U.S. Markets close in 16 mins

Tencent Music Entertainment Group (TME) Q2 2019 Earnings Call Transcript

Motley Fool Transcribing, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Tencent Music Entertainment Group (NYSE: TME)
Q2 2019 Earnings Call
Aug 12, 2019, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, good evening, and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group second-quarter 2019 earnings conference call. [Operator instructions] [Audio gap]

Millicent T. -- Vice General Manager

Hey, sorry operator. We're having a difficult time in hearing you. The line keeps breaking up. Can you just please repeat and make sure that the line is OK for us?



Questions & Answers:


Operator

OK. Thank you. Can you hear me?

Millicent T. -- Vice General Manager

Better now.

Operator

Ladies and gentlemen, good evening, and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group second-quarter 2019 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. [Operator instructions] Please be advised that this conference is being recorded today.

If you have any objections you may disconnect at this time. Now I will turn the conference over to your speaker host today, Ms. Millicent T. Please go ahead.

Millicent T. -- Vice General Manager

Thank you, operator. Hello, everyone, and thank you, all for joining us on today's call. Tencent Music Entertainment Group announced its financial results for the second-quarter 2019 today after the market close. An earnings release is now available on our IR website at IR@tencentmusic.com, as well as, via Newswire services.

Today you will hear from Mr. Kar Shun Pang, our CEO, who will start the call with an overview of our recent achievements and growth strategies. He will be followed by Mr. Tony Yip, our chief strategy officer, who will offer more details in our business developments.

Lastly, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions 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 expressly qualified in their entirety by the cautionary statements, risk factors in 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 as law. Please note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in the company's earnings release and filings with the SEC. You are reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measures, and other non-IFRS measures are not uniformly defined by all companies including those in the same industry.

With that, I'm very pleased to turn over the call, CEO of Tencent Music. Kar Shun?

Kar Shun Pang -- Chief Executive Officer

Thank you, Millicent . Hello, everyone, and thank you for joining our call today. In the second quarter of 2019, TME record solid financial results with revenue growth of 31% year over year and healthy operational performances in both online music and social entertainment services. In our online music services, first of all, one of the most recognizable achievements in the second quarter was the reacceleration of growth in both paying users and subscription revenues.

As the largest online music services platform in China, we added 2.6 million paying users on a sequential basis. The highest number over the past five quarters. Paying users increased by 33% year over year up from 27% year over year from last quarter. As subscription revenues increased 32% year over year, up from 26% year over year for the first quarter of 2019.

This was driven primarily by an improved monthly retention rate and progress in paying for streaming. Paying users driven by the pay-for-streaming model 10 GB of high quality, and we have seen that we started to attract more one time -- more first time paying users, another angle illustrating that our users have positive reception to the new model. As we continue to enrich our content offering behind the paywall, in the future we will roll out membership privileges and differentiated services to paying users, improving user experience and bringing our service to a new level. Our service as the largest online music services platform in China, comes with a duty to uphold copyright protection, and unlock the intrinsic value that our content has to hundreds of millions of music lovers in China.

This will take time, but we are committed to this journey of educating users. With the right approach and effective strategies in place, we firmly believe that our pursuit of this [Inaudible] open tremendous opportunities for us to grow paying users. Second, we continue to diversify our content offering. We expanded our content leadership through cooperation with a greater number of music labels.

and the addition of music-centric variety shows, short-form videos and long-form audio, including audio books and podcasts. In terms of content diversification, we have also expanded content partnership within the Tencent ecosystem. Including Tencent games, Tencent pictures, Tencent video. our goal is to create and distribute a greater selection of high-quality music or games, films and television shows in China.

We are working closely with Tencent games to build a holistic ecosystem for the joint development of game music including upholding copyright standards, increasing the efficiencies of distributions and promoting a healthy development of the game music industry. In the second quarter, we successfully developed a song called Wake Me Up for a virtual male band of the hit mobile game Honor of Kings, which recommend strong -- users within a week of its release we secured a Top five spot on both most popular and new song charts. In the future, we will continue to work together to create more original songs for this hit mobile game. Also since late last year, we formed the various partnerships, including with Tencent pictures and have launched almost 100 songs for over 20 films and television programs.

Through the second quarter of this year, we further deepened our partnership with Tencent pictures and would look to do develop more high-quality original soundtrack with them in the future. After two years of hard work, I am pleased to say that our our Tencent musician program has become the biggest music platform for original music in China and has accumulated approximately 400,000 original songs. Through coordinated promotional efforts across our three music platforms, the total number of streams of this song has reached over 100 billion. On a one year-over-year basis, we have seen the number of original songs streamed per day increased by almost 200%.

