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spk04: Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group third 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.
spk00: Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. TME announced its quarterly financial results today after the market closed. Today, you'll hear from Mr. Kushan Pang, our executive chairman, who will start the call with an overview of our recent updates. Next, Mr. Ross Liang, our CEO, and I, Tony Yip, a CSO, 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 IFRS in our earnings release and SEC filing. With that, I'm pleased to turn over the call to Kashin, Executive Chairman of TME. Kashin?
spk08: Thank you, Tommy. Hello, everyone, and thank you for joining our call today. I would like to begin by acknowledging all of the hard work that went into our successful listing on the main board of the Stock Exchange of Hong Kong under Stock Code 1698 on September the 21st. In addition to our primary listing on the New York Stock Exchange, we are truly grateful to our users, employees, partners, and investors who have been with us along the way and helped us reach this important milestone. From this vintage point, we plan to further advance our dual-engine content and platform strategy to support original content on our platform, expand our innovative business models, work with more partners to tap into the music market's potential, and fulfill our social responsibilities, thereby comprehensively promoting the healthy, diverse, and sustainable development of China's music industry. Providing differentiated content particularly by way of original content production, is our bread and butter, and further explains our already large and diverse content library that appeals to cross-generational audiences. To that end, in the third quarter, we rolled out a voice synthesis technology to quickly and vividly replicate a singer's voice for use in original songs of any style and language. Utilizing this patented technology, we have developed the synthetic voice in memory of legendary artists such as Teresa Teng, Deng Yijun, and Anita Mui, Mei Yanfang, and create an AI singer lineup with the voices of trending stars such as Yang Chaoyue, among others. As of the end of the third quarter, we have launched over 1,000 songs with AI synthetic voices. The female song's version of today, 金天女生版, has become the first song by an AI singer to be streamed over 100 million times across the internet. Additionally, we paid tribute to Anita Mui by creating an AI voice based on hers for the 2022 Film Charity Song of the New Sunshine Charity Foundation. May You Be Treated Gently by the World, Yuan Ni Bei Jie Xi Jie Wen Rou Yi Dai, which is also the holding music for today's earnings call. It was well received by a wide range of listening business cohorts, showing the broad reach of our social commitment to technology and music. As the digital music industry thrives, music lovers' tastes in music have grown increasingly varied. We are thrilled that the concept album, Agnes Farewell, by our Indian musicians, was recognized as the monthly pick by Pitchfork, a worldwide authority in music reviews. In the third quarter, we also produced a number of original singles which went viral on the internet and each record in over 100 million streams. such as Heard From You, Ting Li Shuo, Bai Yu Dong Yuan. All these achievements demonstrated our ability to expand the influence of our original work by bringing them to both domestic and overseas audiences. Furthermore, in deep collaboration with the broader Tencent ecosystem, we explored the chemistry between music and popular IPs, including these of legends, virus, 英雄聯盟, 手游, Q2 Speed Mobile, QQ Feature, and Assault Fire, ,, along with renowned artists such as Stephanie Shun, ,, Angela Zhang, and Jason Zhang, to create indie gaming music in the first quarter. Through these stimulating collaborations, as well as both online and offline promotions, we have further raised the popularity of indie music on our platform. Next, let's look at the Tencent Musician platform. Leveraging our robust technology to innovate and augment our one-stop service offerings for musicians, in the third quarter, we launched a new feature, TME Artist Album. This feature helps musicians release digital albums on all TME platforms at the prices they set with automatically generated sales pages. By the end of the third quarter, 281 of our musicians had utilized this new feature and received the income generated by their album sales, shortening the release time and lowering the barrier for them to forge closer connections with their audience. Second, we continue to launch a broad array of activities and initiatives to support our musicians and help them shine on stage. In the third quarter, We discovered Yilong Wang, Wang Yilong, a young hip-hop musician, providing him with comprehensive guidance from song selection to wardrobe, styling, and personal expressions, and signing him up for the Sing China China Hao Xiang Yin variety show, jump-starting his career as a musician within just two months. What's more, in the third quarter, We also recommended a diverse group of our musicians, including to various shows and events hosted by TME and sponsored by Sprite, SAIC, Audi, and Jingdong. Among others, demonstrating our commitment to providing substantial promotion and commercial resources for our musicians. These endeavours empower our musicians to build a full lifecycle career while also facilitating their communication and connection with their fans. By the end of the third quarter, we have served a total of 350,000 musicians, which also allowed us to attract more active and vibrant creators to our platform. further pushing the prosperity of our ecosystem. Our content strategy also includes a keen eye towards improving the diversity of collaborations with top music labels and artists, both domestically and internationally. In the third quarter, we teamed up with YG Entertainment, Fei Wang, Wang Fei, Woi Wang, Wang Yuan, Lei Zhang, Zhang Yixing, and others to provide our users with benefits in the 30-day head start period following the