revenues continue to grow up as paying users increase and advertisement. So paying users will increase 3.5 million to 4 million each quarter. We will balance between ARTPU and the paying users increase. Expect the ARTPU through the year 2022. Additionally, we are taking tightening controls to content cost to increase content investment ROI. The gross margin of online music will keep increasing in 2022, and we expect the music business will be break-even at the operational level. And the social entertainment revenue will be under pressure in 2022 because of the competition from other platforms and the macroeconomic factors. We will control the revenue sharing ratio of WeThink, increase WeThink gross margin, The gross margin of live stream business on Google and the Google platform also will keep stable. And we expect that the audio stream and international business have pretty good growth. But the revenue share ratio of the new business are higher than the video live streaming. They have the negative impact on gross margin. And in 2022, the one main reason for the pressure on the gross margin will be the revenue mix because low gross margin revenues such as online music, audio streaming, live streaming increased rapidly, and the high gross margin revenues such as live streaming decreased. And for the operational expenses, we will raise the requirement of RI, of marketing and sales expenses, and catch the low potential profitable projects and A focus on our core business, controlled high count and released cost to improve the incidence of high count. For the long-form audio, we will continue investing on this new business. We will try multiple ways to expand the monetization of long-form audio and control the content cost of long-form audio. Expect that the long-form audio break even on growth margin level. And so, we believe when we take all these ways, our net profit margin will be keep stable in 2021 compared to the 2021. And in 2023 is long-term. I believe we can increase our net profit margin, yeah.

Our next question comes from Charlene Lu with HSBC. You may now go ahead.

Thank you for taking my question. Actually, they have already been asked. I'm good now. Thank you very much.

Our next question will come from Wei Xiong with UBS. You may now go ahead.

Sure. Thank you, management. I just want to follow up on the point of the online music paying user growth because we have seen that number has consistently grow at the high end of your target for the past year. So I wonder, could you share what's driving that very robust growth and which channels did you see to have the most effective way in terms of acquiring new paying users? And in terms of paying ratio, because we have, again, set a target of 20% growth this year, Is there a target of the paying ratio if we look at longer term and what kind of the ceiling that we're looking at here? Thank you.

Yeah, in terms of driving our long-term growth in the subscriber base, there are actually many tools that we can leverage. Obviously, providing premium content and attractive content and also providing an overall high quality of service to our subscriber base is very important. And this includes content, these include privileges that users are able to access to, and privileges include maybe unique access to digital albums or unique contents that are offered by TME Live. In addition, we are actively expanding multiple channels and also exploring joint membership partnerships with external parties and also with internal opportunities. For example, we do cross-selling campaigns between music subscription and long-form audio. And we also do joint campaigns with external parties as well. And then in addition to that, as our IoT business, you know, reach a large enough scale and continue to grow at a fast pace. You know, the subscription for IoT device could also act as an effective cross-marketing campaign for us. And then finally, price promotion, you know, periodically, also an important driver. Now, As I mentioned, I think it's important to see that the context of the very strong growth over the past few years is obviously, you know, it's all of the things that I've mentioned. And we focus, we prioritize more on the subscriber growth over the past three years over ARPU. And we're at a stage where we think the whole industry will benefit, not just TME, by focusing more on the quality of service and less on price promotion. And thereby, you know, we see a lot of value in music subscription services that users will learn to appreciate over time. And this approach would help us lay a stronger foundation for the long term as well, which is why, you know, we seek to strike a better balance between subscriber growth and ARPPU growth.

We will be also focusing on the advertising-based business model as well.

Yeah, I think, as Kashi mentioned, that's right. At the same time, this approach will allow us to better manage between growing our paying subscriber and also maintaining our non-paying free user base, which is still a vast majority of our user base. and to be able to effectively generate monetization opportunity from the free user base, this approach would also give us more flexibility to adapt to a prospective competitive landscape. One example of the new ad monetization model we are currently beta testing among a small group of users is that for free users, some of them are given an option to opt in to watch a video ad in exchange for being able to unlock the subscription service for a short period of time. So for example, if you watch a 30-second or 60-second ad, you might be able to unlock a 30-minute or 60-minute period where you can enjoy the subscription service. The benefit of that is we'll be able to generate ad revenues from the free users that may otherwise be difficult to convert to subscribers. And after these users have had a taste of enjoying the premium subscription service, it may actually increase their conversion to become subscribers. So that could help us grow advertising revenue and also help us over time increase the conversion amongst the free user base. So it's a good balance that allows us to manage.