This are great examples of how we are incubating talented musicians and bringing their high-quality original work of -- to hundreds of million of music lovers in China. Third, on product enhancement and innovations, the newly released QQMusic app version 9.0 has been well-received on social media. Beyond providing a refreshed digital and interactive experience, one important change is that it now features a brand-new personalized recommendation tab which helps users discover more music. These changes, together with our optimized algorithm, has resulted in almost 40% sequential improvement in terms of the total number of streams driven by our recommendation engine.

In addition, we pioneered product innovation by adding short videos on the Google Music streaming page, enabling users to watch high-quality PGC and UGC videos while listening to music on the platform. This innovative new function has started to gain traction to users, with average daily stream volume growing rapidly since its launch in May earlier this year. Moreover, for WeSing, we attractively improved user engagement and broaden our user base through the introduction of new product features, and scale up of this mini program pursued by the functionality that lowered the [Inaudible] of use. In summary, we are pleased to report another solid quarter of financial and operational performance.

Our efforts in the second quarter in content diversification, promotional capabilities, product enhancement and technology drove a healthy level of growth across all metrics of both of our online music and social entertainment businesses. We are confident that we have developed the right strategy to drive results, and this will build our mission of using technology to elevate the role of music in people's lives. With that, I will turn the call over to Tony to discuss the development of our business in more details.

Tony Yip -- Chief Strategy Officer

Thank you, Kar Shun. Apart from the encouraging results with our online music business another key highlights of the second quarter was that social entertainment mobile MAU rose almost 5% year over year to CNY 239 million, while ARPPU expanded by nearly 17% compared to the same period last year. These increases came after a series of initiatives that we said we will execute on to reinvest in user growth, and we're pleased to see that those efforts have proved effective and helped improve social entertainment MAU growth. For WeSing, we made efforts to lower the threshold of use and attract prospective entry-level users.

This included scaling up the WeSing mini program in WeChat, which has grown rapidly in the quarter. We only introduced WeSing lite version app, which has streamlined functionality that is designed to attract users in China's lower-tier cities who may have phones with lower-processing capacity, and slower Internet connections, as well as, first-time users who may appreciate a simpler interface. As Kar Shun mentioned, we introduced new product features that have proven to deliver solid results. This quarter, we continued to build on the popularity of WeSing's new product feature called Grab the Mic.

[Foreign language] in Chinese, whereby top-scoring users in that Grab the Mic singing game have the opportunity to play with collective celebrities that were invited to play. The new feature allows the cultivation of fun and engaging interactions between fans and idols, while also promoting social interactions among users. The new feature has been met with huge success, particularly with the younger demographics. For example, the participation of a Chinese female pop singer, attracted millions of users with nearly 100,000 fans competing to play the Grab the Mic singing game with her.

We also officially introduced a quick sing product feature [Foreign language] in Chinese, which we mentioned in the last quarter. The new feature selects only the familiar chorus parts of the song for karaoke singers. This has helped drive the average number of songs sung and published per person by 80% for users who use the quick sing feature compared to the users who did not. On international expansion, we are proactively exploring new opportunities to bring our products and services to a larger audience outside China.

Recently, we launched WeSing in Southeast Asia, and we're seeing encouraging preliminary success in the Philippines in particular, whereby the app has consistently in the most downloaded music-related app on Google Play for the last three months. Now turning to our music-centric live streaming business. Leveraging the early success that we had in the previous quarter, we scaled up our multi-performer live streaming feature by adding more content and attracting more high-quality live streaming performance. As a result, the feature not only drew in millions of new viewers, but also increased the user time spent by over 50% compared to users who did not use this feature.

In addition, building on the success of last quarter, we added more singing competition features to encourage sing offs among performers, which in turn help improve MAU paying ratio, as well as, ARPPU expansion. These initiatives, coupled with the deployment of data analytics through our personalized recommendation engine, helped increase average user time spent on our live streaming platform by double-digit percentages on a year-over-year basis. We also continued to leverage our live streaming platform to discover and nurture new artists. In the second quarter, we held over 100 new song release events [Foreign language] in Chinese to help emerging artists to promote their new songs.

Millions of users watched of the live broadcast with the number of video streams increasing by 77% sequentially. Now turning to other strategic initiatives. We are proactively exploring potential new channels for growing our music users through Internet of Things. By partnering with leading manufacturers of Internet-connected smart devices including cars, speakers, and watches, our goal is to offer users a consistent, cohesive listening experience in their cars, homes or wearable devices, essentially allowing them to enjoy my music services wherever they are.

