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spk01: Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group's second quarter 2022 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, Mr. Tony Yip. Please go ahead, sir.
spk04: Thank you, Alfredo. Hello, everyone, and thank you all for joining us on today's call. TME announces quarterly financial results today after the market closed. An earnings release is now available on our IR website at ir.pensamusic.com, as well as via Newswire Services. Today, you'll hear from Mr. Kushan Pong, 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. The company will discuss non-IFRS measures today, which we believe are meaningful metrics for evaluating our performance. Please refer to our earnings release and SEC filings for reconciliation of these measures to the most comparable IFRS measures. With that, I'm pleased to turn over the call to Tushin, Executive Chairman of TME. Tushin? Thank you, Tony.
spk05: Hello, everyone, and thank you for joining our call today. In June 2020, In June 2022, we celebrated the first anniversary of launching our dual-engine content and platform strategy. Over the past year, TME has continuously innovated business models and improved our all-in-one music entertainment content and product capabilities to better serve our users and partners. Meanwhile, facing the compact and evolving industry landscape, we continue to explore music's intrinsic commercial and cultural value. As always, we try to nurture our music ecosystem and foster the sustained, healthy development of China's music industry. On the content side, we steadily enriched our original content production capabilities. To that end, we launched a new smart music assistant functionality in May, enabling creators to quickly make decisions through our proprietary PDM predictive model at key stages of the music production process, such as demo screening and market appeal potential evaluation. Each of our tools facilitates more efficient production of high-quality work, evidenced by thousands of original songs produced and streamed more than 100 million times in the second quarter. Notably, Blessing of the Three Lifetimes, San Sheng Shan Xin, a song by Hai Lai Ah Mu, dedicated to his beloved partner, was a blockbuster that we produced, promoted, and helped to enlist on the variety show The Treasure of the Void. It dominated major music charts and generated huge social media buzz, comprising over 2.5 billion views, and 350 million streams in the second quarter. Meanwhile, we continue to refine our original content catalog, focusing on key verticals such as gaming and hip-hop music. In the second quarter, we collaborated with popular game titles, including Honor of Kings, League of Legends Pro League, and Peacekeeper Elite, He Ping Jing Ying, among others, and worked with well-known artists including Angela Zhang, Zhang Shao Han, Jim Shao, Shao Jing Tang, and Xing to produce 15 chart-topping game songs, notably the theme song of the Honor of Kings game character, Shang Guan Er, sung by Yisa Yu, Yu Kewei. has achieved the highest number of first-week streams among all QQ Music game songs released in the first half of 2022. What's more, in the trendy hip-hop genre, we cooperated with the NBA on its 75th anniversary album, the title single, Time to Shine, Re Ai, performed by Chinese artist Lei Zhang, Zhang Yixing, and American pro basketball star Nick Young. became the first Chinese theme song to appear in the NBA Finals. Next, through Tencent Musician Platform, we spared no efforts to cultivate a vibrant community of indie musicians while creating a positive social impact. Tencent Musician Platform continues to empower musicians with a wealth of online and offline promotion capabilities and monetization avenues. In the second quarter, we introduced a new service for our musicians to easily master musical work globally to over 150 popular platforms such as Spotify and YouTube with a single click, which has already brought 190,000 songs by over 10,000 musicians to overseas audience as of the end of the second quarter. KUGO also now allows musicians to publish their songs easily on mobile phones and to self-host pay-per-view live events with merchandise sales and backers. For instance, we recently hosted a paid online birthday party for musician Yu Yan, with a rich pipeline of additional parties yet to be unveiled. What's more, as a long-term support program for musicians, our four-stage 2022 program launched the Open My series in April, which has already produced offline performances by over 70 groups of musicians across seven cities. Tencent Musician Platform also plays a pivotal role in exploring China's rich, deeply embedded social and cultural values through music works. Notable examples in the second quarter include First new trend in Chinese ancient style, 国风新潮, an album birthed by up-and-coming and top musicians who gathered to promote Chinese cultural food music. Second, My Girls, our music creation plan for female musicians designed to promote female independencies and self-awareness. Third, a Sino-French album, Music, 月色斑斓, a joint effort between our musicians, French musicians, and the French Embassy, which was showcased on the front page of Apple Music's recommendation list, further enhancing our musicians' international appeal. With our finger on the pulse of our users' preferences, we continue to zoom in on both trendy and time-honored music experiences to further enhance the quality and variety of music