Tencent Music Entertainment Group

NYSE:TME

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group 2021 Third 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 hand the conference over to your speaker host today, Mr. Tony Yip. Please go ahead.

[Cheuk Tung Yip, executive]

Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. TME announced its quarterly financial results today after the market closed. 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. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent updates. Next, Mr. Ross Liang, our CEO; and I, Tony Yip, as CSO, will offer additional thoughts on our product strategies, operations and business development. Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions.

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 IFRS in the company's earnings release and filings with the SEC. You're reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure, or other non-IFRS measures are not uniformly defined by all companies, including those in the same industry.

With that, I'm pleased to turn over the call to Cussion, Executive Chairman of TME. Cussion?

[Kar Shun Pang, executive]

Thank you, Tony. Hello, everyone, and thank you for joining our call today. In the third quarter, we continued to implement our dual engine content and platform strategy, which reenforces one and another. Guided by our goal of becoming a leading provider of high-quality content, we are working to expand our all-round capability in music creation, discovery, promotion and monetization, while strengthening our platform's infrastructure and actively collaborating with the broader Tencent ecosystem. These efforts will enable us to unlock greater potential in each component of the music industry value chain and continue to promote the healthy and sustainable development of the music industry in China.

With respect to content, our accelerated expansion to music production has delivered promising results. We have designed an innovative and comprehensive process that leverages on our proprietary technology and deep understanding of music trends to systematically create, evaluate and promote music. This process accentuates compounding benefits as we integrate, first, our comprehensive music composition library; second, [ brand machine ] and [ menu ] analytics for artists and repertoire discovery; third, our middle platform that enable refined matching for artist collaboration; fourth, our technical system to demo and evaluate trials to improve ROI; and fifth, flexible promotion channels and resources to enhance promotion efficiencies. By utilizing this process, we aim to produce better music, achieve a short-term creation cycle and better hit weight and realize meaningful cost savings from economies of scale and composition tools.

I want to share some recent examples that illustrate this point. First, in the third quarter, through our proprietary process of matching repertoire with suitable singers and producers and promoting on multiple TME and external platforms, we produced [Foreign Language] a hit song which reached the #1 on multiple music charts with streaming volume of over 0.5 billion within the 3 months of its launch. Secondly, we also produced the chart-topping theme song, the Peerless King, [Foreign Language], by artist, G.E.M., [Foreign Language], for the popular game, Honour of Kings, [Foreign Language]. The song was released for the game's 2021 annual competition and the World Champion Cup and has been well received by both music and game lovers.

Cultivating the original works and enriching the indie musician ecosystem through our Tencent Musician platform is another key source of our content differentiation. We empower our indie musicians with useful tools and collaborative opportunities to realize their full potential and create, grow, engage and monetize their art and fan base. We do this, in part, by providing them access to valuable resources, including TME Live performances, incentive plans, promotion channels, education platform, copyright support and more. Our ongoing support to indie musicians has been gaining traction. By the end of the third quarter, the number of indie musicians on the Tencent Musician Platform reached 260,000, expanding its growth with a double-digit year-over-year increases. Meanwhile, the streaming volume of their original work continues to record healthy growth.

Following our December 2020 talent discovery plan, [Foreign Language], we introduced our Riding on the Wind Plan, [Foreign Language], in August 2021 to inspire new music content creation by efficiently pairing musicians with top songwriters and lyricists. With this plan, we have also upgraded our platform artist and repertoire discovery and promotional capability to become a consistent source of hits. As a result, with just 1 month of its launch, the plan generated 8 hits in multiple categories, such as [ Stars in My Dream ] [Foreign Language], By The Virtual Idol, [Foreign Language], [ Galaxy Into the Sea ] [Foreign Language], by the Internet influencer, [indiscernible], and writer [indiscernible], by the broadcasting celebrity [indiscernible], enabling these musicians to grow their fan base by 26%.

Tencent Musician Platform has also established a sustainable and diverse monetization models for musicians and the industry which helps indie musicians to earn a better living while they focus on honing their craft. In the third quarter, we launched and upgraded CNY 100 million incentive plan, which incentivized reputable musicians to collaborate with us in music creation as well as provide comprehensive incentive mechanisms to help high-quality content and active game exposure across our platforms. Within 2 weeks of the plan's launch, we discovered an original hit song, [indiscernible] which is just one of our early successes, and we expect many more hits to follow.