We now provide music services to eight of China's 10 most popular top brands, two of the top three smart speaker brands in China, as well as, China's largest smartwatch brand for the children market. This quarter, we were particularly excited as Tesla becomes the latest auto brand to use our music service in their vehicles, allowing Tesla users to enjoy a personalized listening experience on the road. We see the development of these external partnerships in IoT as an exciting new area, which in the future will enable us to grow our music users beyond mobile Tencent. In summary, from an operational point of view, we executed well for both online music services and social entertainment services, and we are optimistic that our current momentum will continue allowing us to further grow our user base and paying users.

From a strategic point of view, we continue to invest in long-term value-creation opportunities, such as overseas expansion and IoT. With that, I would like to turn it over to, our CFO, Shirley Hu, for a closer review of our financials.

Shirley Hu -- Chief Financial Officer

Thank you, Tony. Hello, everyone. In the second quarter of 2019, our revenues increased by 31% year over year to RMB 5.9 million. This increase was driven by the daily growth in both our online music and social entertainment business.

Revenues from online music services increased by 20% year over year to RMB 1.6 million. The increase was mainly driven by strong growth in revenues from user subscription and the sales of digital music album, which was offset by the decrease in sublicensing revenues from other music service companies. Revenues from music subscription were RMB 798 million up from RMB 605 million in the second quarter of 2018. During Q2, the number of our online music subscribers increased by 2.6 million from Q1, the highest over the past five quarters.

The growth was mainly driven by improved subscriber retention ratio and encouraging user acceptance of our channel of the pay for stream model. In addition to the growth in subscriber number, our subscriber ARPPU rose to RMB 8.6 in Q2 from RMB 8.3 in Q1. This increase was the result of higher percentage of premium membership subscribers. Revenues from social entertainment services increased by 65% year over year to RMB 4.3 billion primarily driven by revenue growth in our online karaoke and live streaming services.

Our ARPPU for social entertainment services increased by 16.8% to RMB 130 year over year while paying user base increased by 16.5%. Cost of revenues increased by 46% year over year to RMB 4 billion. The increase was attributable to higher content expenses and revenue-sharing fees. The increase in content expenses was mainly attributable to the increased market price and the amount of license, and produced music content.

The increase in revenue-sharing fees reflected growth in our social entertainment services. In addition, the company offered users with more professional content and provided users with more incentives to [Inaudible] it services. Our gross margin was 32.9% in Q2 2019 as we firmly executed our strategy of more active content offerings and grow the ecosystem with our content providers. We have always understand the importance of quality growth and insured we were able to return our investments.

Although our overall gross margin decreased year over year as we increased our content investments and other music services companies reduced the sublicensing from us, we were able to improve operational savings during the quarter. Now let's turn to operating expenses. While our total operating expenses increased by 26% year over year to RMB 1.1 billion, we have seen improvement in our operating leverage on a year-over-year basis. Operating expenses as a percentage of total revenue decreased to 70.9% in Q2 2019 from 8.5% in Q2 2018.

Streaming and marketing expenses for Q2 2019 were RMB 416 million representing an increase of 11% year over year. The increase was primarily due to increased spending on growing our user base and promoting our brand, and content. General and administrative expenses increased by 28% year over year to RMB 634 million in Q2 2019. We have been increasing our investments in research and development to expand our age and products and technology.

For example, our recommendation of [Inaudible]. Our effective tax rate was 12.4% in Q2 2019 compared to 9.5% in Q2 2018. The increase was mainly due to the change in preferential tax rates of certain subsidiaries. As a result of foregoing, our net profit attributable to equate [Inaudible] of the company was RMB 927 million and our non-IFRS net profit attributed to shareholders of the company was RMB 1.1 billion.

Our non-IFRS net profit margin was 19.1% in Q2 2019. As of June 30, 2019, our combined balance of cash and cash equivalents and the term deposits amounted to RMB 19.9 billion, an increase of RMB 1.8 billion from RMB 18.1 billion as of March 31, 2019. The increase in the balance was primarily due to cash flow generated from operations of RMB 1.9 billion. Overall, we achieved this -- growth in our top line and our profitability remains at a healthy level.

With strong growth of our online new subscriber base and the social entertainment user base proved the effectiveness of our strategy is investing in our product and content offering. In the second half of 2019, we will build on this momentum of quality growth with effective execution and strive to pursue our annual goal. This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Operator

[Operator instructions] First question comes from John Egbert from Stifel. Please go ahead.