on our platform, as well as our reputation as the go-to destination for Q music verticals, such as classical, DJ, and hip-hop. They established strategic cooperative relationships with professional classical arts institutions, launched the KUWO's DJ for Everything plan, Wanwu DJ Ji Hua, and built up KUGO's new rap brand, Rap Tribalizes. Among other initiatives in the second quarter. One remarkable success was the 2022 hit single, She Can Do Magic, by DJ Little Fish, which dominated charts on many music platforms after its creator joined the DJ for Everything plan, achieving nearly 700 million streams by the end of the second quarter on TME's platform. Moving on to TME Live, our comprehensive online merged offline performances brand was presented 132 high-quality live music performances since its debut two years ago. In the second quarter, in addition to online live concerts for Void Rank, Wang Yuan, among others, TME Live was also proud to breathe new life into two legendary series of recorded concerts by household-name artists Leslie Zhang, Zhang Wuerong, and Jay Chou , supporting the ultra-high-definition visual and sound restorations enhanced by AI algorithms for selective events. These two huge hits went viral and dominated the top trending list, accumulating over 100 million unique viewers within the Tencent ecosystem. and social media buzz of 6 billion views. Jay Chou's concert also set a new record in viewership for online concerts in the industry, and his artist merchandise, including two action figures sold through our Putao Mall and Tencent channels, achieved close to 10 million RMB in GMV in the second quarter. GMV Live not only serves as an online stage for artists and musicians, but also demonstrate our game-changing creativity offline. Through our TME Live in-house, live house tour, we are providing participating artists and users with immersive, interactive experiences. Early-starter artists, including Young Jack, Man Shu Ke, Red Paper, Bai Pi Shu, and Cafe Hu, held live events in the second quarter, and tickets for some events were sold out in just two hours. In summary, what matters most to music lovers, music creators, and the broader music industry are the primary areas where we will continue to invest and drive innovation. Showcasing our ambition to support the sustained growth of the music ecosystem in China That concludes the process 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. Ross, please go ahead.
spk00: Thank you, Carson. Hello, Avera. Moving on to our platform strategy. In the second quarter, we continued to innovate our four pillars of entertainment, namely lacing, watch, sing, and play to provide our users with a stage to express their musical taste and build their sense of identity on TME's platform, which in return deepens their recognition of and connection with our products. In terms of listening, in the second quarter, we added a variety of refined product features to provide a more professional music streaming experience. For example, we pioneered homepage lyrics, which displays synchronous lyrics on the mobile home screen when streaming songs. We also rolled out a premium song feature, supporting real-time song quality enhancement. which is now available via our super VIP membership and has been activated by 85% of these subscribers. What's more, to further improve users' music discovery efficiency, in the second quarter, QQ Music launched the Radar Mode, Radar Mode Shi, on the homepage, which recommends songs to users based on their favorites. with the help of personalized algorithm registration. Contributing to new hype for QQ Music recommendation penetration. In addition, Google wrote out a new search feature allowing user to easily find the different version remix of the same song. We also added features such as looped playback of our selected song section, . and the self-defined music chart preferences to create a more personalized music streaming experience. As for watch, we shall add another dimension to users' immersive music entertainment experience. Based on our understanding of users' preferences The music-related video content we provide to Weixin video accounts is very popular among users on Weixin, ranking among the best in the music category of Weixin video accounts. We also continue to work with Weixin video accounts during the second quarter to boost our promotion capabilities, especially for Indian musicians. The number of our musicians with a connected vision video account continued to grow by double digits quarter over quarter. Meanwhile, our products also released new updates to strengthen visual experience, including one, customize the dynamic images on personal playlists, and two, focus station, 专注电台. which provides a video-enhanced listening experience across three scenarios, studying, sleeping, and meditation. The third pillar of the unique music entertainment experience we provide is SYNC. SYNC launched a major version upgrade in July to expand the experience of SYNC from mirror production of audio work into multi-dimensional performance experience. In the second quarter, we rolled out a 3D avatar functionality to serve as user's identity card in the visual world and allow them to generate dance moves when recording and singing in their dressed-up avatar on stage. Additionally, in the second quarter, We provided innovative singing tools to stimulate users' interest in music creation as participation formats evolve. We think preparing the industry's AI-based voice synthesis