Earnings Call: Q1 2020

May 12, 2020

Earnings release

Ladies and gentlemen, good evening and good morning and thank you for standing by. Welcome to the Tencent Music Entertainment Group 20 21st Quarter 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, Ms. Millicent Hsu. Please go ahead, ma'am. Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. Tencent Music announced its quarterly financial results today after the market close. An earnings release is now available on our IR website at ir.tencentuser.com as well as via Newswire services. Today, you will hear from Mr. Ka Shing Peng, our CEO, who will start the call with an overview of our recent achievements and growth strategies. He will be followed by Mr. Tongli Yip, our CSO, who will offer more details on the operations and business development. Lastly, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we proceed, please note that this call may contain forward looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward looking statements. All forward looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company's filings with the SEC. The company does not assume any obligation to revise or update any forward looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law. Please also note that 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 Standard in the company's earnings release and filings with the SEC. You are reminded that such non IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure and other non IFRS measures are not uniformly defined by all companies, including those in the same industry. With that, I'm now very pleased to turn over the call to Mr. Cai Shen Pang, our CEO. Cai Shen? Thank you, Millicent. Hello, everyone, and thank you for joining our call today. I am glad to meeting every one of you again after we released our 2019 annual results 2 months ago. Even though I'm still wearing a mask like last time, but we still have a smiling face under the mask and every one of us at TME remain very positive. It is because we truly believe that we have been what we have been doing is very valuable to our users and society. Music is really the medicine that can heal and accompany with people no matter what the situation is. I hope to see every one of you well during the pandemic period and we are all together. In the Q1 of 2020, our online music subscription revenues further accelerated its growth, increasing 70% year over year compared with 60% and 48% in the 4th Q1 of 2019. Online music paying users reached 42,700,000, up 50% year over year. Paying ratio expanded to 6.5%, up from 4.3% for the same quarter of 2019. AR PPU for our online music services increased 13% year over year primarily benefiting from users increasing willingness to pay for premium subscription package. Our outstanding online music subscription revenues growth mitigated the softness in other non subscription revenues primarily arising from the COVID-nineteen pandemic resulting 27% overall year over year revenue growth for our online music services. Some of our key strategic focus during the Q1 include further enriching our leading content offering, sharpening our capabilities in content discovery and promotion and supporting indie musicians. In terms of further enriching content, to begin with, we have made significant progress in long form audio, an under penetrated but fast growing market in China that we are committed to serve. Recently, through the strategic partnership with China Literature and others, we have gained quick access to an extensive library of high quality IPs and exclusive licenses for some page turning online literature series with a tremendous fan base in China. Now we have obtained the audio application rights of the majority of China Literature's Top 100 Most Favored Online Books. In addition to audiobooks, we will also produce high quality audio drama to help Super IPs to realize more the drive to value. Such fast progress is starting to position us at the forefront of the game. As we aggressively scale up content offering, the development of our podcast ecosystem has also achieved the initial success. By the end of April 2020, our platform attracted approximately 10,000 new podcasters and many established KOLs, including well known artists, writers and online broadcasters to produce more premium UGC audio work. Our self produced audio programs, our Idol Ritz, Bangyan Yiredu has achieved over 1,000,000,000 total streams by the end of last month and become a very popular audio show, particularly for the young demographic. On April 21, we launched a new application for long form audio, Kuo Accounting, taking another important step to provide dedicated audio entertainment services to our users. We also began to roll our accepted long form audio membership package. All of these developments will help us build a solid foundation for our future development and realize more valuable synergies between online music and long form audio business. 2nd, we continue to solidify our content leadership with popular genres enjoyed by the younger demographic. The cooperation with BN Group, one of Japan's largest one of Japan's highest selling record companies in the 20th century enable us to seek more opportunities and rebuild a closer relationship. Apart from offering highly popular content by renowned Japanese artists, we also actively explored new interactive game page such as a J Pop singing contest to bring an interactive and comprehensive news experience of listening, watching, singing and socializing. As a result, our platform has become a popular destination for J Pop fans in China. 3rd, on supporting our original content creation, time and again we demonstrated our unique capability and know how in talent discovery, cultivation and promotion. Thanks to our fast growing indie musician program, the number of participating musicians and original songs produced doubled year over year in the Q1 of 2020. We rolled out an attractive financial incentive plan earlier this year. This has led to impressive growth in the number of indie musicians' songs that are exclusively licensed to us, which increased by more than 800% year over year. We went an extra mile to promote indie music. We launched the program Galaxy, Yin He Zihua, targeting emerging musicians and also formed a strategic alliance with Bilibili through the launch of program Ganbei, Ganbei Hua to further enhance the cooperation with independent musicians and KOLs. Additionally, we continuously leverage our profound user insights and powerful promotional capabilities to support indie musicians to reach 100 of millions of music lovers. Last quarter, we shared the success story of Hai Lin, a grassroots singer and his song Girl by the Bridge, Chaobian Gu Liang. This quarter, I am pleased to share 2 more successful stories. The World is so Big to Meet You, a song from Echo Chung Changxiang and You, Xiaonian, a song produced by Mira Mengran. Both songs were released during the Q1 and have already achieved almost 5,000,000,000 cumulative streams on our platform. Their success is our success. As a fast growing and leading indie musicians program with the largest music user base, we are very pleased to say as of March 31, 2020, we have successfully promoted indie musicians content to 100 of millions of users on our platform. While the COVID-nineteen global pandemic has changed the businesses and the ways of life in different aspects, it has also brought emerging opportunities in the digital era. We have seen some behavioral changes during the lockdown and observed an increasing number of users listening to music with home apparent especially TVs and smart devices. As a result, in the Q1 of 2020, our online music MAU for mobile devices and in home appearances increased by 3.5% on the year over year basis. Such behavior patterns could persist even after the life returns to normal post the COVID-nineteen pandemic