U.S. Markets open in 7 hrs 22 mins

Edited Transcript of TME.N earnings conference call or presentation 20-Mar-19 12:00am GMT

Q4 2018 Tencent Music Entertainment Group Earnings Call

Mar 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Tencent Music Entertainment Group earnings conference call or presentation Wednesday, March 20, 2019 at 12:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Cheuk Tung Yip

Tencent Music Entertainment Group - Chief Strategy Officer

* Kar Shun Pang

Tencent Music Entertainment Group - CEO & Director

* Millicent T.

Tencent Music Entertainment Group - Vice General Manager

* Min Hu

Tencent Music Entertainment Group - CFO

================================================================================

Conference Call Participants

================================================================================

* Alex C. Yao

JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research

* Alicia Yap

Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research

* Eddie Leung

BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst

* Gary Yu

Morgan Stanley, Research Division - Executive Director

* Han Joon Kim

Deutsche Bank AG, Research Division - VP and Research Analyst

* John Peter Egbert

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Mon Han Chung

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Thomas Chong

Crédit Suisse AG, Research Division - Regional Head of Internet

* Wai Yan Wong

HSBC, Research Division - Head of Internet Research of Asia Pacific & Analyst

* Wei Meng

* Wendy Huang

Macquarie Research - Head of Asian Internet and Media

* Zhi Yi Chen

Goldman Sachs Group Inc., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Tencent Music Entertainment Group Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions)

Today you'll 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 T.

--------------------------------------------------------------------------------

Millicent T., Tencent Music Entertainment Group - Vice General Manager [2]

--------------------------------------------------------------------------------

Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. Tencent Music has announced its quarterly and financial results today after the market close. An earnings release is now available on our IR website at ir.tencentmusic.com.

Today you will hear from our Mr. Kar Shun Pang, our CEO, who will start off the call with an overview of our growth strategies and initiatives. He will be followed by Mr. Tony Yip, our CSO, who will offer more details on our recent business development. Then Ms. Shirley Hu, our CFO, will address our financial results in more detail before we take your questions.

Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements.

All forward-looking statements are expressed 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 today -- 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 that 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, CEO of Tencent music. Kar Shun?

--------------------------------------------------------------------------------

Kar Shun Pang, Tencent Music Entertainment Group - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Millicent. Hello, everyone. Thank you all for joining our very first earnings conference call as a public company.

2018 was an eventful and extraordinary year for Tencent Music. In 2003, we embarked on a journey to digitalize and transform the music industry in China. After 15 years of hard work, on December 12, 2018, we successfully completed our initial public offering on the New York Stock Exchange. The IPO has launched us on to the international stage, elevated global recognition towards our brand and endorsed our successful track record. It has also intensified our efforts in executing our mission of using technology to elevate the role of musics in people's lives.

Our 2018 results were marked with high growth and strong profitability. For the full year 2018, total revenues increased by 72.9% year-over-year. Net profit attributable to equity shareholders increased by 38%, while non-IFRS net profit attributable to equity shareholders increased by 119% year-over-year. Online music services paying users increased about 39% to 27 million and social entertainment services paying users increased by 23% to 10.2 million during the fourth quarter of 2018.

As the leader of the Chinese music industry, we are revolutionizing the ways that our users discover, listen, sing, watch, perform and socialize with our music. We continue to make relentlessly efforts to innovate our product, launch new app features to engage users and increase the breadth and depth of our content offering to satisfy the ever evolving demand of the music fans in China.

We introduced innovative user cases and product features to make the interaction between the artist and performers and their followers and friends to engaging to promote social connectivity, resulting in a push to our user stickiness, leveraging our platforms and widen the popularity, we continue to attract an increasing number of content partners and talents and encourage them to produce more high-quality content and help them cultivate and expand their fan base. Our innovative multi-format content offering that expands into music variety shows, short videos, artists' interviews and mini concerts and our unparalleled access to an immense audience has granted us the partner of choice for content partners and artists to promote their creative work within our ecosystem.

Our tremendous volume of data, proprietary and an ethical algorithm and deep understanding of content trends have all helped us enhance our personalized targeting, attract and retain more users, generating more interactive reviews and improve our user experience.

In summary, we achieved robust financial and operational performance in both our online music and social entertainment businesses in 2018. To fuel our growth for the years to come, we are fully committed to investing in content, product and technology. Going into 2019, we will continue executing relentlessly our mission to use technology to elevate the role of music in people's lives. We are confident that as we continuously develop and promote high-quality content across our platforms, we will be able to not only augment on our market leadership, but also foster the growth and development of the overall music industry.