technology, allowing users to create a visual thing based on their own voice, which improved upon its likeness to its owner as it received an additional input. Google also unveiled its first singer in the voice of Gen Z celebrity Yang Chaoyue, enabling users to synthesize songs with just one click. Riding on the trend of virtualization, we also enhanced our play elements by extending our use cases and the monetization opportunities across music-based virtual interactions. In the second quarter, TME Land, our immersive virtual theme park, teamed up with Adidas Originals and hosted China's first virtual rap concert, landing on the OZ feature, OZ Wei Lai Yin Yue Hui, including sensational avatar by popular rappers Jay Park, and MC Jin, as well as virtual shoppable fashion stores. The sponsor even registered over 7 million views, setting a new recorder in view shape for PME land. We also continued to upgrade our VR album rooms, which combine listening to songs which are virtual exhibition hall for artists. A total of 13 stars have settled in our VR album room since then, including singer and actress Cindy Wang, Wang Xinling, and the musician Liu Shuang, who joined in the second quarter. As a pioneer in the application of innovative listening, watch, sing, and play functions, QQ Music has continued to improve its emails year over year, a testament to our young content operations and advanced future interactions. Our long-form audio serves to round out our music portfolio while simultaneously differentiating our content. Notably, we have been strengthening our brand appearance in sleeping-eyed content, one of the fastest-growing categories on QQ Music. We have teamed up with professional organizations, music labels, musicians, hotels, and other ecosystem partners to provide diverse professional sleeping eye content made by AI or real-world celebrities and deliver sequential growth in users' skills, streaming volume, and time spent in this vertical. In addition, in the second quarter, we continued to enhance our collaborations with Tencent Video to successfully promote popular audiobooks and associate IPs such as the third season of Wudong Qian Kun and Qie Shi Tian Xia. As its beloved dramas hit the airwaves, GM's long-form audio offers of the same title enjoyed a massive upswing in their streaming volumes. With that, I'd like to give the floor to Tony to review our business operations. Tony, please go ahead.
spk04: Thank you, Ross. Hello, everyone. In the second quarter, our online music MAU was $593 million, down year-over-year primarily due to reduced marketing spend. However, subscription revenue continued to deliver robust year-over-year and quarter-over-quarter growth. along with paying user growth and a sequential rebound of ARPPU. Meanwhile, we continue to strengthen engagement among our core user cohorts by deploying richer content, innovative product features, and continual new iterations. Our IoT service MAUs continue to achieve double-digit growth year-over-year as we enrich the use cases of our product and established collaboration with a broader group of partners. For example, we now partner with the top 50 passenger vehicle and top 15 electric vehicle manufacturers by sales, bringing car owners the ultimate in-vehicle music enjoyment through new features such as Dolby surround sound and thousands of customized sound effects. In addition, Through our partnership with Little Genius Smartwatch , which is mostly used by students, WeSing's MAU in the smartwatch segment grew triple digits year-over-year. Despite the macro headwinds that weighted on our online music services revenue in the second quarter, subscriptions maintained its growth trajectory, with 18 percent subscription revenue growth year-over-year. We are also confident we can sustain the ongoing rebound of our ARPPU while continuing to boost paying user growth during the remainder of this year. As a result of macro changes and the resurging COVID-19 outbreak in the second quarter, our advertising revenue softened year over year. However, it rebounded quarter over quarter. driven by the June 18th e-commerce sales promotions, as well as ad sponsorship opportunities arising from TME Live and TME Land. In addition, we consistently innovated to build a diversified advertising portfolio. Our incentive ad-based free listening mode is making good progress. And during the second quarter, we launched a host of new advertising formats and infantries on music charts, search pages, banners, and playlists, among others. As we have strengthened our advertising monetization with additional avenues, we also successfully attracted well-known brands such as Sprite, Beijing Hyundai, and Pepsi to sponsor a variety of customized online and offline live events recently, attracting participation by dozens of popular artists and aspiring musicians in these highly engaging events. We continue to deepen our content partnership to enrich the user experience and explore additional monetization avenues in digital music. First, accompanying the launch of Jay Chow's latest digital album, Greatest Works of Art. We tailored diverse activities for his fans such as the customized vinyl record player interface and sound effects, artist merchandise, and interactions in Jay Chou's virtual room. Copies sold exceeded 6 million by the end of July, marking another digital album blockbuster on our platform. Next, in the second quarter, we entered into strategic partnerships with Time Fung Jun Entertainment, the music