Tencent Music Entertainment Group (NYSE:TME) Q3 2022 Earnings Call Transcript

Tencent Music Entertainment Group (NYSE:TME) Q3 2022 Earnings Call Transcript November 15, 2022

Tencent Music Entertainment Group beats earnings expectations. Reported EPS is $0.86, expectations were $0.71.

Operator: Ladies and gentlemen, good evening and good morning and thank you for standing by. Welcome to the Tencent Music Entertainment Group Third Quarter 2022 Earnings Conference Call. Today you will hear discussions from the management team of Tencent Music Entertainment Group, followed by a question-and-answer session. Please be advised that this conference is being recorded today. Now, I will turn the conference over to your speaker host today. Mr. Tony Yip. Please go ahead, sir.

Tony Yip : Thank you, operator. Hello, everyone, and thank you all for joining us on today’s call. TME announced its quarterly financial results today after the market close. Today you’ll hear from Mr. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent updates. Next, Mr. Ross Liang, our CEO and I, Tony Yip, the CSO will offer additional thoughts on our product strategy, operations and business developments. Finally, Ms. Shirley Hu, our CFO will address our financial results before we open the call for questions. Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which applies to this call, as we will make forward-looking statements. Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in our earnings release and SEC filings.

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

Cussion Pang : Thank you, Tony. Hello, everyone, and thank you for joining our call today. I would like to begin by acknowledging all of the hard work that went into our successful listing on the Main Board of the stock exchange of Hong Kong under stock code 1698 on September the 21, in addition to our primary listing on the New York Stock Exchange. We are truly grateful to our users, employees, partners and investors who have been with us along the way, and helped us reach this important milestone. From this vantage point, we plan to further refine our dual engine content and platform strategy to support original content on our platform, expand our innovative business models, work with more partners to tap into the music market potential and fulfill our social responsibilities, thereby comprehensively promoting the healthy, diverse and sustainable development of China’s music industry.

Providing differentiated content, particularly by way of original content production, is our bread and butter. And further explains our already large and diverse content library that appeals to cross generational audiences. To that end in the third quarter, we rolled out our voice synthesis technology, Lingyin Engine to quickly and vividly replicate a seamless voice for use in original songs of any style and language. Utilizing this patented technology, we have developed the synthetic voice memory of legendary artists, such as Teresa Teng, the Legend and Anita Mui, and create an AI singer lineup with the voices of trending stars such as Yang Chaoyue among others. As of the end of the third quarter, we have launched over 1,000 songs with AI synthetic voice, notably the female songs version of today , has become the first song by an AI singer to be streamed over 100 million times across the internet.

Additionally, we paid tribute to Anita Mui by creating an AI code Space on Earth for the 2022 charity song of the new Sunshine Charity Foundation, may you be treated differently by the world, which is also the hold music for today’s earnings call. It was well received by a wide range of listening — listeners cohort showing the bold response our social commitment to technology and music. As a digital music industry evolves, music lovers tastes in music have grown increasingly varied. We are thrilled that the concept album, Endless Farewell, by our Indian musicians Akini Jing, she was recognized as the monthly pick by Pitchfork a worldwide authority in music reviews. In the first quarter he also produced a number of original singles, which went viral on the internet and each recording over 100 million streams, such as HURTS! .

All these achievements demonstrated our ability to expand the influence of our original work by bringing them to both domestic and overseas audiences. Furthermore, in deep collaboration with the broader Tencent ecosystem, we explored the chemistry between music and popular IPs, including League of Legends, Flowers, QQ Speed Mobile, QQ WeChat and Assault Fire , along with renowned artists such as Stephanie Jing Angela Zhang, Zhang Xiao Han, and Jason Zhang to create entertainment music in the third quarter. Through these stimulating collaborations as well as both online and offline promotions, we have further rise in the popularity of Indian music on our platform. Next, let’s look at the Tencent Musician platform, leveraging our robust technology to innovate and augment our one-stop service offerings for musicians, in the third quarter, we launched a new feature TME Artists Album, champion .

This feature helps musicians release Digital Albums on all TME platforms at the prices they set, with automatically generated sales pages. By the end of the third quarter 281 of our musicians had utilized this new feature and received the income generated by their album sales, shortening the release time and lowering the barrier for them to forge closer connections with their audience. Second, we continued to launch a broader array of activities and initiatives to support our musicians and help them shine on stage. In the third quarter, we discovered Wang, , a young musician, providing him with comprehensive guidance from song selection towards styling and personal expressions and signing him up for the Think China show. From starting his career as a musician within just two months, once more in the third quarter we also recommend a diverse group of our musicians, including to and to various shows and events hosted by TME and sponsored by Sprite, SAIC Audi and Jing Dong, among others, demonstrating our commitment to providing substantial promotion and commercial resources for our musicians.

