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Tencent Music (TME) Q2 Earnings Beat, Revenues Improve Y/Y

Zacks Equity Research

Tencent Music Entertainment Group TME reported second-quarter 2019 adjusted earnings of 10 cents per American Depositary Shares (ADS) that beat the Zacks Consensus Estimate by a penny.

Net profit attributable to equity holders of the company was RMB927 million ($135 million), compared with RMB904 million in the year-ago quarter. Non-IFRS net profit was RMB1.13 billion ($164 million) compared with RMB1.07 billion in the year-ago quarter.

Revenues jumped 31% year over year to RMB5.90 billion ($859 million).

Top-Line Details

Revenues from online music services increased 20.2% year over year to RMB1.56 billion ($228 million), driven by higher revenues from user subscriptions and sales of digital music albums.

Revenues from paid music through sales of subscription packages were RMB798 million ($116 million), up 31.9% year over year.

Tencent Music Entertainment Group Sponsored ADR Price, Consensus and EPS Surprise

Tencent Music Entertainment Group Sponsored ADR Price, Consensus and EPS Surprise

Tencent Music Entertainment Group Sponsored ADR price-consensus-eps-surprise-chart | Tencent Music Entertainment Group Sponsored ADR Quote

Revenues from social entertainment services and others soared 35.3% to RMB4.34 billion ($632 million), primarily driven by higher revenues from both online karaoke and live streaming services.

User Base Expands in Q2

Mobile MAU - online music increased 1.2% year over year to 652 million. Paying users - online music jumped 33% to 31 million. However, monthly ARPPU - online music declined 1.1% to RMB8.6.

Mobile MAU - social entertainment increased 4.8% year over year to 239 million. Paying users - social entertainment improved 16.8% to 11.1 million. Moreover, monthly ARPPU - social entertainment rose 16.5% to RMB130.2.

During the reported quarter, Tencent Music released QQ Music app version 9.0 that features a refreshed visual and interactive experience along with a new personalized recommendation tab.

Moreover, the company added short videos on the Kugou music streaming page. This enabled users to watch high-quality videos while listening to music on the platform.

Tencent Music also took initiatives to diversify content by adding video content, and long and short-form audio content, including podcasts and audiobooks.

Regarding the WeSing app, Tencent Music launched a lite version in the reported quarter. WeSing was also launched in Southeast Asian countries.

Operating Details

Tencent Music’s second-quarter 2019 cost of revenues increased 26.1% year over year to RMB1.05 billion ($576 million), primarily due to increased content and revenue sharing fees.

Nevertheless, gross profit improved 8.1% to RMB1.94 billion ($283 million) in the reported quarter.

Selling and marketing expenses were RMB416 million ($61 million), up 26.1% year over year due to increased spending to promote the company's brands, products and content offerings.

General and administrative expenses were RMB634 million ($92 million), up 38.1% on higher research and development expenses.

Operating profit rose 7% to RMB1.09 billion ($158 million) in the reported quarter.

Balance Sheet & Cash Flow

As of Jun 30, 2019, Tencent Music’s cash and cash equivalents and term deposits were RMB19.90 billion ($2.90 billion) compared with RMB18.10 billion as of Mar 31, 2019.

Net cash from operations was RMB1.89 billion ($275 million) compared with RMB1.98 billion in the year-ago quarter.

Zacks Rank & Stocks to Consider

Tencent Music currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader computer & technology sector include Chegg CHGG, Cirrus Logic CRUS and Garmin GRMN. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Chegg, Cirrus Logic and Garmin is 30%, 15% and 7.4%, respectively.

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