and potentially provide additional avenues for our paying user growth. The launch of TME Live is a great example of how we quickly and innovatively deploy technology to bring offline concerts experience online through live streaming. Within 5 weeks after its launch in March 2020, we successfully held 5 online concerts. This included ones for established artists like as JJ Ling, Lin Jin Jie and Renee Liu, Liu Ruoying and special themes such as an OST concert for the popular web drama series Someday or One Day, leveraging our solid partnership with labels and artists. We are very excited to have built a strong and diversified pipeline to anchor our events. We are also pleased that the user response TMU Live received exceeded our expectations and affirmed the purchase value creation cycle between online music and social entertainment services. This concludes my prepared remarks and now Tony will discuss the Q1 results of our social entertainment services as well as our other focus area. Tony, please go ahead. Thank you, Keshun. Hello, everyone. Apart from what Keshun just mentioned, there are a few other exciting areas that we want to highlight for both our online music and social entertainment services. For online music services, 1st, we kept stepping up our efforts to promote video enrichment. We emphasized short videos through upgraded version of Kugomusic. This provides our users an additional dimension of entertainment while increasing the exposure of video content creators on our platform. It has also contributed to improved user engagement, leading to Kugo Music's increased DAU penetration rate and daily average user time spent on video content after the upgrade. 2nd, while music streaming used to be a less socially interactive experience, we continued to push boundaries by building and promoting an engaging user community through our fan based programs. We invited many artists to personally interact with their fans on our platform. Their engagement in online discussions and participation in song reviews in turn have contributed to better promotion results and increased stream volumes of certain songs on a daily basis. Thirdly, we kept sharpening our data analytics capability and refining our personalized recommendation. In particular, the personalized playlist continues to receive positive user response. In the Q1, the DAU penetration rate and average daily streams of personalized playlists more than doubled on a year over year basis. Now turning to social entertainment services. While its revenue growth moderated due to the impact from COVID-nineteen, our mobile MAU and paying user growth remained robust, up 13% 19% year over year, respectively. Benefiting from the growth initiatives we took to improve user engagement and positive impact from users spending more time on our online karaoke platform during COVID-nineteen. With respect to online karaoke services, first, we continue to strengthen WeSing's core karaoke features to make it more user friendly for users to interact through singing. As such, both MAU penetration rate and average daily user time spent of the song recording function achieved healthy sequential growth in the Q1. In addition, to meet the evolving and expanding user demand, we incubated Kugou Chang Chang, an online karaoke app designed to better serve Kugou Music users with deeper integration between music streaming and online singing across the two apps. Despite its relatively early stage, we are pleased to see Qubo Chang Tang achieving initial success with MAU growing 800% year over year to reach 9,000,000. 2nd, we focused on strengthening WeSing's social attributes. We continue to grow the number of online singing rooms based on diversified music centric themes. In the Q1 of 2020, we are happy to see the unique real time social attributes and interactive features built in the online singing rooms resulted in sequential increase in singing room MAU penetration rate and user time spent. 3rd, we further strengthened video enrichment within We Sync, with more types of video content now dynamically integrated and more video tools deployed to make sharing easier and more eye catching. This has boosted the amount of video content and average daily video users on WeSing. Now for our live streaming services. Against the impact caused by the COVID-nineteen pandemic, we worked tirelessly on many fronts to pave the way for faster recovery in the second half of twenty twenty. We continue to expand content categories such as games, ACG and matchmaking. In the Q1 of 2020, over 30,000 gaming hosts joined QUGO Live, and its DAU penetration rate of game live streaming has been increasingly has been increasing consistently. In particular, QUGO Live recently launched, reached a cooperation agreement with Tencent Games, obtaining the right to live broadcast the full range of Tencent Games. We'll also add more interactive activities and privileges to further incentivize user spending and continue broadening our live streaming content categories to attract more new users. And finally, to boost our promotional capabilities offline, In April 2020, we acquired an equity stake in Radio Music Warehouse, Radio RMW in short, a leading provider of licensed music streaming service to public venues in China. From system design and integration to content curation and support, RMW is an integrated solution provider of licensed music in public venues, including hotels, restaurants, supermarkets, convenience stores and more. Compared with Europe and the U. S, this market in China is still at a nascent stage with promising long term prospects. For TME, this investment serves as another important step to expand our comprehensive music entertainment platform from online to offline. 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. In the Q1 of 2020, our revenues were RMB6.3 billion, up 10% year over year, driven by 27% growth in online music services revenues and a 3% growth in social entertainment service revenues. Online milk service revenues were RMB2 1,000,000,000 up 27% year over year. The increase was mainly driven by sustained outstanding performance from music subscriptions, supplemented by strong growth in advertising services despite the impact from COVID-nineteen, partially offset by decrease in sub license revenue. Music subscriptions revenues were RMB1.2 billion, up 70% year over year, driven by continued growth of subscribers and improvement in AR PPU. Basically, longer app subscribers increased 50% and the subscriber AR PPU grew 13% year over year, reflecting continuous success of paying user retention and the content paywall strategy. Social entertainment service and other revenues were RMB4.3 billion, up 3% year over year, primarily driven by growth in online car okay and live streaming services despite negative impact from quarter 2019, adjustments to interactive features in live streaming and the change in timing of recent annual Gala. On a year over year basis, paying users grew 19%, demonstrating the season of our product. AR PPU decreased 13%, which was primarily due to impact from COVID-nineteen as the users reduced spending to manage the uncertainties. Adjustments to interactive filters also had a short term impact on ARPU in live streaming. Cost of revenue were RMB4.3 billion, up 70% year over year, driven by higher revenue sharing fees and the content expenses. Our gross margin was 31.3% in Q1 2020 and decreased 4.1% from 35.4% in Q1 2019. This was mainly attributable to higher revenue sharing fees resulted from additional promotions to live streaming paying users to mitigate the impact from COVID-nineteen and adjustments to interactive features in live streaming. As well as increased revenue sharing ratio to online KOK performance to strengthen our platforms competitively. Gross margin for online music business has improved in Q1 2020 and is expected to keep improving over time as our music subscription