These endeavors empower our musicians to build a full lifecycle career while also facilitating the communication and connection with their fans. By the end of the third quarter, we have served a total of 350,000 musicians, which also allowed us to attract more active and vibrant creators to our platform, further pushing the prosperity of our ecosystem. Our content strategy also includes a keen eye towards improving the diversity of collaborations with top music labels and artists, both domestically and internationally. In the third quarter, we came up with YG Entertainment, , to provide our users with benefits in the 30 days head start period following the release of their new songs, notably digital album, greatest works of art, , recorded the sales of close to 7 million copies by the end of the third quarter, whereas latest EP West, Taylor Swift’s new pop album Midnight, and BLACKPINK’s digital single, Pink Random and album Born Pink also achieved startling sales reflecting our users pent-up demand for user engagement with artists from home and abroad.

Ongoing cooperation with professional institutions and industry partners also helped bolster our reputation as a go-to-destination across diverse music verticals such as gaming, classical, and relaxing music. In the third quarter, we cooperated with the music label of NCPA Classics, among others, to build head start benefits for their releases. We also collaborated with the world’s top 100 DJs and over 30 domestic and international electronic music labels to launch Tomorrow Drop , helping to bring electronic music into the limelight as a debut platform for international award winning and global acclaimed electronic music. Lastly, moving on to TME Live, our comprehensive online versus offline performances blend, which has consistently provided music entertainment, and performance industry to work by exploring innovative interactive format, and monetization avenues.

In the third quarter TME Live hosted 32 online and offline performances by various A lister star including Han Hong and . At the same time, we unveiled multiple innovations to refresh the user experience. For example, online concert, TME Live moment interactive activity moves your ankle, , marking the first time a live streaming concert audience was invited to vote on the concert’s closing song, creating a customized offline interactive experience for our online users and successfully accumulating close to 15 million unique viewers within the Tencent ecosystem. Going forward, we will incorporate more interactive format in TME Live moments during performances. That concludes our update on our growing content capability. Now I’d like to turn the call over to Ross, who will share more about our platform strategies.

Ross, please go ahead.

Ross Liang : Thank you, Cussion. Hello, everyone. Moving along to our platform strategy, we continued to enhance our users interactive experience by enabling new ways to listening, watch, sing and play on our platform, and offering more satisfying experiences that address their diverse music tastes and nuanced needs. To meet the users demand, we zeroed in on providing our newer user interface and type oriented professional listening experience. In terms of sound effects, improvements in this quarter, we became the first music platform domestically to offer an immersive audio experience with Dolby Surround song, to our Super VIP membership’s subscriber and the entire users as well as in these music releases on our Tencent emulation platform.

In August QQ Music also the revealed adaptive fun which addresses the song volume listening a particular song based on human auditory perception characteristics to maintain our smooth listening experience. To simplify the listening process QQ Music and Google Music launched the Lock Screen widgets on the iOS 16 system, which are essentially one click shop carts. As another pioneering we also upgrade our playlist function, which allows users to generate playlists in a single click by importing the songs referenced in types of pictures and the weblinks. QQ Music and Kugou Music now suppose automatic match in playlists with creating sound effects under customize the playlist posted to inspire more sharing among users. For faster music discovery experiences, we further optimize our smart recommendations future with an upgraded algorithm in the third quarter.

As a result of this refinement QQ Music and Google Music recommendations streaming volume and the timespan producer both rated year-over-year increases. What more as increasing virtualization takes hold, we have been adding more exciting and fun music in the Tencent scenarios. We are unlocking abundant monetization opportunities. In the third quarter, TMELAND our virtual theme park teamed up with Pepsi under its virtual idol group, Team Pepsi to host to another immersive virtual 3d live show, enhanced by our 360 degree circular screen and ground screen, the show registered over 4 million times, rolling our TMELAND new built Lighthouse Station, our brand new landmark venue. In addition we debuted Music Zone, our 2D virtual interactive music community for users to listen, to purchase, play musical instruments and interact with others, at their self decorated virtual homes.