Now I will turn the call over to Tony to discuss our business developments in more details.

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [4]

--------------------------------------------------------------------------------

Thank you, Kar Shun. Hello, everyone. During the fourth quarter of 2018, our operations continued to show substantial growth across both online music and social entertainment services. In online music services, our paying users increased by 39% to 27 million. We added 2.1 million paying users sequentially, which is substantially higher than 1.1 million for the same period last year. Mobile MAU increased by 7% to 644 million from 603 million a year ago. Paying ratio also improved to 4.2% from 3.2% a year ago.

Our continued operational improvements are driven primarily by enriching our content offering, deepening our user engagement and increasing promotion capability. First, to further enrich our content offering, we continue to add strategic partnerships with well-known domestic and international labels, thereby solidifying our industry-leading music library. We also strengthened our multi-format offering such as long-form audio shows and short videos, and thereby broadened our product features and deepened user engagement.

In addition, we further improved personalization features, a tailored recommendations of songs, playlists and feeds to better fulfill user preferences as well as added proprietary audio settings to enhance users listening experience. As a result, our user engagement increased meaningfully throughout the year. Secondly, we've established and expanded strategic cooperation to increase our repertoire of high-quality original content. We coproduced 101, a music-related variety show with Tencent. The show obtained significant popularity and enabled us to unlock a strategic partnership -- to lock in a strategic partnership with a top-ranked performing brand called, Rocket Girls. And we contributed to their rapid rise in popularity. As of December 2018, over 2 million copies of Rocket Girls first album were sold on our platform, thus making it China's best selling digital album in 2018 by volume.

We also launched a series of live stream video talk shows, which promote singers with videos and serve as an ideal launchpad for artists to release their new songs. In addition, we leveraged our ecosystems strong distribution and promotion capabilities to cultivate aspiring music talents. For example, our Tencent Musician program offers a full suite of services to nurture and promote up and coming independent artists. This open platform not only significantly simplified the process for artists to upload and manage their soundtrack across our entire platform, but we also share with them our data analytics and equip them with actionable intelligence on music trends.

In addition, we provide independent artists with off-line stages, including music festivals and lighthouse of shows to showcase their performance and attract followers. Our comprehensive online and off-line resources combined with our strong capabilities in distribution and promotions has garnered a significant recognition across the industry. As a result, songs from Tencent Musician program generated more than 70 billion total streams on our platform in 2018.

Turning to our social entertainment services. During the fourth quarter of 2018, paying users increased by 23% to 10.2 million. We added approximately 300,000 paying users sequentially, which is a healthy number in line with the same period last year when social entertainment services were experiencing a very rapid ramp-up. Mobile MAU increased by 9% to 228 million from 209 million a year ago. Paying ratio also improved to 4.5% from 4.0% a year ago. Such growth in social entertainment resulted from our achievements in engaging and empowering users through our broader set of use cases, attracting an increasing number of live streaming talents and diversifying our content with high-quality original music performed by our certified singers.

But we think we're focused on expanding the breadth and depth of its business operations through both online and off-line. We launched new multilateral interactive features such as multi-mic singing room. We also added proprietary technology features for smart sound adjustment to correct off-key high pitch sounds during performances, including both one-button correction to maximize convenience or targeted individual fragment corrections for optimized performance. We rolled out off-line mini karaoke booths as well as recent television additions to allow users to easily share what would otherwise be off-line karaoke experience with their friends online.

We also added more short-form video features to enable users to easily produce short videos using the music they love. We think the innovative model has successfully improved interactions across our music users and social entertainment users, strengthened their social connections, increased engagement and further differentiated us from our competition.

For live streaming, we continue to focus on improving the quality of music content offered to our users. We screen and selected thousands of talented live streaming performers as a certified singers, where we not only distributed their music on our platform, but also arranged approximately 600 mini concerts in 2018 and attracted millions of viewers to help increase the popularity of these certified singers among a broader audience. We will continue to empower our live streaming performers to help them launch their music career. And in turn, they continue to provide quality content that is highly complementary to our industry-leading content library.

In summary, we continued the strong growth trajectory across all of our business lines and made further progress in content enrichment and user engagement. Looking forward, we believe our premium content offering, innovative product features and advanced data technology will enable us to increase user traction, enhance user experience and improve monetization opportunities.