revenue grow. Total operating expenses were RMB1.2 billion, up 12% year over year. Total operating expenses as a percentage of total revenue was 18.4% in Q1 2020, increased slightly from 18.1% in Q1 2019. The increase was mainly due to increase in R and D employees related costs as we continue to invest in R and D to expand our product competitively, advantage and topology innovations. Our sales and the marketing expenses as a percentage of total revenues remain relatively unchanged from Q1 2019 as a result of our ongoing focus on operating efficiency. Our effective tax rate was 12.8 percent in Q1 2020. Our net profit attributable to equities holders of the company was RMB0.9 billion. Non authorized net profit attributable to equity holders of the company was RMB1.1 billion and the non IFRS net profit margin was 17.5%. As of March 31, 2020, our combined balances of cash and cash equivalents, term deposits were RMB21.9 billion, representing a decrease of RMB1 1,000,000,000 from RMB22.9 billion as of December 31, 2019. The decrease in the balances was primarily due to investment in consortium to purchase an equity interest of Universal Music Group during the quarter. Overall, despite the impact from COVID-nineteen, we achieved strong growth in online music services, partially in music subscriptions as well as healthy growth in social entertainment business in the Q4 of 2020. We expect to see accelerating year over year growth in the next few quarters as the COVID-nineteen pandemic is under control and the business started getting back to normal in China. From long term perspective, we continue to be optimistic about the future of the broader music industry and are confident in the overall ecosystem and the product pipeline that we are building. We will continue to focus on enhance and expanding our product and the service offerings, including non form audio, while maintaining core content investments. This concludes our prepared remarks. Operator, we are ready to open the call for questions. Thank you. We will now begin the question and answer session. Please limit yourself to 1 question. If you have additional questions, you can reenter the Our first question today is from Eddie Leung of Bank of America. Please go ahead. Good morning, guys. Thank you for taking my questions. Can we ask 2 questions? The first one is about the progress in moving more songs over the paywall. So could you talk a little bit about the recent progress as well as the outlook for that? And then secondly, any more detail on the potential launch of live streaming within QQ Music in terms of expanding coverage of users? Thank you. Sure. Thanks for your question. In terms of paywall, we have said that as of the end of 2019, our content behind the paywall is approximately 10% of the streaming volume on our platform. And internally, we estimate that by the end of this year, the paywall should account for approximately 20% of our streaming volume. And as of the end of Q1, we are on track to hit that 20% target. Now, however, I think we want to highlight that, number 1, we are obviously very pleased with the online music subscription revenue growth, growing 70% year over year, which is actually the fastest reported growth ever in our reported history. And we had suffered from a little bit of COVID-nineteen impact during the Q1. So without the impact from COVID-nineteen, we would have grown even faster because music from an MAU perspective as well as from a resulting paying user perspective, saw some users tend to consume more karaoke or games or video when they spend an unusually long time at home. But on the other hand, if we were to include music MAU from in home IoT devices such as smart speakers and smart TV, which is not currently included in our reported MAU data, if we were to include those, our MAU would actually have grown 3.5% on a year over year basis. So we saw that those in home device consumption on our platform actually mitigated some of the weaker mobile MAU. And like we said before, I think given we already have a very large user base in terms of music MAU, our focus continues to be driving user conversion from free to pay. And we continue as you could see to make excellent progress in the current quarter's results. The second question is about when are we going to launch the QQ Musical Live business. In our plan, we are going to launch it in the second half of this year, which is targeting to be in June to July. All the team is working so hard and getting it ready for the launch. So we are positive in this area. And this year, we are going to test water and after we have prepared everything, I think that you will provide further contribution on the social entertainment revenue from the year to come. One more point I would like to add is, even though the pandemic situation will bring some of the negative impact on the online music MAU, but we are still seeing that in this quarter, we are still having a 2% quarter to quarter growth in our online mobile music MAU. So we are doing pretty good and we are also expecting a better recovery after the pandemic situation was under control in the Chinese in China. Understood. Thank you. Thank you. Our next question will come from John Egber of Stifel. Please go ahead. Great. Thanks for taking the question. On the social entertainment side, obviously, the MAU growth is very strong despite the COVID-nineteen impact and paid user growth as well. I wonder if you're seeing any signs of ARPU stabilizing at all through May as things have gotten a little bit more normal. And on the Kuo Chung Kung, curious what the strategy is there, separate apps versus an integrated app approach and how you think subscription and overall monetization for the long form content on the spoken word side might differ from music as you take the strategy of separating an app? Okay. Thanks for your questions. And when we're talking about the social entertainment MAU, yes, we are having a really good result this year, especially during the pandemic situations, more people spending more time at home and they need certain forms of entertainment. So we are seeing a very positive result that our active users being more active and even some of the less active users we activated their account and started the same priority and do social networking with their friends at home. We are seeing that the overall users' behavior is actually changing. But even though after the pandemic situations people start getting back to their long life, we still want to hope that our overall the user active effectiveness of our users will remain in a relatively good level and can persist in the coming months. What we are thinking about is right now since during the pandemic situations even though it helps our photo active users, but we are seeing that it do have some impact on the revenue side. So it impacted growth of the revenue because first of all, some of our live broadcasters, they are not being they are maybe being quarantined or stayed at home. So it impacts the total number of on air time during the pandemic period. And also the pandemic period also brings some negative impact to the overall economy. So maybe our number of users intention for spending on the live broadcasting services will be impacted as well. But after the pandemic period, we are seeing that we are actually experiencing a recovering right now. So we are expecting to seeing that the revenue for the revenue will continue in a healthy growth and also the ARPU that you mentioned will also be improved as well. And in terms of Google, Changshan, starting from this quarter, we have started to include the Google Chang Chang data into our MAU. And the data that you see in our reported filing has been adjusted retrospectively so that they are apples to apples comparison. And as you could see, Quhu, Changsha, despite the very early stage, saw phenomenal growth, growing from 1,000,000 