label of TFBOYS and Teens in Time, 时代少年团, Avex China, and the talented female artist Xin Liu, Liu Yuxing, among others, where our platform has a head-start period on their latest music, customized artist merchandise, or unique artist-fan interaction events. Third, we joined hands with YH Entertainment Group, Yuehua Yule, a well-known artist management company to launch artist subscription, Chaoji Dingyue, packages for its 13 well-known artists such as Meng Meiqi and Justin Huang, Huang Minghao, providing customized audio and video content for their subscribing fans. We also doubled down on our efforts to build a young and trendy cultural community to expand our GNC user base. In the second quarter, our Campus Musician Cultivation Plan, VOLA Campus, 你好大学生, organized the Wish for a Happy Graduation 祝他毕业快乐 event and teamed up with artist 毛不易 and campus musician 杨格 to release the song Small World 小世界. These initiatives brought inspiring messages to the first group of graduates born in the 2000s, resonating strongly with the new graduates' demographic. What's more, we began to bring offline music festivals back to our audience in the second quarter, such as KUGO's KUFAN live performance parade, which debuted in Hangzhou in May, and the first WAVE music festival partnered with SAIC Audi in June. encouraging online live streaming and offline interactions between fans and musicians. These events are just the beginning of our return to live performances. We have an exciting lineup of offline experiences planned for the coming quarters. Now, let's turn to our social entertainment services. If MAUs sequentially improved while paying users declined year-over-year, due to competition and industry adjustments. We will continue to improve our competitiveness through ongoing product innovations and new initiatives such as audio live streaming and virtual interactive product offerings. For WeSing, we launched its latest version with tools to energize the singing experience while lowering the barrier to participate. For instance, the upgraded one-click voice enhancement feature, Yi Jian Mei Ying, customizes voice improvement based on the song's rhythm, as well as uses voice volume and timbre, producing a more natural effect. Along with other upgrades mentioned earlier, these efforts paid off, as evidenced by the strong double-digit year-over-year expansion in karaoke room penetration and user time spent in the second quarter, in addition to the year-over-year growth in recordings, penetration, and user time spent. In the second quarter, WeSing also capitalized on the success of the hit song, Lonely Warrior, Gu Yongze, which debuted on TME and achieved 4 billion streams across our platform since its launch, with a nationwide cover contest to convey positive cultural power to school students attracting a broad group of participants online. In response to the competition faced by traditional live streaming services, we continue to expand our content verticals and bring more differentiated content to improve user experience. QQ Music live streaming continued to expand the scale of its audio live streaming content offerings, where it expanded content across sleeping aid, studying, and commuting use cases received wide user acclaim. In the second quarter, it also collaborated with Tencent Musician Platform to organize 39 sessions of the real-time live singing events, Meet, Let's Sing, 见面吧首唱, connecting musicians and their fans and gaining over 10 million viewers. These efforts contributed to double-digit growth in the average daily number of hosts and viewers as well as a year-over-year increase in QQ Music live streaming revenue in the second quarter. We were also successful in exploring overseas markets with audio live streaming activities, such as chat rooms, leading to strong revenue growth in overseas markets in the second quarter. We also delved into the virtual idle and animation live streaming verticals favored by the young generation, WeSync added a new Live2D function, which captures hosts' expressions and movements in real time and allow the hosts to use an avatar for live streaming and multi-person interactions. Additionally, Google's live streaming hosts, together with its self-owned virtual idol, Shanbao, and Tencent Animation and Comics, Pengxun Dongman, jointly organized a number of events to recommend popular comic IPs to ACG fans through live streaming, during which events participating hosts recorded triple-digit growth in user time spent and the number of viewers of their live streaming routes. Last but not least, I'd like to close with a word about our social responsibility initiatives. On Children's Day, we worked with Tencent to launch a Little Red Flower charity concert, Xiao Hong Hua Gong Yi Ying Yue Hui, uniting over 30 groups of artists and musicians in a heartwarming live concert for children with special needs. We also partnered with Lamar to host a special public welfare concert for World Oceans Day, launching a welfare song, Blue New Life, Wei Nan Xing Sheng by Mao Bu Yi, to create environmental awareness around the marine ecosystem. We're proud of these efforts to leverage the emotional power of music to advance our social commitment. To conclude, as our dual-engine content and platform strategy move forward, we will continue to use technology to elevate the role of music in people's lives and support the sustained development of the music industry with our strong and growing toolkit. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.
