Earnings Call: Q4 2020

Mar 23, 2021

Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group 20 24th Quarter and Full Year Earnings Conference Call. Today, you will hear discussions from 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 Your speaker host today, Ms. Millicent Teah. Please go ahead, ma'am. Thank you, operator. Hello, everyone, Thank you all for joining us on today's call. Tencent Music announced its quarterly financial results today after the market closed. And then this release is now available on our IR website at ir.tencentmusic.com as well as the Avaya Newswire services. Today, you will hear from Mr. Kachen Pam, our CEO, who will start the call with an overview of our recent achievements. Lastly, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Please note that this call might contain forward looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation There are no 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 of these statements are expressly qualified in their entirety by the cautionary statements, risk factors and details the company's filings with the SEC. The company does not assume any obligation to revise or update any 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 the International Financial Reporting Standards in the company's earnings release and filings with the SEC. You are reminded that such non IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure Now with that, I'm very pleased to turn over the call to Ke Shen, CEO of Tencent Music. Ke Shen. Thank you, Minifin. Hello, everyone, and thank you for joining our call today. 2020 was an extraordinary year with the pandemic impacting our work supply and the macro economy. Yes, it also brought opportunities, expediting Internet penetration, causing a paradigm shift in online content consumption and presenting potentials for online concerts. The past year, we demonstrated strong resilience and agility, our commitment to investment in content, Technologies and People as well as Innovation in New Products and Services, solidifying our position as China's leading music entertainment platform and allowing us to build a strong foundation for our music content ecosystem. We closed 2020 on a very strong note and are excited about our next phase of growth along our journey to evolve into an all in one online music and audio entertainment destination in China. 1st and foremost, in the Q4 of 2020, both our financial and operational performance was solid. In particular, our online music services maintained its momentum, registering 29% year over year growth in revenues, up from 26% in the 3rd quarter. Specifically, subscription revenues increased by 42% year over year. This outstanding performance Was driven by 40% year over year growth of paying users, fueled by our effective paywall strategy, diversified bundle membership offering as well as continuous rising user retention rate. With 56,000,000 online music paying users, our paying ratio of 9%, up from 6.2% a year ago, We finished 2020 ahead of the curve and are confident that this success will continue in 2021 years to follow. From our subscription revenues in the 4th quarter, we are pleased to report that we recorded triple digit year over year growth from advertising for 2 consecutive quarters. This impressive growth was driven by increasing ad inventory and improving eCPM across our music application portfolio. In the form of Spreadscreens apps and banner ads, We plan to continue developing our overall brand awareness to engage a broader array of advertisers By initiating more creative advertising products such as immersive video ads, rewarded ads and audio ads. Looking into 2021, as we continue to leverage our in house and Tencent's renowned advertising strength and capabilities, We expect another year of strong growth on advertising. Moving next to content. Our continued investment in procuring and developing content has provided our users with a rich, diverse and endless choice of entertainment, which has been a key driving force behind our success. Our platform comprehensive coverage through category expansion and deepening penetration to further captivate the young demographic We continue promoting and pursuing trendsetting genres from trend predictive models to content procurement and promotion. We have significantly increased our copyright coverage in new hits content, which has Contributed to the increasing engagement of our users. In the Q4, our partnership with leading rap music labels such as Ghost and 4 0 4 Rapper resulted in more rap music streamed by younger users as compared to the beginning of 2020. We also make notable breakfast in Chinese ancient style music. Total streams of which reached over 100,000,000,000 on our platform in 2020. We also made significant progress in cultivating and promoting original music. Let me provide just a few examples. First, the scale of our Tencent Musician platform Expanded rapidly. In the Q4, the number of participating indie musicians on the platform Grew over 100% year over year, an outstanding rate in the industry. In particular, The number of exclusive indie musicians was 14 times of that in the same period a year ago, showcasing the recognition by indie musicians of our capabilities in promotion, platform support and well designed incentive programs. 2nd, the number of original songs uploaded reached over 1,000,000 on Tencent and musicians platform by the end of 2020. Doubling the number compared with a year ago, Numerous original blockbuster songs were incubated on the Tencent Musician platform such as Story of the Wanderer, Zhang Di Xianhua By Ruby Hua, Huatong, with over 1,000,000,000 streams within 3 months of its launch. Our industry influence was significantly amplified by Wang Chi, was enlisted by CCTV's Spring Festival Gala, one of the world's most watched TV programs with more than 1,000,000,000 viewers for years, performing his signature song, The Shepherd of which has already gathered a phenomenal popularity on our platform. These are great examples of what we can do. Losing our prestigious industry know how as well as in-depth insights and data mining abilities to foster and grow original music. 