With [indiscernible] exploration and experimentation, Tencent Musician Platform will drive our success in the original music industry and continue to create benefits and opportunities for indie musicians, encouraging original music creation while unlocking the musician's potential.

Expanding our license of content library is also a crucial component of our content strategy. We are working to cement our leadership position in trending categories like the Chinese ancient style as well as provide full coverage of top hiphop variety shows such as [Foreign Language], and [Foreign Language]. With our presence in diverse genres catering to the younger generation, we are establishing our platform as a go-to place for enthusiasts in each genre with branding such as QQ Music Rappers Alliance and Kugou Music for new hits.

We prioritize copyright protection to protect musicians' right and promote the healthy and sustainable development of the music industry. To this end, we leverage our understanding of the industry copyright pain points and launched the TME Music Cloud. Under this brand, in the third quarter, we introduced a SaaS-based music authorization service for the live streaming industry, which offers copyright licensing service whereby the live streaming platforms and live streaming performers can pay licensing fees to properly obtain legitimate music licenses for commercial use in the live streaming.

In addition, we are helping music rights holders and musicians distribute their work and expand their influence worldwide by collaborating with Apple Music. Going forward, we plan to expand such copyright licensing service to other online applications that require legitimate music licensing for commercial use and continuously contribute to copyright protection in China by establishing a smart music copyright infrastructure.

We are also optimizing our internal and external promotion channels to create a more comprehensive promotion system. We continue to embrace external resources like Weixin, QQ and Weixin Video Account to create new social connection based on models for music promotion. And we are creatively combining music resources such as variety shows, films, videos and performance events to strengthen our content influence. For example, Wang Jing Wen, a rising musician we nurtured entered the industry singing competition show, SING! CHINA 2021 and won second place.

Propelling the popularity of the songs to a new record with a total of 1.9 billion streams on our platform in the third quarter. We began testing a new business model by commercializing some of our promotional capability to enable content providers to purchase promotional resources on our platform. We are also making substantial progress with promotional external smart IoT devices.

Last, but not least, we are more confident than ever in the ability of TME Live to drive new online-merge-offline music scenarios with immersive experience. In terms of its [indiscernible] online, TME Live held 26 diverse live performance in the third quarter, including the 2021 Tomorrowland. TME Live series of mind-blowing electronic music performance is sponsored by e-commerce, automotive and other advertisers helped brand owners dynamically resonate with users and maximize their brand's emotional impact while simultaneously fostering new business models.

To satisfy younger users booming demand for live performances as they seek new social outlets in the pandemic, TME Live has expanded downstream. In the third quarter, TME Live collaborated with the Tencent Musician Platform to showcase live performances in key cities via the 2021 [ 4 ] stage plan [Foreign Language], offering talented musicians the chance to participate in nationwide tours to reach a broader audience, both online and off-line.

We also rolled out a series of music festivals across multiple cities in the third quarter and pioneered an indoor music festival IP, electronic music festival, [Foreign Language]. The first event debuted in Chengdu, a cultural hotspot for music entertainment and home to a vibrant party scenes for younger generations. Motivated by these [ trial-blazing ] successes, we look forward to creating more events that will rock our users' lives.

Having updated you with our progress in content, I would like to turn the call over to Ross, who will share more about our platform strategies. Ross, please go ahead.

[Liang Zhu, executive]

Thank you, Cussion. Hello, everyone. Moving on to our platform strategy. We are strengthening our platform's capability to enable music lovers to enjoy more video-based content, share their passion for music building our community and have more socially engaging experience. To inspire creation and the innovation of video content on our platform, we continue to build shared [ video ware ] and the infrastructure.

First, QQ Music's short video type featuring [indiscernible] and Kugou Music invited analysts on its streaming page achieved a sequential increase in their user penetration. Early indications of our video functionality are very positive. By the end of the third quarter, QQ Music's daily video views and daily unique visitors on our platform reached 100 million and 18 million, respectively, representing triple digital growth rates year-over-year. We are [indiscernible] about its monetization potential while advertising and other avenues going forward as video views ramp up.