We also launched an entertainment feature on QQ Music, Tan Go which allows users to play with a truly rich selecting the song by touching the button on the screen following the tempo of the songs. As a pioneer in the application of our innovative listening, watch sing and play functions QQ Music has continued to improve experience year-over-year indicating healthy user engagement with all our flagship products. Now turning to long form audio, to supplement podcaster ecosystem we unveiled the Shingbo app putting on one stop audio creation assistant in our podcasters pockets. On the back of TME’s massive library of copyrighted books, our podcasters can now easily join the studio for auditions and distribute their content. Through all of TMEs platforms with a single click.

We are managing their podcasts programs with access to operations, data as well as generating income. In addition, we achieved a breakthrough in Text to Sound TTS technology facilitating AI audio creation and macro , increasing word processing efficiency by 12 times and the growing the content synthesize speed of our virtual authors by fourfold in the third quarter. As a starting point of deploying our TTS technology we have launched our virtual authors to provide a differentiated slate by audio content, which has received a wide acclaim from our users. With that I’d like to give the floor to Tony to reveal our business operations. Tony, please go ahead.

Tony Yip : Thank you, Ross. Hello, everyone. Now let me walk you through our operating results in the third quarter. This quarter, our online music MAUs were 587 million, down year-over-year primarily due to churn of our casual users amid competition from Ten Entertainment Platforms, as well as cost optimization measures to focus on boosting monetization efficiencies as a platform of scale. Nevertheless, QQ Music DAUs continue to increase year-over-year, indicating healthy user engagement with our flagship product. Notably, online music paying users, a cohort representing high quality users, continued to grow at a robust pace, and drove paying ratio to a new record, while ARPPU also kept improving sequentially driven by our expanding content offerings and product enhancements, as well as broadened sales channels and moderated promotions.

As a result, our subscription revenue continued to deliver healthy year-over-year and quarter-over-quarter growth. Our IoT MAUs continue to achieve double digit growth year-over-year as we enriched content and established collaborations and added new ones to our partner roster such as BMW and DD. We also broadened our leading auto industry coverage by supporting new EV models, including Li Autos L9, Liuzhou and BYD’s Corvette 07, . To improve users in car music experience we launched updates for our in car app in the third quarter, featuring a brand new user interface and upgrades to sound effects and content. Our online music services revenues achieved healthy growth in the third quarter with 19% subscription revenue growth year-over-year.

We have been promoting the higher value super VIP membership, with an elevated experience, powered by not only premium sound features, and Dolby Surround sound effects, Dolby but also customized content. For instance, at Teens in Times, TME Live online concert, Endless Summer , which registered massive social media buzz totaling over 2 billion mentions. Users with a Super VIP membership were entitled to a variety of privileges, such as a Blu Ray playback of the concert at the highest resolution, cache and projection on TV screens, leading to a 20% increase in the number of Super VIP memberships — subscribers. Going forward, we will roll out more privileged content and higher sound quality features to drive his membership conversion and retention.

Meanwhile, we strengthened the artists subscription offering, by onboarding more artists, whether up and coming, well established, or even AI singers, as well as by expanding the scope of benefits in the package to include privileges, such as customized live streaming events, online chats, and providing access to concerts and album singings. As of the end of the third quarter, we have launched a cumulative 28 artists, building their subscriptions. In addition, in the third quarter we unveiled merchandise related to 21 artists with a total of over 100 SKUs in the . Accompanying the launch of Jay Chou’s digital album, Greatest Work of Art we sold 100,000 pieces of his artists related merchandise, while at the same time carrying out a series of warm-up promotional activities, calling on music lovers to look back on Jay Chou’s classics.

As a result 95 out of 100 of Jay Chou’s existing songs made their way back onto TME’s popular charts, demonstrating our strong promotion capabilities, and our skill in rejuvenating our music library. Additionally, our advertising business continues to improve sequentially from the second quarter thanks to our innovative and diverse advertising product offerings, demonstrating solid resilience. For example, we made headway with our ad-based free listening mode, which showed initial success, with mutually reinforcing growth in revenue and user engagement. Going forward, we plan to expand the free listening mode user coverage, while enhancing engagement and boosting its revenue in stream. Moreover, we make further progress in innovative commercial advertising formats on TME Live and TMELAND, securing extensive sponsorships from well known domestic and international advertisers across e-commerce, food and beverage, auto and banking industries, among others, as we helped them raise the value and influence of their brands.