John Egbert -- Stifel Financial Corp. -- Analyst

Great. I think that was me. The Internet of Things device integrations seem like a really interesting opportunity, are those available to free listeners today? And do you view those devices some of the categories all of them as potential paywall features to drive increase conversion in the future. And separately, is there any color you can provide on the growth of the trends on the other online music service segment between app downloads and sublicensing.

That's been, I think, one of the trickier areas to model recently. I'm just wondering if you can give us any help there. Thank you.

Tony Yip -- Chief Strategy Officer

OK, sure. So in respect to Internet of Things strategy, our strategy is to provide our music services to as many smart device possible so that our music strategy becomes ubiquitous in all of our users' daily lives, whether they are trying to listen to music through a smart speaker at home or whether they are trying to listen to music in their cars or while they are on the go through other wearable devices. At the moment, depending on the specifics of future partnerships, some partnerships are avail -- wear music services are available for the free users, with the exception of some of the content that is sitting behind the paywall. When that happens, it is consistent across multiple devices.

You mentioned the point about conversion, you are correct. It is definitely one of the very strong tool or potential levers that we could add to in addition to our paywall strategy to help convert free users into our paying users. To give you one example, in the future, our price plan -- the premium price plan could evolve into one that offers premium paying users listen to content behind the paywall across multiple devices, beyond the mobile handset. And so at the moment, our conversion strategy is still at -- it's making good progress through the paywall.

But over time, we well-planned strategy and steps that we would continue to add to the paywall strategy and to add to other things -- other tools that can help with the conversion.

Shirley Hu -- Chief Financial Officer

And about the other revenues of online services that is including advertisement revenue and the sales digital -- revenue and the sublicense revenues. And the sublicense revenues is the greatest part of this. So we have told subscriber revenue will decrease, and we expect in the second quarter -- second half of this year, the total other revenues of online music will be stable compared to last year.

John Egbert -- Stifel Financial Corp. -- Analyst

Great. Thank you both.

Millicent T. -- Vice General Manager

Next question please.

Operator

Your next question comes from Alex Yao with JP Morgan. Please go ahead.

Alex Yao -- J.P. Morgan -- Analyst

Hi, thank you management for taking the question. I have two questions. One is regarding the online music. We understand your current strategy is to gradually and steadily increase the content behind the paywall such that the paying ratio will gradually improve over time.

In terms of the revenue growth rate, this quarter the revenue growth rate slowed down to 20%. How would that such operating strategy translate into revenue growth rate? Should we be accepting further deceleration in the coming quarters? Or at some point shall we be expecting acceleration for online music revenue? And the second question is regarding social entertainment operation. The financial and operating results clearly suggested that you prioritize the user growth in the quarter while partly sacrifice the monetization. Can you walk us through what are the initiatives you have introduced, such that the user growth rejuvenizes 90-odd bps, and why these initiatives relative to the monetization.

More importantly, can you talk about the strategy and outlook into second half this year? Thank you very much.

Kar Shun Pang -- Chief Executive Officer

OK. Thank you, Alex, for your questions. And actually, we are really encouraged to see a healthy momentum in our new subscriber growth. Regarding to your first question, I think that right now the key drivers to makes us have a really good revenue growth is because we are doing improvements in our retention rate, such as all the renewal programs that we have introduced and the enhanced content offering that improved our user experience, and which is as a result of the very good results widening our revenue growth in the online music services.

In the future, when we are putting more and more content behind the paywall in a step-by-step process, I think in one to two years, between 2019 to 2020, which is our education process that we have to educate the market. And we are expecting that the revenue growth is going to be in linear growth rate. But we are going to reach an inflection point in two years' time, and by then we are expecting that we are going to have a deeper growth of the online music revenue. So we are pretty in line with what we have been communicated to everyone during the IPO period, and we are very positive on the long-term growing of our online music services.

Regarding to the second questions of social entertainment part. Yes, you are right that we are putting more focus on driving our user base at the moment because we are seeing that even though we have a very good user base for the social entertainment part, we want more users to get involved get a sense, and also started to pay even a small amount of money. So this is very important because we are also learning from the experience of gaming. So once you got more users and participate, and they started even paying a small amount of money they will get more satisfactions and start enjoying the service a lot more than before.

So once we got all these kinds of momentum going, we are seeing that we do have a very good chance to have more monetization that was in the future to capture the actual value of the more growth as well.