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

--------------------------------------------------------------------------------

Min Hu, Tencent Music Entertainment Group - CFO [5]

--------------------------------------------------------------------------------

Thank you, Tony. Hello, everyone. Let me go through our financial highlights, beginning with the [breakdown] of fourth quarter and full year results for 2018.

For the fourth quarter of 2018, revenues increased by 41 -- by 51% year-over-year to RMB 5.4 billion. The increase was driven by the robust growth from both our online music and social entertainment services. Revenues from online music services increased by 45% year-over-year to RMB 1.5 billion. The growth mainly comes from subscriptions, sublicensing and the sales of digital music albums. Subscriptions revenue was RMB 695 million, up 38% year-over-year. In the fourth quarter, we continued to offer promotional subscription packages with automatical renewal and more users in those in this program.

Revenues from social entertainment services increased by 53% year-over-year to RMB 3.9 billion. We introduced new functions and ways for users to interact with their friends and their add-ons on our platforms in 2018. Our users willingness to pay continue to improve, therefore, both our paying user base and user spending expanded in the quarter.

Cost of revenues increased by 63% year-over-year to RMB 3.6 billion in the fourth quarter. The increase was mainly due to increase in content fees and revenue sharing fees. We continued to invest in our content offering. We produced more in-house content and partnered with more musical labels to meet user demand for diverse forms of music entertainment.

Turning to the operating expenses. Total operating expenses increased by 58% year-over-year to RMB 1.4 billion. The increase was mostly due to higher employee benefit expenses and the professional fees incurred from our IPO last December. Employee benefit expenses were higher in the quarter due to increased headcount and employee incentive. We also increased spending on promoting the company's products and content in the quarter.

We recorded an operating loss of RMB 970 million in the fourth quarter, mostly due to one-off RMB 1.5 billion share-based accounting charge from the share issuance to Sony Music and Warner Music in October 2018. Excluding this one-off charge, operating profit would be RMB 549 million.

Non-IFRS net profit attributable to equity holders of the company increased by 37% year-over-year to RMB 916 million.

As of December 31, 2018, cash and cash equivalents were RMB 17.4 billion compared to RMB 5.2 billion as of December 31, 2017. The increase was mainly due to the strong operating cash flow and proceeds from share issuance including our IPO in 2018. We generated operating cash flow of RMB 1.9 billion in the fourth quarter and RMB 5.6 billion in the full year of 2018.

Going into 2019. With our strong profit and balance sheet, we will increase investments in our products, technology and the content offering. We plan to accelerate our investment in content to meet users' demands for more diverse forms of music-related entertainment. Although such investments may put downward pressure on our margins in the short term, they are vital to the continued expansion of our user base and improvement of user engagement.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Wendy Chen of Goldman Sachs.

--------------------------------------------------------------------------------

Zhi Yi Chen, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

So my one question is regarding the other online music revenue. So we see in the fourth quarter the other online music revenue including sublicense, digital album sales remain at a high level above CNY 800 million, it's the same as the last quarter. So just wondering, going forward, should we see this as a sustainable level for this revenue line as the sublicense agreement continuing to next year?

--------------------------------------------------------------------------------

Min Hu, Tencent Music Entertainment Group - CFO [3]

--------------------------------------------------------------------------------

Our other revenue will include sublicense revenue and digital albums and advertising. And in Q4, sublicense revenue has decreased because we -- in Q3, we had some one-off revenues booked. And we expect the sublicense revenue will keep steady growth in next year and no more one-off effective on next year. And for digital, sales of digital albums, we also expect that the growth will be steady. And for advertising -- advertisement revenue is also steady because that is not our main focus on our business.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Our next question is from Eddie Leung of Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [5]

--------------------------------------------------------------------------------

I heard that both Tony and Min mentioned that in 2019 we would step up our investment in content. So could you talk a little bit about the content you're going to start? We would be increasing our investment given we think most of the pop music record labels are already working with us. So wondering what type of content we would be investing in? And then given the investment in content, how should we think about the music paying ratio going forward? And then, finally, just a quick housekeeping question. Could you remind us how much of the IPO-related professional service fees we accounted under our G&A in the fourth quarter?

