Tencent Music Entertainment Group

Good evening, good morning, and welcome to Tencent Music Entertainment Group's second quarter 2025 earnings conference call. I'm Millicent Tu, head of IR. We announced our quarterly financial results earlier today before the U.S. market opened. The earnings release is now available on our IR website and via Newswire services. During today's call, you will hear from Mr. Kushan Pang, our executive chairman, and Mr. Ross Liang, our CEO, who will share an overview of our company strategies and business updates. Then Ms. Shelley Hu, our CFO, will address our financial results before we open the call for questions. Before we continue, I refer you to the safe harbor statements in our earnings release, which applies to this call as we made four looking statements. Please note that we will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in our earnest release and filings with the SEC. All participants are muted at this time. After management's remarks, there will be a Q&A session, and please be advised that today's call is being recorded. With that, I'm very pleased to turn the call over to Kushan, Executive Chairman of TME. Kushan, please.

Thank you, Melissa. Hello, everyone, and thank you for joining our call today. We delivered high-quality growth in the second quarter, with solid year-over-year increases in both revenue and profitability. On one hand, our music subscription business remains a core growth driver and continues to gain traction. On the other hand, we are also seeing impressive results from our expanding suite of music-related services. Key initiatives like advertising, concerts, and artist merchandise all achieved rapid growth in the second quarter. And that strong momentum is carrying into the third quarter. By constantly enhancing our content ecosystem, expanding our offerings, and fostering new ways for artist-fans engagement, we are shaping a vibrant all-in-one music service platform. Now, let me share some of the key highlights on the content business. First, we began cooperating with well-known Korean labels, The Black Label and H-Music for the first time. further strengthened and differentiated our K-pop offerings, we also extended collaboration with renowned Chinese artist Wang Feng, offering both of his classics and latest work on our platform. Secondly, we continue to focus on co-creation and original content production to further enrich and diversifying our content offerings. From concept, originations, creations, to production and promotion, we are actively involved in every stage to build a more dynamic and innovative music ecosystem. A prime example is our recent collaboration with SM Entertainment on NCT's Cheng Le, Zhong Cheng Le, Chinese special EP, Lucid, Chan. Our integrated promotions across music festivals, debut concerts and variety shows attract a large audience. 10,000 music lovers participated in a sing-along at the music festival and variety show. Clips generated over one million likes, highlighting the power of the end-to-end industry collaboration across borders and cultural exchange through music. We also work closely with artists to develop original pieces, like the theme song for the acclaimed film, The Light Tree Roll, Chang An De Li Zhi with Chen Chu Sheng. This song topped the multiple music charts and garnered extensive praise from national media. Additionally, our strategic partnership with Zhejiang Satellite TV, Zhejiang Weishi, has further supplemented our music copyright portfolio of popular variety shows, such as The Treasured Voice, Tianqi de Shengying, and Shining Summer, San Guang de Xia Tian, and opened new opportunities for collaboration in content co-creation, musician promotion, and more. We have also shown strong capabilities in staging artists and connect them with the users through other music related service offerings. These efforts have further energized our ecosystem, boosted user loyalty and cultivated content creation, all together reinforcing our platform unique position in the evolving music industry. A few examples. First, we successfully hosted leading Korean artists, G-Dragon's first major tour since 2017 in Macau, which attracted over 36,000 attendees to immerse in the cultivative atmosphere and the events merchandise was quickly sold out. This marked our first large scale international concert production. significantly pushing our industry reputation. Following a strong kickoff, we are scheduled to expand the tool into other regions this year. Additionally, we organized a series of stadium concerts for Fiona Seed, Shui Kai Qi, Tia Ray, Yuan Ya Wei, and rapper Gai, helping them to reach a broader, younger audience. Due to the overwhelming demand, we quickly responded and worked with Tia Ray to schedule additional shows to accommodate fan interest. Second, we have become an important partner for staging and creating live performances for emerging talents. In the first half of the year, we leveraged our proprietary IPs, City Live and Buff Live, to host over 300 offline shows for nearly 100 Tencent musicians. Our cross-platform promotions also boost a number of works into trending hits, connecting them with a broader audience of music lovers, For instance, after we promoted Xiang Cici's first, Why Not Wait For The Wind, Bu Ru Jiu Deng Feng Lai, on soft video platforms, it quickly went viral, sparkling a wave of users generated contents on social media and surpassing 20 million streams on our platform. Third, we created more opportunities for music lovers to meet and interact with artists, both online and offline. For example, buyers of Jason Zhang Jie's physical album, Not Bad, Yao De, could win opportunities to attend his offline signing events. Such privileges not only deepened the fan's engagement, but also helped drive the album's outstanding performance. In late June, we partnered with DLU, a global fan communication platform company, to launch the interactive community Bubble on QQ Music. Bubble enables users to engage directly with hundreds of K-pop artists from labels such as SM, JYP, and Cube Entertainment, providing artists an avenue to share members-only content. To cater to a wider audience, we also plan to invite some popular Chinese artists to the community, allowing them to foster a deeper and more personal connections with their fans. Finally, reflecting our commitment to serving the music industry and supporting its healthy growth, we host the Third Wave Music Awards, which was designed to honor the most outstanding Chinese music work of 2024. 15 top tier music creators, including Gu Jianfen, Li Haiying, and Xiao Ke, presented the awards. The chart's professionalism earned industry-wide acclaim and endorsement, amassing over 200 million social media views. This quarter, we also cooperated with professional institutions, music labels and artists, leveraging AI technology to unlock the social value and hearing power of music. For example, we launched the Hearing Guizhou project, featuring natural soundscapes to enhance sleep quality. In summary, our dedication to diversifying music services and delivering well-rounded music entertainment has set the stage for long-term sustainability growth. With a strong foundation in place, we will continue to enhance our content and platform ecosystem, offer richer experiences and unlock greater opportunities for both music lovers and stakeholders across the music value chain. Now, I would like to turn the call over to Ross for more details on our overall platform development. Ross, please go ahead. Thank you.