Second, to better cooperate with Weixin Video Accounts, we are now supporting the one-click video publishing feature across Weixin Video Account, QQ Music, Kugou Music and Kuwo Music and WeSing, making it easier to a musician to reach a broader audience within 1.5 months of its launch. The one-click video publishing feature was adopted by more than 20,000 musicians on our platform. In addition, QQ Music's collaboration in the musician live streaming initially with Weixin Video Account had [ 6,633 ] events and attracted over 10 million viewers in the third quarter.

As we aspire to connect people through music, our social and our community building efforts focus on interactions among both [ strangers ] and the brand. We are pleased to see increasing vibrant social interactions on our platform as demonstrated by user utilization of Putong Planet and Kugou's new feature, [Foreign Language], which allows user to swipe through realized user profiles and then interact with those who are listening to the same song as well as our upgraded player synchronized listing feature, which was originated in QQ and carried over to QQ Music.

During the third quarter, average daily listening time spent by users of the synchronized listening feature was 80% higher than the average. The penetration of young user of Putong Planet was over 10% higher than that of QQ Music. Our initiative of listening included the virtual live streaming room launched to provide an all new interactive experience to users, targeting real-time virtual social networks of -- as a new growth engine for user engagement. We strive to appear to diverse user groups and their varying tests with broadened options and features. In the interest of the young generation, we launched [Foreign Language], primary video-driven music listening experience in China and helping users better connect with music with a bright, sleek UI design.

Well, for seniors, we launched a large font mode in QQ Music to provide them an aging user-friendly experience. For music fans seeking the ultimate sound quality, we upgrade QQ Music and the Kugou Music high-resolution audio library, including millions of musical works by popular artists and the domestic and the international musicians. This upgrade has proven very attractive to young users. In addition, QQ Music and the Kugou Music both introduced automatic music score generation functions, which generates professional quality [ shape ] music scores at the user's fingertips.

For those people -- for those users who prefer a simple music listening experience may not have QQ Music Live, [Foreign Language], which offers a whole site of music streaming function with minimalistic user-friendly UI design. These tailored products and options allow us to improve the experience for our users and engage them in a more personalized way.

Most importantly, we are on track to deepen our partnership with the broader Tencent ecosystem to create a new music entertainment experience.

First, in September, QQ Music and the Roblox China, a joint venture set up by Tencent and Roblox, collaborated to launch immersive virtual music concert for an indie musician with exclusive special effects, fireworks, virtual gifts and music mini games in a 3D setting, giving off-line audience and online viewers an intimate view of the action. It attracted more than 2 million viewers domestically and abroad with over USD 100,000 worth of in-event purchases, laying a solid groundwork for our future endeavors in creating transformative experience.

Secondly -- second, we are working with Tencent Video to enhance content distribution. Tencent Video users can now seamlessly discover and enjoy original sound tracks and other music related to the video content they are watching. This function is currently available in [ multi drama series ] hence, another step forward in promoting socialization through singing, users can now update their [ listening ] status when they sing or finish a recording or listening, sharing the experience with the [indiscernible] We are also making strategies with our [ long-form ] audio business as a complement to our music products and a value add to overall user engagement and activeness on our platform. We have made continued efforts to expand and differentiate our [ long-form ] audio content and features. First, our [indiscernible] fantastic radio drama, [Foreign Language], has become a self-produced content blockbuster, accumulating 140 million streams since its launch.

Second, in the third quarter, QQ Music launched an open platform to improve podcast creation process and allow them to upload and share their content to TME and other platforms with a simple click.

Third, to bring users a more immersive, vivid and smooth listening experience, we deployed the industry's first [ vocal ] emotion-enabled AI reading technology to produce audio books, contributing to 30 titles based on well-known literature IPs, such as Battle Through Highlands, [Foreign Language]. First, we further enhanced our content library by offering the audio content from Rock & Roast [Foreign Language], Tencent Video's #1 rated variety show. These efforts led to stronger growth of [ long-form ] audio MAUs, which exceeds 140 million in the third quarter, growing by 89% year-over-year. Long-form audio paying users reached 5 million by the end of the third quarter, growing by over 100% year-over-year, a majority of which are also online music paying users as they are attracted by the complimentary nature of an integrated music and audio streaming service.

