Kuke Music Holding Ltd

NYSE:KUKE

Earnings Call Transcript 2022-Q1

[Operator]

Good morning and good evening, ladies and gentlemen. Welcome to Kuke Music Holding Limited First Quarter 2022 Earning Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks.

I will now turn the call over to the first speaker today, Ms. Jane Zuo, Investor Relations Director of Kuke Music Holding Limited. Please go ahead, ma'am.

[Jane Zuo, Investor Relations Director]

Thank you, operator. Hello, everyone. Welcome to our first quarter 2022 earnings call. On the call with me today are Mr. He Yu, Founder, Chairman, and CEO; Ms. Patricia Sun, President; and Mr. Tony Chan, CFO of Kuke. Mr. Yu will share our views on the business model and strategic focus. Ms. Sun will then review our business operations and then Tony will discuss our financial details. Afterwards, we will take questions from the audience.

Before we start, please note that this call may contain forward-looking statements made pursuant to the Safe Harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance or expectations implied by those forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statement and risk factors included in the company's filing with the SEC. The company undertakes no duty to revise or update any forward-looking statements or selected events or circumstances after the date of this conference call.

As a reminder, this conference call is being recorded. In addition, a live and archived webcast of the conference call will be available on Kuke Investor Relations website at ir.kuke.com. You can check out our full earnings release on our IR website as well.

It is now my pleasure to introduce Mr. He Yu, Founder, Chairman and CEO of Kuke.

[He Yu, Founder, Chairman and Chief Executive Officer]

Thank you, Jane. Good evening and good morning, everyone. Thanks for joining us and welcome to our first quarter 2022 earnings call. Before sharing our Q1 financial highlights, I'd like to talk about the fundamentals of our strategy.

Firstly is our events, focus on classic music service. As demonstrated by Kuke's vision, we aim to expand the influence of classic music in China and throughout the global community. Our business segments include the licensing and subscription services, smart music learning solutions, live music event service, and new initiatives such as NFT technologies. These business segments are built upon the strong foundation of our classic music service.

Second is embracing the growth of China, according to the largest 2022 RPI reports. The Chinese recorded music market grew by 30.4% in 2021, which is above the average global growth of 18.5%. This puts China being one of the fastest growing markets to number six in terms of total recorded music revenues.

And the number three in terms of streaming revenues. Of the global music markets, respectively, as Naxos business partner in China, we believe the Chinese market has great potential for growth due to its large population base of classic music. Through the expansion of Kuke's and Naxos expertise, we will continue to unlock such potentials and share the charm of classic music with all music lovers in China.

Third is expanding our global presence. On the one hand, we are working evermore closely with Naxos to enhance our relationship with artists and performers around the world. On the other hand, we have also developed multiple initiatives to grow our global presence.

Fourth is cultivating technology. Kuke is a company that thrives at the intersection of art and technology. We embrace innovations to advance the development of the entire industry. This could be then demonstrated by our recent investment in KOLO, an NFT platform for classic music in the metaverse.

Now, let me turn the call over to our President, Patricia, to share with you more details on each business segment.

[Li Sun, President]

Thank you, Mr. Yu. Good morning and good evening, everyone. Now turning to the performance of our business segments. With regard to our classical music licensing and subscription segment, we added nearly 1,000 pieces of content through the long-term support of our international strategic partner, Naxos. This brings our total number of music tracks to over 2.9 million, which included 2 million tracks of traditional classical music and 363,000 tracks of jazz, world, folk and other genre of music. These contents in aggregate cover approximately 2,000 different types of musical instruments played by 97,000 musicians from 266 countries and regions. In addition, our content library also contains over 1,000 video titles, 465,000 spoken content tracks and over 5,000 volumes of sheet music.

Naxos, as the largest independent classical music content provider in the world, provides our content library with a wide range of standard and specialty repertoires of classical, jazz, word, folk, and traditional Chinese music recordings that span from medieval to contemporary.

In the first quarter, with Kuke's strong and ever-growing classical music content, our institutional subscribers increased to 809 across China. In addition to larger number of subscribers, the increasing adoption of large screen display in various commercial scenarios and at home has resulted in strong demand for long form videos, which usually comes along with higher contract value. In addition, people working from home as a result of pandemic also boosted the demand for streaming of long form videos.

We are now investing and purchasing more long form videos, including opera, live concert, ballet, documentary, master class and international competition, live streaming to capture the growth opportunities in the market. And we believe this market trends and dynamics should further drive the performance of our classical music licensing and subscription segment in the future.

Next, I would also like to share with you our business updates associated with Naxos. In April, Kuke and Naxos announced to joint sponsor the 10th Fritz Kreisler International Violin Competition, Austria's most important violin competition. As it's known to all, classical music is the universal language of mankind.

Through sponsoring some of the most renowned music events across the world, Kuke continues to expand the influence of classical music in the global community and to promote Kuke brand internationally. Going forward, Kuke will sponsor, promote and monetize increasingly more international competition.

In terms of our smart music learning solutions segment, despite the headwinds in a challenging environment for education business, we have prioritized establishing deep rooted collaboration with public schools and kindergartens since the fourth quarter of last year, with an aim to further enhance our revenue streams through providing high quality smart music learning solutions to the underserved market of art and music learning in China. For the first quarter, revenues from public school became our main revenue growth contributor in the smart music learning segment.

For our live music events segment, revenue in the first quarter reached RMB 13.8 million, mainly driven by income from the marketing, planning and execution services for live music events in China.

With that, I will pass the call over to our CFO, Tony, who will walk you through our financial details for the first quarter.

[Hoi Tung Chan, Chief Financial Officer]

Thank you, Patricia. And hello, everyone. Before we start our detailed financial discussion, please note that we'll be presenting non-IFRS measures today. Our non-IFRS results exclude certain non-cash expenses, which are not part of our operations. Details for these expenses can be found in the reconciliation tables on our press release.

Please note that, unless otherwise stated, all financial numbers we present today are for the first quarter of 2022 in RMB terms. All comparisons are on a year-over-year basis unless otherwise stated.

During the first quarter of 2022, our revenue increased by 128.8% to RMB 26.1 million from RMB 11.4 million in the prior year period, and of which our licensing revenue increased by 275.8% to RMB 1 million from RMB 0.3 million in the same period of 2021 due to the larger client base. Subscription revenue decreased slightly to RMB 3.4 million from RMB 4.3 million in the same period of 2021, mainly due to the decrease in sales of hardware products.

Revenue from smart music learning solution segment increased by 9.4% to RMB 7.5 million from RMB 6.8 million in the same period of 2021. Specifically, smart music learning solution sales revenues increased by 183.1% to RMB 1.2 million from RMB 0.4 million in the same period of 2021, mainly due to increased sales of smart music learning products to public schools in the first quarter of 2021.

Smart music learning solutions subscription revenue from kindergarten students decreased by 1.6% to RMB 6.3 million from RMB 6.4 million in the same period of 2021 due to the contraction of private kindergarten businesses in 2021.

Most importantly, total live music events segment revenue increased to RMB 13.8 million, driven by the substantial increase in live music events services revenue in the quarter. In addition, the total one-time disposal of obsolete inventory revenue was RMB 0.4 million as a result of the contraction of private kindergarten business.

In the first quarter of 2022, our gross profit was RMB 0.2 million compared – decreased from RMB 3.2 million in the same period of last year. Gross margin was 0.7% compared to 28.2% in the same period of 2021.

By segment, the gross margin of classical music licensing and subscription revenue was minus 10.3% compared to a positive 52.4% In the same period of 2021. Specifically, the gross margin of classical music licensing improved to minus 192.3% from negative 481.2% in the same period of 2021, mainly due to the year-over-year revenue growth in the quarter.

The gross margin of classical music subscription decreased to 45.2% from 86.6% in the same period of 2021, due to the decreased revenue and higher amortization costs of royalty payments.

The gross margin of smart music learning solutions segment was minus 3.1 % compared to positive 23.2% in the same period of 2021. Specifically, the gross margin of smart music learning solution sales rose to 35.8% from 28.8% in the same period of 2021 due to increased revenue from the business. The gross margin of smart music learning solution subscriptions from private kindergarten students was minus 10.1 % compared to positive 22.9% in the same period of 2021 due to the higher depreciation costs as a result of the strategic contraction of the private kindergarten subscription business.

The gross margin of live music events segment was 12%, mainly due to the increased revenue from the live music events services in the quarter.

Moving on to the operating expenses. The total operating expenses in the first quarter of 2022 decreased by 18.9% to RMB 40 million from RMB 49.3 million in the same period of 2021, and of which:

Selling and distribution expenses in the first quarter of 2022 increased by 14.4% to RMB 8.3 million from RMB 7.3 million in the same period of 2021. The increase was mainly due to the increase in the number of employees and, therefore, the salary and wages.

Administrative expenses in the first quarter of 2022 decreased by 38.9% to RMB 24.7 million from RMB 40.4 million in the same period of 2021, due to one-time listing expenses and higher stock-based compensation costs that incurred in the first quarter of 2021.

Impairment losses on financial assets in the first quarter of 2022 increased to RMB 6.6 million from RMB 1.6 million in the same period of 2021. This was mainly due to the increased impairment losses on accounts receivable.

Operating loss in the first quarter of 2021 (sic) [2022] was RMB 36.6 million compared to operating loss of RMB 37.1 million in the same period of 2021.

Our net loss was RMB 35 million compared to RMB 37 million in the same period of 2021. And non-IFRS net loss was RMB 17.1 million compared to non-IFRS loss of RMB 15.6 million in the same period of 2021.

In the first quarter of 2022, our basic and diluted loss per ADS were both RMB 1.18. Basic and diluted non-IFRS net loss per ADS were both RMB 0.58.

Moving on to our balance sheet and liquidity. As of March 31, 2022, we had a total of RMB 41.7 million in cash and cash equivalents. With solid cash position and improvement in financial results, we remain confident that we're on the right path by accelerating the growth.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

[Operator]

[Operator Instructions]. Our first question comes from Brian Li from AMTD Group.

[Brian Li, AMTD Group]

I have two questions here. The first one is, we noticed that your gross margin declined in first quarter. So could you please give us more color on this? And what's your guidance for the gross margin of this year?

And then, the second one is, there's a rapid growth in revenue from sales of smart music and learning solutions segment on a year-on-year basis. So, can we expect that growth to be sustainable in following quarters? And the revenue from the licensing also rose significantly and what's the key driver behind?

[Hoi Tung Chan, Chief Financial Officer]

I'll take these two questions. So for the first question, gross margin in the first quarter of 2022 decreased to RMB 0.2 million from RMB 3.2 million in the same period of 2021. The decline was attributable to the one-time disposal of obsolete inventory and the increased amortization of royalty payments. We expect the gross margin to be normalized for the full year.

So, for the second question about the rapid growth, the revenue from smart music learning solutions sales increased by 183% to RMB 1.2 million from RMB 0.4 million in the same period of 2021. This is mainly due to the increased sales of smart music learning products to public schools in the first quarter of 2022. And we believe the growth will be sustainable as we see stable demand from public schools.

Revenue from licensing increased by 275.8% to RMB 1 million from RMB 0.3 million in the same period of 2021. This is spurred by a larger client base as a result of growing demand for classical music in China and new use cases. For example, the increasing adoption of large screen display in various commercial scenarios and at home has resulted in strong demand for long form videos. And people working from home as a result of pandemic also boosted the demand for streaming of long form video.

We're now investing or purchasing more long form videos, including opera, live concert, ballet, documentary, masterclass, international competition, live streaming, et cetera, to capture these growth opportunities in the market.

So, that is my reply to these two questions.

[Operator]

The next question comes from Dick Chang [ph] from Kowhai Asset Management [ph].

[Unidentified Participant]

I have two questions today. The first one being, would you please elaborate on the strategies of working with public kindergartens and schools? And what's the latest development on collaboration with private kindergarten? That's the first question.

And my second question is, could you please elaborate on your strategy of expanding your business in a global market?

[Li Sun, President]

This is Patricia. I will take the two questions. The first one is about strategies about working with public kindergartens and schools. So, since the beginning of this year, considering the headwinds in the challenging environment for private kindergartens subscription business, we have focused more on providing smart music learning solutions to public schools, which is in line with the policy that encourages art education in China.

Therefore, for the first quarter, we have been gradually scaling down the private kindergarten subscription business, while the revenue from public school became the main revenue growth contributor in the smart music learning segment.

So, regarding the second questions about our strategy of expanding business in the global market, I will say, firstly, Kuke has been working closely with our strategic global business partner, Naxos, to enhance our relationship with artists and performers around the globe and to expand the reach of classical music.

As Naxos' business partner in China, we believe the Chinese market has great potential for growth due to its large population base and the currently lower penetration rates of classical music. The company will continue to unlock that potential and share the charm of classic music with all music lovers in China.

Regarding the content strategy, on one hand, we continue to invest in classical music copyrighted content by expanding collaboration with international music labels. During the first quarter, we have added full category long form videos content, including opera, live concerts, ballet, documentaries, masterclasses, international competition, and doing live streaming to further enrich our classical music library and also capture the growth opportunity across the China market.

On the other hand, we expanded online distribution on our leading streaming platform for our self-production content of renowned Chinese artists and their new work. For example, our self-production, The Sound of Nature, has been successfully distributed to the overseas markets through ARC label and Naxos global network. As such, we expect to gradually increase our global revenue from this business.

At the same time, we are committed to grow in Kuke's global presence. As mentioned before in the script, in April, Kuke and Naxos announced to jointly sponsor the 10th Fritz Kreisler International Violin Competition, which will be held in September this year, which is also Austria's most important violin competition.

Classical music is known as the universal language for mankind, and sponsoring the most renowned music events across the world will help us to expand the influence of classical music in the global community and also promote Kuke, its brand internationally. And going forward, the company will sponsor and promote and also monetize increasingly more international competition.

Meanwhile, we will also continue to explore new initiatives and the global business opportunities. Recently, we started our investments in KOLO, an NFT platform for classical music in the metaverse.

We also embrace innovations to advance the development of the entire industry. And we firmly believe that the company, Kuke, is a company that will thrive at the intersection of art and technology.

[Operator]

Next question comes from Tong Wang from Tiger Brokers.

[Tong Wang, Tiger Brokers]

I have two questions. And the first one is how is your latest cash position and do you have any financing plans recently? And my second question is, we noticed an impairment losses on financial assets of RMB 6.6 million. And could you please explain this in detail?

[Hoi Tung Chan, Chief Financial Officer]

I'll take these two questions. For the cash position, as of March 31, 2022, our cash and cash equivalents were RMB 41.7 million. We believe there are plenty of global M&A opportunities in the classical music industry. And when we see a desirable acquisition target, we might be thinking of alternative finance accordingly. So, it really depends on the situation. But, currently, for the cash position, I think we're pretty sufficient right now.

So, for the second question on the impairment loss, the impairment loss were all related to accounts receivable in relation to the smart music learning solutions business.

[Operator]

Thank you. Seeing no more questions in the queue, this concludes the call. Thank you, everyone. If you have any further inquiries in the future, please feel free to contact Kuke at [e-mail]. Thank you.

[He Yu, Founder, Chairman and Chief Executive Officer]

Thank you.