release of their new songs. Notably, Jay Chou's digital album, Greatest Works of Art, recorded sales of close to 7 million copies by the end of the third quarter. Whereas Lay Zhang's latest EP West, Taylor Swift's new pop album Midnight, And Blackpink's digital single Pink Venom and album Born Pink also achieved dazzling sales, reflecting our users' pent-up demand for user engagement with artists from home and abroad. Ongoing cooperation with professional institutions and industry partners also helped bolster our reputation as a go-to destination across diverse music verticals, such as gaming, classical, and electronic music. In the third quarter, we cooperated with the music label of NCPA Classics, 国家大剧院音乐场台, among others, to debut head-start balances for their releases. We also collaborated with the world's top 100 DJs and over 30 domestic and international electronic music labels to launch Tomorrow Drop, 电音联盟, helping to bring electronic music into the limelight. as a debut platform for international award-winning and global acclaimed electronic music. Lastly, moving on to TMD Live, our comprehensive online-merged offline performances brand, which has consistently propelled the music entertainment and performance industry toward by exploring innovative interactive formats and monetization avenues. In the third quarter, TME Live hosted 32 online and offline performances by various A-list staff, including Han Hong and Zhou Huajian. At the same time, we unveiled multiple innovations to refresh the user experience. For example, watching Zhou's online concert, we pioneered the TME Live Moment interactive activity, Vote Your End Call, EPL Shen Anke. Marking the first time a live streaming concert audience was invited to vote on the concert's closing song, creating a customized offline interactive experience for our online users and successfully accumulating close to 15 million unique viewers within the Tencent ecosystem. Going forward, we will incorporate more interactive formats in TME live moments during the performances. That concludes the update on our growing content capability. Now I would like to turn the call over to Ross, who will share more about our platform strategies. Ross, please go ahead.
spk06: Thank you, Ka-Shen. Hello, everyone. Moving on to our platform strategy, we continue to enhance our users' interactive experience by enabling new ways to listen, watch, sing, and play on our platform and offering more satisfying experiences that address their diverse music tastes and nuanced needs. To meet users' core demands, we zeroed in on providing a nimble user interface and a tech-oriented professional listening experience. In terms of sound effects, improvements in this quarter we became the first music platform domestically to offer an immersive audio experience with Dolby surround sound to our super VIP memberships, subscribers and in-car users, as well as indie music releases on our Tencent Musician platform. In August, QQ Music also debuts adaptive song, Xiang Du Zi Shi Ying, which adjusts the sound value using a particular song based on human auditory perception characteristics to maintain a smooth listening experience. To simplify the listening process, QQ Music and Kugoo Music launch the lock screen widgets on the iOS 16 system which are essentially one-click shortcuts. As another pioneering move, we also upgrade our playlist function, which allows users to generate playlists in a single click by importing the songs referenced in text, pictures, and web links. QQ Music and Google Music now support automatic match in playlists with fitting sound effects and customized playlist ports to inspire more sharing among users. To bolster music discovery efficiency, we further optimized our smart recommendation filter with an upgraded algorithm in the third quarter. As a result of this refinement, QQ Music and Google Music's recommendation streaming volume and the time spent per user both registered year-over-year increases. What's more? As increasing virtualization takes hold, we have been adding more exciting and fun music entertainment scenarios while unlocking abundant monetization opportunities. In the third quarter, TME Land, our virtual theme park, teamed up with Pepsi and its virtual idol group, Team Pepsi, to host another immersive virtual 3D live show. enhanced by a 360-degree circular screen and a ground screen. The show registered over 4 million fans, starting at Tiamilan's new-built live hall station, our brand-new landmark venue. In addition, we built the MusicZoom, a 2D virtual interactive music community for users to listen to purchased albums, play musical instruments, and interact with others at their self-secreted virtual homes. We also launched an entertainment feature on QQ Music, Tango, which allows users to play with and truly feel the rhythm of selected songs by touching the keypad on the screen following the tempo of the songs. As a pioneer in the application of our innovative listen, watch, sing, and play functions, QQ Music has continued to improve its DAOs year-over-year, indicating healthy user engagement with our flagship products. Now, turning to long-form audio to supplement the podcaster ecosystem, we unveiled the Shengbo app, putting a one-stop audio creation assistant in our podcaster's podcast. On the back of TME's massive library of copyrighted books, our podcasters can now easily join the studio for auditions and distribute their content to all of TME's platforms with a single click. We are managing their podcaster programs with access to operations data as well as generating income. In addition, we achieved a breakthrough in text-to-sound TTS technology facilitating AI audio creation under multiple roles, increasing word processing efficiency by 12 times, and growing the content synthesized speed of our virtual hosters by fourfold in the third quarter. As a starting point of deploying the TTS technology, we have launched a line-up of virtual hosters to provide differentiated 3D audio content. which has received wide acclaim from our users. With that, I'd like to give the floor to Tony to reveal our business operations. Tony, please go ahead.