spk06: Thank you, Tony. Hello, everyone. Next, I will discuss our results from a financial perspective. Our total revenues for Q2 2022 were $6.9 billion, down by 14% year-over-year and up by 4% sequentially. In the second quarter of 2022, Our IFS net profit was RMB 892 million, and the non-IFS net profit was RMB 1.07 billion, which represented a sequential increase of 13% as a result of our effective cost control and improved operating efficiency. In Q2 2022, we are more focused on the return of the promotions for subscription service and continued to strengthen content operations. We achieved costly growth in subscription service. Music subscription revenues grew to RMB 2.11 million, up by 18% year-over-year, and by 6% sequentially. Online music paying users grew to 82.7 million, up by 25% year-over-year, separating 2.5 million net ads sequentially as we benefit from expanded sales channels and paying users' loyalty resulted from the ongoing efforts we made to cultivate users' willingness to pay for music and high-quality content and services we provide. Month up was RMB 8.5, representing a decrease from RMB 9 in the same period last year. and an increase from 8.3 in the first quarter of this year. Our strategy to grow our music business in a healthy and sustainable way has started to bear fruit and contribute to the continuous growth in music subscription revenue. Revenue from advertising decreased year over year as advertising business continued to be negatively impacted by the industrial adjustment ended the outbreak of COVID-19. However, advertising revenues grew sequentially as advertising businesses began to recover moderately from the outbreak of COVID-19 since June. The June 18th e-commerce sales promotions also contributed to the sequential increase in advertising revenues. We are proactively expanding ad inventories, optimizing ad displays, and rolling out innovative advertising formats to manage these challenges. We remain confident about long-term growth potential and expect advertising revenues to continue to recover moderately in the second half of 2022. Social entertainment services and other revenues will arm the full billing, down by 20% year-over-year, As we face an evolving micro-environment and intense competition from other platforms to adapt to the changing environment and to stabilize revenue skew, we have differentiated our content offerings by enriching our visual interactive product offerings and enrich cross-platform collaboration. Meanwhile, we continue to invest in audio live streaming and extend our international business resulting in growth in revenues from audio live streaming and overseas business year-over-year and sequentially. Growth margin in Q2 2022 was 29.9%, down by 0.5% year-over-year because the decrease in our total revenues outpaced the decrease in our total cost of revenues as some of them remained fixed in nature. Growth margin improved statistically, resulting from our effective control on content costs, including revenue-showing fees for live streaming business and improved operational cost efficiency. We will continue to take measures to manage costs effectively and improve overall efficiency. Now, moving on to operating expenses. Total operating expenses for Q2 2022 were only 1.4 billion or 20.5% as a percentage of total revenues, down by 0.4% from 20.9% as a percentage of total revenues in the same period last year. Including the impact from the expenses related to our application for sector listing, operating expenses as a percentage of total revenues would have decreased by 1% year-over-year. Selling and marketing expenses were on the 303 million, down by 55% year-over-year. During the quarter, we continued to take measures to improve evasives, closely monitor the ROI of each promotion channel, better utilize the external promotion channels, and leverage our internal traffic to attract users and promote our brand. The reduced marketing spend resulted in loss of some casual users and impact our music and AUs negatively. However, our music subscription service continued to grow rapidly with health growth in paying users and the level of user activity. General and administrative expenses were on the 1.1 billion. up by 11% year-over-year, including the impact of approximately RMB $44 million from the expense in Q2 related to our application for second listing. G&A would have increased by 6% year-over-year. We continue to invest in product enhancements, technology innovations, and more diversified product offerings. as well as closely manage employee related expenses by improving headcount efficiency. Our effective tax rate for Q2 2022 was 12.2% compared to 11.5% in the summer period of 2021. The increase in effective tax rate was mainly due to some of our entities are entitled to different tax benefits in 2021 and 2022. For Q2 2022, our net profit was 892 million, and