Tony Yip -- Chief Strategy Officer

And I also add that with regards to services revenue, if you break that down into music subscription revenue compared to nonsubscription music revenue, the music subscription revenue part actually, reaccelerated growth this quarter compared to last quarter. This quarter, our music subscription revenue grew by 32% year over year, which is meaningfully higher compared to the 26% year-over-year in Q1. And you're seeing similar trends and very encouraging trends in terms of the online music paying users, which grew at 33% year over year this quarter, compared to 27% year over year last quarter. And which is why as a result, we're actually very confident as to -- we're very encouraged by the progress that we're making in terms of the paying user conversion, and we're very confident that this growth momentum will actually continue into the second half, and even has the potential of being slightly higher in the second half compared to this quarter.

Millicent T. -- Vice General Manager

OK. Next question please.

Operator

Your next question comes from Eddie Leung from Bank of America Merrill Lynch. Please go ahead.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Hi, thank you for taking my questions, and good morning. Just two quick follow-ups of Alex' questions. On the pay subscription pieces for online music, could you share a bit of color in how you guys decide on which contents to be put under the paywall. Maybe talk about the decision process.

And then, secondly, going back to the social entertainment pieces, could you give us a little bit more color on the different user trends, and potentially ARPPU trends between leasing and live broadcasting getting into second half of the year. Thank you.

Tony Yip -- Chief Strategy Officer

Sure. In terms of the first question, it's obviously, a gradual process as we keep mentioning that we started upon in the beginning of 2019 where as we mentioned, we'll gradually be adding a selection of content and putting that behind the pay for stream paywall. The amount of content being put behind the paid for streaming paywall at the moment is still a very small percentage of our total, as this is just the beginning, and we would continue to do more. In terms of the process, it's a combination of different factors that would take into consideration, which includes for example of the conversion impact, and also what type of content allows to attract more diversified new paying users as opposed to cannibalizing existing paying users.

We also consider the popularity of the song. And the popularity defined not just as sort of new hits, but also all-time hits that may be quite lasting and with a lot of history and following. And so I think we take a combination of those factors. Ultimately, what we try to strike the balance for is user experience.

We want to make sure that user can continue to enjoy vast majority of their -- of the content for free, but at the same time, we want to spend this year and next year as investment years to educate our user base to buy into the concept of paying for an all-you-can-eat music streaming service for a very reasonable price. That is -- and that goes beyond just paying for a particular song or a particular album or a particular artist. It really comes down to educating the user to getting used to paying for a service that is convenient, that allows them to enjoy the most comprehensive content offering in the market, and that's what we'll continue to do in the next -- this year and next year. And we're actually seeing very encouraging progress.

As we keep mentioning about the reacceleration of our paying user growth. I also want to reiterate that the music net adds, music paying user net ads this quarter is actually the highest for the past five quarters, which actually shows a combination of our pay-for-streaming strategy and our retention strategy working quite well. In terms of the second question about WeSing, as well as, live streaming. I think actually both WeSing and live streaming are growing at a very healthy pace.

Previously, there was a question about user growth -- the trade-off between user growth and monetization. I would just reiterate that our social entertainment revenue grew by a very healthy 35% year over year, and that -- just another recap in second quarter of 2018, the social paying users actually declined sequentially in the second quarter of 2018. But in this quarter, the social paying user grew at a very healthy pace. And not just the paying users.

We also saw very healthy growth in ARPPU, which is a reflection of the increasing penetration of the existing paying use cases that we have implemented, an increasing penetration of those use cases among existing users, such as the online karaoke that we mentioned in the past. We're still seeing growth in the paying users penetration there. We continuously invent new paying use cases that are fun and engaging for users, especially for those who pay, such as the multi-mic singing room introduced toward end of last year, early this year. As well as the content improvement relating to live streaming that we keep making progress on by attracting high-quality live streaming performance to provide entertaining content for our users.

And then through the -- our investment in personalized recommendation, which allows our platform to recommend the most relevant content to our social entertainment user base based on their watching preference or listening preference. So a combination of these factors actually allow us -- allow our social entertainment revenue to grow at a continued healthy pace, and we expect that to continue into the second half. 

Operator

Your next question comes from Piyush Mubayi from Goldman Sachs. Please go ahead.

Piyush Mubayi -- Goldman Sachs -- Analyst

Thank you. I've got three questions, if I may, they're all short. First you talked about the IoT revenue model and how it's being embraced. Could you talk us through how it works with the Tesla case, for example.