spk00: Thank you, Ross. Hello, everyone. Now, let me walk you through our operating results in the third quarter. This quarter, our online music MAUs were 587 million. down year-over-year primarily due to churn of our casual users amid competition from pan entertainment platforms, as well as cost optimization measures to focus on boosting monetization efficiencies as a platform of scale. Nevertheless, QQ Music DAUs continue to increase year-over-year, indicating healthy user engagement with our flagship product. Notably, Online music paying users, a cohort representing high-quality users, continued to grow at a robust pace and drove paying ratio to a new record, while ARPPU also kept improving sequentially, driven by our expanding content offerings and product enhancements, as well as broadened sales channels and moderated promotions. As a result, Our subscription revenue continued to deliver healthy year-over-year and quarter-over-quarter growth. Our IoT MEUs continued to achieve double-digit growth year-over-year as we enriched and established collaborations and added new ones to our partner roster, such as BMW and DD. We also broadened our leading auto industry coverage by supporting new EV models, including Li Auto's L9, Li Xiang L9, and BYD's Frigate 07, Biadi Kui Jian 07. To improve users' in-car music experience, we launched updates for our in-car apps in the third quarter, featuring a brand new user interface and upgrades to sound effects and content. Our online music services revenues achieved healthy growth in the third quarter, with 19% subscription revenue growth year-over-year. We have been promoting the higher-value Super VIB membership, 超级会员, with an elevated experience, powered by not only premium sound features, 真品音质, and Dolby Surround sound effects, 都比全景声, but also customized content, For instance, at Teens in Time's TME Live online concert, Endless Summer, which registered massive social media buzz, totaling over 2 billion mentions. Users with a Super VIP membership were entitled to a variety of privileges, such as a Blu-ray playback of the concert at the highest resolution, cache and projection on TV screens, leading to a 20% increase in the number of SuperVIP membership subscribers. Going forward, we will roll out more privileged content and higher sound quality features to drive its membership conversion and retention. Meanwhile, we strengthened the artist subscription offering, Chaoji Dingyue, by onboarding more artists, whether up and coming, well-established, or even AI singers, as well as by expanding the scope of benefits in the package to include privileges such as customized live streaming events, online chats, and priority access to concerts and album singings. As of the end of the third quarter, we had launched a cumulative 28 artists debuting their subscriptions. In addition, in the third quarter, we unveiled merchandise related to 21 artists with a total of over 100 SKUs in the Putao Mall, Putao Shangcheng. Accompanying the launch of Jay Chou's digital album, Greatest Works of Art, we sold 100,000 pieces of his artist-related merchandise, while at the same time carrying out a series of warm-up promotional activities, calling on music lovers to look back on Jay Chou's classics. As a result, 95 out of 100 of Jay Chou's existing songs made their way back onto TME's popular chart, demonstrating our strong promotion capabilities and our skill in rejuvenating our music library. Additionally, our advertising business continues to improve sequentially from the second quarter thanks to our innovative and diverse advertising product offerings, demonstrating solid resilience. For example, we made headway with our ad-based free listening mode, which showed initial success with mutually reinforcing growth in revenue and user engagement. Going forward, we plan to expand the free listening mode user coverage while enhancing engagement and boosting its revenue in-stream. Moreover, we made further progress in innovative commercial advertising formats on TMELive and TMELand, securing extensive sponsorships from well-known domestic and international advertisers across e-commerce, food and beverage, auto, and banking industries, among others, as we help them raise the value and influence of their brands. In the third quarter, we also continue to explore various business models. First, on the sub-licensing side, our SaaS-based music copyright licensing service has expanded from the live streaming vertical to other use cases that require legitimate music licensing, such as short videos, supermarket ambience music, offline public performance, and advertising soundtracks. Second, we launched the industry's first professional data platform, TME Business Intelligence Platform, TME 音乐源途. with high-frequency data updates totaling 150 times per day. This tool can assist music label partners in tracking the performance, popularity, and listener profiles of their singers and copyrighted songs, equipping music professionals with a deeper understanding of the business