3rd, We are proud to share that during the past year, we have dedicated even more financially to this size of the business, which enable over 60% of musicians to more than double their income. Such support will continue in 2021, contributing to a win win situation for everyone. Finally, on our Tencent musician platform, I'm very proud to say that we deeply care about diversity and we are doing our part to promote gender equality. Our support of female artists and musicians, traditionally a minority in the music industry, Has led to female Y and D musicians accounting for nearly 40% of total artists on Tencent Musician platform as of the end of 2020. This is significantly higher than the industry average of around 30% According to the 2020 China Musician Report, our music content leadership has been further cemented by strengthening partnerships with leading music labels and artists. For example, recently ahead of the schedule, We extended a multi year strategic licensing agreement with Warner Music and expanded our in-depth cooperation through forming a joint venture record label in China in future. We have confidence to continue to showcase new generation artists to music lovers, unlock intrinsic value of music in China and keep contributing to the prosperity and development of the music industry. The next topic that I would like to discuss With the strategic importance of our long form audio and our initial achievement during the 1st year of investment. Before going into details, I would like to outline the exciting opportunities the audio services market presents us with and how we can harness them to compete effectively and scale quickly. Firstly, this market has exceeded in China for a decade with no clear significant leader yet. Market penetration remains extremely low. 2nd, this fast growing market has various potential Natural synergies with online music entertainment, giving us a tremendous advantage over vertical players. According to third party research data, the audio market in China is projected to reach a massive user base Similar to that of online music streaming over the next few years, with our massive user base and the complementary We are able to seamlessly convert our music users to audio users, Positioning us to the merch as a significant player while ultimately accelerating the penetration of online audio in China. Firstly, our strategic alliances with prominent content partners such as the China Literature and other content collaboration within Tencent Online Entertainment Ecosystem will continue to empower us to offer a wide range of content quickly. During the Q4, the number of licensed titles was up by 370 percent year over year, covering a broad spectrum of audio categories Such as audio drama, Chinese comedy, parenting and history, apart from the well loved literature. 4th, our 2 pronged approach to integrating with our music applications As well as launching a standalone application is unique and allow us to effectively acquire users at low cost And scale up quickly. For example, we significantly increased our long form audio MAUs penetration In the Q4 of 2020 to 14.8% from 5.5% for the same period of 2019. Such a hybrid model differentiates us from other players at home and abroad. 5th, Our recent acquisition of Lazy Audio, which is expected to be consolidated in the Q1 of 2021, We will become another driver that will help us forge ahead in the pursuit of growth in the years to come. Our view on long form audio is strategic and long term. We believe that investment in content, Whether licensed audiobooks or podcasting, PGC or UGC, we improve user spend time spent, User loyalty and eventually revenue per user. This is evidenced by the 20% sequential increase In average daily user time spent in the Q4, its DAU reached nearly 10,000,000 at year end of 2020 and is on track to double by 2021. Over the past few quarters, we had a good start in monetizing our long form audio business through effective bundled offerings with our existing music streaming services and attract pricing for standalone audio memberships. With increasingly enriched content and growing users, we will tap into the audio ads to unlock commercial value, which will boost our revenue. We consistently ask ourselves what else we can do better to improve user engagement. In 2020, we further expanded our coverage of a broader set of music usage scenarios, integrating with smart speakers, in car audio systems, TV and making inroads in the profit performance market. Although not yet included in our reported online music MAUs, during the Q4 of 2020, Smart devices enjoyed a solid year over year growth in user scale, providing additional channels for users In summary, we achieved solid progress across our full business spectrum in 2020. In terms of scale, industry leadership, content diversifications, monetization and innovation. In particular, our online music services with improving Economies of scale and diversified revenue streams achieved high quality revenue growth and margin expansion throughout the year. In 2021, we expect the strong momentum of our businesses to continue and anticipate A faster revenue growth across the board compared to 2020. With that, now I would like to turn the call over to Tony, who will discuss other highlights and important areas of focus for our businesses. Tony, please go ahead. Thank you, Kashin. Hello, everyone. Apart from the key developments discussed by Kashin just now, I will provide additional highlights for our online music services Before I move on to the discussion of our social entertainment services. During the Q4, Core users are increasingly engaged with our platform. Despite the sequential decline in music MAUs, Average daily time spent per users has increased. This is a result of our concerted efforts to enrich both music and audio content offering, as well as the launch of innovative product features and services for Putum Community and TMB Live. Next, I will elaborate more on these efforts. 1st, as a pioneer in the music fan based economy, Our digital album performance continued to create new milestones, becoming a vital distribution channel for musicians, Further distancing ourselves from peers in terms of promotional capabilities. In the Q4, we released many digital albums Such as Volume Dot 4 by Lu Han, a well known transiting male singer The Album by Blackpink, a top Asian female band and In My Thoughts, Tian Gua JJ Lin, Lin Jun Jie made 3 digital releases on our platform, including his 14th album, Drifter, Like You Do, Xing Chun Zhe, Runi, which topped multiple music charts on the 1st day of its release. To explore new opportunities in the dynamic market, we continue to transform and innovate the fan based economy in China's music industry. In 2021, we will continue to push the boundaries of our fan idol connections and lead industry innovation in areas such as digital album, virtual benefits, fan meetings, offline events and merchandise sales. 