The second question relates to the margins we're observing in the second quarter, and in particular, the gross margins of 32.9%, as well as, the sales and marketing spend that have come in lower than we thought at 7.1%. Are these trends sustainable for the rest of the year? And third is a bigger question -- a bigger-picture question related to the Tencent Group, which is the Tencent's interest in UNG. I wondered if you could comment on that. Thank you.

Tony Yip -- Chief Strategy Officer

Sure. I'll take the first question relating to IoT. The revenue model comes in different arrangements depending on the partnerships. In some cases, we -- TME generates revenue by actually charging a per device fee where the hardware device manufacturer would pay as a per device fee for our music service essentially subsidizing their users.

In other models, we provide a small or limited content library for the free users, and only provide the full library for the premium paying users, and thereby driving conversion. So we actually, actively exploring different alternatives, monetization models through IoT. But at this stage, our core strategy is to expand the user base and expand coverage, and penetration into as many devices as possible first. And once we have made inroads in covering and broadened our coverage in as many devices as possible across cars, speakers, as well as, other wearables, then we can start being a bit more aggressive in terms of the conversion.

I also want to just rehighlight that the IoT channel oould ultimately also become a fairly powerful conversion tool for us because it's very possible for us to offer a single premium plan across multiple device -- multiple devices meaning across mobile app, across speaker, across cars. So if a user is a premium user of the mobile app, they could equally enjoy the listening privileges of content behind the paywall across other devices. So that could actually, potentially become a powerful tool for us to drive conversion. That hasn't happened yet.

But as I mentioned earlier, this is part of our structure plan to sequentially and also as we roll out in the different levers as we go into the future in terms of keep driving our paying users higher. I'll let Shirley take the question on gross margin.

Shirley Hu -- Chief Financial Officer

OK. This quarter were gross margin was 32.9%. Actually, we think this has outperformed our expectation. Compared to the last year, the gross margin is decreased 7%.

There are several reasons. The first, subscriber sublicensing revenues decreased, in last year at the second quarter, we have recorded one of the sublicensing revenues and then, the upside this quarter some -- the third-party music platform gave up sublicensing from us. So sublicense revenues decreased will heavily impact our gross margin. And the second the content music -- the content cost of music has increased.

One reason is the market price is increased. And we [Inaudible] more among license labels, and we made some sales -- made a music content. And for the social entertainment, we give some small incentives to the users to encourage them to interact in our platform. So both of these effects impact our gross margin decrease.

And for the last half of year, we believe we can have a stable margin compared to last -- compared to the first half of this year, and reached our expectations as we have said last quarter.

Kar Shun Pang -- Chief Executive Officer

OK. Regarding the third question that you just mentioned about UMG, right now Tencent is leading the discussions with -- And since the transaction is still at its early stage, and TME has not made any final decision in terms of our participation in this transaction. But there's going to be more discussion internally, especially in the board level of TME, and we're going to have more discussion in that. Again, I think that TME is really open to explore and evaluate strategic partnerships from time to time, especially as we have mentioned before, we launched a joint venture with a label, with Sony Music, we also have some artist partnership with Warner Music as well.

So we continue to evaluate and explore the opportunities in this area. Thank you.

Millicent T. -- Vice General Manager

Next question please.

Operator

Your next question comes from the line of John Thomas with Jefferies. Please go ahead.

Unknown speaker

Hi, thanks management for taking my questions. I have a question regarding our mini program initiatives. Can management coming about how many users or in terms of the revenue, how do you think about the trend in the second half. Should we expect it to be more back-end loaded? And my second question is about that competition.

Given our competitiveness recently, you also talked about some community or part [Inaudible] features. How will we enhance our social features? Or do we think this is something that is already embraced in TME? Thank you.

Tony Yip -- Chief Strategy Officer

Yes. In terms of the first question I want to stress that as I mentioned in quarter in our earnings call, there is a series of initiatives that we have implemented that is focused on reinvesting user growth. And we're actually very pleased to see those initiatives starting to pay off in terms of the MAU growth, and those initiatives included introducing the WeSing mini program within WeChat. And the key objective there is to be able to leverage WeChat's massive user base on the social network to attract new users that are not currently using WeSing or lower-frequency users.

And use it as a springboard to drive traffic back to the WeSing main app. It's more of a user acquisition channel for us as opposed to a revenue monetization channel. In addition to the mini program, we actually have actively introduced new product features within WeSing to also make the product simpler for entry-level users to sing. We mentioned in the last quarter also about the quick sing feature, right, allowing users to sing just part of the song as opposed to full song.