value behind the data. Now let's turn to our social entertainment services. its MAUs and paying users declined over the year due to macro headwinds. We will continue to innovate our products and explore initiatives such as audio live streaming, international expansion, and virtual interactive product offerings. For WeSing, we continue to provide differentiated tools and content to help our users enjoy the singing experience. In the third quarter, we implemented an upgrade of privileges and benefits for WeSing VIP users by launching the sound quality enhancement feature in backing tracks as well as super remix and smart chorus sound effects to create an authentic and fun singing experience. What's more, As an important social platform, WeSync caters to diverse real-time communication scenarios. During the third quarter, WeSync launched multi-person singing and chat rooms in both video and audio settings, further driving growth in the penetration rate and user time spent in these rooms. We also brought our experience in these areas overseas to boost our international business development. For live streaming services, we continue to expand our differentiated content offerings and user experience, benefiting from our streaming format innovations and deeper cooperation with our music content. Revenues from audio live streaming rose double digit year over year in the third quarter to reach a new high. What's more, leveraging our audio live streaming business combined with our know-how in artist incubation we are providing ample space and support for our musicians to grow. For instance, our leading musicians and live streamers, Mars, Du Yao, Shuzhe, and Fan Lu, started their careers via audio live streaming. With TME's support in one-stop musician services, they released songs and earned copyright income with their music, adding another layer to their live streaming revenues. Their songs, The Stars Are Not As Good As You, 满天星辰不及你, and Where Did You Go, 后来的你在哪, became blockbusters during the third quarter and topped multiple TME's music charts. Last but not least, while pursuing business growth, we have endeavored to fulfill our social responsibilities by creating an innovative model of music-empowered charity programs. On 99 Giving Day, 九九公益日, we partnered with artists including Mao Bu Yi and Tencent Charity to launch Hear the Light of Music, 听见音乐的光, a philanthropic album, and Surprised by Music, 不期而遇的歌,寻声, a charity concert to raise awareness and funds for environmental protection. as well as young and elderly groups in rural areas. These events were well attended and garnered coverage from over 100 authoritative media outlets, resulting in huge buzz, with over 600 million mentions on social media. In summary, we are actively expanding and making connections through music. Powered by innovation and technology, we are introducing more products and services to China's dynamic music market, elevating the industry as a whole, and reinforcing our business competitive edge and resilience. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.
spk09: Thank you, Tony. Hello, everyone. Next, I'll discuss our results from a financial perspective. In the third quarter of 2022, Our total revenues were RMB 3.4 billion, up by 7% sequentially. With the success of our effective cost control and improved operating in basis, our profit position continued its growth trajectory since Q4 last year. RFS net profit for Q3 2022 was RMB 1.1 billion. Now RFS net profit for Q3 2022 was RMB 1.4 billion, up by 33% year-over-year base, and by 32% sequentially. In Q3 2022, music subscription revenue grew to RMB 2.2 billion, up by 18% year-over-year, and by 7% sequentially. Online music paying users grew to 85.3 million, up by 20% year-over-year, representing a 2.6 million that adds sequentially. Monthly up in Q3 2022 was RMB 8.8, up from RMB 8.5 in the second quarter of this year. This evidence our strategy to grow music business healthily and sustainably has shown the initial success Our ongoing efforts to cultivate users' willingness to pay for music and high-quality content and services we provide, optimize the product functionally, and improve operations are bearing fruit. We believe increasing willingness to pay for music will drive health growth in music subscription services in the future. Revenues from advertising grew both on a year-over-year basis and sequentially as both online and offline markets begin to recover from the impact of COVID-19. In addition, we have launched new advertising products such as a space-free listening model to reinforce user engagement with improved monetization. We remain confident about the long-term growth potentials in advertising business. In addition, with the launch of new digital albums especially the successful launch of digital albums for GHR, and our strong promotional capability, we had revenues growth in sales of digital albums, both on a year-over-year basis and sequentially. Social entertainment services and other revenues were unbeaten, 3.9 billion, down