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [6]

--------------------------------------------------------------------------------

Sure. I'll take the first part of your questions, and then I'll let Shirley take the IPO fee-related question. So our content investments are comprised of a couple of areas. The first area is continuing to expand our label partnerships through both domestically and internationally. For example, genres that would include ACG, so Animation, Comic and Gaming, EDM, Electronic Dance Music, Chinese ancient genre, which has very national Chinese Tao ancient music as well as urban type music, which includes R&B and hip-hop. Today, we already have the largest content library in China, and we cover almost all popular genres, but increasingly we see the trend of more and more niche genres coming up, both domestically and internationally. And so there is still going to be more investments in that area. The second bucket include the multi-format of content that we talked about. For example, in terms of video, we'll be investing in variety shows. We coproduced 101 as we mentioned. We also self-produced a music chart countdown show and that's also a music variety show format. We also have other forms of talk shows, which -- talk shows with artist or talk shows that helps you promote music. And then we also extend into long-form audio shows, and that include, for example, book reading as well as just the ordinary radio-type talk shows around music. And then thirdly, we'll continue to partner with our label partners in joint ventures or other cooperations to further venture into new genres that we're not currently in, which includes our JV with Sony and Liquid State and potentially others to come. And then I'll let Shirley take the question about the IPO fee.

--------------------------------------------------------------------------------

Min Hu, Tencent Music Entertainment Group - CFO [7]

--------------------------------------------------------------------------------

The last question, we booked IPO fees in Q4 around USD 10 million to USD 15 million.

--------------------------------------------------------------------------------

Eddie Leung, BofA Merrill Lynch, Research Division - MD in Equity Research and Analyst [8]

--------------------------------------------------------------------------------

Got that.

--------------------------------------------------------------------------------

Kar Shun Pang, Tencent Music Entertainment Group - CEO & Director [9]

--------------------------------------------------------------------------------

USD 10 million to USD 15 million.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question comes from Alex Yao of JPMorgan.

--------------------------------------------------------------------------------

Alex C. Yao, JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research [11]

--------------------------------------------------------------------------------

I would like to follow-up with Eddie's question a little bit more. You guys mentioned investments in original music content, such as music-centric variety show, et cetera. Is this a big trend that you are seeing for your future content investment strategy? And compared to the video space, for example, between you and sister company, Tencent Video, what's the difference between your investment strategy in original content and Tencent Video's investment strategy in original content? And then related to that, how should we think about the gross margin in the next couple of quarters.

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [12]

--------------------------------------------------------------------------------

Sure. I'll take the first part of your question, and then I'll let Shirley take the margin part of your question. We see there to be ample synergies between the music variety show investments and our platform. And for example, these music variety show genres are increasingly popular. And if the popularity of these shows can actually help promote and carry the popularity into our apps, and that's because very often when we either coproduce or self-produce these music variety shows, we would insert certain product features, such as voting mechanisms or fan comment mechanism around a show, so that users can actually stay more engaged around the content of the shows through our apps. And so those are 2 feeds -- the popularity of the 2 feeds on each other. Secondly, the show itself generates a lot of content. There are a lot of songs, there are a lot of singers. It is a very good and effective way to identify and work with up and coming music talents. And so very often the top performers that come on those shows, we would strategically partner and work with them. We continue to help them produce even more music that is available and distributed through our platform and that becomes a unique content attraction. Then thirdly, our music library can also be broadened and extended beyond just audio format to include the video format. The variety show can be further dissected into short video clips, which is also very complementary to our audio-based content library. So all of this means that we see a lot of synergies between the music variety shows, which is why in the fourth quarter as well as in 2019, we'd be looking to make more investment in this area.

--------------------------------------------------------------------------------

Kar Shun Pang, Tencent Music Entertainment Group - CEO & Director [13]

--------------------------------------------------------------------------------

One more point that I would like to add is -- regarding to -- the questions is from TME point of view, we are much more focusing on the music-centric variety shows. But compared to, and we are talking about the Tencent video or other video platform, they will be more focusing on a more general approach. So -- since then, we have the expertise and the professionalism in doing the music content. So -- and also we understand the music business really well. So it also make that to be the preferred partner of choice. And that's the reason why not just Tencent music -- not just Tencent video, but we are also seeing that some of the other video platform also come to us and are trying to have this kind of joint ventures and partnerships with us regarding the music-centric variety shows. So I'll ask Shirley to quickly go through the financials.

--------------------------------------------------------------------------------

Min Hu, Tencent Music Entertainment Group - CFO [14]

--------------------------------------------------------------------------------

About the gross margin, we don't disclose rather the specific guidelines for the next year. But in the Q4, our gross margin decreased. That's mainly because first, our sublicensing revenue has decreased compared to Q3. And in the revenue structure, the social entertainment revenue has increased. So the sharing-based feeds to costs has increased. And that the other important reasons that we continued invest in content such as in-house, self-made content. So our gross margin has decreased in Q4. And we will continue -- invest more in content like Kar Shun and Tony mentioned. So our strategy don't changed. And I think on IPO, just 3 months ago, our [billings] have moved -- have not materially changed.