In the third quarter, we also continue to explore various business models. First, on the sublicensing side, our SaaS based music copyright licensing service has expanded from the live streaming vertical to other use cases that require legitimate music licensing, such as short videos, supermarket, ambience music, offline public performance and advertising soundtracks. Second, we launched the industry’s first professional data platform TME Business Intelligence platform, TME, with high frequency data updates totaling 150 times per day. This tool can assist music label partners in tracking the performance, popularity, and listener profiles of the singers and copyrighted songs, equipping music professionals with a deeper understanding of the business value behind the data.

Now let’s turn to our social entertainment services. In MAUs and paying — it’s MAUs and paying users declined year-over-year due to macro headwinds. We will continue to innovate our products and explore initiatives such as audio live streaming, international expansion, and virtual interactive product offerings. For WeSing we continue to provide differentiated tools and content to help our users enjoy the singing experience. In the third quarter, we implemented an upgrade of privileges and benefits for WeSing VIP users by launching the sound quality enhancement feature in backing tracks, as well as super remix, and smart course sound effects to create an authentic and fun singing experience. What’s more, as an important social platform, WeSing caters to diverse real time communication scenarios.

During the third quarter, WeSing launched multi-person singing and chat rooms in both video and audio settings, further driving growth in the penetration rate, and user time spent in these rooms. We also brought our experience in these areas overseas to boost our international business development. For live streaming services, we continue to expand our differentiated content offerings and user experience, benefiting from our streaming format innovations and deeper cooperation with our music contests Revenues from audio live streaming rose double digit year-over-year in the third quarter to reach a new high. What’s more, leveraging our audio live streaming business combined with our know-how in artists incubations we are providing ample space and support for musicians to grow.

For instance, how leading musicians and live streamers, started their careers via audio live streaming. With TME support in one-stop musician services, they released songs and earned copyright income with their music, adding another layer to their live streaming revenues. Their songs, The Thoughts Are Not As Good As You, and where did you go China became blockbusters during the third quarter and topped multiple TME’s music charts. Last but not least, while pursuing business growth, we have endeavored to fulfill our social responsibilities by creating an innovative model of music empowered charity programs. On 99 giving date we partnered with artists, including and Tencent Charity to launch Hear the Light of Music , a philanthropic album and surprised by Are you the Girl, Shinzon , a charity concert to raise awareness and funds for environmental protection, as well as young and elderly groups in rural areas.

These events were well attended and garnered coverage from over 100 authoritative media outlets, resulting in huge buzz with over 600 million mentions on social media. In summary, we are actively expanding and making connections through music. Powered by innovation and technology we are introducing more products and services to China’s dynamic music market, elevating the industry as a whole, and reinforcing our business competitive edge and resilience. With that, I would like to turn the call over to Shirley, our CFO for closer review of our financials.

Shirley Hu: Thank you, Tony. Hello, everyone. Next I’ll discuss our results from a financial perspective. In the third quarter of 2022 our total revenues were RMB3.4 billion up by 7% sequentially. With the success of our effective cost control and improved operating investment our profit position continued its growth trajectory since Q4 last year. Average net profit for Q3 2022 was RMB 1.1 billion. Net asset for Q3 2022 was RMB1.4 billion up by 33% year-over-year base and up by 32% sequentially. In Q3 2022 user subscription revenue grew to RMB2.2 billion, up by 18% year-over-year, and up by 7% sequentially. Online music paying users grew to RMB85.3 million, up by 20% year-over-year, representing a 2.6 million high sequentially.

Monthly ARPU in Q3 2022 was RMB8.8, up from RMB8.5 in the second quarter of this year. This evidenced our strategy to grow music business healthily and sustainably has shown initial success. Our ongoing efforts to cut weight users benefits to pay for music and high quality content, and as always, we provide optimized product functionally and improved operations are bearing fruit. We believe increasing willingness to pay for music will drive healthy growth in music subscription surveys in the future. Revenues from advertising grew both on a year-over-year basis and sequentially at both online and offline market began to recover from the impact of COVID-19. In addition we have launched new advertising products, such as model to reinforce the user engagement, improve monetization.

We remain confident about the long term growth potential. In addition, with the launch of new digital album, especially the successful launch of digital urban for Jay Chou and our promotional capabilities, we had revenues growth in sales of Digital Albums, both on a year-over-year basis and sequentially. Social entertainment services and other revenues, were RMB3.9 billion down by 20% year-over-year, due to the evolving macro environment and intense competition from other platforms to adapt to the changing environment, and to stabilize revenue due. We have differentiated our content offerings by enriching our visual interactive product offerings and enriched cross platform collaboration, and we’ll continue to invest in audio live streaming, and expand our international footprint for long term growth.