MAU last year to by over 800% to about 9,000,000 MAU this quarter. And the strategy there is that TME has a very good track record of executing on multi brand product strategy to more effectively cover different user segments. And Kuogouangsa is another perfect example, similar to a multi brand product strategy that we follow on online music. And that's because Google Chang Chi allow us to better serve specifically the user demographics that are more closely aligned with Google, Google Music than WeSing and LR2Q. So overall, social MAU grew very strongly this quarter. But I'd like to add that during the COVID-nineteen pandemic, people tend to stay home and spend time more on karaoke during that period, our MAUs and paying users did enjoy a little bit of a boost during Q1. And so it would be very normal and reasonable that in Q2 as users return to work and they have less time to spend, it will be healthy to see our MAU in Q2 normalize back down to a level that is slightly below Q1 and paying users would probably be around a similar level in Q2 as in Q1. But overall, from a revenue perspective, we do expect, as Kao Shing mentioned, we do expect our Q2 year over year revenue growth for our social entertainment revenue to be stronger in Q1. And also, you also mentioned about the long form audio strategies, the core accounting apps that we just launched. I would like to add a little bit more comment on that is because, first of all, we are seeing that long form audio is a strategic area that we want to really focusing on. First of all, because our users, we have a strong user base, they get used to listening to music and enjoy all other related content on our platform, it will be very natural for them to spend more time to listen to some audio long form audio formats. We have did a trial 6 months ago and we have achieved a very good result and it also laid a good foundation for us to be more encouraged and started to roll out not just like new features or functions on our music platform, but we tried to launch our independent long form audio apps as well, which is a cool accounting. The reason is even though we just launched it at the end of April, less than a month, but we have already received a very good feedback by the users. We are fine tuning our product and at the same time besides launching all the new applications, we are also rolling out some of our new monthly subscription plan with marketing promotions and really good price tag. And I think it also encouraged the market and we are receiving very positive feedback. So we would like to share with you more in the future once we got any more updates regarding the long term audio strategies. Great. Thank you. Our next question today will come from Binnie Wong of HSBC. Please go ahead. Hi, good morning management. Thank you for taking my questions. My first question is that, I understand the company is is exploring many new initiatives, new opportunities. And then also like the accounting and also the TME Life targeting like the UGC content, DUGC content. How do you see our this has like our monetization plans in terms of like how you plan to monetize these new opportunities and whether you see any cannibalization to our existing app users? And following up on this question is whether you think that will be because we'll be stepping up our sales and marketing or maybe product development expense this year With all these new initiatives we are launching, how will that impact our margin trend this year, please? Thank you. Okay. Very good questions. We are always focusing on try to encourage besides the professional content, we are also encouraging our users to create more user generated content and share with their friends on our platform. Let me give you an example. We just launched out a new version of WeSing, which is version 7.0 just a couple of weeks ago. The major focus of this version is we are more focusing on the videoizations of the apps. So which means that in the past when people was using the recent app, we'd signal a song, we call it which is in audio format and then we share it out to our friend. But right now, besides this, we are also encouraging our users to create video based content. So by very wonderful powerful tool that we created, lower the entry barrier of our users to create content and it's very easy for them to make up their own short form music videos. So this is what we are doing and we have received a very good result and we are seeing that many people started to create this kind of content. And once this kind of content was being displayed to the users, especially they are from your friend, you will be giving a like or you will be watching it, consuming the content and it will encourage the interaction among our users, which have the social networking effect. So this is very important direction that we are working on. So that's the reason why I'm talking about we are working on the videoizations of our applications. So through this kind of product design, we will encourage the interaction among the users and users can also send in virtual gift or maybe if it's going to be a KOL, sending out the short form videos and you can also follow the live broadcast of these KOLs and then we can have monetization method in order to create a virtuous cycle. So this is something that we are working on. In terms of the questions, I think that we are not going to jeopardize our professional content because we are understanding that our users do have different needs. People need professional content, but at the same time they also need the content from their friends and this is also the beauty of TME, we are a Shunsu network, not just platform based digital within professional content. Okay. Thank you, Kristen. Sorry, Jen. About the margin, yes, I will answer the question too. Yes. About the margin, at the gross margin level, we think we expect the gross margin will be stable in this year around the that in the Q1, yes, because even with the COVID-nineteen pandemic recovery, our gross margin about our old business will be increased, but we needed to invest in long form audio. Next product strategy is to focus on VIP, so the content is needed to invest. So we expect that the gross margin will be stable this year. And about operational net margin, we think our we will management our promotion fees, our manage our marketing expenses. So we think our the ratio of this expense to revenue will be around at the same rate at Q1. And we about the administrative expenses, because we needed to invest more new productage and the new technology. So we will invest more on adding expenses and employee costs. So the operation the G and A expenses will increase. So we expect that the net margin level, our net margin will be a little decrease compared to the Q1 and around the reasonable level in this year. Okay. Thank you. Thank you, Katherine and Shirley. Very helpful here. Thank you. Thank you. Our next question will come from Alex Yao of JPMorgan. Please go ahead. Thank you, management, for taking my question. I have two questions. One is regarding the introduction of audiobook function into the product portfolio? Usually, the industry peers use audiobook as an engagement driver and then monetize the engagement and the usage from audiobook of their live streaming business. Does audiobook serve the same role in your portfolio, I. E. It's more of an engagement driver and less of a monetization driver? And secondly, regarding the social entertainment, the revenue growth rate slowed down to 3%, which you guys attributed to the outbreak of COVID-nineteen. So my question is, what does it take for the revenue growth rate to recover to teens, if not 20s, into the next couple of quarters? Is it just because of the COVID-nineteen, does it mean you guys don't need to do anything once the impact from the COVID-nineteen is over, the business will back to the normal growth trend? Or