While it has been great [indiscernible] to see so much enthusiasm for this rollout throughout the quarter, it is important to remember that we are still in the early stages of long-term development of this business.

Finally, our pioneering digital collectible platform remains at the forefront of innovation. Our recent highlights was a [ vinyl album ] month [Foreign Language], who has been a renowned Chinese singer and music producer. The lottery for this limited edition vinyl album with 2 [ sold ] and one [indiscernible] attracted intense -- fans interest in limited editions artist works. It's a success. It's a stronger endorsement of this cutting-edge collection format. And this starts one example of the substantial creative efforts underway. We are building on this early momentum and will engage more artists by creating a diverse pipeline of collectible works in the upcoming quarters.

That covers our platforms progress and innovative -- initiative. Now I'd like to pass the call to Tony to discuss our business highlights. Tony, please go ahead.

[Cheuk Tung Yip, executive]

Thank you, Ross. Hello, everyone. As we continue to execute on our dual engine content and platform strategy in the third quarter, our online music services MAU grew quarter-over-quarter to 636 million, maintaining the progressive recovery trend, which began in the second quarter and bolstering our confidence in the underlying health of our user funnel. Our IoT MAUs reached 74 million in the third quarter with a year-over-year growth rate of 42%, benefiting from the rich and growing variety of products and services we provide on a broad range of IoT devices. We're pleased to see IoT devices becoming an increasingly important and influential music content distribution channel for our platform.

Despite some impact on advertising due to recent regulation on splash screen ads, our online music revenues demonstrated strong momentum in the third quarter as users continue to be attracted by our enhanced music streaming experience with a net add of 5 million during the quarter, the number of paying subscribers to our online music services reached 71.2 million, increasing by 38% year-over-year and resulting in a paying ratio of 11.2%.

To weather the decelerated growth in advertising, we expanded our advertising products by enabling advertisers to better appeal to audience within music streaming page and search sections. We also rolled out a new monetization model to help artists boost their earnings by sharing advertising revenue with them on streaming page advertisement.

To rejuvenate our brand and expand our communication channels with Gen Z users, in the third quarter, we fostered a new culture around Chinese ancient style and hip hop through multiple themed events. We also livestreamed Ariana Grande's Rift Tour Concert, hosted by the popular online game, Fortnite, [Foreign Language], creating an immersive virtual reality experience, including elements of both popular music and games.

In addition, we grew our on-campus influence with events such as Young Music Summer Party, [Foreign Language], and Music for the Future, [Foreign Language], as well as a record label for students, [ Vola College ] [Foreign Language], among other initiatives.

Turning now to social entertainment services. Due to recent regulatory changes and industry competition, social entertainment services' MAU and paying users were lower year-over-year and quarter-over-quarter. We will continue to invest to strengthen the operations of our social entertainment services to better engage users. We continued to establish WeSing as a social entertainment platform with singing at its core. This year, we are focusing on engaging users by demonstrating the power of singing and socializing, celebrating and supporting our community in a meaningful way and creating tools that deliver a more personalized and enjoyable user experience.

We have worked to popularize the music creation process within WeSing, encouraging more WeSing users to become content creators. To this end, we have launched multiple features, including large group chorus, acapella chorus and multivariant adaptation in recent quarters, which have engaged more than 15 million cumulative users. We are also proud to share that many musicians who are currently active on larger stages, such as Curley G, [Foreign Language], from BonBon Girls, [Foreign Language], were loyal and frequent users of WeSing and accumulated their initial fan base on our platform before they were discovered by the wider public and had the opportunities to shine on larger stages.

Amidst increasing competition, we strove to differentiate our live streaming services through audio live streaming, QQ Music livestreaming, cross-platform events, content category expansion and our foray into exploring the metaverse concept, which promises a new era in entertainment. We have made solid progress in expanding audio live streaming, which is a complementary use case to our core listening experience as demonstrated by incremental growth in both user base and revenues quarter-over-quarter and year-over-year. Going forward, we will continue to strengthen our audio live streaming business in China as well as leverage our experience to further expand its presence in overseas markets, where we have seen strong growth and monetization potential.

