This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group First Order 2022 Earnings Conference Call.
spk01: 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, Mr. Tony Yip. Please go ahead, sir.
spk06: Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. TME announces quarterly financial results today after the market closed. and earnings release is now available on our IR website at ir.tencentmusic.com, as well as via NewsWise services. Today, you'll hear from Mr. Kushin 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, will 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. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please also 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. where you are reminded that such a non-IFRS measure should not be viewed in isolation or as an alternative to the equivalent IFRS measure. The other non-IFRS measures are not uniformly defined by all companies, including those in the same industry. With that, I'm pleased to turn over the call to Kashin, Executive Chairman of T&E. Kashin. Thank you, Tony.
spk13: Hello, everyone, and thank you for joining our call today. In an era of increasing entertainment choices, amended and evolving market landscape, a sustained competitive advantage is awarded to those who offer users a differentiated experience. With this in mind, in the first quarter of 2022, we continued to build new professional and personal use cases and interactions around our dual-engine content and platform strategy. as well as expand our efforts to augment the scale and fortify the quality and competitiveness of our music catalog. Meanwhile, we spoke to enhance user experience through innovations built on our four pillars of music entertainment, namely listen, watch, sing, and play, driving momentum for our long-term success and promoting the healthy development of the music industry. First and foremost, we remain committed to energizing original content production, leveraging our technology-driven production capabilities and strength in mobilizing promotional resources. The benefits of our overall content ecosystem are increasingly manifest. With our Xinyao plan, Xinyao Jihua, and Galaxy plan, Yinhe Jihua, we empowered original content production leveraging a technology-driven solution to add value across demo and single discovery throughout the production distribution and promotion phases of these original works our high hit rate for original content blockbusters is supported by our middleware platform which integrates first algorithm-driven screening of lyrics songs and demos second AI voice matching capability builds a point, a stored library of hundreds and thousands of voices. And third, a targeted promotion system based on real-time data analysis to help artists and songs reach the right audience and go viral. Empowered by these advanced technologies, our artists have created quality pieces as well as trendy ones, serving a wide range of user status. Notable standouts in the first quarter include Mirage, Hai Shi Shen Lou, Bai Shan Shu Shuo, and Zhuang Sha Qian, Bai Chuan Qing, two strapping successes that topped multiple music charts and both achieved a peak daily streams in excess of 13 million. Meanwhile, we continue to refine our original content catalog, focusing on key verticals such as gaming, Chinese ancient style, and pop music. In the first quarter, we collaborated with Tencent Games' popular titles, including PUBG Mobile, He Ping Tian Ying, Honor of Kings, Wang Jie Rong Yao, League of Legends, Wild Rift, Yin Zhong Lan Meng Shou You, and several more to produce original themed music content. These songs by leading artists such as Hua Cheng Yu, Chen Li Long, Mao Bu Yi, and Huang Zitao have made their way to the top of various music charts and have also been embedded with the sales of ads and game pops, further driving our revenues. What's more, an inspirational Chinese ancient style hit song, Flying Snow, became the background music of choice for many official media outlets during the Beijing Winter Olympics. generating tremendous social media buzz of over 2 billion views and capitulating it to the top of TME's 12 music charts. Moreover, our Tencent Musician platform continues to provide systematic support for musicians, enabling us to partner with musicians at any stage and in all aspects of their careers to provide a launchpad for more musicians to showcase their talents passion, and music for the broadest possible audience. We have been making resolute efforts to optimize and upgrade Tencent Musician's platforms all around services for musicians, so that being active on our platform becomes not only a preference, but also a habit for creators. For starters, in the first quarter, we launched a brand new behind-the-scenes music production service with an initial group of over 50 industry well-known professionals and more than 100,000 creators who are well-versed in music composition, mixing, recording, and more joining the roster to provide our musicians with production support. Additionally, we have strengthened our platform infrastructure to support musicians with a customized self-service productivity toolkit to analyze data, host concerts, and manage their artwork catalog, profile page, and photo albums. Taken together, these tools empower musicians to create and promote their work more efficiently and reach a higher audience, ultimately helping to build a constructive and active musician's ecosystem. The Tencent Musician platform motivates musicians with an array of creative scenarios and rich promotion resources, both on and offline, helping them break through to a larger audience. Aided by our platform's toolkit, climbed to the top of the trending charts with cumulative social media buzz reaching over 200 million views. Our diverse promotions for the singer and the songs include top variety shows like The Treasure Voice, Online Joint Activities with TMELand and WayZine video accounts. Offline stages such as our Tencent Musician Entertainment Awards, TMEA, and the four-stage Yuanli Wutai Jihua, as well as a handful of offline brand-sponsored events, providing