2nd, in our relentless pursuit of enhancing the user experience, we continuously upgrade our products With music as our home ground to make online music services more social, visual and personalized. In July 2020, we introduced Putong community in QQ Music, through which we foster cultural communities with youthful and trendsetting content and interactions. We have continued to make it more interactive and appealing, which has led to consistent increases in DAU penetration rate and user retention in the 4th quarter. Our efforts also brought resounding endorsement from younger users with users in the teens and early 20s accounting for a larger proportion of Putong community users higher than their presence in QQ Music. In December 2020, QQ Music successfully held Boom Boom Award, a forum that encouraged young people to vote on what was popular in 2020 and offered a glimpse into their views on future trends. It attracted interactions from home and abroad, generating 2,000,000,000 instances of social media buzz, Driving active users in the Pusong community to a record high. Fans Club, Fanjishuo, A new community focused channel introduced by Kugo Music in the Q2 of 2020 also received strong recognition, particularly among young users. This is evidenced by more than half of fan club users being in their teens and mid-20s, With total user time spent increasing 15% sequentially during the Q4. When it comes to video enrichment, we continue to transform the conventional experience of music streaming. Google Music created a video based music product by pioneering embedded MVs on music streaming page, further catering to the needs of users for consuming music videos and bringing in a more immersive audio visual experience. As a result, on a sequential basis, DAUs for embedded MVs on streaming page grew over 70% and daily total time spent increased by 88%. With tens of millions of songs available to be streamed, we continue to leverage our proprietary user insights and data analytics to provide users with more personalized experience, which has led to a sequential increase in the proportion of streaming volume driven by recommendation. Technologically, we continue to shine. In the world renowned MIRRORS Global Song Recognition Technology Competition in 2020, Kugomusic was the winner In the audio fingerprinting category, while Q2 Music's predictive model broke multiple world records in the area of patents for prediction. Aided by these technologies, we are able to improve our predictive capabilities on the popularity potential of music before a wide scale promotion. And in the 4th quarter, We successfully discovered and promoted chart topping songs such as Wrongheaded Now, let's turn to our social entertainment services, which in general maintained a steady performance in the Q4. While live streaming business continued to recover healthily post COVID-nineteen, WeSing delivered faster growth, thanks to product enhancements to improve its competitiveness and monetization efficiency. First, let Let me discuss our online karaoke services. The year 2020 presented WeThink with challenges and opportunities. To take up and respond to competitive pressure, we refocused and made effective adjustments to enhance WeSing's core and differentiated services that are music centric and socially interactive, creating a fun and engaging platform that provides the best online karaoke experience. We are pleased to see WeThink MAU bottomed out during the Q4 And user engagement has improved as active users increased in November, December compared to September, October, and are turning increasingly loyal on WeSing platform, making a good start going into 2021. Our first UI design and short form video recommendation feed on the homepage rolled out in September 2020 continue to gain traction. To lower the entry barrier and improve performance of recordings, we continuously enhance audio and video recording tools, including multi genre remix, Dua Shifeng remix and auto tune, Zhe Dong Xiong, making it simpler And more fun to create and publish recordings. Both number of users publish videos And penetration rate of publishing recordings improved sequentially in the Q4. These efforts boosted content consumption as well as user engagement, which in turn enhance the virtuous cycle of content generation and consumption. Besides, our friend karaoke room has brought the offline karaoke experience online for families and friends to enjoy real time interactions and facilitate tighter social connections. Leveraging the social power of music, Friend Karaoke Room maintained its uprising momentum and led to a significant increase in user penetration and user time spent of online singing rooms in the Q4. As a result of this operational focus, WeThink has recorded improving average daily user time spent. The bottoming out of MAUs and improved monetization efficiency, setting a solid foundation for strong growth in advertising. Our music centric live streaming services delivered healthy operating metrics. Besides active performance, our robust content offering, effective and targeted operational initiatives and personalized recommendations help drive sequential improvements in user retention in the Q4 of 2020. We're also pleased with the increasing user engagement as we rolled out diversified live streaming content and attractive performance in categories such as ACG, Chinese ancient style and gaming. In the 4th quarter, QQ Music live streamings continue to scale up, attracting popular musicians joining the platform and more interactive features added to facilitate social interactions. We are confident that such strong momentum will continue into 2021 And contribute more to our overall growth. As users need to continue to evolve, We are constantly looking for new business opportunities and actively pursuing new drivers for our next phase of growth Through building an innovative online merch offline performance ecosystem. For TME Live, there are a few exciting developments. As of the end of 2020, we successfully hosted more than 50 online live concerts of different styles and genres. In the Q4, TME further expanded its brand's audience by holding 25 live performances for a wide range of influential musicians from both home and abroad. In 2021, We will cultivate a comprehensive performance pipeline to enhance our support of musicians and expand EME live coverage beyond top artists and provide a stage for a wider range of musicians to display their talents. As TME Live continues to increase its popularity and brand awareness, We are attracting rich pipelines of sponsorship to unfold long term monetization potential. In addition, we successfully hosted the 2nd annual Tencent Music Entertainment Awards, TMEA ceremony in Macau on January 23, 2021. Within a short 48 hours, it generated 66 Trending social media topics, attracting cumulative page views of 18,500,000,000 across the Internet. The awards should serve to cultivate and promote high quality music content to the public, as well as highlight the cultural virtues of the Chinese music market benefiting the industry, artists and users alike. In conclusion, We're pleased with the well rounded progress that we have achieved and 2020 was a year defined With a strong existing foundation, increasingly diversified growth engines and our commitment to long form audio investments and its future potential. We are confident and look forward to our next phase of exciting growth in 2021 and the years to come. And with that, I would like to turn it over to our CFO, Shirley Hu for a closer review of our financials. Thank you, Tony. Hello, everyone. Next, I'll discuss our results from financial perspective. In the