Tencent Music Entertainment : Transcript (TME Transcript 1Q25)

Tencent Music Entertainment Group 2025 First Quarter Earnings Conference Call Millicent T.:

Good evening, good morning, and welcome to Tencent Music Entertainment Group's First Quarter 2025 Earnings Conference Call. I'm Millicent Tu, Head of IR. We announced our quarterly financial results earlier today before the US market opened. The earnings release is now available on our IR website and via Newswire services.

During today's call, you'll hear from Mr. Cussion Pang, our Executive Chairman, and Mr. Ross Liang, our CEO, who will share an overview of our company's strategies and business updates. Then Ms. Shirley Hu, our CFO, will discuss our financial results before we open the call for questions.

Before we continue, I refer you to the Safe Harbor statement in our earnings release, which applies to this call as we'll make forward-looking statements. Please note that we will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures, reported under IFRS in our earnings release and filings with the SEC.

All participants are muted at this time. After management's remarks, there will be a Q&A session. And please be advised that today's call is being recorded.

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

Cussion:

Thank you, Millicent. Hello everyone and thank you for joining our call today.

We kicked off 2025 with a strong first-quarter performance, demonstrating robust topline growth and stronger profitability. This underscores the successful execution of our high-quality growth strategy. With the solid foundation we have built, a thriving music ecosystem, and healthy financial position, we are well equipped to navigate global uncertainties with confidence.

As music becomes more accessible and personalized, we see user preferences becoming increasingly diverse. Our platform is uniquely positioned to inspire deeper and broader music consumption through enriching our ecosystem and expanding suite of services.

Let me share some of the key highlights:

1. First, we strengthened our partnerships with record labels to further enrich our classic music library. Notably, we renewed multi-year contracts with Sony Music Entertainment, bringing 360 Reality Audio sound privilege to SVIP members. We also extended collaborations with

   Emperor Entertainment Group and Rock Records, enhancing the listening experience with immersive Dolby Atmos sound.

   Also, we partnered with Dream Music Group (种梦音乐) to further broaden our selection of popular Chinese rap, which has drawn growing engagement and positive feedback from our users.

   Meanwhile, our self and co-produced proprietary content is gaining increasing traction among music fans, offering a differentiated user experience that sets us apart from other music platforms. As for some highlights, in the first quarter, we partnered with CCTV News to produce To Time (敬时光) for Zhou Shen (周深), which ranked No. 1 on the Kugou Mainland Chart and No. 4 on the QQ Music Mainland Chart. We also produced One Thought to Eternity (一念封神), the theme song for the popular Tencent game CrossFire (穿越火线), which quickly topped multiple charts and resonated with both music lovers and gamers.

2. Second, through our insights on content and user evolving preferences, we deepened and revigorated content consumption across different genres. While Chinese songs remain the mainstream choice, we are seeing increasing popularity for Korean, English, and Japanese tracks. In this regard, we renewed contracts with top South Korean labels Starship Entertainment and YG Entertainment, maintaining our leadership in Korean content while also launching merchandise collaborations, such as collectible star cards. Our extended partnership with Japan's top ACG label KADOKAWA Corporation, added thousands of tracks including popular anime theme songs, further expanding genre coverage for fans.

3. Third, we fulfilled users' demand for collectibles and provided them new ways to express their passion and appreciation for artists. Recent highlights included the 10-day head-start presale of Beyond Utopia (叁重楼) by Teens in Times (时代少年团), which rose to No. 1 on the 2025 physical album bestseller chart and No. 2 on the all-time chart during this period. Another example is the physical album produced for Silence Wang (汪苏泷), One Hundred Thousand Volts ( 十万伏特), which quickly became a favorite among his dedicated fans. We also collaborated with K-pop icon G-Dragon to presell official light sticks and other products in mainland China. For fans who purchased his digital albums, we offered the privilege to buy China-limited special edition merchandise which achieved an impressive sales performance.

4. Fourth, we offered users more engaging and interactive music experiences both online and offline. In the first quarter, we staged nearly 40 well-known artists and groups, including JC-T (檀健次), Roy Wang (王源), Silence Wang (汪苏泷) and LEGEND OF PHOENIX (凤凰传奇) in our annual MUSIC FOR PASSION (QQ 音乐超级巅峰之夜) event in Chengdu, attracting tens of thousands of passionate fans. We debuted aespa's first-ever exhibition and BABYMONSTER's pop up store in mainland China, offering fans limited collectibles, interactive displays, and behind-the-scenes content to deepen fan connections with the artists. Online, we invited artists such as XIN LIU (刘雨昕), Sean Tang (唐汉霄), and Yaoyuan

   (卓沅) from SHI GE QIN TIAN (十个勤天) to engage directly with fans in the comment sections, sparking waves of enthusiasm among their fans communities.