additional opportunities for Liu Shuang to shine and unlock his potential. We have established the sustainability and diverse monetization models for musicians, which help them earn a better living while focusing on honoring their craft, To this end, we distributed over 200 million remnant beats from our platform to musicians during the past 12 months, supporting a new generation of indie musicians that has propelled the industry forward. Enriching our content library and building our presence across a multitude of music verticals to reinforce our source of competencies is another focus. which in turn strengthens our platform's reputation as the go-to destination for enthusiasts and benefits our penetration among high-value heavy users. Chinese instrument style music remains our stronghold. In the first quarter, We present in China, ,, a variety show that brought together top Chinese musicians and performers from 41 different genres to compose and showcase original music work that creatively combined the traditional Chinese cultural elements with trendy styles. The show has received a widespread acclaim and over 300 media accolades for its efforts in actively promoting Chinese cultural heritage. In addition, during the first quarter, we began to expand our focus to the electronic, classical, and animated genres. For example, we strengthened operations for electronic music by bringing in musicians, labels, and institutional partnerships. and provide a full range of content, including music audio, playlist, video, and more. By the end of the first quarter, more than half of the world's top 100 DJs had settled on QQ Music, which not only enabled their in-depth communication with Chinese fans, but also promoted the spread of trendy electronic music. Finally, build upon our commitment to promoting healthy and sustainable industry development, TME seeks to create inclusive, professional music charts that accurately reflect and evaluate China's music industry. Our TME chart, Tengxun Yingyue Bao, along with its data-based TME unit chart, Tengxun Yingyue Youli Bao, and its expert review-based TME Wave Chart , served as a solid music rating infrastructure. In the first quarter, we released the TME Music Chart Annual Review, which provided a snapshot of the Chinese music landscape in 2021 with ratings and reviews of over 1,800 songs. becoming a bellwether for the latest and hottest in China's music world and attracting a wave of social media buzz, including over 900 million views upon release. To close, we are motivated every day by the differentiated value we can bring to music lovers, music creators, and the music industry as a whole. We are committed to earning each of these participants loyalty, and devotion to real empowerment. With that, I conclude the progress update on our growing content capabilities. Now, I would like to turn the call over to Ross, who will share more about our platform strategies.
spk11: Ross, please go ahead. Thank you, Karshen. Hello, everyone. Moving on to our platform strategy. In the first quarter, We continue to invigorate our ecosystem and innovate around the four pillars of our music entertainment experience, listen, watch, sing, and play. Beginning with the smallest details, we continuously polish our products to meet the multifaceted needs of diverse youth cohorts and strive to create a sense of belonging. making our products an uncompromising must-have in our users' daily lives. With respect to listen, our users call demand. We are providing innovative and professional product features to elevate users' listening experience. Technology is so deeply embedded in our corporate culture that it has become part of our DNA. QQ Music was the first in China to launch advanced listening functions, including the digital music enhancement engine, which can significantly improve sound quality with one simple click and replay gain and gapless playback. which help equalize music volume and deliver a smooth music listening experience between consecutive song plays, particularly compatible with classical music streaming. These new functions have been well received as millions of users incorporate this feature into their daily practice. We have also optimized our smart recommendation filter and have become more in tune with our users' tastes, as demonstrated by QQMusic's recommendation penetration rates, reaching a new record high by the end of the first quarter. Along with recommendation streaming, volume and time spent both rejected stronger double-digit growth year over year. In addition, our upgrades QQ Music popularity index with real-time updates on the number of listings online, expanded music coverage, and additional song information has considerable strength in the user's sense of participation, with their input directly influence a song or artist's prominence. The second pillar of our all-around multi-sensory entertainment experience offering is watch. We are deepening our collaboration with WeChat video accounts to create vibrant music scenarios and strengthen music promotion capabilities. In March, Tencent Music Platform held a large-scale live charity concert during the pandemic. stream never ends. It was an eight-hour uninterrupted marathon performance by 141 groups of well-known artists such as Chen Li, Hao Mei Mei, and a roster of our musicians. Supported by WeChat video accounts, promotion capabilities, and our ability to mobilize resources on our platform, The concert attracted millions of viewers, generating over 30% increase in the number of viewers in participating musicians' live streaming rooms on the event day. We are proud to share by the end of the first quarter, daily video view of recent video accounts of musicians on our Tencent Musician platform has exceeded 100 million. representing over 70% increase quarter over quarter. Beyond video, our efforts on the visual front also include the use of the graphics and other formats to enrich streaming content. Audio and music's common display function and the streaming visualizations are just a few of the many examples launched in the first course. In terms