Q4 of 2020, our online music services continued its outstanding growth trajectory, particularly in musical subscriptions and advertising. While social entertainment business continues its sales growth, Despite economic uncertainty and the changing competitive environment, our total revenues for Q4 2020 reached RMB8 RMB0.3 billion, up 4.3% year over year. In Q4 2020, Our music subscription business continued to grow rapidly with revenues of RMB1.6 billion and a year over year growth of 42%. As a result of user retention improvements and effective payroll strategy execution, paying users grew 40% While monthly art remains relatively stable year over year as we are dedicated to high quality user growth Advertising is our key strategy. During the quarter, we continued to increase the availability on our platforms, enhance the product quality for our advisors, improve efficiency as algorithm improves and expand our sales force. As a result, our advertising revenues were more than doubled year over year for the 2nd consecutive quarter. Consequently, our online music revenues reached RMB2.8 billion this quarter, up 29% year over year. Social entertainment services and other revenues were RMB5.6 billion, up 8.2% year over year, primarily due to growth from Online Color Okay. Social entertainment marketing app increased 26%, While paying users dropped 14.3% on a year over year basis, significant growth of our ad business and annual dollar events both contribute to up increase this quarter. As discussed last quarter, we have always been focused on monetization improvement. In Q4 2020, Our advertising revenues continued to grow, while number of paying users increased sequentially, Leading to overall monetization improvement on the platform. Gross margin was 32.4% in Q4 2020, which was unchanged sequentially and down 1.3% compared to some period last year. The year over year decrease was primarily due to increased investments in new products and the content offerings, such as long form audio Let us do ramping up in terms of revenue generation and increased revenue showing fees to strengthen our platforms competitively. Online music services continue to positively impact our overall margin. Now moving on to operating expenses. Total operating expenses for Q4 2020 were RMB1.7 billion and was 20% as a percentage of total revenues As compared to 90% in the same period last year, selling and marketing expenses were RMB373 million, up 15% year over year. The increase was due to higher promotional spending And the user acquisition expenses to strengthen our products, competitiveness and solidify our advantage in music centric live streaming. Higher costs associated with annual online events such as Putong Community Event, WeSing Gala General and administrative expenses were RMB906 1,000,000, up 21% year over year. The increase was driven by increased investment in R and D For product enhancement and the technology innovations such as long form audio, WeSing International Version, brand car okay room. That's all leading to higher employee rate costs in R and D. Our effective tax rate for Q4 2020 was 5.5%, decreased from 9.3% last quarter. As some of our operating entities in China became qualified for certain tax benefits this quarter And the cumulative impact was recorded in Q4 2020. Our effective tax rate for full year 2020 was 9.8%. Our net profit attributed to equity holders of the company was RMB1.2 billion. Non IFRS net profit attributed to equity holders of the company was RMB1.3 billion and the non IFRS net profit margin was 16.4%. For full year 2020, our total revenues were RMB29.2 billion, Up 14.6 percent year over year. Net profit attributed to equity holders of the company on the IFRS and the non IFRS were RMB4.2 billion and RMB5 1,000,000,000 respectively. As of December 31, 2020. Our combined balances of cash, cash equivalents and term deposits were RMB28.9 billion, representing an increase of RMB1.2 billion from Q3, which was primarily driven by cash flows generated operations. Looking forward, we continue to be optimistic about the future of the broader music and audio industry. We are confident in the overall ecosystem and product pipeline that we are building in the long run. We'll keep focusing on new products and the features as well as monetization improvements on our platforms, while maintaining core company investments. Advertising is always our key strategy and we will keep improving ad product quality effectively and Lifesize. Additionally, we are investing proactively on long form audio and are excited That's the Lavey Audio joined us, which will further accelerate our long form audio business development. This concludes our prepared remarks. Operator, we are ready to open the call for questions. Thank Two fairly quick questions. The first one is about kind of the proportion of songs you guys have moved across the Hey, Will. Do you feel we are reaching more on top like a high level, which means going forward, it's Thank you, Tim. It's very interesting that you guys, I think, first time mentioned about User base on so called Internet or same devices, right, in car audio, speakers, etcetera. So could you give us an idea whether these users are basically the same users on your mobile app? Or are we addressing a different set of user base? Thank you. Thank you for your question, Eddie. In terms of paywall, at the end of 2020, we are just over 20% In terms of our streaming share of content that's sitting behind the paywall. And we actually don't see there to be a ceiling in the near term. And we continue to expect that by the end of this year 2021, we continue to increase our paywall in a similar pace as the previous years, which would take us to just over 30% by the end of the year. We wanted to note that in the 4th quarter, Our net adds delivered a very solid performance of over 4000000, 4,300,000 net adds. And when we continue to expect our net adds to be strong, in particular in Q1, we expect the net adds in Q1 to be even stronger in Q4, driven by a very successful payroll strategy and our various marketing campaigns. In terms of your second question on IoT, there's actually a different user group. We see that majority of them are non overlapping because it's a different use case. People who I think because it's a different use case. People who listen to music on smart speakers or in car, a slightly different MAUs and DAUs compared to the music platform. So effectively, our IoT strategy It's helping us broaden our user base. We note that while the MAU, online MAU saw So a slight decline, which is mainly attributable to a higher churn of non core users. But on the other hand, Our core users actually increased their level of engagement on our platform. And by that, I mean, if we look at the average daily Time spent for our DAU, which is more representative of our core users, it actually increased year over year. And that's a result of all the products enhancements