the net profit attributable to equity holders of the company was 856 million. Non-authorized net profit was 1.07 billion, and the non-authorized net profit attributable to equity holders of the company was 1.03 billion. Non-RFI's net profit margin was 15.4%. As of June 30, 2022, our combined balances of cash equivalents, term deposits, and short-term investments were RMB 25.8 billion, compared with RMB 25.9 billion as of March 31, 2022. During the three months ended June 3, 2022, net cash generated from operations was RMB 1.2 billion, and cash used in share repurchases was RMB 669 million. We also incurred a net cash outflow of RMB 497 million for acquisition of shares in various subsidiaries and associates. Such combined balance was also affected by the change in the exchange rate of RMB to USD at different balance sheet dates. Looking forward, we will continue to focus on our core business and invest mindfully in new products and services, including long-form audio and international business to maximize our investment returns and the future growth potential. Meanwhile, we will continue to implement cost controls in areas including revenue-assuring fees for social entertainment business, content royalties, operating costs, account-related costs, and selling and marketing expenses to improve our 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 touchtone 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 may reenter the queue. At this time, we will pause momentarily to assemble our roster. Our first question will come from Alex Poon with Morgan Stanley. Please go ahead.
spk02: Good morning, management. Congrats on a very strong quarter on the profit side. My question is related to gross margin. The gross margin is up about 2% each point on a sequential basis in Q2. And despite the social revenue was flat on a Q2 basis, Can management explain on each of the segment, gross margin trend from Q1 to Q2, and how should we think about the second half? Thank you very much.
spk06: Okay. About the gross margin, this quarter, we take more measures to control cost and improve operational efficiency. And we have started to bear fruit. Gross margin in Q2 increased 2% sequentially. The following factors have positive impact on gross margin. First, revenue sharing ratio of live streaming have been controlled and continued to decrease sequentially. And second, we increased the IRC requirement of content cost. We distracted the agreements with some music labels and saved positive feedback that have positive impact on our gross margin. to optimize the technology and operation strategy related to bandwidth and storage capabilities, and improved the utilization of our service and equipment. Our operational costs decreased sequentially. And fourth, subscription revenue growth and advertising revenue recovery also have positive impact on gross margin. And we will continue to focus on increasing efficiency of all business units and cost items. And we expect our loss margin will be increased in the next quarter.
spk01: Our next question will come from Lei Hang with Bank of America. Please go ahead.
spk11: Hi, thanks, management, and congrats on the solid results. My question is mainly about your music art pool. Notice the Q&Q rebound of music art pool, and any more color you can hear behind it, and how should we look at the art pool trend going forward? And related to this, can you give us more color on a super VIP, like adoption rate, user feedback, and the contribution to the art pool? Thank you.
spk04: Yeah, in terms of the ARPPU, we saw a sequential improvement from last quarter's $8.30 RMB to this quarter's $8.50 RMB. And that's a result from more effective promotions as well as more discipline in the way that we manage the marketing spend. Our focus, as we mentioned last quarter, is on the quality of the subscription revenue growth as the overall target. In that, we are aiming to both grow the paying user as well as the ARPPU at a healthy pace. And we've been able to achieve that in the second quarter. And we expect this level of a growth trend for both our subscribers and ARTPU to continue into the rest of the year.
spk01: Our next question will come from Alex Yeo with JPMorgan. Please go ahead.
spk03: Hi, good morning, Benjamin. Thank you for taking the question. I have a couple of questions on the music subscription side of the business. Can you guys share with us your progress in terms of pushing up the paywall? What percentage of the company now is behind the paywall? And what target are you aiming to achieve by the end of the year? And also regarding the non-paying users, their user experience is becoming inferior as they are able to listen to less and less of the content. What do you plan to do with these guys? Are you going to let them go, or do you want to engage them through other strategies and features? Thank you.