Yeah, exactly. And we are also seeing the trend that when a user is going to pay for the monthly subscription or they are going to watch the ads and put in some of the other adverts in order to get the right to enjoy the more premium content, they will be more active on our platform. So we are seeing that we are continuing improving the overall quality of our users. And also, just like Eddie mentioned during the question section, it will also increase the thickness of our users as well in terms of the usage of the content.

Our next question comes from Thomas Chong with Jefferies. You may now go ahead.

Hi, good morning. Thanks, management, for taking my questions. May I ask about our M&A strategies for this year, given we have just closed a deal with a controlling stake for entity in Japan, and also just want to get a sense about how would the deal impact the Q1 revenue? And my second question is about, in the press release, we talk about coming back to Hong Kong by way of introduction. Just want to get a sense about our management thoughts in this regard and the timeline that we should be anticipating. And my final question is about the social entertainment revenue. When should we expect it to be stabilized in the future? Thank you.

Sure. In terms of M&A, You know, we adopt a very prudent approach to obviously capital management. We are constantly on the lookout on attractive M&A opportunities. We're focused on strategic investment opportunities that provide synergies and that are complementary to our core businesses. And the recent acquisition of M&E Mobile Limited fits that criteria. They operate the leading online karaoke app, Pokekara, in Japan. So it plays very well into our experience in managing the world's largest online karaoke product. It also allows us to broaden our international footprint into Japan, which previously we do not yet have a presence. And then in terms of Hong Kong listings, To provide our shareholders with an additional trading venue and protection amid the changing regulatory environment, we have already commenced the process of pursuing a secondary listing in Hong Kong through a listing by way of introduction. It is important to note that this is a direct listing without offering new shares. And the idea behind that is to allow shareholders to be able to enjoy the benefits of an additional listing without the impact of dilution. In terms of timing, obviously, I think we are working very hard, but we need to obtain a number of regulatory approvals, and we'll continue to work very hard to move things forward in an expedited manner. And to the extent that we have major developments, we will make the appropriate announcements. And then finally, with regards to social entertainment revenue trends, overall, first quarter, we still see some challenge. Seasonally, Q1 is always a difficult quarter because during the Chinese New Year holidays, a lot of the live streaming hosts, they go on holiday. And as a result, the revenues tends to be a bit weaker. In addition to that, there are changes to industry adjustments around taxation that effectively increase the cost of doing business for many of the large streaming hosts. So some of them need to readjust their activity levels. And overall, what we're trying to do is to stabilize the decline, and we believe Q1 would be a challenging period. But as we look forward into the rest of 2022, we do think that we will start to see some gradual recovery, you know, referencing Q1 as a low base. The initiatives we're taking to drive that recovery include continuous revamping of online karaoke room in WeSingh. As we mentioned on the script, you know, we are adding casual games such as Karaoke Farm and Karaoke Town to broaden our revenue streams. You know, and in the last quarter, we also mentioned that we are enabling more inter-room and cross-room interactions, and all of this resulted in our WeSing online karaoke room revenue achieving a year-over-year growth in the fourth quarter. even though the traditional live streaming revenue within Resync recorded a decline. And then the second area of major initiatives to help drive the recovery is audio live streaming, which is a complementary use case to our core music listening experience. And we are seeing some strong growth in both user base and revenues, and it will continue to grow We'll continue to grow our audio live streaming business in China, as well as to leverage our expertise to expand our presence overseas and monetize through audio live streaming in our overseas products, such as WeSing, as well as our newly acquired Pokecara, as well as M&E product portfolios. 2Q Music live streaming is also a flagship in terms of audio live streaming. We are seeing revenue growing at a strong double digit at a year-over-year level. Users, performers, revenues all continue to ramp up. And throughout 2021, we've attracted 12,000 musicians to live stream. It's becoming a go-to place for musicians to connect and interact with a fan base via live streaming. And we continue to expect a good double-digit year-over-year growth rate for 2022 for our audio live streaming. And yeah, that's it.