that we've been investing over the past year, such as long audio, Embedded MB from streaming page, Flutone Community, TME Live, etcetera. And it's important to note that our reported music MAU figures Do not include the IoT devices such as smart speakers in car and smart TV. And the IoT devices MAU Actually recorded strong double digit growth year over year in the Q4. And that presents additional opportunities For us, which we will share more in the future. Great. Next question please. Thank you. Your next question comes from Alicia Yap from Citigroup. Please go ahead. Hi. Good morning, management. Thanks for taking my questions. My question is related to your long form audio. Given the 15% penetration rate, could you share more detail regarding the user profile and any overlap of the existing music subscriber and also their content of interest. In relation to that, can you also elaborate The various monetization model that you plan to push more aggressive this year, would that be more on the subscription or would that be more on the online app to drive the growth in 2021. Thank you. Okay. Thank you so much for your questions. Actually, the long form audio is a very important strategy that for TME, we are fully committed to invest in this area. I think this is a very natural way for TME to doing it because we have a very strong competitive advantages compared to the other vertical player in the industry right now. First of all, we're seeing that this is a very natural extension of music consumption Because a lot of our music users nowadays besides listening to music, they will be more easily to be Extended their time and then listening to more audio programs. So this is very Easy for us to convert our existing music users into the long form audio users. So we will save the user acquisition cost in this aspect. Beside this, we are seeing that we have already set up a lot of content partnerships, especially with a very renowned A company like the China Literature that we have already set up the strategic partnership during last year. We're also starting to team up with other content providers in the industry as well, not just the professional content, but we are also extending our footprint into the podcasting and also other UGC and PUGCs area. The first point I would like to mention is for the TME long form audio strategies, we are taking the 2 pronged approach, which is unique in the industry, which means that on one side, we are going to leverage our music application C. Wei:] To have a long form audio section on our apps. But on this other side, we are also launching out our standalone long form audio application as well. And with the acquisition of the Lazy Audio team, the news that we announced by the end of Last year, we actually further strengthened our strength on the standalone long form audio side. So I think that this is a very unique strategy and make us to stand out from the competitions in the industry. Beside this, we are also continuing to pull in more financial resources. And also, we have set up A core team to working on the long form audio businesses, and I'm sure that in the year 2021 is going to be another huge step for us. And by doing this, we strongly believe in that the long form audio will create long term value to the entire group. First of all, it will increase, as Tony mentioned, it will increase the user engagement because their time spent on our platform We'll be improving and also to be increasing because they will enjoy more and more content from our platform. Secondly, because of the Different monetization model that we have, for example, we have the premium content, monthly subscription model. We also have the advertising model as well. So we will further bring in other monetizations, opportunity for us and create strong revenue growth in the future. Next please. Thank you. Your next question comes from Jon Egbert from Stifel. Please go ahead. Great. Thanks for taking my question. Advertising clearly has a ton of momentum. I think you each highlighted a few of the key drivers of recent strength there. But Wondering if you could dig deeper into the runway for future advertising growth by maybe looking at the current state of your business there versus what you might In terms of like ad coverage on your various services, ad load within the screens that you're actively monetizing today, Potential for new ad formats to kind of change your capabilities, anything worth calling out there? Yes, sure. Advertising grew at a very rapid pace of over 100% year over year for 2 consecutive quarters. And in the Q4, advertising now accounts for the majority of the non subscription revenue within online music accounting for just over 50%. And this is all a result of the investments In the advertising technology and solutions that we made in the last year as well as leveraging Tencent Group's overall strong ad sales capabilities, which enable us to penetrate into an increasing number of advertisers. We also continue to see room for us to increase our ad load. There is more real estate on our various multiple platforms. That provides us with ample inventory. And so far, our ad format has been rather homogenous to the traditional banner as well as Flash Screen. But as Kashin mentioned in his early remarks, we do intend to broaden Our ad format into other ads such as audio ads, reward ads as well as other. And as a result, we expect Such strong growth in advertising to continue for the near to mid term. Okay. Next question please. Thank you. Your next question comes from Alex Poon from Morgan Stanley. Please go ahead. Good morning. Thanks for taking my question. I want to go back to the music subscription business. So I want to understand about The effectiveness of the paywall, you mentioned about just over 20% by end of last year. And last year, on average, Roughly, we have added about 4,000,000 per quarter. I want to understand about if we go from 20% to 30%, This organic conversion would increase from $4,000,000 to something, say, dollars 5,000,000 would be faster than before. And actually on top of Payroll, you have better user engagement, long form audio, freemium model promotions, Content, a lot of new tools that you can drive conversion. So try to understand Just the first part is on the organic effectiveness of the payroll going from 20% to 30% compared with the 10% to 20% and then these new drivers, how they can how much additional growth that can come from these new tools Yes, sure. Music subscription revenues obviously continue to deliver very strong growth at around 42% year over year. In particular, the paying users recorded strong growth at over 40% year over year. And the solid net additions of 4,300,000, which brings the total paying users to 56,000,000 Or a 9% paying ratio, which is a substantial increase compared to just about 6% last year. In addition to the paywall strategy that we've mentioned, there are actually many other product