by 20% year-over-year. due to the evolving macro environment and intense competition from other platforms. To adapt to the changing environment and to stabilize revenue scale, 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 expand our international footprint for long-term growth. Growth margin in Q3 was 32.6%, up by 3% year-over-year and 2.7% sequentially. The increase was primarily due to our effective control on revenue-sharing fees and content royalty costs, as well as improved operational cost efficiency. This will all result from the implementation of our full spectrum cost control measures this year. The growth in advertising revenues and revenues from sales of digital albums also contributed to the growth in gross margin. We will continue to take measures to manage costs effectively and improve overall efficiency. Now moving on to operating expenses. Total operating expenses for Q3 2022 were RMB 1.4 billion or 19.5% as a percentage of total revenues, down by 1.5% from 21% as a percentage of total revenues in the same period last year. Excluding the impact from the expenses related to our application for secondary listing, operating expenses as a percentage of total revenues would have decreased by 2% year-over-year. Selling and marketing expenses were on the 245 million, down by 58% year-over-year. And this is our third quarter with more than 50% cut in selling and marketing expenses. On a year-over-year basis, all of the reduced spending on user acquisition had impact on our MAUs. Our core music progression service continued its rapid growth trajectory. We continued to take measures to improve efficiency, closely monitored the ROI of each promotion channel, vitally utilized external promotion channels, and leverage our internal traffic to attract users and promote our brand. When evaluating the health list of business and assessing ROI, we focused more on measures such as leverage of engagement, user retention rates, extra. General and administrative expenses were RMB 1.2 billion, up by 13% year-over-year, including the impact from approximately RMB 44 million of expenses related to our application for secular listing, G&A would have increased by 9% year-over-year, mainly due to increased investment in research and development. We continued to closely manage employee-related expenses by improving HICOM efficiency. Our effective tax rate for Q3 2022 was 12.2% compared to 11.5% in the same period of 2021. The increase in effective tax rate was mainly because some of our entities are entitled to different tax benefits in 2021 and 2022. For Q3 2022, our net profit and the net profit attributable to equity holders of the company will be 1.1 billion. Non-RFIS net profit and non-RFIS net profit attributable to equity holders of the company were RMB 1.4 billion. Non-RFIS net profit margin was 19.2%. For the third quarter of 2022, basic and diluted earnings per ADS were RMB 0.67 and RMB 0.66, respectively. 49% on a year-over-year basis. Non-RFIS-based and diluted earnings per ATIs were RMB 0.87 and RMB 0.86 respectively, up 41% on a year-over-year basis. Such results demonstrated our commitment and initial success on operating efficiency improvement. as well as the impact from share repurchase program. We are endeavoring to provide high-quality investment returns for our investors and shareholders and remain confident about our financial performance, the development of our business, and the overall industry. As of September 30, 2022, our combined balances of cash equivalents term deposits and the short-term investments were RMB 25.4 billion as compared with RMB 25.8 billion as of June 30, 2022. Such combined balance was also impacted by the change in exchange rate of RMB to USD at different balance shift states. Looking forward, we will continue to grow our core business with innovative and diverse products and services for our users, and invest mindfully in new products and services, including non-form audio and international billing, to maximize our investment returns and future growth potential. Meanwhile, we will continue our focus on operating efficiency and adhere to Triton controls on cost and expenses to achieve health finance performance. This concludes our prepared remarks. Operator, we are ready to open the call for questions.
spk04: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And 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. We will pause momentarily to assemble our roster. And today's first question comes from Alex Poon with Morgan Stanley. Please go ahead.
spk05: Hi. Good evening, management. Thank you for taking my question. Congrats on very strong results. My question is, about our music segment growth margin and net margin in Q3. Roughly, what levels are those two numbers? And going forward, how should we think about the pace of these two margins expansion, considering we have a lot of levers, including advertising revenue, music, art pool, music content cost, long-form audio cost, et cetera, et cetera. Thank you very much.