By the end of the third quarter, QQ Music live streaming had attracted approximately 10,000 musicians to live streaming. These broadcasts enabled musicians to connect and interact with their fans via live streaming on our platform, amplify their music influence and establish deeper bond with fans, which ultimately drive audience growth and improve monetization of their fan base. This, in turn, drove the number of performers and active users on QQ Music's platform.

Kugou Music, QQ Music and WeSing live streaming services also joined forces in another cross-platform large streaming event in September, fostering improved paying user engagement. We believe the Metaverse concept represents a [ sea change ] opportunity for future entertainment innovation as well as category expansion. Kugou Live launched Cool Dimension, [Foreign Language], a virtual ACG live streaming social platform. It targets users different from those on Kugou Live with generation born in the 2000s and female users, both accounting for 60% of the user base, respectively.

Cool Dimension creates an exclusive community for ACG fans through seamless integration of virtual reality, live streaming and social interactions. We will explore more opportunities to leverage the metaverse concept for innovative, interactive entertainment experience going forward.

In summary, we see both challenges and opportunities in our operating environment, we'll meet them with determination, passion and persistent effort to differentiate TME, expand our capability for creators and optimize user experience.

With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.

[Min Hu, executive]

Thank you, Tony. Hello, everyone. Next, I'll discuss our results from a financial perspective. Our total revenues for Q3 2021 were RMB 7.8 billion, up 3% year-over-year. Our online music revenues were RMB 2.9 billion this quarter, up 24% year-over-year. In the third quarter of 2021, our music subscription business continues to grow rapidly with revenues of RMB 1.9 billion and a year-over-year growth of 30%. This resulted from our continuous improvements in products and content, expanded sales channels and the effective marketing campaigns. Monthly ARPPU was RMB 8.9 this quarter, compared to RMB 9.5 in the same period last year as we solidify our competitive advantages and offered more effective promotions to cultivate users' willingness to pay for music.

Our Q3 advertising continued to grow on a healthy pace. During the quarter, we added more advertising product options to mitigate the impact from the new guidance on [indiscernible] issued by the regulator in the second quarter this year. We also partnered more closely with Tencent to reach more advertisers and improve EPM.

Social entertainment services and other revenues were RMB 4.9 billion, down by 6% year-over-year as we faced more intense competition from other entertainment platforms and tightened regulatory environment. To cope with the competition, we are making efforts in retaining existing and attracting new performers by utilizing our internal growth platform traffic to attract more users and keep revamping product features and launching new initiatives to maintain steady revenue scale.

Gross margin was 29.6% in Q3 2021, down by 2.8% year-over-year, which was better than expected. The decline was due to the following reasons: Firstly, with the continued growth in subscription revenues, revenue mix shifted as revenue from online music accounts were higher percentage of revenue whose gross margin were generally lower; secondly, [indiscernible] increased on a year-over-year basis and remained relatively stable quarter-over-quarter; thirdly, audio live streaming accounted for a higher percentage of revenue with relatively lower gross margin; lastly, increased investments in new products such as long-form audio led us to ramping up in terms of revenue generation also had a negative impact on gross margin this quarter.

Now moving on to operating expenses. Total operating expenses Q3 were RMB 1.6 billion and was 21% as a percentage of total revenues as compared to 19% in the same period of last year. Selling and marketing expenses were RMB 587 million, down by 8.6% year-over-year, mainly because we managed the external promotion. [indiscernible] to attract users. General and administrative expenses were RMB 1.1 billion, up by 33% year-over-year, driven by higher number of employees in R&D as we invested in product enhancement, technology innovation and more diversified product offerings.

Additionally, share-based compensation expenses post acquisition awards for previous management team and amortizing -- and the amortization of intangible assets arising from the acquisition of Lazy Audio of approximately RMB 66 million, also contributed to higher general and administrative expenses this quarter. Excluding impact from the acquisition of Lazy Audio, G&A would have increased by 24.7% year-over-year.