spk04: Sure. Well, first of all, in terms of our subscription package, obviously I think we continue to be on track. As we have more and more discussions with our label partners to add more content, into the premium package. And that progress is going well. And we expect there to be more content partners to be added to the paywall in the second half. So I think we will talk more about that as that bears fruit. And then in terms of the balance between free user experience and the paid user experience, we mentioned previously and we also touched upon it this time is the incentive ad-based free listening mode. You know, we're seeing very good progress on that type of free listening mode. We think that's a good way for us to strike the balance because there will, you know, as with any entertainment platform online, you're bound to have a portion of users with very low probability of conversion to become a subscriber. and yet we need to find a way to be able to monetize. And so the incentive ad-based free listening mode is a good way for us to do so. Right now, within our advertising revenue, close to 10% of that on a run rate basis is generated by the incentive ad-based free listening mode. free-through-incentive ads, more correctly speaking. So I think that's growing quite well. So we continue to expect that to serve as the balancing factor to provide a good free user experience.
spk01: Our next question will come from Alicia Yap with Citi. Please go ahead.
spk10: Hi, good morning, management. Thanks for taking my question. I have a question related to the advertising. So can management share with us the latest sentiments among the advertisers? Which industry vertical actually has recovered strongly and which industry verticals are still leaning quite weak? And then when can we expect the ad revenue to experience the re-accelerate on the year-over-year basis, re-accelerate the growth again? And thank you.
spk04: Yeah. Obviously, I think in the first half, you know, as a result of industry adjustments on the splash ads, as well as the pandemic measures, advertising revenue was quite weak in the first half. However, as the pandemic improves, as well as the macroeconomic situation improves, we are starting to see moderate recovery of the advertisers' demand. Coupled that with our ongoing effort to expand our advertising format, as well as advertising infantries that we've mentioned, we are expecting to see a recovery of the advertising revenue in the second half. In addition to kind of the ad formats that we mentioned, such as incentive ad or infantry that we mentioned in the various parts of the platform, we are seeing increasing amount of interest by ad sponsors, that are particularly interested in interactive events, events that we organize both offline and online, such as ones that we do on TMD Land or through TMD Live or other sponsored events with Pepsi, Sprite, and Beijing Honda, et cetera. In terms of verticals in this quarter, You know, we see decent demand recovery, particularly from e-commerce, given the e-commerce June season. The consumer stable, specifically categories such as food and beverages, as well as the automobile industry.
spk01: Our next question will come from Sheking Zhang with CICC. Please go ahead.
spk09: Hey, thanks, management, for taking my question. And my question is related to Tianyi Live. We saw some other short video platforms have launched online live performance during the summer. So just wondering how do we position Tianyi Live and how do we think about the computation landscape with the strategy and monetization plan for the experience? Thank you.
spk05: Okay. For ClearMe Live, I think we have a very good plan in having arrangement on not just for the top-tier artists, but we are also growing the long tiers, the other different verticals as well. We have a really good cooperation with the racing video accounts, so we also strengthen our distribution capabilities for our live projects. As we mentioned during our call, we mentioned about some of the top-tier artists like Jay Chou and also Leslie Zhang, that we are trying to do a new release of their traditional, their very popular classical music. concerts and it aroused a lot of interest from the users and we also bring in our technology advising that we help to improve the quality of the overall video and also the audio qualities so to ensure a better user experience for our users we have continued to bring in some of the artists for example interactive capabilities to demonstrate in our tmb live program as well So we have a very good confidence, especially we are doing online and offline collaborations for our concerts. So all of this will continue to strengthen our TME live projects, and we're definitely seeing that there's going to be some more great programs to come in the future.
spk01: Our next question will come from Wei Zhang with UBS. Please go ahead.
spk07: Good morning, management. Thank you for taking my question and congrats on the earning speed this quarter. My question is around the online music subscription or paying user addition. We see that this quarter the net paying user addition was a little bit lower than the previous run rate given our focus on the quality growth and also seek the balance between paying user and ARPU. So just want to check How should we think about the run rate of the paying user addition for the second half also next year? And given our focus on the marketing spend to strengthen our cost controls, will that impact the paying user retention? Thank you.