And we're seeing very good conversion there that helps us improve MAU. In addition to that, the lite version is also very helpful to help us attract first-time users who prefer a simpler user interface or less-Internet savvy lower-tier users. So a combination of those initiatives have actually, been quite successful. It's not just about the mini program.

And then in terms of competition, I think we are by and large, the largest social entertainment -- music-centric social entertainment network in China already. We didn't launch karaoke as a first entry -- as a first mover to the industry. As most of you know, there were an existing incumbent within karaoke, but within a short time span. We overtook the incumbent to become now the largest online karaoke platform.

But more importantly, based on the number of social connections among users on WeSing, we have over 40 billion social connections among users on WeSing. And that's an extremely, extremely powerful asset and strength that is actually, very hard for other players to replicate, which is why we keep focusing on the social engagement and social interaction of our social entertainment platform. It's not just a media consumption platform, it's a social interaction platform because users genuinely interact with one another after they sing a song or after another user perform a song through live streaming, and those engagements are extremely active. And with more engagement, it actually gives us a lot more user loyalty, which as a result provide a lot of monetization opportunities for us.

And in addition to that, we also have actually continued to innovate our own products, above and beyond social entertainment. As Kar Shun mentioned, the 9.0 version of QQMusic has been very well received by our users. And with its brand-new personalized recommendation, which is a very, very key highlight for this new version, which substantially strengthened our recommendation algorithm, and we're actually, seeing very good volume being driven through music streaming volume based on recommendation with very high sequential increase. In addition to that, another example of product innovation that we continue to do is we've added what we can claim pioneering a feature in the industry, a short video watching feature while user is listening to music through the music streaming page.

Nowhere else in the market will you find this feature, where users can actually enjoy watching a series of short videos while listening to and enjoying to music. So this is very innovative feature. And we are also seeing very good conversions rate -- conversions on the back of that.

Millicent T. -- Vice General Manager

Next question please.

Operator

Your next question comes from Hans Chung with KeyBanc Capital Markets. Please go ahead.

Hans Chung -- KeyBanc Capital Markets -- Analyst

Hi, good morning. Thanks for taking my questions. So I have a couple of questions. One, so I just follow up operating COGS.

So it seems like the operating expense can be lower-than-expected in the second quarter, and then just wonder what drove the result. And then would that be sustainable going forward? And then secondly, regarding the international expansion strategy. So can you elaborate a little more what's your strategy and then, also what the potential user you are targeting. And then, any financial implication for the content culture, gross margin or sales and marketing spend.

Thank you.

Shirley Hu -- Chief Financial Officer

For the first question about operating expenses, this quarter, our operating expenses have operated average because we are focused on our -- how to spend based on promotion expenses. And for the second half of this year, we have said we need to pool some resources on acquiring test -- for social entertainment. But we will also focus on our ROI. So we expect in the second half of this year, the operation expense will be increased, but we will control this ratio of revenues of expenses at the same rate as for the last year.

For the second question --

Tony Yip -- Chief Strategy Officer

In terms of our international expansion, as we think about expanding beyond China, we obviously have a choice of expanding our music service or our social entertainment service, namely online karaoke. It was a very clear strategy for us to prioritize expanding WeSing. And that's because WeSing is, by far, the largest online karaoke platform globally. We have not seen any large player of scale that is comparable to where WeSing is today.

We have several years of operating know-how and track record that we have accumulated through a lot of experience. We are actually actively looking to leverage of that know-how and operational expertise to broaden the footprint of WeSing beyond China. And the reason we decided to first tackled the Southeast Asia region is because of cultural similarities with China with a fairly sizable Chinese population in some of the countries, as well as, similarly high-frequency karaoke activities as a way to social -- as a common social activity in the countries that we're targeting. For example, Philippines, as I think we all know, a country with people who love to sing.

In that country specifically, WeSing is actually seeing early success in terms of being a very top-rated music app on the App Store. It is still early days. We only started embarking on this international expansion this year. As we continue down this path, we do expect to spend, on a very prudent scale, some sales and marketing expenses to help promote the service, but with as consistent with our overall sales and marketing spend, we will track our ROI closely to ensure that our margin profile are not impacted.

Millicent T. -- Vice General Manager

OK. For the interest of time, we'll have time for just one last question.

Operator

Your last question comes from Hans -- sorry, Gary Yu with Morgan Stanley. Please go ahead.