Yeah, regarding the M&A strategies, I would like to emphasize that our strategy is not just simply doing some of the financial investment, but rather we would like to invest in the company that will have synergy to our core business. So at the example that you point out regarding the Pokecara, which is really suitable to our overseas development on our WeSync platform. So this is one of the projects that we will be looking forward. Besides the platform side, we will also be focusing on some of the content investments as well. During the past three to four years, we have been practically involved in doing some of the strong production of the music content with many different music labels. We also started to invest in some of the music labels as well, setting up JVs. So I think that is also another example to showing that our M&A strategy is we want to build a more synergistic business together with our core strategies. Regarding we have a very strong cash base, our cash reserve is around $25 billion. in our company, so I think that we will continue to get the best use of this as our advantages, and when the right opportunity comes out, we are more than happy to do more investment in order to help the company grow and ensure our success in the long term. But again, we will do it in a prudent way.

Operator, we have time for one final question.

Okay, our final question comes from Xueqing Chong with CICC. You may now go ahead.

Thank you. Thank you, Benjamin, for taking my question. And my question is related to TME Lines. We launched TME Lines at the end of last year, and this quarter's earnings conference call was also held at TME Lines. So can management share more color about TMI Land? How does it help to develop our business? And how does management see the music industry opportunity in the Metaverse? Thank you.

Ross, would you like to add color?

TMI Land is our first attempt in the Metaverse. In the future, in the virtual world, In fact, it is a representative. Later, we will do more attempts in the virtual world and the original universe. PMLand will be an event venue. There will be various special scenarios in the future. For example, Zhou's William Castle. We will build different scenarios and hold various special concerts in these scenarios, including similar to a virtual avatar, a real virtual avatar concert. This is where we can become a gathering place for events. On the other hand, we will continue to apply Tiamilan's technology in our virtual karaoke online studio. This way, users can be in different places, including some low-end studios. Users can be in a venue like this can use their own avatar to interact with friends and other people in the world. From there, we can discover more opportunities for growth. Finally, we will explore the use of the original universe in the entire music app. In the middle of the year, we may release a relatively professional A version of the original universe. Everyone will have their own music room. Users can decorate their own room. For example, they can play their own wata. They can also decorate their own room. They can place their own collected music in there. Their friends can visit their room. And several people can play with different instruments. according to a real environment to visit. For example, it can have a different sound effect, a different visual feeling, and then we can create a... Through Metalworks, we can create a listening environment that is more similar to the real environment on a music platform. So the entire TMI Line will be a representative of our original universe. In fact, we will become... Throughout this year, on all music platforms, we will explore various aspects of the use of the original universe.

So in terms of TME land, it's our flagship metaverse initiative into the virtual world. You know, there are many use cases of TME land. The first is that we'll be using it as an event hosting venue for special events, you know, such as one that we hosted in the Countdown Gala. There will also be special settings that are customized for particular artists. So, you know, we'll be partnering with more and more artists to develop, you know, special settings for him or her. We'll also be hosting concerts, virtual concerts for these artists. Some of them may be a virtual avatar concert whereby the artists are immersing into this environment through an avatar and performing through an avatar. Secondly, we'll be applying the TMELand technology into the online karaoke room as well as virtual nightclub types of settings, which encourage users to interact with one another in this virtual setting and therefore extract new user engagement and monetization opportunities. Thirdly, looking ahead into 2022, QQ Music will see an upgrade with a metaverse feature where user will have its own individual room where you can put your own music into that virtual room. Friends can come and visit. You can listen to the music together. You can play instruments together. And for artists, you know, we'll be also opening kind of virtual showrooms for these, you know, partnering artists to display all of their albums in this virtual world and users can come into this virtual showroom, listen to all the music under different audio effects. So effectively, what we try to do is create a parallel world in parallel to the current physical world and the current 2D environment, but there's a parallel 3D environment that can mimic the physical world as much as possible in a virtual setting. So I think, thank you very much for all of your questions, and thank you for joining us today. Feel free to contact TME's investor relations team if you have additional questions. This concludes today's call, and we look forward to speaking with you all again next quarter. Thank you, and goodbye. Thank you.

Thank you. The conference is now concluded. Thank you for attending today's presentation.