Our effective tax rate for Q3 was 11.4 -- 11.5%. Our net profit was RMB 788 million and net profit associated to equity holders of the company was RMB 740 million. Non-IFRS net profit was RMB 1.06 billion and non-IFRS net profit attributable to active holders of the company was RMB 1.02 billion. Non-OpEx net profit margin was [ 0.6% ] As of September 30, 2021, our combined balances of cash, cash equivalents, term deposits and short-term investments were RMB 24.5 billion, representing a decrease of RMB 1.3 billion from Q2, primarily driven by payment for stock repurchase. Cash generated from operating activities had a positive impact on the combined [ finance base ] Looking forward, we'll continue to invest in content, especially in self-produced content through various channels, such as content musician platform and the collaboration with Tencent Group. We will also keep focusing on new initiatives, including improving monetization for audio products and revamping product features through socialization, [ rate ] utilization and the community building for our long-term healthy growth. Meanwhile, as discussed earlier, we will continue to effectively manage our spending in selling and marketing expenses and enhancing operating efficiencies.

This concludes our prepared remarks. Operator, we are ready to open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from Eddie Leung from Bank of America.

[Eddie Leung, analyst]

Just a question perhaps following up on Shirley's point about current costs. Given the regulatory changes as well as growing independent musicians' content, how should we think about the outlook of the [indiscernible] or the gross margin related to the online music users, not in the near term, but more of like a trend.

[Min Hu, executive]

Okay. We will continue investment on the musician platform, and that will be -- give us a content advantage for our products. And a part of the content's regulator, our content will be [ changed to ] non-inclusive license. So in the short term, that will be having no material effect on our gross margin. But in long term, that will be -- have a positive impact on our gross margin. And -- okay.

[Operator]

Your next question comes from Alex Poon from Morgan Stanley.

[Chun Poon, analyst]

My question is regarding our music subscription business. So from music net adds perspective, we have hit the high end of our guidance range 5 million in the last 3 quarters, every quarter. With the better user engagement now, we have seen MAU up sequentially in 2Q, 3Q and also user acquisition cost is down. And we also recently launched a new QQ Music app recently. How should we think about the paywall ARPPU and net adds outlook in the coming quarters? Is it possible we can do better than 5 million in the coming quarters?

[Cheuk Tung Yip, executive]

In terms of the music paying users, we're very pleased to see that it surpassed the 70 million milestone to reach 71.2 million in the third quarter. It recorded very strong growth of 38% year-over-year. Net adds was very strong at 5 million, bringing the paying ratio to 11.2%. The music subscription revenue continues to deliver strong growth at 30% year-over-year. And we've achieved all this while, at the same time, being able to improve on the retention rate of the paying users.

Music ARPPU recorded a slight decline as we offered some promotions in response to the changing competitive landscape. Although our music ARPPU will continue to be at a premium compared to industry peers. And as a result of the price promotion it actually gives us more room to be flexible with regards to putting premium content behind paid subscription while still being able to achieve the 4 million to 5 million quarterly net add goal that we set out, which continue to be the case.

[Operator]

Your next question comes from Thomas Chong from Jefferies.

[Unknown Analyst]

My question is about the advertising outlook. Can management share about the view on the future advertising outlook and the key categories across QQ Music, Kugou, Kuwo in the dynamic industry environment?

[Cheuk Tung Yip, executive]

Yes. Advertising accounted for approximately half of the music non-subscription revenue this quarter, but it actually could have been higher. And advertising has seen some slowdown as a result of the regulatory impact that we have outlined. However, we continue to see positive year-over-year growth rate on the advertising revenue, and we believe the impact would only affect us in the short term. As we digest the regulation changes and introduce more advertising products and build out our advertising business in general, we see advertising as a substantial opportunity with strong growth potential going forward. The growth sectors that we are seeing include cosmetics, consumer electronics and food products. Sectors that are more impacted by industry regulatory changes, in general, such as finance and gaming, represent only a very low percentage of our advertising revenue. And as a result, we are less impacted than the overall industry.

[Operator]

Your next question comes from Alicia Yap from Citigroup.

[Yik Wah Yap, analyst]

My question is related to the social entertainment competition. In terms of the competitive landscape, just curious, from management view, if the social entertainment live streaming business could see a revival of growth in the coming quarters following the product upgrades and enhancement? Or do you -- does management think this is more or less a more mature and stable industry and potentially could see some declining trend going forward? So any color on how management thinks about this revenue growth outlook for Social Entertainment segment would be appreciated.