Thank you, Kaishen. Hello, everyone. In the second quarter, our platform demonstrated robust growth driven by our commitment to continuous product improvement and operational excellence. Online music recorded stronger performance, supported by a sustained expression in both our subscriber base and ARPPU. This positive trajectory was underpinned by our innovations across product features, artist merchandise, and artist-fan interactions, which has further strengthened or appeared among SVIP members. Overall user average time span reached a record high and SYP subscribers exceeded 15 million, a new milestone that reflects the deep trust and the loyalty within our user community. To enhance the SYP experience, we introduced a range of new and upgraded features during this quarter. Here are some key highlights. First, high quality sound quality remains the most popular SVIP membership benefits. This is effective in fulfilling users' robust demand for more premium and immersive listening experiences. In the second quarter, Kugoo Music pioneered Viper Hi-Fi sound quality and a one-click audio enhancement 2.0. By delivering superior audio fidelity and louder speaker volumes, we let users easily transform their smartphones into portable speakers. We also upgraded voice extraction technologies with the industry-first AI chorus function. Users can now plug in a live concert, sing along, experience anytime and anywhere without the user fuss. Second, to further drive SYIP adoption, artist-centric privileges became increasingly effective. Such achievements are powered by our deeper collaborations with libraries and artists that unlock a wide range of compelling benefits for our users. Digital albums are a great example. Recently, we premiered JJ Lin, Lin Junjie, and Lin's new digital single, Hold Me Close. We also launched Zhaolin Cai, Cai Yilin's new album, Pleasure, by integrating these albums as SYP sign-up privileges. We significantly boosted SYP conversions. Another example is priority access to concert tickets for in-demand events. This quarter, SYP users had the opportunities to secure tickets for G-Dragon and Blackpink's concert tours in advance on our platform, sparking significant buzz among music fans. We also cooperated with both domestic and international artists, including JCT, Tan Jianci, Silence One, Wang Sulong, and Icefire to release Marker Star Cards series. These initiatives successfully met users' growing demand for collectibles. Third, we elevated the user's engagement by introducing new ways for artists and the fans to connect. For example, beyond launching Bubble in May, we partnered with TF Entertainment, Shidai Feng Jun, to live stream teens in time, Shidai Shao Nian Tuan, and the Transform Project, Top Deng Lu Shao Nian Zu He, two concerts. This event garnered over 33 million viewers, with SYP members enjoying dedicated access to solo camera angles, bringing fans even closer to the artists. We also upgraded our virtual fan community, Penguin Ireland, introducing special avatar outfits and gestures for SYP members to make online meetups more personalized. During last Huang Zi Hong Fan's birthday and song releases, we hosted a fun team building activities and a live voice call with him, attracting over 100,000 users to his island page. Next, as our in-car music service gained recognition from SVIP members, we broadened our alliance with prominent automakers. For instance, this quarter, we formed a comprehensive partnership with Geely and collaborated with Xiaomi on its first SUV, the U7 model. This partnership integrated Dolby Atmos and the premium series sound effects, elevating users' music listening experience. We also built an AI-powered music cabine for Great Wall Moto, offering personalized on-demand features like AI vocal extraction and a healing music playlist to facilitate a more enjoyable journey. Alongside the success of our SAP offerings, the power of our platform and the innovative ad formats led to an accelerated advertising growth. both quarter over quarter and the year over year. In particular, we optimized the interactive and the tasks and the enriched reduction benefits, significantly boosting users engagement and the receiving positive feedback from advertisers. Lastly, our initial pilot on ad-based membership gained positive momentum. It gave us more room to provide tailored solutions to advertisers and users with various needs. Looking ahead, we see great potential in the music entertainment space and are committed to investing in new initiatives that create lasting value and impact on music creation and consumption. Along this journey, we will continue to push boundaries, innovate and enhance user experiences to deliver more premium and immersive experiences to all of our users. With that, I would like to turn the call over to Shirley, our CFO, for a deep dive into our financials.