do you need to do something to maybe change the way the consumer behaves post the COVID-nineteen outbreak. The relevant question is, can you share us with the user behavior trend of the social entertainment business in April versus February March? Thank you. I'll address the second part of the question on social entertainment and then perhaps Shirley can talk a little bit more about the audiobooks segment after. So look, while social entertainment revenue grew only 3% year over year, primarily as a result of COVID, We strongly believe the worst is behind us and we do expect the growth rate will recover in Q2. And so like we said, we expect the Q2 year over year growth rate for revenues to be stronger than Q1. And most of that is driven by just organic growth of users, paying users being more willing to send virtual gift with the economy reopening back up and the content supply reopening back up given what Kashan mentioned earlier, having some of our live streaming performance being back to work on a more normal level in Q2. And so most of the growth is just going to be driven by organically from our Google Live, Polar Live and to some extent, WeSing as well. Like we mentioned, we do think our social entertainment business remain healthy and solid, but it doesn't stop us from continuing to broaden and expand our social entertainment business beyond that to include the launch of QQ Music live streaming. And I just want to just be clear that we plan to launch the QQ Music live streaming service in June, right, in June. And we'll continue to expand the live streaming content category that I talked a little bit about into gaming and the likes of ACG or other categories such as matchmaking. And in fact, it's been we've made tremendous progress in April by announcing the strategic cooperation with Tencent Games, allowing Kugoo Live to live stream all of Tencent's popular games. So all these are initiatives, growth initiatives that would help us drive further growth beyond our organic growth and more of that will probably shine through in the numbers towards the second half of next year rather than Q2. Alex, thanks for your questions. And let me address the first question that you mentioned about the audiobook functions. You're absolutely right that the audiobook function or maybe I call it the long form audios is really an engagement driver to us because I think as I mentioned it before it's very natural for our users because they listen to music, they get used to it on our platform and it's very easy for them to listen to more other format of content like a long form audio. So it's very natural for them and when we are going to offering this kind of content and we will help us to increase the time spent of our users, which has been proven during the past 6 months that we launched our soft launch service already. So I think that this is very healthy to our platform because we even though we have already got a huge amount of MAU, so we are not relying on this long form audio features to get additional new users. Definitely we will get some, but if we can use them to let our users to get more engagement and increase their time spent is going to be the number one objective that we would like to achieve. So once we got our users to be more active, there's many ways for us to do the monetization. Like I mentioned before, we have the monthly subscription VIP plan, which is we offer a very attractive price tag for the moment to encourage people to spend more besides the normal news state monthly subscription. We also have the a la carte model that they can also spend on a particular long form audio content. We can also drive more advertising revenue in the future as well, because as every one of you knowing that on the TME platform there is a lot of potential for us to drive for the advertising dollars. Beside in this, we are also seeing that just like you mentioned, we can also let the KOLs who provide the long form audio content to us to even have some live broadcast. We are also showing this very good result and feedback by the audio based live broadcast as well. So it's on the QQ music platform, it's on the Qo platform. We are seeing that the trend is coming. And this is also another potential area that we can even drive further business development. So there's many ways for us to do the monetization in the long form audio base. So I think that this is the reason why we are so emphasizing it and we will continue to put in more resources in this area. And this new monetization ways we think we need time to training the users. So we expect the meaningful revenue will be coming from next year. That's all. As a reminder, Our next question is from Alex Poon of Morgan Stanley. Please go ahead. Hi, management. Thank you for taking my questions. You touched on overall gross margin of the company going to be stable. If I want to split between the music services and the social entertainment margin, how would the trend be look like? And for music margin, understand that the master agreement with 1 of the top 3 labels is expiring. Can you give us some update about that? And what are you hoping to achieve from that negotiation? And how would that impact your cost structure? And also, will that new agreement have any implication on other domestic labels, other music labels, cost structure in future? Thank you very much. Sure, Chris. I'll address the question about the licensing and then Shirley can address the question about the margin going forward. Look, we are in the middle of the negotiation with 1 of the 3 major. And like we said in the past, our focus is on getting to an outcome where it's no longer going to be a master license. It will be a non exclusive arrangement. And in terms of the cost structure, in the past, obviously, there is primarily a fixed cost minimum guarantee driven cost structure. What we're striving to us is ensuring that the components of the cost that are revenue shared based more than in the previous contract and the components of the contract at our fixed cost base in terms of the MG are less compared to the last contract. So overall, that would be an improvement compared to where we were previously. And in the long run, we believe that obviously from an absolute dollar perspective, if you look at the licensing costs, it's fair that it should go up over time. But relative to the growth rate of our music revenue growth, music subscription revenue growth, we're confident that we'll be able to see operating leverage kicking in, in our music business despite the growth in the licensing cost. I also want to remind everybody that I know there's a lot of focus on our 3 majors, but the biggest five labels account for only less than 30% of our streaming volume on our platform. It's actually even less than that now. So we have a very diversified set of content supplies, which is very, very different than in the West. And importantly, we are investing and are very committed to building independent musician ecosystem, the Tencent Musician platform, because and you could see the result coming through, as Kasia mentioned, with the number of songs being uploaded or the number of people that are signing up to the platform doubling. And increasingly, even some of those content are being licensed to us through the Tencent Musician platform on an exclusive basis to us, that's growing even faster. So overall, I think we're and we're helping many of these independent musicians grow very fast and promote the song very successfully as the examples that Ka Shing talked about. So overall, I think our content portfolio will be very broad and comprehensive. It will have the top labels such as the 3 major and we'll continue to be the partner of choice there and we're confident that we'll be able to get to an outcome that is reasonable and profitable for both parties. But at the same time, we're also very working very closely and investing heavily on broadening our content ecosystem to include all these indie musicians as well, which is very good for us in the long run. About the gross margin on online music, we expect the gross margin will be improving in long run better and better. There are two reasons. 