spk09: This quarter, our gross margin of music keeps increasing, and our operating net profit also broke even and increased. And there are some reasons. First, our increased We increased the IRC requirement of content cost and optimized the model of IRC. We retracted the agreement with some music labels, tried to switch MG model to revenue sharing model or got more reasonable MG. Then that have the positive feedback and also have a positive impact on our gross margin. And second, Our subscription revenue growth, especially our up, increased continually. So that has a positive impact on growth margin. And the third, advertising revenue recovery and digital album revenue increased also have positive impact on growth margin. So this quarter, we have a very good performance on the growth margin of the music services. and we expect our gross margin for music service can be increased in next quarter because we expect our advertising revenue and subscriber revenue can be increased healthily. So we also can continue to control our content cost so that the gross margin and net margin also will be increased in the Q4.
spk04: Thank you. And our next question today comes from Lee Huang with Bank of America Merrill Lynch. Please go ahead.
spk12: Hi, Matt. Thanks for taking my question. Congrats on the third quarter. My question is mainly on our pool and music subscriber trend. Notice that we have another current improvement in the music pool. So how should we look at ARPU trend? And I knew that we have like two to three million Mildred subscriber guidance previously. So do we still maintain this trend? And overall, how should we look at ARPU and Mildred subscriber growth in the following quarter? Thank you.
spk00: Thank you. I'll answer the first part of the question regarding subscriber growth, and then Shirley can chime in about the ARPU. We're very pleased with our subscriber growth this quarter. We continue to record high teens percentage year-over-year growth rate in terms of our subscriber growth. And that's a trend that we expect to continue. In the near term, within the one year or so, give or take, one or two quarters, You know, our near-term goal is to reach the round number 100 million subscriber base. We're now at, you know, 80-something million. So that's, to us, a very achievable target. And then in the longer run, you know, and at the moment, our paying ratio is about 15%. And so in the longer run, in a multi-year timeframe, you know, when we benchmark ourselves against, other verticals, such as online video verticals in China. We feel that we're confident to be able to achieve a mid-20s percent paying ratio in a multi-year time frame. Shirley, please chime in on the offer side.
spk09: Okay. In Q3, markup of music subscriber is 8.8, increased from 8.5 in Q2, and increased two-quarters continually. That's because more discipline promotion, more content operation, and optimize the pricing strategy. In the future, we will continue to focus more on the quality growth of our overall subscription revenue. We will reduce the promotion activity on subscriber business and strengthen our content operation further. On the other hand, we will provide a super VIP service that have higher AI up give more privilege to our users. So we expect our app can be increased gradually while paying users continue to grow healthily. And we expect in the next quarter, our app will be increased gradually.
spk04: Thank you. And our next question today comes from Lincoln Kong at Goldman Sachs. Please go ahead.
spk01: Thank you for taking my question. So my question is about the advertising business. I think this quarter we have a pretty solid increase for the advertising business and reversed the declining trend in the first half. Could management give us more color in terms of what's been the underlying driver of that? And especially in terms of the new format of ads, including TME Live, you know, how are we thinking, you know, the position for these new formats going forward? And if there is any outlook for the fourth quarter in terms of ad strength? Thank you.
spk00: Sure. In terms of advertising revenue, we're very pleased to see that this quarter we're starting to see a positive year-over-year growth, which reversed the negative year-over-year growth trends in the previous quarter. And in particular, in the previous several quarters, splash green ad represented a majority of our advertising revenue. But we're also pleased to report that splash screen ad now represent less than half of their advertising revenue as the result of our investment in new formats and new advertising innovation products. It's now the second quarter in a row where we're seeing our advertising revenue growth on a queue-on-queue basis. And so looking forward into the next quarter and also into next year, provided that the macroeconomic conditions continue to improve in the current trend, we are optimistic about the outlook on the advertising business. A couple of things is driving this growth. Number one, our sponsorship ads continue to grow at a healthy pace. as we host and organize an increasing number of events. These events include TME Live events, include other sponsored live events, for example, on TME Land, as well as others. In addition, our ad-supported free listening mode saw strong growth and now represent approximately 10%. of our online music advertising revenue. So all of these are important drivers together with an improving macroeconomic conditions. That leads us to an optimistic outlook.
spk08: Yeah, we will continue to work with the WeChat video accounts team to continue to provide a high quality offline an online TME Live event for our users. As what Tony mentioned, it will help us to draw more advertising sponsorship, but at the same time, it will help us to continue to attract more partners to join our hands with us. In the third quarter, we have already successfully launched over 30 events of our T&D Live. So we are expecting that after the pandemic of the COVID, I think that the overall situation will be continually improving, and it will continue to drive the advertising sponsorship for us as well.
spk04: Thank you. And our next question today comes from Alicia Yap with Citigroup. Please go ahead.