Thank you, Ross, and greetings to everyone. Let me now turn to our financial results in Q2 2025. Our total revenues hit a record high of only 8.4 billion, up by 18% year-on-year. successfully overcoming the challenges from adjustments in social entertainment services in recent years. This was driven by continued strong growth in musical subscription and advertising services, as well as robust growth from artist-related merchandise sales and offline performances. Online music revenues grew 26% year-on-year to RMB 6.9 billion, Music subscription revenues grew 17% year-on-year to RMB 4.4 billion in Q2 2025, driven by continued expansion in subscriber base and monthly ARPPU. Monthly ARPPU reached RMB 9.7 this year, compared to RMB 10.7 in the same period of last year. primarily driven by expansion in SRIP subscribers and ARTPU. As discussed earlier, to enhance the SRIP members' experience, we continued to broaden and strengthen SRIP benefits, including enhanced sound quality and effects, artist-centric privileges, such as free shipping for our merchandise, priority access to concert tickets, and artist-related merchandise, These efforts collectively have helped enhance our SOIP membership base and achieve higher monthly NIPPU this quarter. Advertising revenue continues its strong growth trajectory on both year-on-year and quarter-on-quarter basis, primarily driven by the following. First, our innovative AD formats, such as AD-supported model, keep gaining traction and significantly contribute to our advertising revenue growth. Second, the 618 Shopping Festival provided a great opportunity to showcase our recent product optimization results, leading to increased number of advertisers, higher entrance rates, and ECPM. Third, sponsorship advertising also had strong growth this quarter, which benefits from increased number of offline events and performances. Additionally, artist-related merchandise sales and offline performance delivered robust results this quarter and further contributed to overall revenue growth in music services. the shipping for the physical album of Xiao Zhan this quarter. Together with the offerings of artist-related merchandise, such as Joker's Share, the physical albums, and G-Dragon's official light sticks, significantly enhanced the revenues from artist-related merchandise sales in Q2. Meanwhile, we continued our strategic initiatives in the offline performance market. This quarter, leading Korean artist G-Dragon started his first major tour since 2017 and very successfully hosted his concerts in Macau in Q2, with more locations to come in Q3. We also hosted other high-profile concerts for artists such as Will Pan this quarter. Social entertainment services and other revenues were unbeaten, 1.6 billion, down by 9% year-on-year. The year-on-year decrease was mainly due to the adjustments to certain live streaming, interactive functions, and more stringent compliance procedures previously implemented. Our growth margin rose by 2.4 percentage points year-on-year to 44.4%, primarily driven by the following factors. First, strong growth in music subscription and advertising revenues. together with improved cost-efficiency, thanks to our long-standing win-win relationships with labels and artists, have benefited our growth margin. Second, as the market landscape evolves, we successfully lowered our revenue-sharing ratio in social entertainment services without materially impacting revenues. Meanwhile, the growth in revenues from artist-related merchandise and offline performances which require higher investment, had off-site growth margin increase. Moving on to operating expenses, sales and marketing expenses as a percentage of revenues were 2.6%, down from 2.9% in the same period of last year. General and administrative expenses as a percentage of revenues were 11.1%, down from 30.1% in the same period of last year. Reflecting our strong operating business, majority of our sales and marketing spending have been in the category of content promotion and channel spending. We will keep monitoring market conditions and increase spending as needed with financial discipline. Our effective tax rate for Q2 2025 was 17.3% compared to 19.4% in the same period of 2024. We accrued with holding income tax of RMB 118 million in the second quarter of 2025. In Q2 2025, our net profit increased by 38% to RMB 2.5 billion, and the net profit attributable to equity holders of the company increased by 43% to RMB 2.4 billion. Now our finance net profit increased by 33% to RMB 2.6 billion, reaching a historical high. And the non-authorized net profit of the company increased by 37% to 2.6 billion. Our diluted earnings per eight years this quarter was 1.55, up by 45% year-over-year. And the non-authorized diluted earnings per eight years was 1.66, up by 39% year-on-year. These results underscored our effective monetization, enhanced operating efficiency, and the benefit from our share repurchase program. As of May 6, 2025, our confined balance of cash, cash equivalents, term deposits, and short-term investment were RMB 34.9 billion, as compared to RMB 37.7 billion as of March 2017. 31st of 2025. This combined balance was also effected by changes in exchange rate of RMB to USD at different balance to today's. Going forward, we will keep focusing on expanding our SYIP membership, introducing more and enhanced SYIP privileges, such as high-quality content, artist-centric privileges, including early access to artist merchandise and concerts. Meanwhile, we will continue to invest in our products and innovative technologies globally. We remain optimistic in the health growth prospects of the music entertainment industry and are confident about the high quality growth of our business. This concludes our prepared remarks. Later, we are ready to open the call for questions.

Thank you, Shirley. If you are dialing in by phone, please press 5 to ask a question and then press 6 to unmute yourself. If you are accessing the call from the Tencent Meeting or Vote Meeting application, please click the raise hand button at the bottom left. For the benefit of all participants on today's call, please remind... Please be reminded to limit yourself to one question. If you have more than one, please re-enter the queue. If you ask your questions in Chinese, please repeat in English. And the first question comes to the line from Lincoln from Goldman Sachs.

Lincoln, your line is open. Hello, Lincoln, can you hear us? Yeah, we can hear you. Your line is open, Lincoln.