5. Before I conclude, I also want to briefly touch on our ESG progress. In April, we released our 2024 ESG Report to offer stakeholders enhanced transparency and insight into our operations. The report details our practices and achievements in key areas including intellectual property protection, user privacy and data security, product inclusion and accessibility, and the fostering of diverse music communities. As we continue to unlock the potential of music and technology, we remain committed to advancing sustainable growth and creating social value.

In summary, our solid start to the year is a testament to the strength of our comprehensive content ecosystem and our operational excellence. These core capabilities, together with our strategic focus, ensure that we remain well positioned for sustainable growth in 2025 and into the future.

Now I would like to turn the call over to Ross for more details on our overall platform development. Ross, please go ahead. Thank you.

Ross:

Thank you, Cussion. Hello, everyone.

Our consistent focus on high-quality content and innovative product offerings, has enabled us to build a dynamic music ecosystem that meets a wide range of user preferences. As a result, we have seen sustained enhancement in user engagement, illustrated by year-over-year growth in both paying users base and ARPPU in the first quarter. This positive trend was further supported by continued strength in SVIP adoption, reflecting the increasing recognition and engagement of our valued members.

Here are some highlights to share:

1. First, our premium sound quality and audio effect offerings remain a key attraction for SVIP members, penetrating about 50% of our SVIP user base. To illustrate, Kugou Music introduced the industry-first Viper External Amplification Enhancement Sound Effect (蝰蛇外放增强音效), which intelligently optimizes sound depth and clarity when using external speakers. We also launched a dedicated audio effect for AirPods, enabling users to enjoy the advanced audio performance of the newer models without upgrading devices.

2. Second, a range of unique perks have proven effective in driving SVIP conversions, including unique album discounts, special badges, early access to merchandise and live events. As an example, at our annual MUSIC FOR PASSION event, SVIP members enjoyed special privileges such as priority ticket purchase. Moreover, those who bought tickets through this channel were also provided with exclusive services such as reception and transportation. We

   also helped Fiona Sit (薛凯琪) stage her first 10,000-seat concert tour in mainland China, offering SVIPs early ticket access and fan meet-and-greet opportunities. Additionally, we enriched our system, enabling SVIPs to unlock expanded rewards, deepening their sense of identity and community.

3. Third, long-form audio content, particularly top IPs, contributed to boosting SVIP retention. In the first quarter, we created the audio drama The Grave Robbers' Chronicles (盗墓笔记), and co-developed it with original author Nanpai Sanshu (南派三叔), star voice actors, and top-tier producers. Benefiting from interactive activities such as live streaming with the author and in-character voice commentary by the leading voice actor, it quickly gained popularity, surpassing tens of millions of streams within just 14 days.

On technology, we continued to use AI to elevate user engagement, one example was introducing an interactive commentary feature that transforms music charts into conversations, enhancing fan immersion. Users can also personalize music effects, switching between different vocals and instruments with one single click. In parallel, we adopted the DeepSeek LLM to help evaluate content quality and improve recommendation precision with user preferences.

On the non-subscription side, advertising remains a key growth driver and continues to deliver solid year-over-year growth across the board, thanks to diversifying ad formats. In particular, our innovative ad-supported mode, grew from strength to strength in the past quarter. We have also introduced a variety of interactive tasks for both paid and unpaid users, which saw an upward trend in engagement and adoption. Such positive trends provided us further confidence to continue to grow our advertising business as a whole, unlocking more potential in the future.

Looking ahead, we remain committed to enhancing our core competitiveness and pioneering new ways to inspire deeper and broader music engagement.

With that, I would like to turn the call over to Shirley, our CFO, for a deep dive into our financials.

Shirley:

Thank you, Ross, and greetings to everyone.

Let me now turn to our financial results. In Q1 of 2025, our effective monetization of online music services and operational efficiency management continued to drive robust financial results. With strong performance in our music subscription and advertising businesses, revenues continued growth momentum and reached RMB 7.4 billion, with a 9% year-over-year growth.

Online music revenues increased by 16% year-over-year to RMB 5.8 billion. The increase was mainly driven by strong growth of our music subscription revenues and advertising revenues, supplemented by growth in revenues from artist-related merchandise and offline performances.