spk04: Yeah, as we mentioned before, our overall goal for the subscription revenues for the online music is to see a healthy growth in overall subscription revenue and not be overly leaning on just either the subscriber or the ARPPU. So we want a healthy growth in both metrics because we think the whole industry will benefit from focusing more on the quality of service as opposed to just on price. And we do believe there's a lot of value in the music subscription service that we offer, and that our continuous effort to cultivate the user's willingness to pay for the subscription service, that continues to see good results. And so by having more of a balanced approach, we lay a stronger foundation for the long-term growth, which we continue to see there to be a strong potential. Obviously, at the same time, you know, we are very focused on expanding on the privileges and the service that we offer within the subscription plan. So, you know, we mentioned that we continue to add more and more privileges, such as, you know, this quarter we mentioned about the super VIP, you know, whereby, you know, for 30 renminbi a month, which is double the price of a normal premium subscription, subscription, you get a lot more, you know, such as you get access to a large number of digital albums. You know, you get access to super high-quality sort of music effects, ones that Ross mentioned. You know, you get access to the We Sing membership. You get access to the Long Audio membership, et cetera, et cetera. So we are seeing... It's early stage, but we are seeing good traction as we roll that out. And people are adopting and they are appreciating the privileges that we're putting in to those Super VIPs. So, for example, the premium sound quality feature, that's adopted by over 80% of people who have subscribed to the Super VIP. And so that also helps us improve the ARPPU in addition to having, you know, more discipline in cost control as well as promotional spend.
spk01: Our next question will come from Jen Howell with PH Capital. Please go ahead.
spk08: Yeah, morning management. Congratulations. That's a good quarter. The question is related to your much more grant strategy with Tencent. And you guys have already started to do advertising, member, and content distribution. And I wonder, you know, for our newly added members, how many, what percentage of them come from Tencent Channel? And going forward, as Tencent continues to add its new functions, like Tencent Shiki, et cetera, et cetera, how are you guys going to have a, how to say, long-term cooperation and to enable you guys to have more sustainable users instead of, you know, only, instead of driven by this hit albums or artists? Thank you. That's my question.
spk04: Yeah. We have very extensive collaboration with Tencent. I can start, and perhaps Ross can add additional comments as well. We have extensive collaboration with Tencent, both on the content production side as well as on the music promotion side. You know, on the content production side, we mentioned that we Almost every quarter, we showcase original songs that are produced either for some of the Tencent IPs, such as selected IPs in Tencent Games or some of the IPs from Tencent Videos, for example. And many of these original content that are either produced by us or co-produced together, they see very good results in terms of popularity on the music charts. That's kind of one big bucket of areas. The second big bucket of areas are in the form of content promotion. You know, a prime example of that is, you know, our deepened collaboration through the Weixin video accounts. You know, it's an important means for us to enrich the music video-based content. You know, all of our platforms, you know, be it QQ Music or Kugo or Kuwa, we promote a lot of music-related video content through Waysing Video Account. In fact, the content that we provide is ranking amongst the best in the music category within the Waysing Video Account sort of music vertical. And so that serves as a way for the music lovers to discover music, after which the users come back to TME platforms. to continue to explore and enjoy music in a more deepened way. And then finally, while we don't rely on Tencent channels at all from a user perspective, given our music platform is already very established and we've been in operation for many years, have very established brands, so most of our traffic is organic, We do have more and more collaboration, for example, through our partnership between QQ Music and WeChat, WeSing. There are more product features, collaborations, such as you can now set ringtones on WeSing using music provided by QQ Music. Obviously, you can go back to QQ Music to listen to the songs. You know, you can update your personal profiles. using songs provided and being listened to by Onkuku Music, et cetera. So we are seeing more and more collaboration, and we expect that to continue. We are now approaching the end of the conference call.
spk01: I will now turn... The call over to your speaker host today, Mr. Tony Yip, for closing remarks.
spk04: Okay. Well, thank you very much for joining our second quarter earnings call. If you have further questions, please feel free to contact the investor relations team. And this concludes today's call. We look forward to speaking with you all again next quarter. Thank you and goodbye.
spk05: Thank you so much. Goodbye.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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