Okay. Yeah, thank you for taking my question. So congrats on a very strong quarter. So my question is about the outlook. So given that the first half, we have a very solid momentum. So how should we think about the second half in terms of our revenue and as far as the profit outlook? Thank you.

Thank you very much. Thank you to the management for accepting my question. First of all, I would like to congratulate the management for achieving a very strong performance in this area. My question is more about the development prospects of the company. In the first half of this year, our overall business development is very strong. What should we look at for the next half of the year?

Thank you so much, Lincoln, for your questions. And actually, we are really encouraged by this quarter's solid and well-rounded performance, with both of our top line and also bottom line coming in strong. While our music subscription business remains robust, we will continue to focus on the high-quality growth As mentioned before, our subscriber base right now has already reached over 124 million and the pace for the net edge may fluctuate from quarter to quarter, but we do have the confidence that it will continue to have a high quality growth in a healthy and dynamic manner. And for the ARPPU, I think we are seeing a steady upward trend as we continue to enhance our offerings and the value we provide to users. We believe these efforts will further strengthen our value propositions and users' willingness to pay over time. So besides a good performance in the subscription business, I think the traction that we are seeing in our non-subscription services are also very exciting. On one hand, the advertising continues to be an important growth driver, innovative and formats tailored to different user cohorts are particularly welcomed by the advertisers. And on the other hand, as we keep innovating and collaborating with more artists and labels, the new revenue streams from concerts and artists merchandise are becoming more scalable. So in the second quarter, revenue were more than doubled from a year over year basis. which really validates our strategy of building a comprehensive music entertainment platform. So for the visibilities, as you can probably understand, the concerts, for example, we experienced some short-term quarter over quarter fluctuations as they involving in a lot of things like scheduling, venue selections, and other logistical coordinations. But overall, we are real optimistic and focused on driving a sustainable long-term growth. So in a nutshell, for the full year of 2025, having factored by the solid performance year today, we now see the revenue expected to come in higher than our previous expectations. With our focus on the operational efficiencies, we see more room for bottom line improvement as well. Thank you for your questions.

Thank you, Christian. The next question comes from Alicia Yap from Citigroup. Alicia, please.

Hi, good evening, management. Thanks for taking my questions. Congrats on the solid results. I have a questions on bubble. So can management share with us the attractions of your recently launched bubble? What is the user feedback and user experience so far for this new product? And can Bubble become a meaningful product in the coming future with potentially decent revenue contribution? Thank you.

Thank you very much. Thank you, management. Thank you very much, management, for accepting my question. First of all, congratulations to the company for achieving a very outstanding result in this quarter. I have a question related to the Bubble platform. Can you please share with us the basic performance of a brand of Bubble launched by the company recently? So far, how is the user feedback and user experience of this new product? Can it become a truly meaningful product in the future and bring an objective income contribution to the company? Thank you.

Thank you very much. Thanks for your question.

First of all, the company has been very happy that we worked with DRU in this quarter to release the product named Bubble.

Actually, the reason why we are doing this is because we also saw from the feedback of the entire user that there are actually a lot of fans like this. In fact, it was relatively difficult for them to open up the eight services before and to communicate with these stars that they are concerned about.

Talking about the reason why we launched this service, the reason is because we have the feedback from the entire user group. There are some of the fans groups. Right before Bubble, it would be very challenging for them to communicate with the artists they follow.

So we basically launched this version of QQ Image through such close cooperation.

So within the QQ music, we still would like to continue to enhance the user experience. So that's the reason we continue to strengthen our cooperation with Dear You of launching such a service in this quarter.

So after this launch, we continued to optimize the experience of more bubbles, especially in terms of Korean and Chinese translation capabilities. From the current user feedback side, we can see that the user is very recognized for this effect.

So once the bubble community is being launched and we continue to optimize its basic experience to the user, especially the translation and the language proficiencies within the South Korean language and Chinese, this is a feature that we do see very wide recognition from the user feedback.

Like what Kashin just mentioned, other than the three Korean artists, we will also introduce Chinese artists that our users like.

So as Koshan stated in his statement, besides the South Korean artists from the three labels who are working now, in the near future, we're also going to introduce the Chinese artists to the bubble community.

This is what our partners are looking forward to.

In that way, we will be able in the greater China region of providing the user experience that is within the human touch and the broad coverage, what then the bubble used to have. This is also the expectation from our partner.

But at the same time, we also have the bundled service for bubble and the subscription and SVIP business.

And we do hope such a bundled service would become a key growth driver for the future SVIP growth.

According to the existing user profile, we can see many of the pay-to-go users, they are still the young users.

So in the near future, they also demonstrate a very high activity. And this trend also allows us to build more confidence for the future user growth and commercialization.

Actually, Bubble is already a relatively successful social product overseas. So we believe that our collaboration with Bubble is to be able to provide a very solid foundation for our future KU Music, including TME, to promote socialized products in the music field.

As many of you may notice, indeed, Bubble is a well-established social product in overseas market. And we surely believe having Bubble on board will help us to continue to consolidate our QQ music and help TME to continue to launch socialized apps and services in our existing music business. I surely believe as we continue to introduce Chinese artists into bubble community, and we're also going to add additional features, for example, like live streaming, in that way, we will be able to provide a richer commercialization opportunities to our entire subscription business in the near future.