Gross margin in Q3 was 32.6% up by 3% year-over-year and 2.7% sequentially. The increase was primarily due to our effective control and revenue should increase as well as improved operational cost efficiency. This will all result from the implementation of our full spectrum cost control this year. The growth in advertising revenues and the revenues from sales of digital albums also contributed to the growth in gross margin. We will continue to take measures to manage cost effectively and improve overall investment. Now moving on to operating expenses, total operating expenses for Q3, 2022 were RMB1.4 billion, or 19.5% as a percentage of total revenues, down by 1.5% from 21% as a percentage of total revenues in the same period last year. Excluding the impact from the expenses related to our application for secondary, operating expenses as a percentage of total revenues would have decreased by 2% year-over-year.

Sales and marketing expenses were RMB245 million down by 58% year-over-year. And this is our third quarter with more than 50% cut in selling and marketing expenses. On a year-over-year basis, we reduced spending on user acquisition had impact on our MAU. Our core music subscription surveys continue it’s rapid growth trajectory. We’re continue to take measures to improve efficiency and closely monitor the ROI of each promotion channel, further utilize external promotion channels and leverage our internal channel to attract users and promote our brand. When evaluating the healthiness of business and assessing ROI we focus more on measures such as leverage of engagement, user retention rates, etc. General and administrative expenses were RMB1.2 billion, up by 13% year-over-year.

Excluding the impact from approximately RMB44 million of expenses related to our application for secondary listing G&A would have increased by 9% year-over-year, mainly due to increased investment in research and development. We continue to closely manage employee relationship management by improving high competition. Our effective tax rate for Q3 2022 was 12.2% compared to 11.5% in the same period of 2021. The increase in effective tax rate was mainly because some of our entities are entitled to different tax benefits in 2021 and 2022. For Q3 2022, our net profit and the net profit attributable to equity holders of the company were RMB1.1 billion. Non-IFRS net profit and non-IFRS net profit attributable to equity holders of the company were RMB1.4 billion.

Non-IFRS net profit margin was 19.2%. For the third quarter of 2022, basic and diluted earnings per ADS were RMB0.6 billion and RMB0.66 respectively, up 49% on a year-over-year basis. Non-IFRS basic and diluted earnings per ADS were RMB0.87 and RMB0.86 respectively up 41% on a year-over-year basis. Such results demonstrate our commitment and the initial success of leading indicators improvement, as well as the impact from share repurchase program. We are endeavoring to provide high quality investment returns for our investors and shareholder and remain confident about our financial performance, the development of our business and the overall industry. As of September 30, 2022, our combined balances of cash, cash equivalents, term deposits, and short term investments were RMB25.4 billion as compared with RMB25.8 billion as of the June 30, 2022.

Such combined balance was also impacted by the change in exchange rate of RMB so we will see a different balance sheet base. Looking forward, we will continue to grow our core business with innovative and diverse products and services for our users and the invest mindfully in new products and services, including long form audio and international business to maximize our investment returns and the future growth potential. Meanwhile we will continue our focus on creating investments and adhere to tightened controls on cost and expenses to achieve a nice performance. This concludes our prepared remarks. Operator, we are ready to open the call to questions.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. And for the benefit of all participants on today’s call, please limit yourself to one question, and if you have additional questions, you can reenter the queue. We will pause momentarily to assemble our roster. And today’s first question comes from Alex Poon with Morgan Stanley. Please go ahead.

Alex Poon: Hi, good evening management. Thank you for taking my question. Congrats on very strong results. My question is about our music segment gross margin and net margin in Q3. What roughly what levels are those two numbers? And going forward how should we think about the pace of these two margins expansion considering we have a lot of levers including advertising revenue, music, ARPU, music content cost, long form audio cost, etc., etc. Thank you very much.

Shirley Hu: This quarter, our music gross margin from music keep increasing, and our operating net profits also are growing and increased. And there are some reasons. First, our increase — we increase the RMB requirement of content cost and optimized the model. We chartered agreement with some music labels, tried to switch the model to revenue sharing model or got more reasonable fees. And that have the positive affect and also has a positive impact on our gross margin. And second, our subscription revenue growth, especially our app increased continually. So that have positive impact on gross margin. And the third advertising revenues recovery and the digital album revenue increase also have positive impact on gross margin.