of scene, We were the first in the industry to offer sound tuning without the required earbuds, Wai Fang Xiu Yin, an easy-to-use function that can substantially improve the sound effects of songs recorded without external devices. Another new feature that has inspired widespread accolades among users is our cloud-based sound mixing, Yun Duan Hun Yin, which helps produce nearly studio-quality sound mixing in just two minutes after the musical work is uploaded to the cloud. We have also endeavored to expand music entertainment scenarios, adding more fun play elements to the music entertainment experience. We hosted our first virtual learning course on PME land and are planning to organize additional featured events such as virtual avatar concerts and customized events on this exciting new virtual music playground in the second quarter. In addition, we have pioneered dedicated virtual rooms for artists including recently launched rooms for Zhou Jialun, and Wang Yuan, which provide immersive, interactive social scenarios where fans can listen to their idol's digital album anytime and anywhere, while posting song reviews, chatting with other fans, and displaying self-expressions in virtual avatars. We are proud to share that through pioneering innovations in the four pillars of music entertainment, listen, watch, sing, and play. QQ Music has achieved solid initial results as demonstrated by its continuous year-over-year MAU growth. Building a complementary component to our music entertainment ecosystem, we continued to grow our long-form audio business with increasingly differentiated content. We are delighted to see mid- and long-tail podcast hosts flourishing in the TME's ecosystem and gain traction thanks to our large user base. For example, after participating in TME's Podcast Creation Center in 2022, podcast host Lao Shiqi's audio work of the non- TimeRiders' Beipai Daomu Biji racked up to 23 million streams within one month upon its release and shot to the top of TME's charts, leading to substantially higher financial gains for Lao Shiqi and inspiring a growing crowd of mid- and long-tail creators to join our podcast ecosystem. Secondly, we enhanced our joint content operation with popular IPs, particularly in TV drama series. Through audiobooks, artists' participation in the two-tone community and more channels, we successfully promoted both the audiobooks and the associated IPs with highlights in the first quarter, including Ren Shijian, Luo Hua Shijie, and Yu Sheng Qing Duo Zhi Jiao. During the release of these hit dramas, TME's long-form audio offers of the same title saw their streaming values surge. Going forward, we will leverage our membership to maximize the monetization potential of long-form audio as we also continue to optimize content ROI and DAO monetization efficiency to improve its profitability. As we drive our business progress, we remain dedicated to undertaking our social responsibilities to create a better world and promote character spirit and create a new model of public welfare through music. To celebrate the 15th World Autism Day, we launched an autism care charity project, Shape of Music, 如果音乐有形状, which presented a series of artworks such as our first public Wi-Fi digital collado single, The Brightest Star , the music album Symphony of the Galaxy , and the Shape of Music art exhibition. Allow music to not only be heard but also seen and treasured through the crossover of different content and art forms online and offline. The entire net income from the project was donated to autism institutions to advocate for social connections with these autism groups. With that, I'd like to give the floor to Tony to reveal our business operations. Tony, please go ahead.
spk06: Thank you, Ross. Hello, everyone. In terms of operating results in the first quarter, our online music MAUs were 604 million. down slightly year-over-year. Despite churn of casual users who opted for other Penn Entertainment platforms, we are encouraged by the progress we've made in our original content production capabilities, music catalog, and innovative product features, which continue to strengthen the engagement of our core user cohort. Our IoT service MAU continued to witness a double-digit year-over-year increase in the first quarter, which was primarily attributable to our comprehensive IoT entertainment content, integrating music, singing, live streaming, long-form audio, and more. In the first quarter, we worked with little genius smartwatch, Xiao Tian Cai Shou Biao, and multiple electric vehicle manufacturers, such as NIO, Wei Lai, and XPeng, Xiaopeng, to provide karaoke functionalities on IoT devices. Due to macro headwinds, our online music revenue decreased year over year in the first quarter. However, our fundamentals remain healthy and we successfully sustained our growth momentum in subscriptions. We achieved a net ad of 4 million in the first quarter and a paying user penetration rate of 13.2%. At the same time, user retention remained largely stable. For the reminder of 2022, we are committed to delivering a healthy balance between paying user growth and ARPPU, which reflects the quality of growth of our online music business. In the first quarter, as the pandemic waited on our advertising business, we continued to implement innovative, diverse advertising solutions to unlock more ad revenue potential. To fully leverage our large user base, we are testing a free listening mode where users can listen to songs for 30 minutes for free with every 15 seconds of video rewarded ads that they watch. In addition, our music promotion service, 音樂推, and playlist bonus task, 歌單達人, which allow for accurate targeting of the right audience and increase in streaming volume and popularity of selected songs for a fee have both achieved early success with strong growth in their daily revenue in streams. We also forged ahead with new business models to enrich user experience and monetization avenues. In the first quarter, we launched our super VIP membership, 超级会员, which complements the two existing tiers of our subscription plan and incorporates up to more than 