So finally, let's emphasize that such a service is actually a very important step for TME in the social field. We believe that in the social field, the demand and business opportunities of such a user are very huge.

I also would like to emphasize for bubble to be a very important step for us to embrace the social entertainment. And because we do notice the customer needs such a service, and we do believe it has a great potential for its future commercialization.

Thank you. And then this question comes from Thomas Chung from Jefferies. Thomas, please.

Hi, good evening. Thanks, management, for taking my questions, and congratulations on a very strong set of results. My question is about our recent deal with Simalaya. Can management comment about synergies with Simalaya, such as cost optimization, enhancement in port offerings, and any... areas that we can benefit the SVIP offerings as well. Thank you.

Thank you, Manager Chen. Thank you, Manager Chen, for accepting my question. First of all, I would like to congratulate the company for achieving excellent and outstanding results in this quarter. My question is about the recent content related to the Himalayan Exchange. Can you briefly introduce the current progress of the Himalayan project and how we can make further improvements, including in the provision of products and the current progress in the rights of products? Can our SPIP business make progress from the Himalayan products and services? Thank you.

Regarding our deal with Himalaya, according to the regulation in China, we're still waiting for the further approval from the regulatory authorities.

So now it would be very difficult for us to make any corresponding comment.

But the reason why we go for the Himalaya deal is because for the management team and for the whole company, we always believe in the value of long-form audio.

Long-form audio is a very important content form. To us, it's already played a complementary role to our existing music business.

所以从我们自己的实践来看,无论是在懒人听书上的独立会员和广告,以及在我们各个音乐APP里面的长音频的内容,我们在用户规模跟商业化上面都取得了很好的一个进展。

At least from our own perspective, for the book listening, the individual members, as well as the advertisement, and also the long-form audio content in different music apps, we do see that nice progress being made on the subscriber base, as well as commercialization.

At the same time, we also see that Chang Yipin's consumption in SYP's penetration rate is steadily increasing. And we also see that consumption of the long-form audio and its penetration ratio with SVIP continue to go up.

So if the deal goes smoothly in the near future, I surely believe no matter for the subscription revenues or the ad revenue, we will have every opportunity to continue to grow our user base. If there's any further progress regarding this deal, we will also disclose the information to the market in due time. Okay.

Thank you. And the next question comes from Morgan Stanley Liu Yang. Yang, your line is open.

Thank you. Congratulations for the very strong result. I have a question on the other music revenue. Does management believe that in the long run, this part of the business will account for bigger piles of total revenue? And what will be the impact to the gross margin? because we understand that advertisement is a very high margin business, but how about offline performance, concert and merchandise, the overall impact to gross margin? Thank you.

Thank you, Manager Ceng. First of all, congratulations to Manager Ceng for a very good performance this quarter. I have a question about other music revenue. From a long-term perspective, will other music revenue continue to rise in our revenue ratio? What impact will it have on our profit? As we all know, advertising is a high-profit business. But from the perspective of offline performances, concerts, and other surrounding areas, how will they affect our profit? Thank you.

In terms of other income, we are currently in the overall development of the content and platform. In terms of the offline concert and the fan economy, they are also the key to our future development. They are also our strategic business, so from a long-term perspective, they should be the key to our future development.

Thank you very much. And the company is adopting the strategy of having content and a platform at the same time. It is an all-in-one development. Well, regarding the Earthlight Concert, as well as the fence economy, I think it's going to be a very important direction for us to go in the near future. It is also part of our strategic business. So in the long run, the art of music is going to be a key for our future development.

Yes, for the fans' economic business, it is related to the star's period and the rhythm of our goods. So in terms of income, its overall trend is growing, but it may fluctuate in the season. The concert is actually the same. The concert may be affected by the star's period and the scale of the venue. It will also fluctuate in the season.

Well, let's talk about the Fence economy. As you may see, it is actually subjected to the scheduling of the artist, as well as the merchandise shipment. From the revenue perspective, Fence economy, the revenue continued to ramp up, but it will have some fluctuation. I mean, the seasonal fluctuation, the same as the AirFly concert and events. Due to the artist scheduling, as well as the venue selection, there might be some seasonal fluctuations.

Well, regarding the GP margin, I have to admit for Fancy Economy and Earthlight Concert, indeed, both GP margins are relatively low.

So it will have some impact on the overall GP margin of the company.

On the one hand, our overall profit margin is still increasing. For example, the increase in our member income, the expansion of our SYP, and the increase in our advertising income, including the decline in our social division. Overall, we have a good profit margin.

But generally speaking, on one side, we will continue to ramp up the GP margin. For example, we have ever increased subscriber base, and we also have more revenue from the advertising business, and we embrace the social entertainment. But at the same time, all those factors are indeed blessing our GP margin.

In terms of the growth of the fans' economy and the scale of the concert, it has a relatively small proportion of online music and online revenue.