So this quarter, we have very good performance on the gross margin of the music services. And we expect our gross margin with music service can be increased next quarter, because we expect our advertising revenue and the subscriber revenue can be increased healthily. So we also can continue to control our content cost. So that’s the gross margin and net margin also will be increasing two-fold.

Operator: Thank you. And our next question today comes from Lei Zhang with Bank of America Merrill Lynch. Please go ahead.

Lei Zhang : Hi, management. Thanks for taking my question, and congrats on a solid quarter. My question’s mainly on ARPU and music subscriber trend. Notice that we have another Q-on-Q improvements in music, ARPU. So how should we look at ARPU trend? And I knew that we have like two to three million subscriber, so the way to maintain this trend and overall, how do I look at the ARPU and the music subscriber growth in the following quarters? Thank you.

Tony Yip : Thank you, I’ll answer the first part of the question regarding subscriber growth and then Shirley can chime in about the ARPU. We’re very pleased with our subscriber growth this quarter. We continue to record high teens percentage year-over-year growth rate, in terms of our subscriber growth. And that’s a trend that we expect to continue in the near term, within the one year or so, give or take, one or two quarters. Our near term goal is to reach the round number 100 million subscriber base. We are now at 80 something million. So that’s to us a very achievable target. And then in the longer run — and at the moment, our ping ratio is about 15%. And so in the longer run in a multi-year timeframe, when we benchmark ourselves against other verticals, such as online video verticals in China, we feel that we’re confident to be able to achieve a mid-20%s paying ratio in the multi year timeframe. Shirley, please chime in on the ARPU side.

Shirley Hu: Okay, in Q3, most ARPU of music subscriber is RMB8.8, increase from RMB8.5 in Q2, and increased two quarter continually. That’s because more promotions, more content operations, and optimize the pricing trajectory. In the future, we will continue to focus more on the quality growth of our own subscription revenues. We will reduce the promotion activities, subscriber business and strengthen our content operation products. On the other hand, we will provide a super VIP service that have higher AI up giving more quality to our users. So we expect our ARPU can be increased gradually, while paying users to continue to grow healthily. And we expect in the next quarter, our ARPU will be increased gradually. Yeah.

Operator: Thank you. And our next question today comes from Lincoln Khan at Goldman Sachs. Please go ahead.

Lincoln Kong: Thank you for taking my question. So my question is about the advertising business. I think this quarter, we have a pretty solid increase for the advertising business, and reversed the declining trend in the first half. Could management give us more color in terms of what’s been the underlying driver of that? And especially in terms of the new format of ads, including TME Live, how are we thinking, the position for these new format going forward? And if there is any outlook for the fourth quarter in terms of ad strength? Thank you.

Tony Yip : Sure. In terms of advertising revenue, we’re very pleased to see that this quarter, we starting to see a positive year-over-year growth, which reversed the negative year-over-year growth trends in the previous quarter. And in particular, in the previous several quarters, splash screen ad represented a majority of our of our advertising revenue. But we are also pleased to report that splash screen ads now represent less than half of their advertising revenue as a result of our investment in new formats and new advertising innovation products. It’s now the second quarter in a row where we are seeing our advertising revenue growth on a Q-on-Q basis. And so go looking forward into the next quarter, and also into next year, provided that the macro economic conditions continue to improve, in the current trend, we are optimistic about the outlook on the advertising business.

A couple of things is driving this growth. Number one, our sponsorship ads continue to grow at a healthy pace as we host and organize an increasing number of events. These events include TME Live events, include other sponsored live events, for example, on TMELAND, as well as others. In addition, our ad supported free listening mode saw strong growth, and now represents approximately 10% of our online music advertising revenue. So all of these are important drivers, together with an improving macroeconomic conditions. That leads us to an optimistic outlook.

Ross Liang: Yeah, we will continue to work with WeChat video accounts team to continue to provide high quality offline and online TME Live event for users. As what Tony mentioned that it will help us to bring more and more advertising sponsorship. But at the same time, it will help us to continue to attract more partners to join hands with us. In the third quarter, we have already successfully launched that 30, over 30 events of all TME Live. So we are expecting that after the pandemic of the COVID, I think that the overall situation will be continuing improving. It will continue to drive the advertising sponsorship for us as well.