Music subscription revenues in Q1 of 2025 reached RMB4.2 billion, representing a 17% increase year-over-year and a 5% rise sequentially. Driven by continuous expansion of the SVIP membership program and reduced promotional activity, monthly ARPPU increased to RMB11.4 this quarter, compared with RMB10.6 in Q1 2024. To meet the evolving needs of our users, we keep enriching the rights and privileges of our SVIP members, such as premium audio content, enhanced sound quality and effects, and early access to artist-related merchandise and live events.

Advertising revenues also achieved strong year-over-year growth, primarily due to the growth in ad-supported mode revenues. With more interactive features and enriched benefits, we boosted the entrance rate for ad-supported mode advertising, enhanced eCPM, and attracted more advertisers. Meanwhile, sponsorship advertising remains attractive to brand advertisers. The success of our flagship MUSIC FOR PASSION (QQ 音乐超级巅峰之夜) event was a great example to evidence this. Through offline event sponsorships, we've strengthened advertiser partnerships while driving ecosystem monetization.

In addition to music subscriptions and advertising, we have also made good progress on artist-related merchandise sales and offline performances. In Q1, we started shipping the physical album of Xiao Zhan released in Q4 2024 and the related revenues were recorded, resulting in a year-over-year revenue increase from artist-related merchandise sales. In addition, with the increased opportunities in offline performance markets, we've strengthened partnerships within the music industry and successful hosted concerts featuring renowned artists, leading to revenue growth this quarter.

Social entertainment services and other revenues declined 12% year-over-year to RMB 1.6 billion. Starting this quarter, we have ceased disclosing operating metrics for social entertainment business on a quarterly basis. As we have shifted our strategic focus to our core music businesses which has accounted for a growing dominant portion of our revenue, operating metrics for social entertainment business are no longer considered key drivers to our growth and prospect.

Our gross margin improved to 44.1% and increased 3.2 percentage points year-over-year, driven by the following key factors. First, the strong growth of our subscription revenue driven by increased monthly ARPPU and advertising revenues has contributed to the growth of gross margin. Revenues from Wesing membership and advertising in social entertainment services has also positively impacted our gross margin. Second, the scaling of our own content further improved our gross margin. Third, for social entertainment services, the decline in revenue sharing fees outpaced the decrease in revenues. Fourth, with years of dedicated efforts and investments, we have established win-win relationships with labels and artists. This has enabled us to explore more partnership opportunities and monetization models with them and further improve our cost efficiency.

On the operating efficiency side, we have maintained strict financial discipline and ROI-focused promotional spending management while directing investments toward long-term growth areas. Operating expenses as a percentage of revenue decreased to 15.5% in Q1 2025, compared with 16.8% in the same period of last year.

Our effective tax rate for Q1 2025 was 9.2%, compared to 19.9% in the same period of 2024. The lower ETR was primarily due to the impact from gain on deemed disposal. We accrued withholding tax of RMB118 million in Q1 of 2025.

In Q1 2025, our net profit was RMB4.4 billion, and net profit attributable to equity holders of the Company was RMB4.3 billion. This quarter, we have received a 2% equity interests in UMG through a distribution-in-kind from an associate, which was designated as financial assets at fair value through other comprehensive income, and have recognized a gain of RMB2.37 billion on deemed disposal of the associate. Non-IFRS net profit increased by 23% to RMB2.2 billion and non-IFRS net profit attributable to equity holders of the Company increased by 25% to RMB2.1 billion, respectively.

Our diluted earnings per ADS this quarter was RMB2.77, and non-IFRS diluted earnings per ADS was RMB1.37, up by 26% year-over-year. These results underscored our effective monetization, enhanced operating efficiency, and the benefit from our share repurchase program.

As of March 31, 2025, our combined balances of cash, cash equivalents, term deposits and short-term investment were RMB37.7 billion, as compared with RMB37.6 billion as of December 31, 2024. This combined balance was also affected by changes in the exchange rate of the RMB to USD at different balance sheet dates.

In March 2025, we declared a cash dividend of US$0.09 per ordinary share, or US$0.18 per ADS, for the year ended December 31, 2024, and the cash payment for the dividend of US$275 million was made in April 2025.

Looking ahead, we will prioritize high-quality growth in our music business, by expanding SVIP memberships, growing our advertising business, and diversifying our offerings across the music value chain. We will continue to invest in original content production, high-quality content, and innovative technologies globally, to further improve user engagement, user experience, and strengthen our ecosystem. We remain confident in the healthy growth prospects of the music industry that we are a part of and are committed to delivering high-quality investment returns for our shareholders.

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

Millicent:

Thanks, Shirley.

Millicent:

Thank you. Thank you everyone for joining us today. If you have any further questions, please feel free to contact our IR team. And this concludes today's call, and thank you so much again and look

forward to speaking to you next quarter.