So generally speaking, according to our existing observation of the Fancy Economy and the Earthlight Concert, I have to say that compared with our existing online music, no matter for the subscription business or advertisement business, the revenue contribution from the Fancy Economy and the Earthlight Concert is relatively small. As its revenue contribution is relatively small, so its impact over the JP margin is also small.

Yes, but we just talked about the seasonality of these two main income types. In some seasons, the income of these two types is relatively high, so there will be some fluctuations in the interest rate. But overall, in the future, our interest rate is still going up.

I also mentioned about the revenue seasonalities for defense economy and the Earth flight concert. In certain reason, when the revenue from both cities are relatively high, it will surely fluctuate the overall GP margin. But overly speaking, we're still very confident on the uprising trend of our GP margin.

I would like to add that, in addition to what Sherry has just mentioned, we have always regarded the online performance, analysis of the economy, and some of the surrounding businesses that we have just mentioned, we will not treat them as an independent business. We have more of a very important ability to make them an online business that can reach our platform.

I also would like to make a comment on caution. And beside what has been mentioned by Shirley, I have to say that we never take the AirFly events concept or even the fancy economy and the merchandise as a separate business. We take it as a business that can be complimentary to our existing online business.

So as we create these new business features, it will ultimately help our online music to continue to develop healthily. So for TME, our content and platform is indeed a one-off strategy, which will ultimately bring us more possibilities and real advantages in the business.

So we actually leverage the privileges generated from the offline business to continue to support the healthy growth of our online musical business. To TME, as we have already mentioned, we have the content and the platform, the two-win-in-one-body strategy, and we hope that in the near future, such strategy will help us to explore more possibilities and a competitive edge.

In addition, I would like to add that we are currently preparing to launch a year-end card member based on the surrounding SYP in this quarter, which will provide a service of discounting commercial products. This is actually the same logic as the current e-commerce member. So through such a set-up, we can also improve the profitability of our surroundings.

I also like to make a comment, I'm Ross, and I think in this quarter we plan to launch the SVIP annual membership card for the shopping malls, especially for the merchandise product. In other words, provide a discounted offering of the merchandise we have in our shopping malls. Fundamentally speaking, it is within the same nature as the e-commerce membership card. We hope by initiating such a great strategy, we will continue to improve the profitability of the merchandise.

Thank you. And then this question comes from Alex Yao from J.P. Morgan. Alex, please.

Thank you, management, for taking my question and congrats on solid quarter. Just want to follow up with this fans economy development. As you guys expand from online music distribution into the broader fans economy, including artists-related merchandise, offline performance, connectivity between artists and fans, et cetera, et cetera, where do you see as the biggest opportunity and what do you see as the biggest challenge? Let's say one to two years for you.

Thank you. Thank you very much. Thank you for accepting my question. First of all, congratulations to the company for achieving a very good performance this quarter. I have a follow-up question to ask about the development of the fans' economy. Because the company has expanded its fans' economy from traditional music to a wider range, including the relevant surroundings of artists, as well as current concert performances, as well as some platforms of interaction between our artists and fans. In terms of management, what do you think is the biggest opportunity for future development, especially in the next one to two years?

And what is the biggest challenge? Thank you. The biggest opportunity is still, as Ka-sheng mentioned, we still need to establish a comprehensive service for copyright, as well as around the world. In fact, the fans economy is not a separate business model.

Talking about the biggest opportunity, as Koshin has already mentioned, fundamentally speaking, the company is still committed to building a comprehensive service platform, including the copyright content, the merchandise, as well as the privilege. So we believe that France's economy is not something separate. It's already within our system.

So for us, what we are more concerned about is our... and how to have a closer link with our online platform to promote our user size at the same time. This is actually what we care more about.

At least for the company, what we truly care about is leveraging the merchandise as well as the AirFly concept to continue to forge a deep bond between the AirFly and online platform. In that way, we will be able to continue to grow our subscriber base. This is something the company really counted on.

So in terms of opportunities, based on our advantages in copyright cooperation, we are looking forward to extending it. We are now able to extend our copyright advantage from international and domestic copyright to our current comprehensive music service.

So now, and we do enjoy great advantage on copyright, but what we do is trying to further expand our advantage in copyright in both China and internationally. And we hope what we could be is a comprehensive music entertainment service to our user.

Regarding the challenge, and I think to some extent, we really need to make sure the size and development of the platform can help us to make sure we have an integrated development for both content and the privileges. The biggest opportunity for us this time is that we will be doing GD. We will be doing GD abroad. In the future, there may be other areas in Southeast Asia. So basically, our surrounding areas and our concert halls, these comprehensive services, we think that in the future, internationalization should have a relatively... In the next few years, there should be a development that we look forward to.

Another opportunity I do notice that for this quarter, we organized the concert for GD Dragon. It was staged in overseas countries and very likely to have extra stations in Southeast Asia market. And at the same time, besides providing the EarthFly concert, and we also have the merchandise as a comprehensive service. This will help us to continue our international expansion.

Thank you. The next question comes from Macquarie. Ellie, please.