50 privileges, including access to more music and audio content, as well as digital albums for a monthly fee of 30 RMB. Additionally, in the first quarter, we continue to explore the tie-ins between celebrity artists with our music pets, digital collectibles, and Putao Mall. To captivate more Gen Z users and cultivate a young and trendy cultural community, we further embraced our deep roots in the college campus scene and spared no effort in bringing more and more promising voices to be heard with our campus musician cultivation plan, Vo La Campus, Ni Hao Da Xue Sheng. In the first quarter, we are particularly proud of the positive impact we have had on female campus musicians included in the winner of the first prize scholarship of Volley Campus and Chinese folk fusion musician Georgina Qian Renyu, who created the Chinese ancient style original work Mulan based on the classic heroine. With this song, Georgina bloomed on the CCTV program Sing My Heart, exemplifying female bravery and spiritual power. We were also instrumental in her collaboration with household names and brands, such as the award-winning lyricist Vincent Fang, Fang Wenshan, Lancome, Lancome, PUBG Mobile, He Ping Jing Ying, and QQ Speed Mobile, QQ Fei Chen Shou Yong, to produce original theme songs, helping her achieve accelerated professional growth and broader recognition. now let's turn to our social entertainment services both mau and paying users were affected during the quarter by seasonality as well as macro headwinds facing the fast challenging landscape we will continue to improve our competitiveness through ongoing product innovations and new initiatives in social entertainment such as audio live streaming international expansion and virtual interactive product offerings for we sing To achieve our goal of making singing more fun and recording more professional, we provided innovative, easy to use features and tools to elevate users' singing and playing experience, as well as energize the relationship among our users. Our investment in these innovative singing and playing tools in the past few quarters started to pay off as the adoption rates of and the user time spent in our singing room both improved year over year and quarter over quarter. Facing competition for our traditional live streaming services, we will strive to generate more differentiated content and user experience. Firstly, we continue to make progress in vertical content category expansion. Focusing on the SHE economy, Google Live launched the Goddess Festival event in March, which successfully attracted female users with premium ARPPU to enjoy our audio livestreaming routes. Our audio livestreaming business achieved a double-digit year-over-year increase in revenues in the first quarter, and will become a key component of our overseas development strategy due to higher monetization efficiency in international markets. We also broadened WeSync's target user base by adding live streaming educational content, addressing seniors' online learning and sharing needs, such as lessons on square dancing, calligraphy, and traditional Chinese operas. Secondly, cross-platform collaboration is another way we can differentiate. For example, our first real-time live singing event, Meet Let's Sing, 见面吧首唱, co-hosted by QQ Music Live Streaming and WeSing, brought premium karaoke content to live streaming. QQ Music Live Streaming advanced steadily with the number of hosts increasing rapidly and daily active hosts reaching a record high of 10,000 during the first quarter. In conclusion, we kicked off 2022 by facing challenges head on, but we remain confident as we execute our dual engine content and platform strategy. We will persist in making our ecosystem, our content, products differentiated and highly specialized, which in turn will help us capture the hearts and minds of hundreds of millions of music lovers and unlock the massive opportunity in front of us. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.
spk07: Thank you, Tony. Hello, everyone. Actually, I'll discuss our results from a financial perspective. Our total revenues for Q1 2022 were on B, 6.6 billion, down by 15% year over year, and by 20.7% sequentially. In the first quarter of 2022, our R5S not-appropriate was RMB 649 million, and the non-R5S not-appropriate was RMB 139 million, which represented a sequential increase of 8% as a result of our focus on operating efficiency. In the first quarter of 2022, music, Corruption business continued health growth with revenues of RMB 1.99 billion and year-over-year growth of 18%. As we benefited from expanded sales channels and paying users' loyalty, using high-quality content and services we provide, online mail-to-paying users grew to 80.2 million, up 32% year-over-year, representing 4 million net ads sequentially. Monthly up was RMB 8.3 this quarter, compared to RMB 9.3 in the same period last year, as we offered more effective promotions to attract the user. Taking out the impact from fuel commander days in Q1, ARPPU maintained stable sequentially as we focused on the quality growth of our overall subscription revenues. Revenues from advertising dropped on year-over-year, and sequentially as our advertising business continued to be actively impacted by the industrial adjustment and seasonality. Our advertising revenues were also impacted by the outbreak of COVID-19 and the lockdown in some major cities. We are proactively expanding the ad inventories, optimizing and displaying, and rolling out innovative advertising formats to manage these challenges. While we expect ed growth will continue to be impacted in the short term due to headwinds from regulation on splash, AIDS, and the regional COVID-19 outbreak, we remain confident about long-term growth potential and expect advertising revenue to start recovering in the second half of 2022. Sublicensing revenues also dropped on a year-over-year basis, and sequentially due to restructuring of agreements with certain musical labels. Social entertainment services and other revenues were unbeaten for billing, down by 21% year-over-year, as we faced an evolving