Operator: Thank you. And our next question today comes from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap: Hi, good evening management. Thanks for taking my questions. Also, congrats on solid results. I have a questions related to the social entertainment business. So assuming if the economy rebounds and reopens in the next few months or next couple quarters, should we actually expect to see the positive impacts to the social entertainment business? Or will this business continue to weigh on competitive pressure? So any color that you could share would be helpful. Thank you.

Tony Yip : Due to the impact of challenging macro environment and increased competition from other pan entertainment platforms, the social entertainment revenues recorded a negative year-over-year growth this quarter as well as the previous few quarters. We continue to expect a pressure and challenges in that area. However, we will continue to innovate more products and explore new initiatives such as audio live streaming, and virtual interactive product offerings. Within audio live streaming segments, within the social entertainment revenues, that has recorded a very healthy mid-double digit type year-over-year growth rate. And we’re very, very pleased with that. And that can help us offset some of the challenges in the traditional live streaming segment.

In addition, we continue to expand in overseas market, both organically as well as through suitable M&A opportunities, such as the Japanese leading karaoke Pokekara acquisition that we made, which continued to contribute positive growth both organically and through M&A, in our international business.

Operator: Thank you. And our next question today comes from Xueqing Zhang with ICC. Please go ahead.

Xueqing Zhang: Hey, good evening management. Thank you for taking my question. And congratulations on strong quarter. So my question related to long form audio. We talked about related, this later quarters. So just wondering, management could share more color about long form audio business with us, such as, what’s the country driver and what’s the main target KPI for this business? And how should we expect the future investment and the profit? Thank you.

Tony Yip : Thank you, long form audio has proven itself to be an effective complement to our powerful portfolio of music apps, as it continues to convert more and more music users into long form audio users, and drive higher user engagement and activeness as a result. We continue to expand and differentiate long form audio content through licensed content as well as self-produced content. We also provide users and content creators with useful tools to build an active podcast, and UGC content ecosystem. We will gradually improve its monetization through monthly subscription and focus on ROI for content investment. Our overall target is for the long form audio business to break even at a gross margin level by the end of next year.

Operator: Thank you. And our next question today comes from Wei Xiong with UBS. Please go ahead.

Wei Xiong: Hi, good evening management. Thank you for taking my question. And also congratulations on a good quarter. I want to follow up on the margin side. So we have made a great deal of effort this year to improve our overall operating efficiency. So just want to understand our maybe cost planning for next year, especially around headcount and also marketing strategy, and how much more room we can further improve our net margins for next year. Thank you.

Shirley Hu: Yes, we expect the gross margin and net profit margin can be increased in the next year. And you want to know how room to — we can get in the next year. We think we will continue to control the sales and sales and marketing expense. And we don’t give a goal to net expense. We just monitor the ROI, and we increase the ROI in the next year. So we think we also have some room to get more performance on the sales and the expenses. And for the second part, we think we one — on the one hand, we needed to invest more new products and the fund the growth potentials. So we will continue invest to this path. And the other hand, we will look through the high count efficiency. And for the older products, and for the last products, we also need to require them to make up with .

So we think this part we can have some improved ad efficiency. So I believe with the revenue of music service can be increased healthily and the social entertainment revenues can be stable or some little decrease the gross margin and the net profit margin can be increased in the next year.

Tony Yip : Yeah, and just to supplement to what Shirley has said, this quarter marks the second consecutive quarter of revenue growth, Q-on-Q, but the third consecutive quarter of our net profit growth Q-on-Q. And so there’s a very clear trend through cost optimization and efficiency programs of improving profitability. And so even though this year, for the full year this year as a whole revenue, we saw revenue decline on a year-over-year basis. Our goal looking forward into next year is to be able to achieve positive revenue growth next year, and as a result, positive growth for profitability as well.

Ross Liang: Yeah, I think a really strong financial result of this quarter has demonstrating us has been doing a really good job in improving our operational efficiencies. It also demonstrates that we have tried many, many ways, not just cutting for example the marketing or channel costs, we are also trying to make our team to be more lean than before. And it also help us to improve the overall efficiencies as well. In the future, we will continue to try to have a good control on our content costs as well. So we try to talk to all of our partners, and try to change our revenue sharing model, from the minimum guarantee model to the revenue sharing model, which will help us further to improve our efficiencies. So these are all of the plans that we are enhanced, and we are continuing doing it for almost a year now. So we will continue seeing a continuous improvement for the future.

Operator: Thank you. Our next question comes from Thomas Chong at Jefferies. Please go ahead.