--------------------------------------------------------------------------------

Alex C. Yao, JP Morgan Chase & Co, Research Division - Head of Asia Internet and New Media Research [15]

--------------------------------------------------------------------------------

Very helpful. Can I follow up a little bit? So I think the -- my first question is really about how do you think about from moving -- moving from a pure distributor role to a semi-distributor and a semi-content creator role in the value chain?

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [16]

--------------------------------------------------------------------------------

I think -- well, first of all, we are, by far, the largest music distributor in the industry. And so I wouldn't exactly categorize us as a semi-distributor-type model. I think our -- that is still our -- very much our core business is distribution and promotion and helping the user discover music content. And our venture into more original content is really quite complementary to that core business. And we are doing it in the way that does not compete directly with our label partners. We -- they continue to be good partners with us, and we continue to work very closely with them. We're only doing things where our label partners do not do, which is -- such as music variety shows, such as music chart countdown shows, such as long-form audio shows that we talked about. All of these are investments that are quite complementary. And furthermore, from a Tencent Musician program perspective, that serves a very massive long-tail market that has traditionally been underserved. And the conventional labels focus on the top artists, whereas the Tencent Musician program focus on the long-tail artist. We help them with uploading their songs, distributing their song throughout our platform. So distribution is still the core part of that strategy. We provide the independent artist with the data that helps them produce better music. And so there is a production element that also feeds back into enriching our content offering. And these data analytics also help them identify what kind of music they ought to be producing. And we also give them a lot of exposure through our online resources and offline resources, some of which I talked about earlier. So all of these are part of our content strategy, which is, in our mind, quite complementary to our existing content partnership and our core business of distribution and promotion.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question will come from Han Joon Kim of Deutsche Bank.

--------------------------------------------------------------------------------

Han Joon Kim, Deutsche Bank AG, Research Division - VP and Research Analyst [18]

--------------------------------------------------------------------------------

I wanted to follow up on the purported kind of UMG stakes that's out there. And how -- if you guys have any updated thoughts on it. And would this be more of a strategic kind of investment if we do get involved? Or is it much more of a financial investment? And alongside that, if you guys have any perspective on how to value an asset like that and how that valuation looks relative to our own valuation? Just kind of any framework of how you guys are thinking about that would be vastly appreciated.

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [19]

--------------------------------------------------------------------------------

Right. Well, it is some -- obviously, we cannot comment on market rumors and speculation, any market rumors or speculation now. Our investment philosophy is such that we will always evaluate the right opportunities thoughtfully, and we'd only deploy capital very prudently in a strategic way that adds value to our business in the long run.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Our next question comes from Wendy Huang of Macquarie.

--------------------------------------------------------------------------------

Wendy Huang, Macquarie Research - Head of Asian Internet and Media [21]

--------------------------------------------------------------------------------

Two with regards to user (technical difficulty) specific

(technical difficulty) music (technical difficulty).

--------------------------------------------------------------------------------

Min Hu, Tencent Music Entertainment Group - CFO [22]

--------------------------------------------------------------------------------

Hey, Wendy, we are having difficult time in hearing you.

--------------------------------------------------------------------------------

Wendy Huang, Macquarie Research - Head of Asian Internet and Media [23]

--------------------------------------------------------------------------------

Is it better?

--------------------------------------------------------------------------------

Min Hu, Tencent Music Entertainment Group - CFO [24]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Wendy Huang, Macquarie Research - Head of Asian Internet and Media [25]

--------------------------------------------------------------------------------

So my question is about the user traffic. So the online music MAU, I noticed declined by 11 million sequentially this quarter. What's the reason behind that? And should we expect the resume of the growth into 2019? And also for the social entertainment user base, in the past few quarters, it has been going through some fluctuations. It declined sequentially in Q3, but resumed to growth slightly in the fourth quarter. So how should we think about the reason behind the fluctuation and also the churning to 2019?