spk12: Hi, good evening, management. Thanks for taking my questions. Also, congrats on solid results. I have a question related to the social entertainment business. So assuming if the economy rebounds and reopens in the next few months or next couple quarters, should we actually expect to see the positive impact to the social entertainment business or will this business continue to wait on the competitive pressure? So any color that you could share would be helpful. Thank you.
spk00: Due to the impact of a challenging macro environment and increased competition from other pan-entertainment platforms, the social entertainment revenues recorded a negative year-over-year growth. this quarter as well as the previous few quarters. We continue to expect pressure and challenges in that area. However, we will continue to innovate more products and explore new initiatives such as audio live streaming and virtual interactive product offerings. Within audio live streaming segment within the social entertainment revenues, that has recorded a very healthy mid-double-digit type year-over-year growth rate. And we're very, very pleased with that. And that can help us offset some of the challenges in the traditional live streaming segment. In addition, we continue to expand in overseas market, you know, both organically as well as through suitable M&A opportunities, you know, such as the Japanese leading karaoke app, Pokikara acquisition that we made, which continue to contribute positive growth, both organically and through M&A in our international business.
spk04: Thank you. And our next question today comes from Sue Queen Zong with CICC. Please go ahead.
spk11: Hey, good evening, management. Thank you for taking my question, and congratulations to John Carter. So my question is related to long-term audio business. We talked a little this related quarter, so just wondering if management could share more color about long-term audio business with us, such as what's the current level and what's the main target KPI for this business? And how should we expect the future investment and the profit? Thank you.
spk00: Thank you. Long-form audio has proven itself to be an effective complement to our powerful portfolio of music apps as it continues to convert more and more music users into long-form audio users and drive higher user engagement and activeness as a result. We continue to expand and differentiate our long-form audio content through licensed content as well as self-produced content. We also provide users and content creators with useful tools to build an active podcast and UGC content ecosystem. We'll gradually improve its monetization through monthly subscription and focus on ROI for content investment. Our overall target is for the long-form audio business to break even at a gross margin level by the end of next year.
spk04: Thank you. And our next question today comes from Wei Xiong with UBS. Please go ahead.
spk03: Hi. Good evening, management. Thank you for taking my question and also congratulations on the good quarter. I want to follow up on the margin side. We have made a great deal of efforts this year to improve our overall operating efficiency. Just want to understand our maybe cost planning for next year, especially around headcount and also marketing strategy, and how much more room we can further improve our net margins for next year. Thank you.
spk09: We expect the gross margin and net profit margin can be increased in the next year. And you want to know how room we can get in the next year. We think we will continue to control the sales and marketing expense And we don't give a goal to that expense. We just monitor the ROI, and we increase the ROI in the next year. So we think we also have some room to get more performance on the sales and expenses. And for the Haikang part, We think we, on the one hand, we need to invest more new products and find the growth potentials. So we will continue to invest to this part. And the other hand, we will improve the high-count efficiency. And for the older products and for the lost products, we also need to require them to make a break-even. So, we think this part we can have some improved efficiency. So, I believe with the revenue of music service can be increased healthily and the social entertainment revenues can be stable or or a little decrease, the growth margin and the net profit margin can be increased in the next year.
spk00: Yeah, and just to supplement to what Shirley has said, this quarter marks the second consecutive quarter of revenue growth Q1Q, but the third consecutive quarter of our net profit growth Q1Q And so there's a very clear trend through cost optimization and efficiency programs of improving profitability. And so even though this year, you know, for the full year this year as a whole, you know, revenue, we saw revenue decline on a year-over-year basis. Our goal looking forward into next year is to be able to achieve positive revenue growth next year, and as a result, positive growth for profitability as well.
spk08: Yeah, I think the very strong financial result of this quarter has demonstrated that it has been doing a really good job in improving our operational efficiencies. It also demonstrated that we have tried many, many ways, not just cutting, for example, the marketing or channel costs. We are also trying to make our team to be more lean than before. It also helps us to improve the overall efficiencies as well. In the future, we will continue to try to have a good control on our content cost as well. So, we try to talk to all of our partners and try to change our revenue sharing model from the minimum guarantee model to the revenue sharing model, which will help us further to improve our efficiencies. So, these are all of the plans that we have in hand and we are continuing doing it for for the year now, so we will continue seeing a continual improvement for the future.
spk04: Thank you. And as a reminder, ladies and gentlemen, please press star then 1 if you have a question. Our next question comes from Thomas Chong at Jefferies. Please go ahead.