macro environment and intense competition from other entertainment platforms to adapt to the changing environment and to stabilize revenue skills We have demonstrated our content offerings by enriching our virtual interactive product offerings and enriching cross-platform collaboration. And we are also expanding our international footprint, as discussed earlier. Growth margin in Q1 was 28%, down by 3.5% year-over-year, due to the following factors. First, given the continuous growth in music subscription revenue, Our revenue mix shifted, with revenues from online music, which generally have a low gross margin, accounting for a higher percentage of revenue. Second, revenues from audio live streaming, whose gross margin was relatively lower, also grew faster and accounted for a higher percentage of revenue. In addition, the decrease of advertising and subsidized revenues also impacted the margin. Meanwhile, our time to control our content costs with increased ROI requirements as well as lower revenue sharing ratios for social entertainment business has a variable impact on gross margin on a sequential basis. Now, moving on to operating expenses. Total operating expenses for Q1 2022 will only be 1.3 billion or 20% as a percentage of total revenue which was relatively stable comparing with last year. Take out the impact from acquisition of lazy audio, operating expenses as a percentage of revenues would have been slightly lower year over year. Selling and marketing expenses were on the 330 million, down by 51% year over year. During the quarter, we took measures to improve efficiency closely monitored on the ROI of each promotion channel, better utilized external promotion channels, and leveraged our internal traffic to attract users and promote our brand. General and administrative expenses were unbeaten, one billion, up by 15 year over year, including the impact of approximately unbeaten 44 million from the acquisition of Lazy Audio, D&A would have increased by 10% year-over-year. The increase was driven by a higher number of employees in R&D as we invested in product enhancement, technology innovation, and more direct product offerings. Meanwhile, we have been closely monitoring employee-related expenses and taking actions to improve hack-on efficiency. which started bearing fruit this quarter and resulted in a decrease in G and H basis on a sequential basis. Our effective tax rate for Q1 2022 was 12.2% compared to 11.5% in the same period of 2021. The increase in effective tax rate was mainly due to some of our agitators. are entitled to different tax benefits in 2021 and 2022. Our net profit was RMB $649 million, and the net profit attributable to equity holders of the company for Q1 2022 was RMB $609 million. Non-offensive net profit was RMB $939 million, and the non-offensive net profit attributable equity hold of the company was RMB $819.9 million. Non-advanced net profit margin was 14.1%. As of March 31st, 2022, our combined balances of cash, cash equivalents, term deposits, and short-term investments were RMB $24.9 billion. representing an increase of only 1.2 billion from December 31st, 2021. Looking forward, we will continue to focus on our core business and invest in new products and services, including non-form audio and international business. With a focus on investment returns and the future growth potential. Meanwhile, we will continue to effectively control high country-based costs and selling and marketing expenses to improve the overall operational efficiency. This concludes our prepared remarks. Operator, we are ready to open the call for questions.
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 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 queue. At this time, we will pause momentarily to assemble our roster. Our first question will come from Alicia Yat with Citigroup. Please go ahead.
spk10: Hi, good morning, management. Thanks for taking my questions. I have a question related to how the lockdowns and the COVID test impacted us. So if management can share or elaborate, you know, the overall tense and music, you know, how has been, for example, the prolonged lockdown in Shanghai's impact, any positive impact on the time span, on the online music sub, or even the social entertainment active user? Specifically, have you seen any spike in the user demand or time spent for your long-form audios or the podcast, and any negative impact from the spending willingness and also the spending behavior? Thank you.
spk06: Sure. In terms of traffic on the music side, As a result of various investments in the innovative features that we have been making over the past several quarters, particularly in QQ Music, we actually did not see any meaningful negative impact from the lockdown. So as we reported during the early remarks, we actually saw a year-over-year increase in the MAU with QQ Music. And then with regards to the social entertainment side, specifically with regards to WeSing and the online singing components of that product feature, we actually saw a slight increase in the online singing activities as a result of people spending more time with karaoke during their quarantines. However, with respect to revenues, There was a meaningful impact on the advertising revenue as a result of a large number of our advertising customers being in lockdown situations in major cities. And also, it had an impact on our live streaming revenues. because both the hosts are also affected in terms of the activities and affected the users' willingness to spend on live streaming.
spk10: Thank you.
spk01: Our next question will come from Alex Poon with Morgan Stanley. Please go ahead.
spk03: Good morning. Thanks, management, for taking my question. My question is related to our music art pool trend. Since beginning of this year we have started scaling back some of the promotions to balance between the growth of net ads and art pool growth and we are also launching new membership programs which has very high art pool. So how should we think about the art pool trend from second quarter, third quarter, fourth quarter onwards? Thank you very much.