Good evening, management. Thank you for taking my question and congrats on the strong result. We are very encouraged to see all of these exciting developments and initiatives. So my question is really on our long-term positioning. Could management share how we foresee our longer-term revenue mix and how this could further evolve, especially seems like we are expanding into more diversified kind of music offerings? And also taking a much longer-term view, how do you see TME expanding positioned on the entire entertainment value chain. Thank you.

非常感谢,谢谢管理层,晚上好。 非常感谢接受我的问题。 首先恭喜公司在本季度取得的亮眼的成绩。 我们作为投资人也非常高兴能够看到 公司所采取的各种发展的举措和相关的项目。 我的这个问题更多是关于公司的一个长期定位。 管理层是否能够帮助我们分享一下, 从长期角度来说, 公司的一个收入构成会是怎么样的? 未来的进一步发展会是怎样的? Especially seeing that we have achieved more diversification in music products and our services. From a more long-term perspective, how does the company view our entire group, including our business, in terms of the position of the entertainment value chain as a whole?

Thank you. I think we will continue to advance the development of the company as we have done in the past.

Regarding the overall position of the company, as Office, we are still going to leverage our one-body, two-wing strategies. That is the platform plus the content ecosystem to continue to advance our strategy.

With the stable development of our music media platform, our future main income and profit will also come from our online music.

As we have a very steady development for the live streaming music platform business, I do believe in the near future, the key source of the revenue and profit are coming from our online music business.

Advertisement business is also another highlight of our overall business.

So in the long run, I believe the advertisement revenue growth is even going to be kind of faster than the online music revenue growth. But indeed, both are all very important growth drivers with our online music revenue.

我们在内容还有演出以及艺人粉丝经济周边等等的收入也会持续有一个比较好的一个增长。

Well, regarding the social entertainment, our revenue has already been stabilized. But in the near future, we will have a new growth driver, as Shirley and Ross has already introduced to you. Besides the content, we also have the performance, a fly concert, fancy economy, including the artist merchandise. Those will also continue to contribute revenue to the company with nice growths.

So from the island of the development of TMP Group, we will strive to continue to make better progress in our current core business model. At the same time, we also hope to make improvements in the future, including some new businesses, including Chang Yingping, which we just mentioned, and a new expansion overseas. We hope to bring more opportunities for new businesses to grow.

So generally speaking, and for TME, we're still going to take a development or retention in the near future. Our key focus is to continue to develop the company based upon our existing model, where at the same time, we were also going to keep an eye on the new business, for example, long-form audio, as well as our international business expansion. I surely believe they will also provide extra acceleration for our existing business.

Thank you. And the next question comes from Wei Xiong from UBS. Please, your line is open.

Sure. Good evening, management. Thank you for taking my question and congrats on a solid quarter. So earlier, management mentioned the strong advertising revenue growth this young year, which was partly helped by a newly launched ad-based membership. So could management share more detail about the revenue and subscriber contribution from this new membership? And what's the operational strategy to scale it up and maximize the revenue opportunity here without affecting the conversion to the standardized subscription plan? Thank you.

Thank you, Manager Ceng. Thank you for answering my question. Congratulations to Manager Ceng for a brilliant result this week. I heard Manager Ceng say that we saw a very strong increase in advertising revenue. To a certain extent, this is also due to the online membership model that we introduced before. Could you share with us the details of the revenue and the specific details of the subscription level in the new online membership model? Without affecting our standard subscription conversion, Actually, I think the fast growth of the advertisement business is coming from the online advertising rather than the ad-based membership growth. Therefore, in the near future, I think at least for the advertisement business, incentivized-based advertisement is still going to be the key in the next few years.

Since free advertising is different from standard advertising, the online advertising model can be used for all users, because it is an incentive model for all users. Therefore, we are looking forward to the development of the income of online advertising.

Different from the standardized free advertising, the incentive-based advertisement is for all the users. It is a common and general incentives model to all users. So we are still confident in the future growth from the incentive-based advertisement business.

Actually, with the existing user base of the incentivized ad business, about two months ago, we started a pilot on the advertisement membership format. Just now, I have already mentioned for ad-based membership, the ROP is relatively low, but it can provide a differentiated solution to different user groups. So I think in the near future, for ad-based membership, plus our standard member, as well as SVIP, it's a three-tier membership system.

It can help us to continue to broaden the size of our subscribers and the user.

So this is a relatively important way for us to operate. So this is also something that we've been paying attention to in the past two months. But it's still early in the process. If we have further progress in the future, we can share it with you.

So this is indeed a very important strategic operational direction for us to go. That's the reason for the past two months, we actually attach great importance to the content of the platform. But I have to say it's still in the infancy stage. If there's any nice progress being made in the near future, we will surely share it with all of you.

We still have some questions and we'll take the last two. So Roger from Berkeley, your line is open.

Roger, please. Roger, can you hear us?

Thank you, management, for taking my question. And congrats on a very solid quarter. So my question is on operating expenses. For the last couple of quarters, our bottom line continued to outpace our top line growth, thanks to very successful cost reduction in terms of sales and marketing expenses and in GNN expenses. Should we see this trend to continue for the rest of 25 and 26? Given that we have identified so many growth opportunities, the management has to talk about how should we think about our operating leverage from this point on. Thank you.