Thomas Chong: Hi, good evening. Thanks management for taking my questions and congratulations on a solid set of results. My question is about the competitive landscape. How should we think about the competition with the short form video and other incumbents in coming years? And my second question is about — on the margin side, given our cost control measures, the focus on ROI? Can you comment about the online music margin, ex-long form audio? How is the trend going forward? Thank you.

Tony Yip : On the competition side, I’ll start and other management team can complement. I think we’ve mentioned in the past that with regards to short form video platforms, it’s a combination of both cooperation and competition. We obviously leverage, the short video platforms as a marketing tool to help promote our music, as well as to help promote some of our brand activities. And that has been proven to be quite successful. But on the other hand, there’s also been news about a potential entry into the music market by the likes of Adobe. Although having said that, I think we observe that the progress being made in the music entry front, we continue to monitor the scale of the users in the music platform, while by doing continue to be small.

And there continues to be a wide gap between the content offering by their service compared to our service. So obviously, we’re watching the competitive dynamics extremely carefully and extremely closely. And we stand ready to react. But at the moment it’s something that to pay attention to, as opposed to, something to react to. On the margin side, I think we’ve talked about this earlier, the music margin, continue to improve as a result of a number of factors as Shirley mentioned. The healthy subjects subscription revenue growth, driven by a combination of both ARPU increase, as well as subscriber growth and not just subscriber growth, the continued solid increase in advertising, as well as good cost control on our content cost side all leads to healthy and sustainable improvements in music margin.

And then on the long form audio side, the negative margin there continue to improve as well, as we expect to break even on the gross margin basis for long form audio by the end of next year. So overall, both of that combined to see an improving music margin.

Operator: Thank you. And our next question today comes from Liu Charlene with HSBC. Please go ahead.

Unidentified Analyst: Hello, I’m Cathy on behalf of Charlene Liu from HSBC. So first I wanted to dive on long form video side. My question is regarding the average response of the overall impact in the future, in the next year. .

Tony Yip : Sorry, can you repeat. Your line’s not very clear. What was question regards to?

Unidentified Analyst: I’m sorry. So I’m asking on behalf of some Charlene Liu from HSBC. So my question is regarding a potential impact from the open business next year, or the impact .

Tony Yip : So the impact from what?

Unidentified Analyst: Oh, the revenue in next year.

Tony Yip : Sorry can you repeat the impact from what?

Unidentified Analyst: Sorry, sorry. Apologies for the technical issue. My question was regarding to the overall impact of the revenues in next year.

Tony Yip : Sorry, I don’t understand your question.

Shirley Hu: Could you please repeat your question?

Unidentified Analyst:

Tony Yip : I think I think we can move on. Next question, please.

Operator: Thank you. And our next question today comes from Su Long with TH Capital . Please go ahead.

Unidentified Analyst: Yes, good evening, management and thanks for taking my question. And my question is about the cooperation between TMELAND and WeSing Video. How is the collaboration progressing now and what else will be explored in the long term cooperation to have more substantive users and attaching more commercial value?

Tony Yip : Yeah, we continue to deepen our cooperation with WeSing, specifically, the video account to enhance music focus, collaboration, and promotional capabilities of both music and live events. This is important, important means for us to enrich the music video based content on both our platform as well as on the WeSing platform, as well as to leverage WeSing to expand our promotional channels for artists, especially for musicians. QQ Music and Kugou Music, both have official video accounts on WeSing, and they constantly evaluate users preferences through operations, and the recommended music content is very popular among users, ranking among the best in the music category within WeSing video accounts. And WeSing video account serve as an important channel for music lovers to discover music, after which user often come back to the TME platform to continue to explore and enjoy the music they love.

As for concerts, TME Live and WeSing video account have co-hosted many live performances, such as concerts by most recently. In the future, will cooperate more closely to present even more and better shows to users and to explore more innovative and expanded monetization avenues.

Cussion Pang:

Tony Yip : Yeah, what’s he’s saying that obviously our cooperation with Tencent in particular on the live related shows are set on a project by project basis. We each have a pipeline of projects. And for each project, we discuss timeline as well as the revenue sharing arrangements.

Operator: Thank you. And ladies and gentlemen, we are now approaching the end of the conference call. I will now turn the call over your speakers today, Mr. Tony Yip for closing remarks.

Tony Yip : Great. Thank you, everyone. Thanks for joining us today. If you have any further questions, please feel free to contact the investors relations team. This concludes today’s call and we look forward to speaking to you again next quarter. Thank you and goodbye.

Operator: Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.