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [26]

--------------------------------------------------------------------------------

Sure. So first of all, quarter-on-quarter softness in Q4 is normal seasonality, right, in terms of users because of higher levels of activities during Q3, during the summer break. We are satisfied with the Q4 performance. To put things into perspective, our music MAU grew by 40 million year-over-year despite the already very large user's -- user base. And so our focus is very much on operating better and engaging the users better and providing them with a more multitude of user experience to enhance the stickiness of fresh users rather than growing the sheer size of an already very large user's -- user base. The -- we've a lot of users on that platform already, and we've done a lot in the areas that I talked about to increase engagement and user loyalty. We've been improving the content -- our content quality through technology-driven solutions such as personalization, better curation. We offer the 1-button sound correction features that enhance the quality of the singing performances. We provide more fun and engaging features such as multi-mic singing room, which we talked about. We also broadened our content offering to include multi-format contents, such as short video, mini concerts, long-form audio. We also extended user engagement beyond conventional online use cases into offline settings, such as television additions as well as mini-karaoke booths. And so while these investments may not immediately translate into MAU or paying user numbers, but these investments will most definitely -- most definitely translate into higher engagement and stickiness over time, which is the more important focus of our business. And also I think finally, to put things into perspective, both our online music, subscription revenue as well as the social entertainment revenue grew at a very healthy pace, which we are quite happy about.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Our next question comes from Thomas Chong of Credit Suisse.

--------------------------------------------------------------------------------

Thomas Chong, Crédit Suisse AG, Research Division - Regional Head of Internet [28]

--------------------------------------------------------------------------------

I have a -- or relatively a big picture about the 2019 outlook. Can management briefly talks about how we should think about the revenue as well as the margin trend? I think just now, we talk about there's no material difference from other years in the IPO. So I just wanted to get a sense about how we should think about the key financials as well as any color on Q1 would be great.

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [29]

--------------------------------------------------------------------------------

Sure. We have not provided specific guidance on figures because we wanted to be very focused on growing the company over the long term rather than being distracted by short term -- quarter-on-quarter fluctuations. And so without going to specific figures, we can say that we're very confident about the business and that it will continue to grow at a very healthy pace. And since the IPO, our strategy and the way we view our business direction remains the same. And while there will always be seasonal fluctuations in the short-term quarter-by-quarter, our focus is on the long term because we strongly believe that the China music industry has -- still has enormous potential and as long as we continue to execute relentlessly upon our strategy that we've stated and the business direction we've stated, we will deliver long-term value.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Our next question comes from Hans Chung of KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Mon Han Chung, KeyBanc Capital Markets Inc., Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

So I'd like to dig into more on the social entertainment in fourth quarter. And then can you provide any color around the segment regarding the financial or operational performers for Kugou live streaming or -- and versus the WeSing? And then going forward, how should we think about the driver for the social entertainment will be -- are from either the user growth or the ARPU or the paying ratio?

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [32]

--------------------------------------------------------------------------------

Sure. So again, I think on -- in the fourth quarter, we're pleased with the fourth quarter performance of our social entertainment services. And that includes both WeSing online karaoke as well as live streaming. And -- that the revenue growth are driven by both increasing paying users as well as ARPU growth. And in WeSing, we've achieved a lot. And -- for example, we talked about improving the quality of content and the music and the product experience that we offer in WeSing through the technology-based 1-button sound adjustment. Singing is a core feature within WeSing. And so by making it much more convenient for users to improve their singing performance, that is a major attraction and a very innovative technology-based product feature. We also launched a multi-mic singing room. Previously, we talked about a singing room, which allow users to -- 1 user to sing. But now, more than 1 person can sing together in singing rooms. And that becomes an additional enhancement to what is already a quite an engaging use case. We also broadened the content offering to include short video to allow many more users to create short video using the music they love. And that's again -- we've also seen very good traction, in terms of the growth of consumption there as well as the offline use cases that we talked about in terms of the mini-karaoke booths offline as well as the singing karaoke through televisions additions at home. So all of these asset are all translated into a very healthy growth in our WeSing business. And then in terms of live streaming, we've also made a lot of investments into continuously improving the quality of the live streaming content, specifically around music. We continue to invest to help live streaming performers develop their music career. We ramped up our certified singer program where we certified thousands of singers to make them more prominently appear and showcase their music creative work. We've also enhanced the live streaming content category substantially in -- beyond just singing share rooms to include much more mini concert at genres as well as music variety shows and video talk shows type genres. And these mini concerts as well as live streaming variety shows provides a very strong leverage and serve as a great way for our live streaming business to promote the emerging artists who are certified as our singers, and thereby create a very strong virtuous circle of these emerging artists, promoting their music through our platform and -- which enables them to produce even better quality music, which feeds into -- become highly complementary content on a music service. So all these are good efforts within our live streaming business that -- where we continue to make investments in. And as a result, we've also seen very pleasing results in the fourth quarter.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Our next question comes from Binnie Wong of HSBC.