spk06: Yeah, thank you. Well, I think let me kind of spend a minute to talk about the overall subscription revenue growth, because that plays in hand with the ARPU trends. In terms of subscription, our overall goal for subscription revenue year-over-year growth for this year is to achieve close to 20% for the full year. And there are two ways to achieve this objective. The previous approach was to focus on subscriber net ads of 3.5 to 4 million per quarter, which translates to approximately 20% subscriber growth, you know, counting from the end of last year. And then ARPPU, that is on a slight downward trend. The new approach that we'll be implementing going forward is to have a better balance between subscriber growth and ARPPU. and we'll work on improving the ARPPU through less promotions and other measures, such as Super VIP that we mentioned. And as a result, we expect ARPPU to increase going forward with Q1 as a base. For subscriber numbers, because of the better ARPPU growth, we can have lower quarterly net ads, less than the 3.5 to 4 million range that we previously talked about. But overall, still achieve a close to 20% growth in subscription revenue with a more healthy mix of ARPPU improvement and subscriber growth.
spk01: Our next question will come from J. King Heng with CICC. Please go ahead.
spk09: Hey, hi, good morning, management. Thank you for taking my question. And my question is related to Tencent ecosystem, especially cooperation with WeChat. Since we see a series of new functions have launched on WeChat, could management share with us the key directions of cooperation and what functions are particularly helpful? And wondering how does it help with the operational data? Thank you.
spk11: Yes, we have been cooperating closely with WeChat. Of course, some data may not be easy to understand, but there are some clear functional points, and we have already introduced some of the cooperation in the video number just now. From the basic service point of view, we have done a lot of cooperation since last year, from chatting and social media. We can set the status of WeChat directly from QQ Music, We are also working with WeChat. We will consider video collection in the future. However, we are not completely sure about the future. It is also related to our communication with WeChat products. However, based on the current capabilities of WeChat, This is also a very important attempt in our time. Another important point is about the video number. As I said, we focus on the music ecosystem of the video number. We work with the WeChat team to do this. We can see that the growth is relatively rapid. ah ah The concerts are all live broadcasted by our platform with the WeChat video number. We can also notice that in the concert part, due to some effects of the epidemic, there are some relatively clear business models. We can see that in the last concert, there has been an income of recruiters in the WeChat video number concert. This time, in fact, it may also be reflected in Zhou Jianlun. So in the future, we will continue to operate in the video distribution part of the video number. We really value the good combination of the music platform itself with the short video side. So there may be a better function later, but this is not necessarily clear. Because we can't fully determine the coordination of Tencent's side, it is a relatively clear one. In the normal short video mode, you will see a short video with background music when it is released. The background music can continue to be followed or listen to the background music. This ability is actually not available in the current short video number. This is also an opportunity for us to promote the video number for development. This is the progress of short video. As I just said, in fact, we may focus on promoting uh uh We can also see that there will be a very large number of users in it, because only in this large number of users will there be better business opportunities. So we also saw through the cooperation with WeChat, there was a relatively good development in the online concert, which is also what we might do this year. We hope that music can become a tool for mutual communication between friends. It can be a ringtone, a state, or an important ability to share one's current state with friends. This is also what we are doing with the basic platform of WeChat. The second part is that we are going to establish the music people on WeChat to work with them to operate the content of the short video of this kind of music. At the same time, we can do a good job of promoting our own music content so that more new songs can be presented very well. The third part is that in the live broadcast part, through the video number part, through the cooperation of artists, this is actually our I'll just spend a quick minute to do a short translation in the interest of time. We continue to deepen our cooperation with WeChat with the overall objective of
spk06: letting music to become an important part of the social use cases. And as Ross mentioned, there are a number of areas of our corporation. It includes things like in the Weixin profile, you can change the profile based on the music that you've been listening on. In the Weixin's audio core ringtone, you can now customize using music from QQ Music. During WeChat, you can directly share music from QQ Music. And then also with regards to video account, which we've mentioned in the prepared remarks, we continue to see very rapid growth in the operating metrics, such as daily video views. And with respect to live concert, that's also a key area that we are looking to expand our cooperation in. We have done a number of very successful live concert events, such as ones with Leslie Chung, Mayday, etc. And increasingly, these events would have a monetization element, such as ad sponsorships and others. So overall, we provide a very healthy music content vertical to help enrich the video account content ecosystem for Weixin. In return, which can provide us with very complimentary promotional capability, and we also help them with artist partnership to strengthen that partnership.