spk07: Hi, good evening. Thanks, management, for taking my questions, and congratulations on a solid set of results. My question is about the competitive landscape How should we think about the competition with the short-form video and other in-companies in coming years? And my second question is about also the margin side. Given our cost control measures that focus on ROI, can you comment about the online music margin long-form audio? How is the trend going forward? Thank you.
spk00: On the competition side, I'll start and other management team can complement. I think we've mentioned in the past that with regards to short form video platforms, it's a combination of both cooperation and competition. We obviously leverage the short video platforms as a marketing tool to help promote our music, as well as to help promote some of our brand activities. And that has been proven to be quite successful. But on the other hand, there's also been news about a potential entry into the music market by the likes of a Douyin. Although, having said that, I think we observed that the progress being made in the music entry front We continue to monitor the scale of the users and the music platform by Douyin continue to be small and there continues to be a wide gap between the content offering by their service compared to our service. So obviously we're watching the competitive dynamics extremely carefully and extremely closely and we stand ready to react. But at the moment, it's something to pay attention to as opposed to something to react to. On the margin side, I think we've talked about this earlier. The music margin continues to improve as a result of a number of factors that Shirley mentioned, the healthy subscription revenue growth, driven by a combination of both ARPU increase as well as subscriber growth and not just subscriber growth, the continued solid increase in advertising, as well as good cost control on our content cost side. All leads to healthy and sustainable improvements in music margin. And then on the long-form audio side, the negative margin there continues to improve as well, as we expect to break even on the gross margin basis for long-form audio by the end of next year. So overall, both of that combined to see an improving music margin.
spk04: Thank you. And our next question today comes from Leigh Charlotte with HSBC. Please go ahead.
spk02: Hello, I'm asking on behalf of Charlene Liu from NTSC. So first I want to congratulate on a very strong portfolio result. My question is regarding, can I get a point of the overall impact from a potential reopening in the next year? So one point we can see is the natural condition to drive home ratio for the online music and the maybe social entertainment business.
spk00: Sorry, can you repeat? Your line's not very clear. What was the question in regards to?
spk02: Sorry, sorry. So I'm asking on behalf of Charlene from Entrance ED. So my question is regarding to the potential impact from reopening in next year. On one hand, we can see the macro... So the impact from what? Reopening. Reopening in next year.
spk00: Sorry, can you repeat the impact from what?
spk02: Sorry, sorry. A budget for the technical issue. My question is regarding to the overall impact from the opening in next year. Sorry, I don't understand your question. Excuse me, would you please repeat your question?
spk00: Yeah. Sorry, I think we can move on. Next question, please.
spk04: Thank you. And our next question today comes from Solo Wong with PH Capital. Please go ahead.
spk10: Yeah, good evening, management, and thanks for taking my question. And my question is about the cooperation between TME Live and Tencent Radio. How is the collaboration progressing now, and what else will be explored in the long-term cooperation to have more sustainable users and getting more commercial value? Many thanks.
spk00: Yeah, we continue to deepen our cooperation with Weixin, specifically the video account, to enhance music focus, collaboration, and promotional capabilities of both music and live events. This is an important means for us to enrich the music video-based content on both our platform as well as on the Weixin platform, as well as to leverage Weixin to expand promotional channels for artists, especially for indie musicians. QQ Music and Google Music both have official video accounts on Weixing, and they constantly evaluate users' preferences through Revive operations, and the recommended music content is very popular among users, ranking among the best in the music category within Weixing video accounts. And Waysing Video Account serves as an important channel for music lovers to discover music, after which users often come back to the TME platform to continue to explore and enjoy the music they love. As for concerts, TME Live and Waysing Video Account have co-hosted many live performances, such as concerts by Zhonghua Jian and Han Hong most recently. In the future, will cooperate more closely to present even more and better shows to users and to explore more innovative and expanded monetization avenues.
spk06: Yeah, Ross is saying that obviously our cooperation with Tencent
spk00: in particular on the live related shows, are sort of on a project-by-project basis. We each have a pipeline of projects. And for each project, we discuss timeline as well as the revenue sharing arrangements.
spk04: Thank you. And ladies and gentlemen, 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.
spk00: Great. Thank you, everyone. Thanks for joining us today. If you have any further questions, please feel free to contact the Investors Relations team. This concludes today's call, and we look forward to speaking to you again next quarter. Thank you, and goodbye.
spk04: Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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