investments as well as Marketing campaigns that we've embarked on, which are starting to pay benefits, we continue to observe the retention rate Our paying users continue to improve. They've basically been improving every quarter since the Q1 of 2019, so for 8 quarters now, which means that once we've converted a user from free to paying, They are actually remaining as paying for a longer period of time compared to before. And that's also helping us to improve the paying user. And we are able to achieve all this throughout 2020 While seeing an increasing trend in ARPU, right. So we are very optimistic in terms of our subscription growth. We expect, Like I said, the net adds in Q1 to be stronger than in Q3 than in Q4. And I guess for the year 2021, We expect that average net adds to be approximately between 45,000,000 per quarter, and which would be a strong growth driver to our overall business. Next question, please. Thank you. Your next question comes from Alvin Yao from JPMorgan. Please go ahead. Good morning, management. Thank you for taking my question. I have a follow-up question regarding your payroll strategy. Can you share with us how do you strike the balance between size of the payroll Paying ratio and the platform users. Theoretically, you can achieve 100% of the paying ratio if you adopt an For music type of monetization model, I. E, content is only available to paying subscribers, But that will probably come at a big cost in terms of the platform usage or While your current strategy is pushing the size of the Gradually, we're driving up the paying ratio. Can you share with us philosophically how Do you strike the balance? And what are the key considerations to make you more aggressive or less aggressive, including The size of the paywall and over the longer term, what could be the equilibrium level of the paying ratio? Thank you. Sure. There is a good balance that we do need to strike between our paywall strategy as well as the free user experience. At this point in time, we continue to see the payroll strategy to be very effective without substantially hurting the free user experience. However, we are investing in new monetization capabilities such as various forms of advertising to help us monetize the free segment of users that for whatever reason may be very difficult to convert to premium. And for that those particular user, the monetization strategy isn't paywall. The monetization strategy for those a user would be advertising. And perhaps, we would provide them with advertising as a way for them to unlock certain benefits, which allow them to access a limited volume of songs behind the paywall. I think that's an example of how we could strike A good balance between free and pay users. Again, I think we continue to see The payroll strategy to be very effective. We expect the pace of that strategy rollout to be in line with previous 2 years. And because of the various factors that we mentioned, we expect the net adds this year to continue to perform well of approximately 45,000,000 per quarter this year, which is an increase compared to last year. And one more point I would like to add is, as we mentioned it before, educating the users saying that the Music to have a value will take times, but we are super excited because in the last 2 or 3 years, we have done a great job and our users really treasure The music and also they are willing to pay for it. But now at this time, we are educating our users to buying a monthly subscription. They will be have the perfect music experience. What I mean is they can enjoy all the songs and they Don't need to worry about which kind of songs that they can listen or which songs that they cannot. But at the same time, we are also providing Are the privileges to them? So besides listening to song, as we mentioned, we also have the TME Live events that we offered. So for our monthly subscribers, they will have some privileges. For example, in different special use experience is enjoying the TME Live event. So, this is all the things that we are keep evolving and keep innovating And we are targeting to bring a new type of experience for the TMB Live in this year. And also, it will help our VIP, which is a monthly subscriber to have more privileges. Beside in this, we are also focusing on defense based economy, So which means that if you're a monthly subscriber, you will also enjoy some of the privileges on Bestie Henry as well. So all of this will be worked together as And let our users really think that being a monthly subscribing VIP, this is the right way to enjoy music and Also all other different experience on our platform. We have been getting really encouraging result By moving to the retention rate of our membership subscription, it has already been keep continuing improving. So I think this is a really good signal to us, and we strongly believe that with the combination of putting the songs behind the paywall In a steady pace, together with the premium that I just mentioned, it will really make our subscription model and together with As an advertising model as well, it will really work out together and bring a good healthy development of our revenue in the future. Great. Next question please. Thank you. Your next question comes from Zijin Liu from UBS. Please go ahead. Thank you, management for taking my questions. I have two questions. First, how do you think about the timing of Huaz? Sorry, Chichi, we can't hear you. Oliver, do you mind speaking up a little bit? Yes, yes, yes. Sorry. My first question is how do you think about the timing for us Do we see any potential risk of balancing user experience and competition on premium model? 2nd, can you also share us some colors on how long form audio contributes to overall time spent of our music apps? Thank you. Sure. In terms of the timing, we continue to make investments in the various ad formats That leverage to monetize the free user base, in particular, the segment that may be difficult to convert to premium, And that's ongoing. You see us talking about this in the last one to 2 quarters. We start to implement Some of that as beta test during this year. But in terms of the exact timing of when we will scale up In a larger sense, obviously, we need to observe on how the adoption level and how and the effectiveness level of that. And then in terms of long form audio, I think it's important to Understand that there's a lot of natural synergies between music and audio. And just like In the radio era, users are very used to listening to both music and audio content together. And similarly, we actually see that dynamic playing out in online platforms. And so when we provide audio content to our music users, they don't switch off and listen less to music In order to listen more to audio, they actually end up increasing the total time spent. And therefore, It's actually very it puts us in a very advantageous position in being the leading music platform going