spk13: Okay, besides the content distribution and promotional capabilities that we mentioned that we work with together with Leasing, I think that there's one more important point is we are working with them really closely. on the program development side. So, such as the online concerts, we are not just distributing it, but we are also working on the details productions to ensure a high quality of online music concerts will be delivered to our users. So, this is the top priority of the TME team and also the V-SYNC video account team as well. We have been in the Tencent corporate umbrella for a long time and we work together peer to peer and side by side. So I think that we are really working together to create synergies and we are looking forward to have a lot more very high quality content will be provided through this platform. Besides the top tier artist concerts, we are also working on the long tiers and also some of the really high potential musicians content as well. So a lot more wonderful content can be expected in the future, and we have a lot more to come.
spk01: Our next question will come from Eddie Lueng with Bank of America Merrill Lynch. Please go ahead.
spk02: Good morning, guys. Thanks for taking my question. Could you tell me a little bit about the outlook for your live streaming pieces for the rest of the year, especially different recent regulations in hold taxation problem as well as protection of miners? Thank you.
spk06: Thank you. In terms of the outlook for the full year, In the last earnings call, we said that for the full year 2022, we were expecting total revenue year over year to decline, to be around mid-single digit. And obviously, that was prior to a number of recent regulatory announcements, such as ones you mentioned, as well as from the very recent impact from the pandemic measures. And without those impacts, obviously, the previous guidance would have continued to apply. However, following these recent pandemic measures as well as latest regulation, specifically the live streaming one that you talked about, which comes into effect in June, we're likely to see live streaming revenue be impacted for the rest of the year. Because the new regulation and the new restrictions around tip ranking as well as around PK, i.e., competition between performance during live streaming sessions, don't come into effect until next month. We're not yet in position to quantify that impact for you at this point. Because the details will depend on the actual detailed execution and the implementation of those restrictions. And we'll be working very closely with the regulator to figure out exactly, you know, how to best to be fully compliant. And then to offset some of these challenging pressures, obviously we will continue to invest in building new opportunities to mitigate. And these opportunities in social entertainment lie mainly around audio live streaming. where some of the restrictions recently announced are less prevalent in audio live streaming. And then secondly, with international expansion within our social entertainment business, that we see opportunities in Southeast Asia, Japan, as well as the Middle East. And then lastly, in the longer run, as we continue to build out our metaverse experience through our first pioneering virtual music playground, TME Land, we'll continue to host more and more exciting and interactive virtual events to pioneer a new form of social entertainment.
spk02: Got that. Thank you, Tony.
spk01: Our next question will come from Wei Tsui with UBS. Please go ahead.
spk08: Hi. Good morning, management. Thank you for taking my questions. My question is on margins. management mentioned about a few factors that affected our gross margin just now. So just wondering how should we think about the gross margin trending in the next few quarters? And also together with our focus on efficiency improving this year, any areas we see still have potentials for further cost saving and how will that impact the net margin for this year? Thank you.
spk07: Okay, growth margin is 28% in Q1, down by 0.8% sequentially. The main reason is advertising revenue dropped quickly, and that has higher contribution growth margin. During Q1, there are some positive factors on growth margin. First, revenue sharing ratio of social entertainment business have been controlled and decreased sequentially. Second, adapted to new macro environment, we increased the IRC requirement of content cost. We restructured the agreement with some music labels and see the positive feedback that have positive impact on our gross margin. And looking forward to 2022, we expect our gross margin will be increased in the next quarter if our social entertainment revenue can be stable. we will focus on increasing expenses of all business units and all cost items. And for the operating margin, cost and expense control to improve operation expenses is one of our top priorities this year. We have taken tight control on selling and marketing expenses in Q1, resulting in 51% decrease on a year-over-year basis. We will further monitor our eye of each promotion channel and manage the internal and external resources more effectively to improve efficiency of selling and market expenses. And for high-count management, we will continue to invest in new products and new business, such as long-form audio, international business, and music programs. Meanwhile, we will pay more attention to improve the profitability of business and products, such as optimizing organizational alignment and improving the headcount efficiency. And looking forward to 2022, we expect our adjusted net profit can be increased sequentially. Adjusted net margin can meet or above lecture of 2021. And our music business can break even on operational level. That's all.
spk01: Our next question will come from Robert Ronald Keong with Goldman Sachs. Please go ahead.
spk04: Thank you. Thank you, management. I want to ask on the pricing side, on subscription, given that the APU has fallen over the past, sequentially over the past few quarters. So with the COVID impact, with the macro impacts, Yet, we do think the competition has been quite rational, so we want to hear about the pricing trend outlook. When will we see a potential stabilization in ARPU for subscription, and also any iterations on long-term paying sub-targets? Thank you.