I'd like to thank the management for accepting my question. First of all, the company has achieved outstanding results in this quarter. My question is related to operating expenses. In the past few seasons, we can see that the overall profit growth of the company has actually exceeded our income growth. This is mainly due to the company's progress in the market. Since the company has so many opportunities to grow in the process of business development, I would like to understand the current situation. Thank you very much.

Thanks for your question.

Our monthly expenses... especially the sales expense, is actually being used for the promotion of the content as well as traffic gain for the channel.

We will adjust these two parts according to the market competition. Currently, we will continue to increase the investment in music content and music channel promotion.

Well, for both, we were going to make an adjustment according to the market competition. As of now, what we do is to continue our investment for the musical content promotion investment as well as the music channel promotion.

Well, regarding the R&D expenses, we will always keep an eye on the new technological empowerment

to see how the new technology will bring the industrial innovation and the new opportunities.

And we do foresee that compared with 2024 and the

Absolute value of the operational expenses will grow compared with the baseline of 2024.

但是我们会控制这个费用的增长比例会低于这个收入增长的比例 那我们的净利润率和净利润都有一定的这个空间吧

But we will make sure we control the expenses growth would always be slower than the revenue growth. In other words, we still leave enough growth for the net profit rate and the net profit.

Okay, in the interest of time, we'll take the last question from Maggie from CLSA. Maggie, please.

Thanks for taking my question and congrats on the very impressive set of results. My question goes back to online music subscription business. Can you share a bit more on the super VIP penetration? It's our full trend and the overall retention rates in this quarter and overall. We noticed that many of the drivers behind super VIP penetration are time-based or event-driven type of activities. Just wondering how shall we think about the sustainability of such growth? What would be management's top priority in driving a sustainable revenue growth in the superfan economy? Thank you.

非常感谢管理层接受我的提问。 首先,祝贺管理层在本季度取得了非常亮眼的成绩。 我的问题又回到在线音乐的包月业务上。 能不能请公司简单和我介绍一下目前SVIP的一个渗透率的基本情况。 as well as its basic trend in this quarter, as well as its flow rate. I realized that one of the main driving factors behind the penetration rate of SVIP is some activities that are driven by time or events. I want to know if such an increase in SVIP is sustainable. How can the company and the management level use the corresponding strategies and the corresponding methods to ensure the sustainable growth of our fans' economy? Thank you.

Thank you very much.

But first of all, I think there will be some misunderstanding here I need to clear. And first of all, the key growth driver of SVIP penetration ratio is not on time or not on any single event. It just happened to be when there's a new sound or new algorithms being released, there might be some marginal growth from this release.

. . . . . .

Well, as already been stated in our prepared remarks, we now have 50 million SVRP members and 124 million subscribers. And you can then calculate the SVRP penetration ratio, where we also going to see the penetration ratio will continue to go up, including the ARPPU and retention, they are all ramping up. And we're very likely and happy to see the growth trajectory is in line with our expectation.

The driving force of our core SYP is mainly from our high-level sound and sound effects. And then we mentioned the content of the long audio screen, including the tree bricks. So it's basically still in its system, which is what we talked about from the green diamond table or from ordinary members to upgrade to SYP. So the growth of its core SYP is mainly from such a basic system.

Well, actually, the key growth drivers are still coming from the primary sound quality, as well as the long-form audio content, as well as digital IP. To some extent, we also have the regular members who have been converted into the SVIP. So the fundamental logic of SVIP growth is still coming from our well-consolidated business growth.

So let me share with you a recent one. Today, we have an album like Chen Yixun's. In fact, the sales on this album of S1P has actually reached a proportion of what we expected. It's no longer like before, a scale of non-music sales. It should be a scale of non-music sales.

For example, let me just share a case with you. For example, the Eastern Trans new album and the sales of this album with our SVIP is already hitting our expectation. We no longer to record it as a single album sales.

So our SYP should still be developing steadily. Finally, I have a question for you. Can the fan economy continue? As I said, we will prioritize doing more long-term, from half a year to a year of business season. So our goal is to make our business, which is related to artists, more stable and developed.

So that's the reason I think our SVIP will continue to grow in a very robust manner. To the second part of the question regarding whether the fancy economy business is going to be sustainable, as I have already mentioned, we did many preparations at least six months to 12 months before the event happened for the scheduling. In that way, we will be able to make sure we will be able to run the artist-related business in a more robust and sustainable manner.

At the same time, we now have a more important task for the team, which is that when there are no big events in the daily life, we can maintain a more stable growth rhythm for our surrounding sales. At present, we also see that such a daily sales is also growing steadily. So basically, we are all trying to make our fans' economic income develop according to our rhythm.

One more additional comment to our team. If there's no major offline concert event happens, we're starting to maintain a rapid growth of the merchandise sales. As you may see, we already have a steady growth on that. What we're committed to do is to make sure our fancy economy revenue will continue to grow as we expect it.

Thank you, and thank you everyone for joining us today. If you have any further questions, please feel free to reach out to the IR team. This concludes today's call, and thank you once again, and look forward to speaking to you next quarter. This concludes today's call.

Thank you so much.

Thank you. Bye-bye.