1, at this moment, the monetization with the music side is at the very early stage. We expect our revenue on music will be increased rapidly, including subscriber revenues, digital sales and advertising revenues. So this is one reason. The second, we will manage the cost of license. We hope we can more part of the cost will be remissuring dials and reduce the minimum guarantee. But I think this is need time. It's a long strategy. It's need time to get to go. So we believe that the gross margin on that music will be increased in the long run. Round. About the social entertainment gross margin, we believe in the next quarters, this part will be recovery because the epidemic will be over. But the revenue stream ratio will be a little increase on the music. No, no, no, sorry, on the okay. So that will be a little increase in gross margin in social entertainment. But overall, compared to the Q1, the gross margin will be increased. Our next question will come from Wendy Chen of Goldman Sachs. Please go ahead. Hello. Hi. Thanks management for taking my question. My question is about the change on the music industry amid the COVID-nineteen and the subsequent from home trend as we see the way of user consuming music might change and some upstream player might suffer amid the lockdown. So I'm just wondering what's the management strategy to further drive music monetization post the pandemic award. For instance, are we looking at to monetize those live concert streaming product or the IoT product? Thanks very much. Okay. Thanks for your questions. And actually you're absolutely right that during the COVID-nineteen pandemic period, more people are staying home and they consume the pattern of consuming user is also different than in the past. I think that we are seeing positive impact frankly speaking because we are not just doing it right now, but around a year or 2 year before we started to extend our footprint in providing music service through IoT and other home appearances like the smart TV, etcetera. This really will help us to lay a good foundation for us to help our users to enjoy music at any time, at anywhere in their convenience. So I think that we have already laid a good foundation. So during the COVID-nineteen, even though the patterns of the daily life of our users have changed, which we will have some negative impact to the overall activeness of our users, but we are still doing a pretty good job in this quarter, the Q1 of 2020, which we still have a quarter to quarter improvement in the total MAUs. So I think that in the future, I think that since the people are starting to try get tried on using music through the IoTs or other platforms, I think that you also help this kind of user activeness to be perceived in the future. So I think this is going to be another potential growing area of us. So we will continue to have a strong partnership not just by ourselves, but also with other IoT manufacturers and also other platform as well. We will continue to strengthen our business in this area. In terms of the monetization, I think that there's 2 ways. In terms of the music, I think that we have been continually showing very good encouraging feedback in our growing of our subscription base, which is a 70% growth, which is a record high. And I think that this is very important for us to be proven that the way that we are doing is the correct way to go. So right now we have the paying ratio at just 6.5%. We are seeing that it's going to continue to grow in a healthy manner and the inflection will be rich in the future and then we are going to maybe one day we can achieve even a lot higher paying ratio which is going on the time we will be coming. The second part is we are also seeing that we started to have some kind of online entertainment format, new form of online entertainment for our users when they are staying at home. So that's the reason why we roll out the GME Live program during the pandemic area. We have successfully launched 5 online concerts with top tier artists. Frankly speaking is not an easy work because we are not just letting the top tier artists to record a song at their home and then just simply just broadcast it. But we are arranging online concerts, which is around 1.5 hour full length concerts. This is very not that easy to arrange, but we have already tried it out. We're getting a lot of really good feedback from the users and also the top tier like JJ Ling and also like Reni Liu, they are also thinking that it's a very positive, not just the format of it, but also sending a really positive messages to the society that we are staying together during the pandemic situations. But I think that after gathering this kind of experience, we will continue to fine tune our TME Live online concerts. It's not just simply broadcast online event and let them to become an offline event, we need to have new formats, something that is more suitable to the younger generation, something that's more suitable for the behavior of our online users, so we are working on that. And also in the future we will be adding more and more monetization method for this online haunches as well. It's not just for online ticketing, where we can encourage more virtual gifting, we can encourage more real time interaction among the artists and also the audience. We can arrange a fan space event. We can arrange a lot of fan space activities during the online concert period as well. So there's many ways to come. So I'm so encouraged by even though the COVID-nineteen is not a good situation for the entire world, many people will suffer, but we are also seeing that we can use all these kind of innovative ways to provide some of the new services which can help our users to be positive and also having many ways of entertainment even if they are staying at home. So I'm seeing that there are a lot of new business opportunity out there. Our next question will come from Thomas Chong of Jefferies. Please go ahead. Hi, good morning. Thanks management for taking my questions. I have a question relating to competition and revenue sharing with broadcasters. Given the fact that we are having more content in our social ecosystem, can you comment about how we think on short form video and game broadcasting competition with other peers in the future? And with that, how should we think about our revenue sharing ratio with the broadcasters, given that we are thinking about the GP margin to be relatively stable on a year on year basis for the full year? Thank you. Okay. I'll take the competition question. Look, I talked a lot about video enrichment across a number of our apps on music as well as on WeSing. And we are not trying to become a short video platform. Let me just be clear. What we are trying to do is enrich the video content format so that we can better serve the user needs because users, they want to consume music, but they also have desire to consume video content that are related to music. And in the past, we haven't been able to fulfill that need. But going forward, we want to enrich the video content category so that we could actually fulfill their needs and thereby increase engagement and time spent on the platform. In addition to that, I would say that in terms of video, it's not just short video. For example, we have a show like a mini variety show called Mr. Radio on QQ Music. It is now into we just finished the 2nd season, a highly successful show. Since the total stream for the 2 seasons combined is almost 600,000,000 streams and that's on our platform, right? This is not streamed externally by video based platform. And we had attracted like that's basically a radio talk show