spk06: Yeah, I think as I previously mentioned, the new approach that we'll be taking with our subscription revenue is to have a better balance between subscriber growth and ARPPU growth. And even though our recorded ARPPU for Q1 saw a slight sequential decline, that was mainly a result of the lower number of days in Q1. If we adjust for that, the ARPPU for Q1 versus Q4 is actually fairly stable. And using Q1 as a base, we are actively working on improving the ARPPU through, obviously, less price promotion as well as through other measures such as bundling, super VIPs, and other measures as well. And so we'll be expecting the ARPPU to increase as a trend with Q1 as a base. And we talked about the subscriber as well because of our goal to achieve overall close to 20% of subscription revenue for the full year. And with a rising ARPPU, you know, we can have a slightly lower quarterly net ads, less than the 3.5 to 4 million range that we previously talked about, but still be able to achieve a close to 20% target of subscription revenue growth for the full year.
spk13: Yeah, I think we are encouraged by the strong growth of our online music subscription business, and especially under the macro headwinds. And also we are achieving a pretty good, the subscription rate is over 13% right now. I think that we will continue to pull in more high-quality content into the subscription plan, which helps us because we really learned that a lot of users really scratch the value of the music content so that they are willing to pay for it. In terms of the ARPU, we can also drive it by, for example, launching out some of the new VIP plans with new privileges to our users, which has a higher price tag than the regular one that we have. we can also have many different ways to drive the monetization. For example, we can also work with different business partners to work on the new channels for promotion as well. So I think that overall, the online music subscription business for TMEs, we are still developing in a really healthy manner. Wonderful.
spk04: Thank you, Manchester.
spk01: Our next question will come from Thomas Chong with Jefferies. Please go ahead.
spk12: Hi, good morning. Thanks, management, for taking my questions. Given the amount of cash that we have at the end of Q1, and when we look into our strategies going forward, how should we think about the priority in terms of cash usage? Are we going to do some more M&A in international markets share buyback or considering dividends. And may I also ask about the progress on the Hong Kong listing by way of introduction? Thank you.
spk06: Yep, thank you. In terms of our cash utilization, obviously I think we would be very disciplined and prudent with our cash management. We have announced that we'll continue and we intend to fully complete our share repurchase program by the end of this year. As of the latest date, just shortly before the earnings release, we have already spent over $670 million on share buybacks since March last year. And as a percentage of our current market cap, That's a very sizable amount. And at this stage, we have no intention to declare a dividend. With respect to M&A, we'll continue to be prudent and assess strategic opportunities both overseas as well as domestically in areas that are complementary to our core music as well as social entertainment businesses. And in terms of the Hong Kong listing, Last quarter, we talked about that we have already started in pursuing the Hong Kong secondary listing. We are currently in an active execution phase, and we will strive to move things forward in an expedited manner and obtain the necessary regulatory approvals in due course. And to the extent there are major developments, we'll be making the appropriate announcement at that time.
spk12: Thank you.
spk01: Our next question will come from Charlene Liu with HSEC. Please go ahead.
spk10: Hi. Thank you for the opportunity. I wanted to ask about new ad monetization model. I think in the last quarter you mentioned a freemium mode, which allows users to unlock music subscription services by watching ads. Can you share with us the progress on this in terms of user penetration and feedback from ad clients more generally? And do you have any long-term targets in revenue from this mold? Thank you very much.
spk06: Yep. Sure. Advertising overall saw some impact as a result of obviously recent regulation around the splash screen ads as well as the pandemic measures. You know, specifically, a large number of our large advertisers are actually based in major cities. And as a result, obviously, I think the advertising revenue has been affected, and we've seen a decline on a year-over-year basis in the first quarter. However, if we look at the sort of subcategories within our over-advertising revenues, We are seeing positive momentum in selected new ad formats. An example of that is the video incentive ad that you mentioned and that we talked about previously. We continue to increase the penetration rate of new ad products, you know, the video incentive ad specifically, which is gaining very positive momentum. And the revenue of this new format is growing sequentially despite the difficult overall ad environment. It's now a sort of low single-digit percent of our advertising revenue at the moment, but we expect it to grow and to become a much more meaningful portion over time. In the long run, despite the short-term challenges, we do expect a lot of potential in the advertising business, and we expect a recovery into the second half. We do see certain sectors that are stronger than others. For example, the FMCG kind of traditional consumer staple products continue to perform well. as well as online games, as people spend more time on online games during quarantine. And conversely, areas such as cosmetics or electronics and e-commerce in general have saw a bit of a weakness in the advertising verticals.
spk10: Well, thank you.
spk01: We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Mr. Tony Yip, for closing remarks.
spk06: Thank you, everyone, for joining us today. If you have further questions, please feel free to contact our investor relations team. And this concludes the call today. We look forward to speaking with you again next quarter. Thank you, and bye for now. Thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer