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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen. Good evening and good morning and thank you for standing by. Welcome to the Tencent Music Entertainment Group 2020 First Quarter 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, Ms. Millicent Tu. Please go ahead, ma’am.
Thank you, operator. Hello everyone, and thank you all for joining us on today’s call. Tencent Music announced its quarterly financial results today after the market close. An earnings release is now available on our IR website at ir.tencentmusic.com, as well as via newswire services.
Today, you’ll hear from Mr. Kar Shun Pang, our CEO, who will start the call with an overview of our recent achievements and our growth strategies. He will be followed by Mr. Tony Yip, our CSO, who will offer more details on our operations and business developments. Lastly, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions.
Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of 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 these forward-looking statements.
All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the Company’s filings with the SEC. The Company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law.
Please also note that the Company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in the Company’s earnings release and filings with the SEC. You are reminded that such non-IFRS measures should not be viewed in isolation, or as an alternative to the equivalent IFRS measure, and other non-IFRS measures are not uniformly defined by all companies, including those in the same industry.
With that, I’m now very pleased to turn over the call to Mr. Kar Shun Pang, our CEO. Cussion?
Thank you, Millicent. Hello everyone, and thank you for joining our call today. [Indiscernible] after we released our 2019 Annual Results two month ago. Even though I’m still wearing a mask like last time, but we still have a smiling face under the mask and every one of us at TME remain very positive. It is because we truly believe that we have been - what we’ve been doing is very valuable to our users and society.
Music is really the medicine that can heal and a company with people no matter what the situation is. I hope to see every one of you well during the pandemic period and we are all together. In the first quarter of 2020. Our online music subscription revenues further accelerated its goal including 70% year-over-year compared to 60% and 48% in the fourth and first quarter of 2019. Online music paying users reached at 42.7 million up 50% year-over-year. Paying ratio expanded to 6.5% up from 4.3% for a same quarter of 2019.
ARPPU for our online music services inclusive 13% year-over-year primarily [indiscernible] from users increasing willingness to pay for premium subscription package. Our outstanding online user subscription revenue grew mitigated the softness in other non-subscription market use primarily a rise from the COVID-19 pandemic. We saw decline [ph] 7% overall year-over-year revenue growth for our online music services. Some of our key strategic focus during the first quarter include further enriching our leading content offering partnering our capabilities in content discovery and promotion and supporting indie musicians.
In terms of further enriching content to begin with, we have made significant progress in long-form audio and underpenetrated fast growing market in China that we are committed to serve. Recently through the strategic partnership with China Literature others, we’ve gained quick access to an expansive library of high quality IPs and exclusive licenses for some page turning online literature series with a tremendous fan base in China. Now we have obtained the audio application right of the majority of China Literature’s top 100 most favorite online books. In addition to audio books, we also produce high quality audio drama who help super [ph] IPs to realize more to add to value. Such fast progress is starting to position us at the forefront of the gain.
As we aggressively scale our content offering the development of our podcast ecosystem has also achieved initial success. By the end of April 2020, our platform attracted approximately 10,000 new podcasters and manly established KOLs including well known artists, writers and online broadcaster who produce more premium UGC audio work. Our self-produced audio programs, our audio books [Foreign Language] has achieved over 1 billion total streams by the end of last month and become a very poplar audio show particularly for the young demographic.
On April 21, we launched a new application for long-form audio [Foreign Language] taking a rather important step to provide dedicated audio entertainment services to our users. We also begin to rollout a separate long-form audio membership package. All these developments will help us build a solid foundation for our future development and realize more value of our synergies between online usage and long-form audio business.
Second, we continue to solidify our content leadership with popular genres enjoyed by the younger demographic. The cooperation with UM Group one of Japan’s highest selling record companies in 20th Century enable us to seek more opportunities and rebuild a closer relationship. A platform offering highly popular content from renowned Japanese artist. We also actively expose new interactive game page such J-Pop singing contest to bring an interactive and comprehensive news experience of listening, watching, singing and socializing. And so we sell our platform has become a popular destination for J-Pop in China.
Third, on supporting our regional content creation. Time and again, we demonstrated our unique capability and knowhow in talent discovery, cultivation and promotion. Thanks to our fast growing indie musician program the number of participating musicians and our regional songs produced doubled year-over-year in the first quarter of 2020. We rolled out an attractive financial incentive plan earlier this year. It has led to impressive growth in the number of indie musician songs that are exclusively licensed to us, which increased by more than 800% year-over-year.
We ran an extra mile to promote indie music. We launched the program [Foreign Language] targeting emerging musicians and also formed a strategic alliance with [indiscernible] through the launch of program [Foreign Language] to further enhance their cooperation with independent musicians and KOL. Additionally, we continuously leverage our profound user insight and powerful promotional capabilities to support indie musicians to reach hundreds of millions of music lovers.
Last quarter, we shared the success story of Hai Lun, a grassroot singer and his song Girl by the Bridge [Foreign Language]. This quarter I’m pleased to share two more successful stories. The World is So Big to Meet You [Foreign Language]. A song from [Foreign Language] and Youth, [Foreign Language] a song produced by [Foreign Language]. Both songs were released during the first quarter and had already achieved almost five billion cumulative streams on our platform. Their success is our success, as a fast growing and leaning indie musicians’ program with the largest music user base. We are very pleased to say as of March 31, 2020. We have successfully promoted indie musicians’ content to hundreds of millions of users on our platform.
While the COVID-19 global pandemic has changed the businesses and the ways of life in different aspect. It has also brought emerging opportunities in the digital era. We have seen some behavioral changes during the lockdown and observed an increasing number of users listening to music with home appliances, accessory, TVs and smart devices. As we saw in the first quarter of 2020, our online music MAU for mobile devices and in-home appliances increased by 3.5% on the year-over-year basis such behavior patterns could persist even after the life returns to normal course, the COVID-19 pandemic and potentially provide additional add news for our pay user growth.
The launch of TME Live is a great example of how we quickly and innovatively deploy technology to bring offline concerts, online through live streaming. Within five weeks after its launch in March 2020 we successfully held five online concerts. These include ones for established artist like JJ Lin [Foreign Language] and Rene Liu [Foreign Language] and special things such as an OST concert for the popular web drama series Someday Or One Day [Foreign Language] leveraging our solid partnership with labels and artist.
We are very excited to have built a strong and diversified pipeline to anchor our event. We have also pleased that, the user response TME Live exceed our expectations and affirmed their value creation cycle between online user and social entertainment services.
This concludes my prepared remarks and now Tony will discuss the first quarter result of our social entertainment services as well as other focus areas. Tony, please go ahead.
Thank you, Cussion. Hello everyone. Apart from what Cussion just mentioned there are few other exciting areas that we want to highlight for both our online music and social entertainment services. For online music services, first we kept stepping up our assets to promote video enrichment. We emphasized short videos through upgraded version of Kugou Music. This provides our users an additional dimension of entertainment while increasing the exposure of video content creators on our platform. It has also contributed to improve the user engagement leading to Kugou Music’s increased DAU penetration rate, a daily average user time spent on video content after the upgrade.
Second, while music streaming used to be a less socially interactive experience. We continued to push boundaries by building and promoting and engaging user community through our fan-based programs. We invited many artists to personally interact with their fans on our platform. Their engagement in online discussions and participation in song reviews in turn have contributed to better promotion results and increased stream volumes of certain songs on a daily basis.
Thirdly, we kept sharpening our data analytics capability and refining our personalized recommendation. In particular, the personalized playlist continues to receive positive user response. In the first quarter, the DAU penetration rate and average daily streams of personalized playlist more than doubled on a year-over-year basis.
Now turning to social entertainment series, while its revenue growth moderated due to the impact from COVID-19 our mobile MAU and paying user growth remained robust, up 13% and 19% year-over-year respectively. Benefiting from the growth initiatives, we took to improve user engagement and positive impact from user spending more time on our online karaoke platform during COVID-19.
With respect to online karaoke services. First, we continue to strengthen WeSing’s core karaoke features to make it more user friendly for users to interact through singing. As such, both MAU penetration rate and average daily user time spent of the song recording function achieved healthy sequential growth in the first quarter. In addition, to meet the evolving and expanding user demand we incubated Kugou Changchang, an online karaoke app designed to better serve Kugou Music’s users with deeper integration between music streaming and online singing across the two apps. Despite its relatively early stage we are pleased to see Kugou Changchang achieving initial success with MAU growing 800% year-over-year to reach nine million.
Second, we focused on strengthening WeSing’s social attributes. We continue to grow the number of online singing rooms based on diversified music-centric themes. In the first quarter of 2020, we are happy to see the unique real-time social attributes and interactive features built in the online singing rooms resulted in sequential increase in singing room MAU penetration rate and user time spent. Third, we further strengthened video enrichment within WeSing. With more types of video content now dynamically integrated and more video tools deployed to make sharing easier and more eye catching. This has boosted the amount of video content and average daily video users on WeSing.
Now for our live streaming services, against the impact caused by the COVID-19 pandemic we work tirelessly on many fronts to pave the way for faster recovery in the second half of 2020. We continue to expand content categories such as games, ACG and matchmaking. In the first quarter of 2020, over 30,000 gaming hosts joined Kugou Live as its DAU penetration rate of game live streaming has been increasingly consistently. In particular, Kugou Live recently launched [indiscernible] cooperation agreement with Tencent Games obtaining the right to live broadcast the full range of Tencent Games. We’ll also add more interactive activities and privileges to further incentivize user spending and continue broadening our live streaming content categories to attract more new users.
And finally, to boost our promotional capabilities offline in April 2020, we acquired an equity stake in Radio Music Warehouse, RMW in short. A leading provider of licensed music streaming service to public venues in China. From system design and integration to content curation and support. RMW is an integrated solution provider of licensed music in public venues including hotels, restaurants, super markets, convenient stores and more. Compared with Europe and the US, this market in China is still at a nascent stage with promising long-term prospects.
For TME, this investment serves as another important step to expand our comprehensive music entertainment platform from online to offline. And with that, I’d like to turn it over to our CFO, Shirley Hu for closing review of our financials.
Thank you, Tony. Hello, everyone. In the first quarter of 2020, our revenues were RMB6.3 billion up 10% year-over-year driven by 27% growth in online music services revenue and 3% growth in social entertainment services revenue. Online music services revenue were RMB2 billion up 27% year-over-year. The increase was mainly driven by sustained outstanding performance from music subscription that prevented by strong growth in advertising services despite impact from COVID-19 partially offset by decrease in sublicensing revenue.
Music subscription revenues were RMB1.2 billion up 70% year-over-year driven by continued growth of subscribers and improved in ARPPU. Basically number of subscribers increased 50% and subscribed ARPPU grew 13% year-over-year reflecting continued success of paying users retention and content paywall strategy.
Social entertainment services and other revenues were RMB4.3 billion up 3% year-over-year primarily driven by growth in online karaoke and live streaming services despite negative impact from COVID-19 adjustment to inactive future in live streaming and a change in timing of releasing Annual Gala. Our year-over-year basis paying users grew 19% demonstrating the rise in our product.
ARPPU decreased 13% which would primarily due to impact from COVID-19 as users reduced spending to manage uncertainty. Adjustments to inactive users also had a short-term impact ARPPU in live streaming. The cost of revenues were RMB4.3 billion up 70% year-over-year driven by higher revenue sharing fees and the content expenses. Our gross margin was 31.3% in Q1, 2020 and decreased 4.1% from 35.4% in Q1, 2019. This was mainly attributable to higher revenue sharing fee resulting from additional promotion to live streaming paying users to meet guided impact from COVID-19 and adjustments during the active users in live streaming. As well as increased revenue sharing ratio to online karaoke performance to strengthen out platform competitively.
Gross margin for online music business has include in Q1, 2020 and is expected to keep improving overtime as our music subscription revenue grow. Total operating expenses were RMB1.2 billion up 12% year-over-year. Total operating expenses as a percentage of total revenue was 18.4% in Q1, 2020 increased slightly from 18.1% in Q1, 2019. The increase was mainly due to increase in R&D employees related cost, as we continue to invest in R&D to expand our product competitively, advantage and popularity innovation.
Our sales and marketing expenses as a percentage of total revenues remain relatively unchanged from Q1, 2019 as a result of our ongoing focus on operating efficiency. Our effective tax rate was 12.8% in Q1, 2020. Our net profit attributable to equity holders of the Company were RMB0.9 billion, non-operating net profit attributable to equity holders of the Company were RMB1.1 billion and non-IFRS net profit margin was 17.5%.
As of March 31, 2020 our combined balances of cash and cash equivalents term deposits were RMB21.9 billion representing a decrease of RMB1 billion from RMB22.9 billion as of December 31, 2019. The decrease in the balances was primarily due to investment in consortium to procure an equity interest of Universal Music Group during the quarter. Overall, despite the impact from COVID-19 we attribute strong growth in online music services partially in music subscription as well as healthy growth in social entertainment business in the first quarter of 2020.
We expect to see a [indiscernible] year-over-year growth in the next billed quarter as the COVID-19 pandemic is on the control and the business started getting back to normal in China. From long-term perspective, we continue to be optimistic about future of the broad music industry and are confident in overall ecosystem and product pipeline that we’re building. We’ll continue to focus our enhanced and expanding our product and the service offering including long-form audio while maintaining core content investment.
This concludes our prepared remarks. Operator, we’re ready to open the call for questions.
[Operator Instructions] For the benefit of our participants on today’s call, please limit yourself to one question. If you have additional question, you can reenter the queue. [Operator Instructions]
Our first question today. Eddie Leung of Bank of America. Please go ahead.
Can we ask two questions? The first one is about the progress in moving more songs over the payroll. So could talk a little bit about the recent progress as far as the outlook for that? And then secondly, any more detail on the potential launch of live streaming within QQ in terms of expanding the coverage of users. Thank you.
Sure, thanks for your question. In terms of payroll we have said that as of the end of 2019 our content behind the payroll is approximately 10% of the streaming volume on our platform and internally, we estimate that by the end of this year the payroll should account for approximately 20% of our streaming volume as of the end of Q1, we are on track to hit that 20% target.
Now however, I think we want to highlight that number one. We’re obviously very pleased with the online music subscription revenue growth growing 70% year-over-year which is actually the fastest reported growth ever in our reported history. We had suffered from a little bit of COVID-19 impact during the first quarter, so without the impact from COVID-19 we would have grown even faster because music from an MAU perspective as always from a resulting paying user perspective saw some users tend to consume more karaoke or games or vide when they spend an unusually long time at home.
Right so, but on the other hand, if we were to include music MAU from in-home IoT devices such as smart speakers and smart TV which is not currently included in our reported MAU data, if we were to include those our MAU would actually have grown 3.5% on a year-over-year basis. So we saw those in-home device consumption on our platform actually mitigated some of the weaker mobile MAU. Like we said before, I think given we already have a very large user base in terms of music MAU, our focus continues to be driving user conversion from free to pay and we continue as you could see to make excellent progress in the current quarter’s results.
Your second question is about when are we going to launch QQ Music live business in our plan we’re going to launch in the second half of this year which is a targeting to be in June to July. All the team’s working so hard and getting it ready for the launch, so we’re positive in this area. And this year we’re going to test water and after we have prepared everything. I think that it will provide further contribution on the social entertainment - perhaps in the years to come.
One more point I would like to add this, even though the pandemic situation to bring some of the negative impact on the online music’s MAU. But we’re still seeing that in this quarter we’re still having 2% quarter-to-quarter growth in our online mobile music MAU. So we’re doing pretty good and we’re also expecting better recovery after the pandemic situation was under control in China.
Understood. Thank you.
Our next question will come from John Egbert with Stifel. Please go ahead.
On the social entertainment side obviously MAU growth is very strong despite the COVID-19 impact and pay user growth as well. I’m wondering if you’re seeing any signs of ARPU stabilizing at all through May as things have gotten a little bit more normal. And on the Kugou Changchang, I’m curious what the strategy is there a separate apps versus integrated app approach and how you think subscription in overall monetization for the long-form content, the spoken words side might differ from music as you take the strategy of separating an app.
Okay, thanks for your questions. When we’re talking the social entertainment MAU, yes, we’re having a really good result this year especially during the pandemic situations, more people spending more time at home and they need certain forms of entertainment. So we’re seeing a very positive result that our active users being more active and even some of the less active users we active their account and started the same trial and users who never came with their front at home. We’re seeing that the overall users’ behaviors is actually is changing. But even though after the pandemic situations people start getting back to their old life. We still want to hope that our over order app, the effectiveness of our users will remain in relatively good threshold and can persist in coming months.
What we’re thinking about is right now since during the pandemic situations even though it helped our total active users. But we’re seeing that it will have some impact on the revenue side. So the impact growth of the revenue because first of all some of our live broadcasters they’re not being - they’re maybe being quarantined or stay at home. So it impacted total number of on air time during the pandemic period and also the pandemic is also bringing some negative impact to the overall economy, so maybe our number of users intention for spending on the live broadcasting services will be impacted small. But after the pandemic area [ph] there’s a period we’re seeing that we are actually experience recovery right now. So we’re expecting to see that the revenue for the rest of the year, we’ll continue in healthy growth and also the ARPU that you mentioned will also be improved as well.
In terms of Kugou Changchang starting from this quarter, we have started to include the Kugou Changchang data into our MAU and the data that you see in our reported filing has been adjusted retrospectively so that they’re apples-to-apples comparison. And as you could see, Kugou Changchang despite the very early stage saw a normative growth growing from one million MAU last year to by over 800% to about nine million MAU this quarter. and the strategy there is, TME has a very good track record of executing on multi-brand product strategy to more effectively cover different user segments and Kugou Changchang is another perfect example similar to multi-brand product strategy that we follow on online music and that’s because Kugou Changchang allow us to better serve specifically the user demographics that are more closely aligned with Kugou Music than we see in our QQ.
So overall, social MAU grew very strongly this quarter but I’d like to add that during the COVID-19 pandemic as people tend to stay at home spend time more on karaoke during that period. Our MAU’s and paying users did enjoy a little bit of a boost during Q1 and so it would be very normal and reasonable that in Q2 as users return to work and they have less time to spend, it will be healthy to see our MAU in QQ [ph] normalize back down to the level that is slightly below Q1 and paying users who’ll probably be around similar level in Q2 as in Q1. But overall, from a revenue perspective we do expect as Cussion mentioned, we do expect our Q2 year-over-year revenue for our social entertainment revenue to be strong than Q1.
And also, you also mentioned about the long-form audio strategy the Kugou Changchang team apps that we just launched. I would like to add a little bit more comment on it just because first of all, we’re seeing that long-form audio is a strategic area that we want to - will be focusing on. First of all because our users - we have a strong user base. They’re used to listening to music and enjoy all other related content on our platform. It will be very natural for them to spend more time to listen to some long-form audio fformat. We have tried only six months ago and we have achieved very good result and it also laid a good foundation for us to be more encouraged and started to rollout, not just like new features or functions on our music platform that we try to launch our independent long-form audio apps as well which is cool Changchang.
The reason is, even though we just launched at the end of April less than a month but we have already received a very good feedback by users. We’re fine tuning our product and at the same time besides launching out the new applications we’re also rolling some of our new multi subscription plan with marketing promotions and really good price tag and I think we also encourage the market and we’re receiving very good positive feedback. So we would like to share with you more in the future once we got any more update regarding the long-form audio strategies.
Great, thank you.
Our next question today will come from Binnie Wong of HSBC. Please go ahead.
My first question is that, I understand the company is exploring many new initiatives, new opportunities and then also like the Changchang and the TME Live targeting like the UGC content, new UGC content. How do you see our monetization plans in terms of how you plan to monetize this new opportunities and whether you see any cannibalization to our existing app users? And following-up on this question is, whether you’re saying that will be because we’ll be stepping up ourselves and marketing or maybe part of development expense this year, with all this new initiatives we’re launching how will that impact our margin trend this year, please? Thank you.
Okay, very good questions. We’re always focusing on try to encourage besides the professional content. We’re also encouraging our users to create more user generated content and share with their friends on our platform. Let me give you an example, we just launched the new version of WeSing which is version 7.0 just a couple weeks ago. The major focus of this version is, we’re more focusing on the visualizations of apps. So which means that in the past, when people were using WeSing app with single song, we call it which in audio format and then we share it out with our friends. By not besides this, we’re also encouraging our users to create video based content. So by very wonderful powerful tool that we create, load to carry [ph] off our users with great content and it’s very easy for them to make up their own short form music video, so this is what we’re doing and we have received very good results and we’re seeing that many people started to create this content and once this kind of content was being displayed at to the users expressively for their friend, you’ll be giving a like or you’ll be watching it, consuming the content and even encourage the interaction among our users which have social networking effect.
So this is very important direction that we’re working on. And so that’s the reason why I’m talking about we’re working on the visualization of our applications. So through this kind of product design, we’ll encourage the interaction and among the users and users can also sending virtual gift or maybe if it’s going to via KOL short form video and you can also follow the live broadcast of this KOLs and then we can have monetization, in order to create virtual cycle. So this is something that we’re working on.
In terms of the questions, I think we’re not going to jeopardize our professional content because we’re understanding that our users who have different needs. People in the professional content but at the same time they also need the content from their friends and this is also the beauty of TME. We are a social network, not just a platform based digitalizing professional content.
Okay, thank you, Cussion.
Yes, I will answer the question too. Yes. About margin at the gross margin network we think, we expect gross margin will be stable in this year around back in the Q1 because even with the COVID-19 pandemic recovery our gross margin about our old billings will be increased. But we need to invest in long-form audio next product strategy is to focus on wear IP so the content is needed to invest. So we expect the gross margin will be stable this year. And about operational NAV margin, we think our - we’ll manage our promotion fees, manage our marketing expenses so we think the ratio of these expense to revenue will be around the same rate at Q1.
About the administrative expenses because we need to invest more new product and new technology, so we will invest more R&D expenses and employee cost the G&A expenses will increase. So we expand that matching our net margin will be little decrease compared to Q1 and around the reasonable level in this year.
Okay, thank you. Cussion and Shirley, very helpful here. Thank you.
Your next question will come from Alex Yao of JP Morgan. Please go ahead.
I’ve two questions. One is regarding the introduction of audiobook function into the product portfolio, usually the industry peers have used audiobook as engagement driver and then monetize the engagement and the usage from audiobook of their live streaming business. The audiobook serves the same growth in your portfolio i.e. it’s more of engagement driver and less of monetization driver. And secondly regarding the social entertainment, the revenue growth rate slow down to 3% which you guys attributed to the outbreak of COVID-19. So my question is, what does it take for the revenue of growth rate to recovery to [indiscernible] not 20s into the next couple of quarters just because of the COVID-19, it doesn’t mean you guys don’t need to do anything once the impact from the COVID-19 is over the business will move back to normal gross trend or do you need to do something to maybe change the way that consumer behaves post-COVID-19 outbreak. The relevant question is, can you assure us with the user behavior trend after social entertainment business in April versus February and March. Thank you.
I’ll address the second part of question of social entertainment and then perhaps Shirley can talk a little bit more about the audio books segment afterwards. While social entertainment revenue grew only 3% year-over-year primarily as a result of COVID. We strong believe the worse is behind us and we do expect the growth rate will recover in Q2 and so like we said, we expect the Q2 year-over-year growth rate for revenues to be stronger than Q1. Most of that is driven by just organic growth of paying users being more willing to send virtual gift with the economy reopening back up and the content supply reopening back up given what Cussion mentioned earlier having some of our live streaming performance being back to work on a more normal level in Q2. And so most of the growth is just going to be driven by organically from our Kugou Live, Kuwo Live and to some extent WeSing as well.
Like we mentioned, we do think our social entertainment business remain healthy and solid. But it doesn’t stop us from continuing to broaden and expand our social entertainment business beyond that to include the launch of QQ Music live streaming and I - just be clear that we plan to launch the QQ Music live streaming service in June. And we’ll continue to expand the live streaming content category that I talked a little bit about gaming and the likes of ACG or other category such as matchmaking. And in fact, we’ve made tremendous progress in April by announcing the strategic cooperation with Tencent Games allowing Kugou Live to live stream all of Tencent’s popular games.
So all these are growth initiatives that would help us drive further growth beyond or organic growth and more of that will probably shine through in the numbers towards the second half of next year rather than second quarter.
I’ll answer questions and let me address the first question you mentioned about audiobook functions. You’re absolutely right that the audiobooks function of maybe I call it the long-form audios. It’s really an engagement drive for us because I think as I mentioned before it’s very natural for our users because they listen to music, they get used to it on our platform and it’s very easy for them to listen to more other format of content like a long-form audio. So it’s very natural attend and when we’re going offering this kind of content and will help us to increase the time spent of our users, which has been proven that during the past six months that we soft launch the service already.
So I think that this is very healthy to our platform because even though we have already got huge amount of MAU, so we’re not relying on this long-form audio features to get additional new users. Definitely we’ll get some, but if we can use them to let our users to get more engagement and increase the time spent, it’s going to be the number one objective that we would like to achieve. So once we got our users to be more active there’s many ways for us to do the monetization. Like I mentioned before, we have the monthly subscription VIP plan which is we offer a very attractive price tag for the moment to encourage people to spend more besides the normal music monthly subscription.
We also have the à la carte model that they can also spend on a particular long-form audios content. We can also drive more advertising revenue in the future as well because as every one of you knowing that on a TME platform there’s a lot of potential for us to drive for advertising dollars. Besides this, we’re also seeing that just like you mentioned we can also let the KOLs who provide the long-form audio content to us to even have some live broadcast. We’re also showing this very good result and feedback by the audio base live broadcast as well.
So if on the QQ Music platform is on, the Kuwo platform we’re seeing that the trend is coming and this is also another potential areas that can depend even drive further business development. So, there’s many ways for us to do the monetization in the long-form audio base. So, I think that this is the reason why we’re so emphasizing it and we’ll continue to put more results in this area.
And this new mitigation ways, we think we need time to trimming the users. So we expect the meaningful revenue will come from next year. That’s all.
As a reminder, we ask questioners to please limit themselves to one question and if they have additional questions. Please reenter the queue. Our next question is from Alex Poon of Morgan Stanley. Please go ahead.
You touched on overall gross margin of the company going to be stable. If I want to split between music services and social entertainment margin. How would the trend be look like and for music margin understand that the master agreement with one of the top three labels is expiring? Can you give us some update about that and what are you hoping to achieve from that negotiation and how does that impact your cost structure and also will that new agreement have any implication on other domestic labels, other music labels cost structure in future? Thank you very much.
Sure, Alex. I’ll address the question about the licensing and then Shirley can address the question about the margin going forward. We are in the middle of the negotiation with one of the three major and like we said in the past. Our focus is on getting to an outcome where is no longer going to be a master license, it would be a non-exclusive arrangement and in terms of the cost structure in the past. Obviously, it’s primarily a fixed cost minimum guarantee driven cost structure. What we’re striving towards is ensuring that the components of the cost that are revenue share based are more than in the previous contracts and the components of the contracts that are fixed cost base in terms of the MG are less compared to the last contract. So overall that would be an improvement compared to where we were previously.
And in the long run, we believe that obviously from an absolute dollar perspective, if you look at the licensing cost it’s clear that it should go up overtime. But relative to growth rate of our revenue growth from music subscription revenue growth. We’re confident that we’ll be able to see operating leverage ticking in, in a music business despite the growth in the licensing parts. I also want to remind everybody that I know there’s a lot of focus on our main three majors but you know the biggest five labels account for only less than 30% of our streaming volume on a platform. It’s actually even less than that now so we have a very diversified settle content supplies and I mean which is very, very different than in the west.
Importantly, we’re investing in a very committed to building independent musician ecosystem, the Tencent Musician platform because you could see the results coming through as Cussion mentioned with the number of songs being uploaded or number of people that are signing up to the platform doubling. And increasingly some of those contents are being licensed to us through the Tencent Musician platform on exclusive basis to us that’s growing even faster. So overall I think and we’re helping many of these independent musicians grow very fast and promote the song very successfully as the example that Cussion talked about.
So overall I think our content portfolio will be very broad and comprehensive. It will have the top labels such as the three major and will continue to be the partner of choice there and we’re confident that we’ll be able to get to an outcome that is reasonable and profitable for both parties. But at the same time, we’re also working very closely and investing heavily and broadening our content ecosystem to include all these indie musicians as well, which is very good for us in the long run.
About the gross margin online music. We expect the gross margin will be improving in long run better and better. There are two reasons. One, at this moment monetization rates at music side is at the very early stage we expect our revenue music will be increased rapidly including subscriber revenues, digital sales and advertising revenues. So this is one reason. The second we will manage the cost of license, we hope we can - part of the cost will be revenue sharing sales and reduce the minimum guarantee. But I think this it needs time to get the goal. So we believe that the gross margin on the music will be increased in the long run.
About the social entertainment gross margin, we believe in the next quarter this part will be recovery because epidemic will be over. The revenue sharing ratio will be little increased on karaoke. So that will be little increased in gross margin in social entertainment. But overall compared to the Q1 the gross margin will be increased. Yes.
Our next question will come from Wendy Chen of Goldman Sachs. Please go ahead.
My question is about the change on the music industry amidst COVID-19 at the subsequent work from home trend. As we’ve seen the way of user consuming music might change and some upstream player might suffer amidst the lockdown. So I’m just wondering what investment strategy to further drive music monetization post the pandemic. For instance, are we looking at monetize those live concert streaming product or the IoT product? Thanks very much.
Thanks for your questions. And actually you’re right, during the COVID-19 pandemic period more people are staying home and the patent of consuming music is also different in the past. I think that we’re seeing positive impact frankly speaking because not just doing right now but around a year or two-year before we started to expand our footprint in providing music service through IoTs and other home appliances like the smart TVs etc. This really helped us to lay a good foundation for us to help our users to enjoy music at any time, at anywhere in their convenience. So I think that we have already laid a good foundation. So if during COVID-19 even though the patterns of the daily life of our users have changed which we will have some negative impact to the overall activeness of our users. But we’re still doing a pretty good job in this quarter, the Q1 of 2020 which we still have quarter-to-quarter improvement in total MAUs.
So I think that in the future I think that since people have started to tried on using music through the IoTs or other platforms I think that you will also have these kind of user activeness to be persist in the future. So I think this is going to be another potential moving areas offers, so we’ll continue to have a strong partnerships not just by ourselves but also with other IoTs manufacturers and also other platform as well. We’ll continue to stringent our business in this area.
In terms of the monetization I think that there’s two ways in terms of the music I think that we have been continuously very good and encouraging feedback in growing of our subscription base which is 70% growth, which is record high and I think that this is very important for us proven that the way that we do is a correct way to go. So right now, we have the paying ratio at 6.5% we’re seeing that is going to continue to grow in a healthy manner and in fact, will be raised in future and then we’re going to maybe one day we can achieve even a lot higher paying ratio which is - the time will be coming.
The second part is, we’re also seeing that we started to have some kind of new form of online entertainment for our users when they’re streaming at home. So that’s the reason why we roll out TME Live program during the pandemic area. We have successfully launched five online concerts with top tier artist. Frankly speaking it’s not easy work because we’re not just letting top tier artist to record a song at their home and they’re just seemed pretty - broadcast it. But we’re arranging online concerts which is around 1.5 hour pooling concerts. This is very - not that easy to arrange but we have already find it out.
We’re getting a lot of really good feedback from the users and also the top tier artist like JJ Lin and also like Rene Liu. They are also thinking that is a very positive not just format of it. But also sending a really positive message to society that we are staying together during the pandemic situations. But I think that our preparing this kind of experience we will continue to fine tune our TME live online concerts. It is not just simply broadcast online event and let them to become offline event. We need to have new format something that is more suitable to the younger generation, something that is more suitable for the behavior of our online users so we’re working on that.
And also in the future, we’ll be asking more and more monetization for this online concerts as well. It’s not just for online ticketing, where we can encourage more virtual ticketing. We can encourage more real-time interaction among the artists and also the audience. We can arrange fan-based event. We can arrange a lot of fan-based cater these doing the online concerts period as well. So there’s many ways to come. I’m so encouraged by even during the COVID-19 it’s not a good situation for the entire world. Many people have suffered. But we’re also seeing that we can use all this kind of innovative ways to provide some of the new services which can help our users to be positive and also having many ways of entertainment even they stay at home. So I’m seeing there’s a lot of new business opportunity out there.
Our next question will come from Thomas Chong of Jefferies. Please go ahead.
I’ve a question relating to competition and revenue sharing with broadcasters. Given the fact that we‘re having more content in our social ecosystem, can you comment about how we bring on short-form video and in broadcasting competition with other peers in the future and with that, how should we think about our revenue sharing ratio with the podcasters given that we’re thinking about the GP margin to be relatively on a year-on-year basis for the full year? Thank you.
Okay, I’ll take the competition question. Look I talked a lot about video enrichment across a number of apps on music as well as on WeSing. We are not trying to become a short video platform, let me just be clear. What we’re trying to do is enrich the video content format so that we can better serve the user needs because users they want to consume music but they also have desire to consume video content that are related to music. And in the past, we haven’t been able to fulfill that need. But going forward, we want to enrich the video content category so that we could actually fulfill their needs and thereby increase engagement and time spent on the platform.
In addition to that, I would say that in terms of video it’s not just short video. For example, we have a show like a mini variety show called MR RADIO on QQ Music. It is now into - we just finished the second season highly successful show. Since the total stream for the two seasons combined is almost 600 million streams and that’s on our platform. Right, this is not streamed externally by video-based platform. And we have attracted like that’s basically a radio talk show type show. But it’s a video content and those two seasons attracted over 100 groups of artists. Right. And actually that’s on season two alone which is 70% higher than season one and we promoted like hundreds of hundreds of songs through that. There’s a lot of - have very good positive user feedback on that.
So that’s another form of video enrichment on our platform that is not just short video but those are sort of 20 minutes in length. And then at the same time, we are also broadening. So we’re talking little bit about PGC. We’re also broadening our UGC. So in Kugou Music app for example in the music streaming page increasingly you’ll be able to see while you’re listening to a song, the system will automatically recommend a background video, a background shot video for you to consume and those videos, some of that are part of the whole slates of variety of shows that we have either invested in or we participated.
We have some of the partner label participated in, so we have access to those content so are purely UGC provided. So I think we’re trying to but all of that are music-centric. So again it all comes back to enriching our engagement and time spent by allowing users to consume music-centric video on the platform. And so they don’t have to leave the platform to go to another platform for this regard. Outside of music-centric content that’s something for an external platform to do.
Our next question will come from Alex Ziyang of Macquarie. Please go ahead.
So management, how do we think about the balance between say like user growth and ARPU under the current social segment? If we look beyond second half since we’re gradually recovering from COVID-19 and I think all the metrics how the new features like gains and QQ Live streaming would impact ARPU in longer term? Thank you.
Sure. So I think it’s important to recap the Q1 metrics because that’s in a point to understand that to understand the future. I mean, we saw the paying user increase and the ARPU slightly decrease on a year-over-year basis and that’s primarily because of the COVID impact. We saw an increase in time spent on online karaoke which drove the MAU and drove the paying users. However many of these paying users tends to be lower ARPU right compared to the live streaming paying user and as a result obviously dragged down the overall ARPU. And at the same time the live streaming paying users who are economically impacted by COVID are also has a less willingness to spend and so we have those two impacts.
And then going into next quarter and beyond obviously with the economy reopening and people returning to work. From an online karaoke perspective the paying user growth won’t be obviously as high in Q2 as than it is in Q1. So from a total paying user perspective it probably be at a similar absolute level. Maybe just a little bit of growth compared to Q1 but that’s completely normal if we talked about one quarter. Obviously, we’ll grow beyond that, from Q3 and into Q4 and from an ARPU perspective with the reopening of the economy and the live streaming paying users returning the ARPU would obviously increase sequentially compared to Q1.
So I think we see that trend continuing which is very healthy trend. And also, I want to stress that the MAU would also normalize a little bit in Q2 - that would be in a level that will be slightly below Q1. But again that will be completely normal because of the COVID impact that boosted the karaoke MAU in Q1. It’ll still be at a very healthy and strong level.
Our next question will come from Zhijing Liu of UBS. Please go ahead.
I’ve just one question. It was great to see continued acceleration of music soft revenue in past two quarters. So how sustainable this round of strong traction especially considering that soft addition had a slighter deceleration in 1Q? Thank you.
I’ll take that. I think in Q1 obviously I talked about the impact of COVID on music MAU and as a result paying users as well because when users spend a usually long amount of time at home. They tend to consume more in terms of karaoke or online games, online videos, right? But despite that, right. We’re able to grow subscription revenue at 70% year-over-year basis which is actually our fastest reported growth. And so, going forward into Q2 with the reopening taking in, we actually expect our Q2 year-over-year growth rate for our overall online music revenue to be even stronger than Q1, right? And that’s again going to be driven by subscription revenue continuing to grow at a very rapid pace.
And in terms of net adds, you talked a little bit about net adds. We expect the net adds of our music paying users in Q2 to be higher than Q1 obviously and hence the music paying user year-over-year growth rate would also be at a very high level similar to that of Q1. And from an ARPU perspective, let me touch a little bit on music ARPU because what we’re seeing is a very strong growth on a year-over-year basis in terms of ARPU is the result of many previous quarters of investment that we made like last year.
In the form of for example, a promotional efforts around auto renewal subscription plans. The impact of those auto renewals subscription plans is that we provide a first month discount if a user sign up so that they check the auto renewal option but then after the first month discount it will actually - goes back to the normal pricing. So it has impacts of slightly decreasing the near term ARPU increasing the long-term ARPU.
Now we’re enjoying the benefit of those promotional efforts few quarters ago now and like we said, in the past we’re still at a very early stage of monetization with only 6.5% of our paying users. So if we could grow our subscribers more by keeping our ARPU flat we’ll prioritize on our subscriber growth over ARPU. So I won’t be surprised if in the next quarter or two we see a more flattish sequential ARPU. But still growing on a year-over-year basis, if that happens that’s basically us spending again promotional assets to invest in growing long-term ARPU and that’s actually a very good thing for us, that we’ll see.
Yes one more point I would like to add which is the retention rate of our monthly subscription. Yes in continue growing, so we’re still seeing that in a really healthy manner and once the retention rates continue to improve, it will further help us drive up our paying ratio as well.
Thank you.
Our next question will come from Tian Hou of T.H. Capital. Please go ahead.
So, I have a question regarding to TME Live. After I seeing the concert, actually my team watching all five concerts. I felt pretty excited about your business. Since you’re actually step up what’s existing like broadcasting or music services and enter into a new territory of music area. So, I wonder if that is your ongoing plan. If you have an ongoing pipeline for that and also how to monetize it. Each concert you can have like hundred, tens of audience or millions of audience. I think if you don’t monetize this, it’s really waste of resources. I can imagine Tencent will have a lot of those kinds of advertisements as requirements or resources if they can actually put some aim. You can actually monetize in a great deal. So, I want to - what’s the strategy going forward? If there’s a pipeline, how do you monetize it? Thank you.
Yes, thank you so much for your questions. We also feel exciting about TME Live at [indiscernible] we’re organizing for the moment. And yes, you’re absolutely right we’re not just providing a music service through the mobile apps. But we have already expanded our footprint and really aimed to build out total music entertainment ecosystem. Which means that we need to go upstream and also downstream as well and I think the TME Live event really demonstrating that we’re putting in a lot of efforts and also creating wonderful new experiences for our users from the performance area.
I think for the TME Live events that we’re organizing first of all there’s many things for us to learn. It’s not simply making on, offline concert and directly broadcasting and make it online concert. I think that we can have many new format, which is also some of the streams of TME. Like the socializing, okay how we can let our users when they’re enjoying the online concert and they can also socialize with each other. So, the fan-based economy can actually kick in. We can do a lot of things for example, if you’re fans of JJ Lin. Okay maybe before the concept it’s going to start. You can get it in some voting on which songs that JJ Lin is going to perform for the online concert. And also, during the online concert you can also have a lot of interactions as well.
You can have many kind of check-in or sending virtual gifting throughout to your beloved idols. We can arrange some gamifying [ph] ways for our users who enjoy the online concerts as well. So, all this happened will be the monetization methods. That we can putting in. so I think that as I mentioned the five top tier artist online concert will be arranged during the pandemic situations it’s really a good stock for us and we learned a lot of experience, we’re accumulating more experience and we’re fine tuning our business model.
And the most encouraging result is, not just our users really like this concert but also the artist, also feel there’s a lot of potential and they’re also want to go with TME and arrange more online concert, a new format online concert together in the future. So, I think as I mentioned before we’re truly the preferred partners not just by the music label, but also the preferred partners by our artist because we’re growing up together. We work for better industries and we work out better music and better music means more users. So just wait for us and we’ll continue to explore and I’m definitely seeing that TME Live and this kind of performance-based activities we’ll have in a good hand [ph] work a more positive result in the future.
Thank you.
Our next question is from Alex Lu [ph] of China [indiscernible]. Please go ahead.
I have one question. Given the user demographic is different between QQ Music and Kugou. How does the management envision QQ Music live streaming to different from the current Kugou live streaming? In terms of product design content vertical and user paying pattern. Thank you.
Sure. I think we’ll be able to talk a lot more about it without giving too much away until we’ve launched the service. Broadly speaking what we’ve tried to achieve like we said, is continuation of the multi-brand product strategy across music that you saw we have multi-brand across karaoke that you see that we have in box upon the incubation of Kugou Changchang and also in live streaming multi-brand. And I think each brand and each product will have slightly different targets of user segment. Needless to say, I think the live streaming business within QQ Music will be more complementary to the user segment for QQ Music. It will have more focus on independent musicians which QQ Music is working very closely with and it will have more features to work with these musicians to promote, the music in a more live and interactive manner and all of this is very complementary like we saw in music. Multi-product doesn’t cannibalize it actually help us broaden our reach and help us better cover the entire population in China. China is very big, with different segment. So, through this multi-brand and multi-product strategy we can actually extend our existing business into more and more user segment and thereby broadening our revenue growth potential.
And also the user of electing among QQ Music and Kugou Music is also very minimal. So that’s the reason why I think that when we’re going to roll out the live broadcaster on QQ Music platform which will help us to serve our users better, to serve the QQ Music users better and it’s not going to cannibalizing the Kugou Music live business as well.
Thank you.
Our next question will come from Hans Chung of KeyBanc. Please go ahead.
So I’ve a quick couple question. The first one just following up the Kugou Music live streaming question above just wonder, what are your initial thoughts the potential like addressable user the scale and the paying user potentially? Is that going to be similar to what do we have now for the Kuwo Music live streaming and or could be even the bigger or less. And then second question would be still regarding the social entertainment business just wonder can management team just elaborate more the progress of a recovery. I think you guys mentioned there’s some recovery I mean in this quarter and what’s the trajectory that could say in the end of March, in April into the early May. What do we see the year-over-year growth trajectory I mean overturn year and what do we expect the revenue run rate label to be - to add what level compared to the pre-COVID-19 label? Thank you.
Okay, look I think obviously by us with all the subject to all the disclaimer related to forward-looking statements. By virtue of us saying that we expect the second quarter revenue growth or social entertainment to be stronger than Q1. We’re saying this because we’re already seeing a recovery in the number in April and parts of May that we’re in. So it’s in line. The reality of what we’re seeing happening is in line of what we’re saying and then in terms of the addressable market.
I think live streaming is a multi-hundreds of billions in Renminbi terms in market size. I mean live streaming business is huge. And I think we have obviously a very strong foothold in the music-centric live streaming and we’re already in. Nobody is in this space and this is still just a small percentage of the overall live streaming pie and we actually think we could continue to grow that pie of music-centric live streaming alongside the growth of overall live streaming which is enormous market. As to whether it could one day reach the size of Kugou Live. I think it will not in the near term. I think it’s fair to say but given Kugou Live has done this for many, many years. It would take many years for us to reach that level. But I think the potential is definitely there.
So look I think that’s the last question. Overall just to close things out. Like we said I think in terms of online music we’re seeing very positive momentum continuing. We expect that second quarter revenue growth could be stronger in Q1 driven by continuous rapid growth in subscription revenue. In terms of social entertainment revenue, we again also expect Q2 to be growing faster than Q1 and so combining all of the above. We expect our total revenue growth next quarter to be stronger than Q1. And so let’s put the COVID impact behind us and we think that worst is over and we have better results ahead of us starting Q2 and into second half.
Okay, thank you everyone.
Thank you so much for your time.
And ladies and gentlemen, this will conclude today’s conference. We thank you for attending. If you have any further questions contact TME’s Investor Relations team. We look forward to speaking with you again next quarter. Thank you and goodbye.