--------------------------------------------------------------------------------

Wai Yan Wong, HSBC, Research Division - Head of Internet Research of Asia Pacific & Analyst [34]

--------------------------------------------------------------------------------

This is Binnie here. If we look at the overall on the paying ratio, we have seen a steady increase, right? So we just want to understand that if we look back at this, do you think that -- because there's some softness, right, in MAU, too. And we also see a steady increase in the paying users. So going forward in 2019, as the management in the opening remark talked about -- a lot about enriching our content and personalizations and how we can drive up the step-up in the paying users. So how could we think of that into 2019? Can -- is there any update on the strategies, any more examples or maybe, as you said, like in terms of a variety shows or some production content? Can you give us more color into helping us understand how should we think about the paying users increase in 2019? And then a follow-up to that is that on the social entertainment services. If you look at the monthly ARPU, right, it also have been growing very nicely, right, in this quarter. So can we understand the reason why on this -- on the monthly ARPU side, on the social entertainment services? And how should we look at that in terms of 2019? How should we think about company balancing between a growth in paying ratio and the ARPU?

--------------------------------------------------------------------------------

Kar Shun Pang, Tencent Music Entertainment Group - CEO & Director [35]

--------------------------------------------------------------------------------

Okay. Thank you for your questions. First of all, I think that when we are talking about driving the paying ratio of our users, I think that these are very important, these are ongoing and gradually developing process. So we are not going to achieve everything in one day, but we are seeing a very positive and healthy growth and also with the experience that we have. We have to do a lot of things in order to drive it in the right direction. First of all, we need to continue to do the IP like protection correctly. So we have -- putting in a lot of efforts to make sure that of the IP, like all the music content, was being well protected. Secondarily, we're also spending a lot of efforts in educating our users that music do have a value. So we are also moving our content to the paid database step-by-step. First of all, as what we have mentioned before, we have created a digital album concept. And also, we are also making the new releases content into the paying model as well. So which means that our user only need to pay in order to listen it to the content or download it or even enjoy other free features for streaming. So what we are doing right now I think is, we are still trying to -- looking forward to our ongoing process. So we don't want to move too rush-ly. So we just want to make sure that it's not going to have too much effects to our user experience. So this is the way that we are working on. For the second questions that you mentioned in terms of the social entertainment ARPU, first of all, we need to understanding that our social entertainment platform do have a really huge user base, which is over 200 millions of users -- the active users in a monthly basis. Most of them are from the WeSing platform, and they do not have a spending habit before. But after a whole year of even some educations and hard work of our team, we have created a lot of things that help our users to start enjoying the business through paying. So we think that there's a lot of event, more people will start -- starting to pay through the WeSing platform. So that's the reason why it helped to drive up the overall ARPU of the entire social entertainment business.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question comes from John Egbert of Stifel.

--------------------------------------------------------------------------------

John Peter Egbert, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [37]

--------------------------------------------------------------------------------

I had a question on content investments. Investments in long-form audio have really picked up with some of your peers outside of China. I'm curious whether consumption of this type of content is material for TME yet, if you're seeing anything attractive about this genre from a financial perspective. It seems like with the lower production costs and greater fragmentation of ownership, it could potentially carry a higher margin profile than music or some of your professional video content. But curious, what you think about that.

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [38]

--------------------------------------------------------------------------------

Sure. We're only in the early stages of venturing into long-form audio. We started to have more long-form audio content late last year. And we continue to do so in 2019 because we really see positive signs of user engagement. When a user engage in long-form audio content compared to users who does not, users who do engage in long-form audio content tends to have a higher time spent as well as a better, higher retention rate. But again, I think it's too early stage for us. Audio content naturally is quite complementary to music content on our service. But I think for -- it's too early days. So I think, for us, we'll continue to make progress and -- towards this direction.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Our next question comes from Gary Yu of Morgan Stanley.

--------------------------------------------------------------------------------

Gary Yu, Morgan Stanley, Research Division - Executive Director [40]

--------------------------------------------------------------------------------

My questions is regarding our ultimate plan to transit to pay-for-streaming model. What have we done in terms of gradually moving some of the content behind the paywall? When should we expect these programs to take place in the next 1 or 2 years?