Gary Yu -- Morgan Stanley -- Analyst

Hi, thank you for the opportunity to ask questions. The first question is on online music. I saw that the paying views in that was very strong in the second quarter. Remember during the first quarter when management expects sequential improvement in the paying user net adds in [Inaudible].

So just wondering whether we expect this trend to continue to improve from what we saw 2.6 net as in the same quarter in the next few quarters. Second question related our retention rate that we also mentioned that the improvement in net ads was partly driven by reduction in churn rate. Just wanted to see what kind of trend or retention rate we are seeing today where was it before the second quarter. Last question on social entertainment, we mentioned that second quarter company focus was on MAU with monetization probably up a little bit later.

Wanted to see whether that still remains the focus in the third and fourth quarter for this year? Or we should finally find expect some improvement in both paid user and rapid growth for social entertainment going forward? Thank you.

Kar Shun Pang -- Chief Executive Officer

OK. Thank you, Gary, for your questions. Regarding the online data services, yes, you are right that we are doing really good in the second quarter of this year, and we are having really encourage healthy momentum in driving this from time to time. I think as I mentioned before, there's a couple of reasons why we are doing that this quarter, especially because after the overall retention rates keep improving.

As you understand, we are not disclosing our retention rate. But I can assure you that this keeps improving and having a very good and positive result. Besides that, we are also adding more and more content behind the paywall in a step-by-step process. I think it's more educational process, and it's going to really going to pay off in the future.

And I also mentioned before is, the paywall I think it's just the first lever that we are pulling to convert more paying users at this moment. But we do have many, many other tools in the toolbox in the future that we can use to drive more monetization like we advertising models going on. We also have many privileges and differentiations in our membership as well. So what we are selling in here is not just selling music content, we are selling the overall music VIP services.

So which means that once our users are going to be adopted to this VIP privileges, they will be hassle-free and able to enjoy the wonderful content and service that we are providing to them. So we are -- and you're right, we are confident that the online music service side of our business will keep growing in the second quarter -- second half of this year.

Tony Yip -- Chief Strategy Officer

Yeah. And just add to music paying user side. As we mentioned, the growth rate of the paying user accelerated this quarter compared to last quarter, and we are very confident that this trend would continue into the second half, meaning we expect the growth rate of our online paying music users to the growth rate of that to continue to accelerate. And then, coming to the social entertainment part of the question, we continue -- I think in the second half we'll continue to focus on providing an attractive content offering in the live streaming part of the business in terms of attracting high-quality live streaming performance onto the platform, as well as, through our recommendation engine promote and recommend the most relevant live streaming content to our users based on their watching experience and preferences.

In addition to that, in terms of WeSing, we'll continue to provide interesting and fun and engaging paying use cases that attract the people to pay. We talked about the online karaoke room. We talked about the multi-mic singing room. We also talked about lowering the singing barrier to allow users to effectively sing more songs, which makes the karaoke community more vibrant, which actually also in turn could result in a more paying activity.

And in addition to that, the penetration of all these paying use cases continue to be relatively low. So there's still a lot more room for that to grow. And in addition to that, we -- I think a couple of quarters ago, we talked about synergy between our music streaming page and live streaming where while users listening to particular song on the music streaming page, we actually, signal to the user there is a live streaming performer that is singing this particular song that you're listening to at this very moment. And thereby, if you're interested in listening to an alternative version of that song you click on that link, and it drives you from the music listening page to a live streaming session.

The penetration of that still have more room to grow. And so all of these actually, will be key drivers for us to grow our overall social entertainment revenue into the second half. So we actually, continue to see very healthy growth for both WeSing and live streaming into the second half.

Operator

We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Ms. Millicent T., for closing remarks.

Millicent T. -- Vice General Manager

Thank you, everyone, for joining us today. If you have any further questions, please feel free to reach out to us through the IR team. And this concludes today's call, and we look forward to speaking to you again next quarter. Thank you, and goodbye.

Tony Yip -- Chief Strategy Officer

Thank you.

Operator

[Operator signoff]

Duration: 69 minutes

Call participants:

Millicent T. -- Vice General Manager

Kar Shun Pang -- Chief Executive Officer

Tony Yip -- Chief Strategy Officer

Shirley Hu -- Chief Financial Officer

John Egbert -- Stifel Financial Corp. -- Analyst

Alex Yao -- J.P. Morgan -- Analyst

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Piyush Mubayi -- Goldman Sachs -- Analyst

Unknown speaker

Hans Chung -- KeyBanc Capital Markets -- Analyst

Gary Yu -- Morgan Stanley -- Analyst


More TME analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribing has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com