[Cheuk Tung Yip, executive]

As reported in the third quarter, we saw a slight year-over-year decline in the growth rate of the Social Entertainment revenues. And in response to that, we continue to revamp the leasing product, namely the online karaoke room to make singing more fun and socially engaging. We've launched multiple features, including the large chorus, acapella, multi-variant adaptations, which we mentioned. We also enable more intra room and as well as cross-room interactions. And all these features have engaged a large number of users. WeSing have also launched a virtual live streaming room to pioneer a new 3D live entertainment experience into the metaverse environment.

In addition to WeSing, we see strong pockets of growth within large streaming such as audio live streaming, which is a very complementary use case to our core music listening experience. We're seeing strong growth across both user numbers as well as revenue, and we continue to grow our audio live streaming business in China as well as to leverage that experience to further expand our overseas market as we have seen strong growth and monetization potential there.

And then in terms of QQ Music live streaming, which is a fast-growing and emerging pockets of growth within our live streaming business, users, performers and revenues all continue to ramp up with revenues of QQ Music live streaming growing at over 100% year-over-year. It has attracted 10,000 musicians to live stream and enable musicians to connect and interact with the fans via live streaming.

QQ Music live streaming currently accounts for mid- to high single digit of the social entertainment revenues. And is -- and between QQ Music live streaming as well as audio live streaming as well as our international expansion opportunity, we see effective ways to be able to offset some of the decline in the more traditional live streaming businesses.

[Operator]

[Operator Instructions] Your next question comes from Wei Xiong from UBS.

[Wei Xiong, analyst]

We see that your long-form audio business continued to make a very good progress this quarter. So if we take a slightly longer view of this business, how should we think about the revenue potential and the margin profile for this business in the next 2 to 3 years?

[Cheuk Tung Yip, executive]

Long-audio is a highly complementary service to our core music product as well as music content portfolio. As we have seen by experience, it is very accretive to user engagement and time spent. We continue to enrich the licensed titles, podcasts as well as continue to build the UGC content ecosystem to enhance our audio content offering. Examples that we've mentioned include the Source Snow Stride, [Foreign Language], which has become a very popular self-produced content blockbuster, accumulating a large number of audience.

We also continue to enhance our content library by offering audio content from Rock & Roast, [Foreign Language]. And QQ Music has also launched an open platform to improve podcasters' ability to create and upload podcast-related content and allow them to share content to TME as well as to other platforms with a few simple clicks. And as a result, we have seen a very strong growth in long-audio MAU to exceed 140 million, which recorded growth of 89% year-over-year.

And in addition, we continue to grow the monetization opportunity within long-audio. And we see, in the long run, opportunities both across audio subscription, which we have recorded over 5 million paying users in the third quarter, as well as audio advertising, as we build out the lon- audio business. And while it remains to be a negative gross margin contributor this year and likely into the next few quarters as well, we do expect the long-audio business to be a profitable business beyond that.

[Operator]

Your next question comes from Charlene Liu from HSBC.

[Charlene Liu, analyst]

I would like to know whether you can -- obviously, the [indiscernible] expenses came in better than expected. And I was wondering if you can give us some guidance on how should we think about sales and marketing and cost of sales going forward in the next quarter and entering into 2022?

[Min Hu, executive]

Okay. [ About sales ] and marketing expenses, this quarter, I -- we [ thought of ] many ways to control these expenses. First, we reduced [ direct ] expenses to acquire users because we use our internal capital efficiently to attract more users. And face to the competition, we need to use our [indiscernible] efficiently. So we will add more content and internal capital to attract more users. And looking forward, we think we will continue to control our sales and marketing expenses. And we expect that will be getting more good results in the future. Yes.

[Operator]

We are now approaching the end of the conference call. I'll now turn the call over to your speaker host, Mr. Tony Yip, for closing remarks.

[Cheuk Tung Yip, executive]

Thank you, everyone, for joining us today. If you have any further questions, please feel free to contact TME's Investor Relations team. This concludes today's call, and we look forward to speaking with you again next quarter. Thank you, and goodbye.

[Unknown Executive]

Thank you.

[Min Hu, executive]

Thank you.