into audio And with the addressable market expected to reach to a similar size of music users, the Large several 100 of 1,000,000 in the next few years. We're very optimistic about the audio market, as Kashan mentioned. And that's why we actually think together with our content strategy within audio that Tushan talked about, Our monetization strategy as well as our 2 pronged integrated music and audio app as well as standalone audio app strategy. I think all this would play very well to provide us with ample growth opportunity in the next few years. Great. We're ready to take the next question, please. Thank you. Your next question comes from Eastern New from Eden and Company. Please go ahead. Hello. Thank So the first question is also on long form audio. Just following up on that question. Can management share some light on How these users' pain habits are compared to the music only users? And I hear other analysts ask about Our target penetration rates for the near term for long form audio. So do we have some Number that we can share. And my second question is on the podcast. So does the company have a plan to sign creators for exclusive content in the podcast space. Thank you. Yes. In terms of target users for long form audio, I think Kashin mentioned that we've reached About 10,000,000 DAU, and you could see that our MAU reached about 90,000,000 by the end of last year, And we expect our user base to double by 2020 end of 2021, right. So that's the near term target. And by no means we're done. We actually think The total addressable market, as I just mentioned, is very, very large for audio market. Similar size to the music market In the high several 100,000,000 in terms of scale, and that would play out over the next few years. And we also see there to be ample monetization opportunity. And it's different depending on the types of audio content. For example, audiobooks, which we've talked about in the past being the biggest Content category within the audio consumption, that's obviously primarily driven a lot by subscription, right, chapter by chapter. And that plays very well in terms of synergies with our music subscription because we could bundle our music subscription plan with the audio subscription plan. And on the other hand, there are other forms of audio content, which are much more suitable for audio advertising. And so we're also seeing that play out. And as our MAU and DAU grow, we see ample opportunity In both of these two categories. For the podcast content that you mentioned, actually we are also Kousin talks with different content providers. I think there's different tier of content that we try to bring into our platform. First of all, which is similar to What's the strategy that Spotify is doing? They are also talking to some of the top media actors or maybe podcasters. We are also in talks with some of them. Some of them may be in some of the news industries and some of them is providing other content for more fan entertainment area. So the top tiers, we are in tops and we are also working on the long tail as well because our platform is really big. And I think that one of the competitive advantage that we have is we have different music platform like the QQ Music, Kugo and Cool Wall And all of the target audience will be a little bit different in terms of their positioning. So they can tailor make different kind of First of all, the professional content or the user generated content according to the needs of their own audience. So I think that we are really open right now and having a lot of talk and especially heavily investing in the content side for not just This is Binney Wong from HSBC. So my few questions here, very quick one. I just want to follow-up with Shelly here in terms of the investment because I think in the previous 2 years, we talk We are already investing a lot in the Goose acquisition and also a new form of business. So I just want to understand that how much of Initiatives, do we expect to see more meaningful revenue contribution into 2021? Just one question. And just one quick follow-up In terms of live streaming, so we see some of your short video players have also been Seeing that live streaming growth has also been softening from last year for different reasons, right? But then if you look at into 2021, How do we position in live streaming? Because I think there are also if you look at like ARPU also paying ratio, there are something like How can we maintain at a more competitive level in the live streaming business? And how do you see in 2021 this will trend, given that this is still one of our most meaningful earnings driver. Thank you. Sure. In terms of live streaming, I mean, social entertainment broadly, revenue grew by 8% year over year as a result of, obviously, a more difficult base comparing to the pre COVID Q4 last year, but also impacted by the lingering Weakness in the macroeconomic situation, which affected the paying users' willingness to spend. However, on the other hand, we are encouraged to see a continued recovery in our traditional Kugo Live and Kugo Live in an organic sense. And in addition, we're also broadening the content category to include ACG China Asian Style, but also around music. And that's the key point because even though you may be Benchmarking us against other peers, but it's important to stress that our live streaming is differentiated. It is the most music centric compared to other peers, and that continues to provide us with differentiation in terms of attracting performance as well as users. In addition to that, we obviously have we are very pleased to see the continued scale up In QQ music live streaming, which we'll continue to see an increasing contribution to our social entertainment revenue into 2021 as well as we're also encouraged to see that WeThink's DAU and MAU Decline clearly bought bottom in Q4 and beginning to see a sequential growth in December, January compared to September, October, for example. So as a result, we as we look into the full year 2021, Well, I mean, in terms of total revenue growth, we actually expect our total revenue growth to be growing at a faster pace At close to 20%, compared to 2020's 14%. And that's a result of Factor growth rate in both online music as well as social entertainment. Yes. And also for the social entertainment side besides Live streaming, I would like to spend a little bit of time talking about the WeSing platform, the Quanmin Keiko. Actually, it's a very unique platform that TMB have and especially make us to stand out in the industry. In last year, I think that we are doing actually is an evolution and trying to make it to be more up to the current needs of the users. So what we are doing is actually I think that singing is still a very strong demand from our users. So we are focusing on Making the singing experience even better than before. We lower the content production's entry barrier and we create a lot and helping our