type show, but it's a video content. And those 2 seasons attracted over 100 groups of artists, right. And actually that's on season 2 alone, which is 70% higher than season 1. And we promoted like hundreds and hundreds of songs through that. And there's a lot of very good positive user feedback on that. So that's another form of video enrichment on our platform. That is not just short video, but those are sort of 20 minutes in length. And then at the same time, we are also broadening so we are talking a little bit about PGC. We are also broadening our UGC. So in Google Music apps, for example, in the music streaming page, increasingly you'll be able to see while you're listening to a song, the system will automatically recommend a background video, a background short video for you to consume. And those videos, some of that are part of the whole slate of variety shows that we have either invested in or we participated. We have some of the partner labels participated in. So we have access to those content. Some are purely UGC provided. So I think we're trying to but all of that are music centric. So again, it all comes back to enriching our engagement and time spent by allowing users to consume music centric video on the platform. And so they don't have to leave our platform to go to external platform for this regard. Outside of music centric content, that's something for an external platform to do. Our next question will come from Emily Zhang of Macquarie. Please go ahead. Thank you management for taking my question. So management so how do we think about the balance between say, like user growth and ARPU under the current social segment if we look beyond second half? Since we're gradually recovering from COVID-nineteen and normalizing all the metrics, how the new from COVID-nineteen and normalizing all the metrics, how the new features like games and QQ live streaming would impact ARPU in longer term? Thank you. Sure. So I think it's important to recap the Q1 metrics because that is important to understand that to understand the future. I mean, we saw the paying user increase and the ARPU slightly decrease on a year over year basis and that's primarily because of the COVID impact. We saw an increase in time spent on online karaoke, which drove the MAU and drove the paying users. However, many of these paying users tends to be lower ARPU compared to the live streaming paying user and as a result obviously dragged down the overall ARPU. And at the same time, the live streaming paying users who are economically impacted by COVID also has less willingness to spend. And so we have those two impacts. And then going into next quarter and beyond, obviously with the economy reopening, we're going to and people returning to work. From an online karaoke perspective, the paying user growth will be obviously as high in Q2 than it is in Q1. So from a total paying user perspective, it probably be at a similar absolute level, maybe just a little bit of growth compared to Q1, but that's completely normal. If we're talking about 1 quarter, obviously, we'll grow beyond that, from Q3 into Q4. And from an ARPU perspective, with the reopening of the economy and the live streaming paying users returning, the ARPU would obviously increase sequentially compared to Q1. So I think we see that trend continuing, which is a very healthy trend. And also, I want to stress that the MAU would also normalize a little bit in Q2 from that would be at a lower that would be at a level that would be slightly below Q1. But again, that will be completely normal because of the COVID impact that boosted the karaoke MAU in Q1. It will still be at a very healthy and strong level. Our next question will come from Zhanping Lu of UBS. Please go ahead. Thanks, management, for taking my question. I have just one question. It was great to see continued acceleration of Music subs revenue in past few quarters. So how sustainable is this round of strong traction, especially considering that subs addition had a slight deceleration in 1Q? Thank you. Yes. I'll take that. I think in Q1, obviously, I talked about the impact of COVID on music MAU and as a result paying users as well because when users spend an unusually long amount of time at home, they tend to consume more in terms of karaoke or online games or online videos, right. But despite that, right, we were able to grow subscription revenue at 70% year over year basis, which is actually our fastest reported growth. And so going forward into Q2 with the reopening kicking in, we actually expect our Q2 year over year growth rate for our overall online music revenue to be even stronger than Q1, right? And that's again going to be driven by subscription revenue continuing to grow at a very rapid pace. And in terms of net adds, you talked a little bit about net adds, we expect the net adds of music paying users in Q2 to be higher than Q1, obviously. And hence, the music paying user year over year growth rate would also be at a very high level, similar to that of Q1. And from an ARPU perspective, let me touch a little bit on music ARPU because in the what we're seeing is a very strong growth on a year over year basis in terms of ARPU is a result of many previous quarters of investment that we've made like last year, right, and in the form of, for example, our promotional efforts around auto renew subscription plans. Now, the impact of those auto renew subscription plan is that we provide a 1st month discount if a user sign up so that they check the auto renewal option. But then after the 1st month discount, it actually goes back to the normal pricing. So it has an impact of slightly decreasing the near term ARPU, but increasing the long term ARPU. Now we are enjoying the benefit of those promotional efforts a few quarters ago now. And like we said, in the past, we are still at a very early stage of monetization with only 6.5 percent of our paying users. So if we could grow our subscribers more by keeping our ARPU flat, we would prioritize on our subscriber growth over ARPU. So I wouldn't be surprised if in the next quarter or 2 we see a more flattish sequential ARPU, but still growing on a year over year basis. If that happens, that's basically us spending again promotional efforts to invest in growing long term market. And that's actually a very good thing for us that we'll see. Yes. One more point that I would like to add, which is the retention rate of our monthly subscription. It has been continued growing. So we are still seeing that we are in a really healthy manner. And once the retention rate continues to improve, it will further help us to drive up our paying ratio as well. Thank you. Our next question will come from Tian Hou of T. H. Capital. Please go ahead. Good morning, management. Thanks for picking up for the question. So I have a question regarding to a TME live broadcast, TME Live. So after I seen the concerts, actually my team watched the 5 concerts. I feel pretty excited about your business since you're actually step out what's existing like a light broadcasting or music services and enter into a new territory of a music area. So I wonder if that is your ongoing plan, if you have an ongoing pipeline for that and also how to monetize it. Each concert you can have like 100 tens of audience or millions of audience. I think if you don't monetize it, it's really waste of resources. I can imagine Tencent will have a lot of those kinds of advertisement requirements or resources if they can actually put some aim it, you can actually monetize a great deal. So I wonder what's the strategy going forward? If there is a pipeline, how do you monetize it? Thank you. Okay. Yes, thank you so much for your questions. And we also feel exciting about the TMB Live activities that we are organizing for the moment. And yes, you're absolutely right that we are not just providing music service through the mobile apps, but we have