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [41]

--------------------------------------------------------------------------------

Sure. So we have already begun to lay the foundation for a gradual transition to pay for streaming. And to do this, we're doing it step-by-step by developing the user habit of paying for streaming. We've already begun to slowly, as Kar Shun mentioned, add a little bit at a time steps -- step-by-step some of the content behind the pay-for-streaming paywall. And so, maybe it is still early days, but so far, the signs are encouraging. It is going to be an ongoing and gradual process, we must stress. It's a long-term evolution rather than a short-term switch. And we are committed to continue to make progress in this area because this is the way we believe -- yes, is that -- the best way to promote the over-healthy development of the music industry. And given the paying ratio is still at a very low level compared to national levels, we continue to see there to be a lot of growth potential for pay for streaming to develop in the years to come.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question comes from Alicia Yap of Citigroup.

--------------------------------------------------------------------------------

Alicia Yap, Citigroup Inc, Research Division - MD and Head of Pan-Asia Internet Research [43]

--------------------------------------------------------------------------------

Congrats on recent IPO. I have some follow-up questions on the online music service revenue. Should we expect the subscription as a percentage of this revenue line will continue in proportions of the concentration going forward? I think a follow-up on Sherry (sic) [Shirley] just to clarify. When you mentioned advertising and sub-licensing revenue, when you say steady, do you mean steady growth? Or is it flat on the absolute dollar terms?

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [44]

--------------------------------------------------------------------------------

Oh, yes. So in terms of the music growth, yes, again, we don't -- while we don't provide specific guidance in terms of figures, we expect both music service and our social entertainment service revenue to grow at a healthy space. And then in terms of the non-subscription music revenue, yes, we expect that to be a steady in terms of absolute level.

--------------------------------------------------------------------------------

Min Hu, Tencent Music Entertainment Group - CFO [45]

--------------------------------------------------------------------------------

Yes. About the subscription revenue, that is the most part of our online music service revenue, okay? And for sub-licenses revenue and the advertising revenue, I said it's a steady growth, not very flat. Just steady growth for next quarter.

--------------------------------------------------------------------------------

Kar Shun Pang, Tencent Music Entertainment Group - CEO & Director [46]

--------------------------------------------------------------------------------

Yes. And also in the future, we should consider about all the new use cases that we are developing right now. I think that advertising, as of today, is not a really huge portion in terms of our revenue and -- but frankly speaking, we have no rush in pushing for this revenue stream, but they are the lower-hanging fruit. For example, if we have developed these new use cases, as what we have mentioned before, for example, like a INCA systems, which will create a very good environment for us to have some added advertising business model. So we will keep our mind and also our eyes open. So once all of this opportunity is at the right time, and then we'll go ahead and make sure that the user experience is good for our users as well.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Our next question comes from Wei Meng of CICC.

--------------------------------------------------------------------------------

Wei Meng, [48]

--------------------------------------------------------------------------------

I have a specific question on Kugou. We'd list that Kugou has made a significant new update in Q3. Could you please talk about the performance of Kugou since then and -- in both paid subscription in music and live streaming?

--------------------------------------------------------------------------------

Cheuk Tung Yip, Tencent Music Entertainment Group - Chief Strategy Officer [49]

--------------------------------------------------------------------------------

Sure. So the new interface design at Kugou have seen very good results. And number one, the -- with better helping users to discover new music through recommendation feed. Number two, it allow us to get access to much more accurate data as to what's kind of music and what type of song or albums or genres our users prefer because through each click and unclick on the recommendation feed, it gives a very specific data in terms of the user preferences. Number three, yes, through the recommendation feed, the feed itself enhances our promotional capability because -- since it's a personalized recommendation feed, we can much -- we can leverage that feed to effectively work with music label partners as well as artists who promote their music to a much more targeted user base. And number four, and given that feed is a much more visual format of engagement, it also lays the foundation for future advertising monetization in the future. And as a result, we've seen a very good momentum and continued increase in music consumption that are consumed via the feed recommendation.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

This concludes our question-and-answer session. I would like to turn the conference back over to Millicent T for any closing remarks.

--------------------------------------------------------------------------------

Millicent T., Tencent Music Entertainment Group - Vice General Manager [51]

--------------------------------------------------------------------------------

Thank you, everyone, for joining us today. If you have any questions, please feel free to reach out to us through our Investor Relations website at ir.tencentmusic.com. This concludes the call, and we look forward to speaking with you again next quarter. Goodbye.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.