users to make their content better and let them to share on the social platform. So I think that what we're doing is not just doing user engagement, but we are doing user interaction. This is very important. And besides, we are also Bringing in the short form recommendation feed on the Xiamen Tico, the recent platform, which really allowing us to increase The people to consume more audio and video based content. So I think this is some of the evolution that we have made And we didn't make it overall, the user base is really bottom out, and we are seeing a Positive trend in the early 2021. So I think that for the year to come, especially for the social entertainment side, Besides all the live streaming development and also the revenue outlook, I think that the, Trami Tengo is also another platform that we will be strongly focusing on. And this is also the unique, Very special platform that PME have when compared to our competitors. Okay. So in the interest of time, we'll take the last question, operator. Thank you. Your next question comes from Thomas Chong from Jefferies. Please go ahead. Hi, good morning. Thanks management for taking my questions and congratulations on a solid set of results. Just now let's Talk about our thoughts about the 2021 revenue growth. May I also ask about how we should Think about the margin side or how we should think about the trend in terms of the expenses given that we also have a number of areas for investment. On that one, can you also comment about our M and A strategies As well as the regulatory environment in China as we further expand our scale. Thank you. Sure. Well, I'll first touch upon the regulation and M and A and then I'll let Shirley take the margin question. In terms of regulation, we continue to maintain a very constructive relationship and a close working dialogue and relationship and a close working dialogue and relationship with the relevant authorities. Even when the relevant authorities issues any new rules, We are committed to work closely with them to comply with the applicable laws and regulations because our overall goal is to work towards promoting a healthy growth and development of the China music industry. And TME has been In operation for 16 years, over 16 years, and we faced multiple new regulations throughout our corporate life. And we are experienced in dealing with new regulation, and we are fully committed to comply with relevant authorities. And then in terms of M and A, as you can see, we recently announced the acquisition of Lazy Audio, which is an integral part of our long term audio strategy, which is highly strategic and long term, which we're very committed You see us continuously set up increasing amount of joint venture to venture into content development With our label partners, we announced that we will set up a joint venture with Universal. And then just We're announcing that we're setting up a joint venture with Warner, and that's following a very successful JV that we've already had with Sony. And all these will lead us to continuously improving our content development and promotional capabilities, which is also very synergistic to our music platform and music distribution business. So we'll continue to explore M and A opportunities around our core music and audio platform and we'll deploy capital in a disciplined manner. Yes. In terms of the M and A, I really think that is a really exciting journey for us because Our theory is not just doing financial investment, but instead we really want to have a very strong business cooperations with our partners. As Tony mentioned, of the joint venture of music labels really works out. I remember that around 3 years ago when we talked about the first music label JV with Sony Music, We just bring it out and then I'm so glad that we have the support of the 3 majors and then Sony really joined hands with us. And nowadays, if you guys Recognizing that we are just rolling out a number of really good songs in these few days, especially we have a very close partnership with Tencent Games We're rolling out the theme song for the PUBG, the first anniversary. And we actually rolled out the Together with some really renowned worldwide artists like the DJ Lee Ham and also with Jolie inside, which is also another very popular female artist in Asia. So I think this is some of the it's starting to bear the fruit. And so I think that is something that really make us feel excited because we are not just doing some financial investment, but instead We are creating wonderful music content that was widely accepted and being As we mentioned during the last quarter, we saw the announcement. We are also going to have another JV with Universal Music. The setup is now in really good progress. The management is on board already, And we have a different positioning for this music label and I'm looking forward to have creating more quick songs for the industry in the future. And today, we announced another joint venture, which is with 1 Music, I think. It will follow the first step And really made us to show that TME is really opened, and we would like to team up with Of the industry player in order to make, it's going to be a winning situation and create better content for our users. So this is very exciting for us. So maybe Shen Yi can talk about the margin side. Okay. About the gross margin, in Q4 2020, our gross margin is 30 0.4%. That is relatively stable compared to that of Q3 and meet our expectation. In Q4, The revenue growth of subscription revenue and advertising revenue have positive impact on our Gross Margins. And in Q4, we will provide the live stream gala. So we will provide more promotion actives and installs for the performers. So the revenue sharing of social entertainment is increased. In conclusion, the Q4 gross margin is stable. Looking forward to 2021, We expect the first growth of subscription revenue and The advertising revenue will be continue to have positive impact on our gross margin. And second, we will keep eye on the industry. We will control our revenue sharing phase of social entertainment. So except for these two points, We will invest more on our new products and new features such as the long form audio and In conclusion, in 2020, we will invest more And So just to close out, I think we're very pleased with this quarter's results, with online music subscription revenue continuing its rapid growth. And we believe China's online music industry continues to be in a long term secular growth trend that will provide us ample opportunities in the future. And our outlook in 2021 remains very positive. We expect total revenue growth to accelerate Compared to 2020, close to 20%, driven by faster growth rate in both online music and social entertainment services. Okay. So thank you everyone for joining us today. This concludes today's call and we look forward to speaking to you again next quarter. Thank you and goodbye. Thank you so much. Thank you.