already extended our footprint and really aimed to build our total music entertainment ecosystem, which means that we need to go upstream and also downstream as well. And I think the TMB Live event really demonstrating that we are putting in a lot of efforts and also creating a wonderful new experience for our users from the performance area. I think that for the TME Live events that we are organizing, first of all, there's many things for us to learn. It's not simply making an offline concert and directly broadcast it and name it an online concert. I think that we can have many new formats which is also some of the strength of TME like the socializing, Okay, how we can let our users when they are enjoying the online concert and they can also socializing with each others. So defense based economy can actually kick in. We can do a lot of things. For example, if you are the fans of JJ Lin, okay, maybe before the concert is going to start, you can get involved in some voting on which songs that JJ Link is going to perform for their online concert. And also during the online concert, you can also have a lot of interactions as well. You can have many kind of tracking or sending virtual gifting to your beloved idols or maybe you can we can arrange some of the some gamifying ways for our users to enjoy the online concerts as well. So all this happening will be the monetization methods that we can putting in. So I think that as I mentioned, the 5 top tier artist concerts, online concerts that we are raising during the pandemic situations is really a good start for us and we learned a lot of experience, we are accumulating more experience and we are fine tuning our business model. And the most encouraging result is not just our users really like this concept, but also the artists also feel that there is a lot of potential. And they also want to go with TME and arrange more online concert, in new format online concert together in the future. So I think as I mentioned before, we are truly the preferred partners, not just by the music label, but also the preferred partners by our artists because we are growing up together. We work for better industries and we work out better music and better music experience for our users. So that's the way for us to go and we will continue to explore and I'm definitely seeing that TME Live and this kind of performance based activities, we will have in a good hand to work on more positive results in the future. Thank you. Thank you very much. Our next question is from Alex Lu of China Ren. Our next question is from Alex Liu of China Ren. Please go ahead. Thanks for taking the question. I have one question. Given the user demographic is different between QQ Music and Kugou, how does the management envision QQ Music live streaming to different from the current Qubo live streaming in terms of product design, content vertical and user paying pattern? Thank you. Sure. I think we'll be able to talk a lot more about it without giving too much away until we've launched the service. But broadly speaking, what we try to achieve, like we said, is continuation of the multi brand product strategy across music that you saw we have multi brand, across karaoke that you see that we have embarked upon the incubation of Google Tang Tang and also in live streaming multi brand. And I think each brand and each product will have slightly different targets of user segment. Needless to say, I think the live streaming business within QQ Music would be more complementary to the user segment for QQ Music. It will have more focus on independent musicians, which QQ Music is working very closely with. And it will have more features to work with these musicians to promote the music in a more live and interactive manner. And all of this is very complementary like we saw in music, multi product doesn't cannibalize. It actually help us broaden our reach and help us better cover the entire population in China. China is very big with different segments. So through this multi brand and multi product strategy, we can actually extend our existing business into more and more user segment and thereby broadening our revenue growth potential. Wonderful. And also the user overlapping among QQ Music and Google Music is also very minimal. Okay. So that's the reason why I think that when we are going to roll out the live broadcast service on QQ Music platform, which will help us to serve our users better, to serve the QQ Music user better and it's not going to cannibalize the Google Music Live business as well. Thank you. Thanks. Our next question will come from Hannah Cheung of KeyBanc. Please go ahead. Hi, good morning. Thank you for taking my questions. So I have a quick couple of questions. The first one, just following up the Q2 music live streaming question above, just wonder what's our initial thought on the potential like real addressable user the scale and the paying user potentially. Is that going to be similar to what we have now for the cool music live streaming and or could be even the bigger or less? And then second question will be still regarding the social entertainment business. Just wonder, can management team just elaborate more the progress of a recovery? I think you guys mentioned there's some recovery, I mean, in this quarter. And then what's the trajectory, like, say, in the end of March, in April, in the early May, what do we see the year over year growth trajectory, I mean, over time here? And then what's the what do we expect the revenue run rate level to be to at what level compared to the pre COVID-nineteen level? Thank you. Okay. Look, I think obviously by us with all the subject to all the disclaimer related to forward looking statement. By virtue of us saying that we expect the 2nd quarter revenue growth for social entertainment to be stronger than Q1. We are seeing this because we are already seeing a recovery in the numbers in April and parts of May that we are in. So it's in line. The reality of what we're seeing happening is in line with what we're seeing. And then in terms of the addressable market, look, I think live streaming is a multi 100 of 1000000, billions, multi 100 of 1,000,000,000 in renminbi terms in market size, right. I mean live streaming business is huge. And I think we have obviously a very strong foothold in the music centric live streaming that we're already in. Nobody is in this space. And this is still just a small percentage of the overall live streaming pie. And we actually think we could continue to grow that pipeline of music centric live streaming alongside the growth of the overall live streaming, which is an enormous market. As to whether it could one day reach the size of Google Live, look, I think it will be not in the near term. I think it's fair to say, given QUGO Live has done this for many, many years, it would take many years for us to reach that level, but I think the potential is definitely there. So look, I think that's the last Overall, just to close things out, like we said, I think in terms of online music, we're seeing very positive momentum continuing. We expect the 2nd quarter revenue growth to be stronger than Q1, driven by continuous rapid growth in subscription revenue. In terms of social entertainment revenue, we again also expect Q2 to be growing faster than Q1. And so combining all of the above, we expect our total revenue growth next quarter to be stronger than Q1. And so let's put the COVID impact behind us and we think the worst is over and we have better results ahead of us starting Q2 and into second half. Okay. Thank you, everyone. Okay. Thank you so much for your time. Yes. Okay. Thank you. And ladies and gentlemen, this will conclude today's conference. We thank you for attending. If you have any further questions, please feel free to contact TME's Investor Relations team. We look forward to speaking with you again next quarter. Thank you and goodbye.