Earnings Call: Q1 2019

May 14, 2019

Earnings release

Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group First Quarter 2019 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 Tu. Please go ahead, ma'am. Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. Tencent Music has announced its quarterly financial results today after the market close. An earnings release is now available on our IR website atir.tensamusic.com as well as on the Newswire services. Today, you'll hear from Mr. Keqing Pan, our CEO, who will start the call with an overview of our recent achievements and our growth strategies. You'll be followed by Mr. Tony Yip, our SNSO, who will offer more details on our business development. Lastly, Ms. Shelly Hu, our CFO, will address our financial results before we open the call for questions. Before we proceed, please note that this call may contain forward looking statements made pursuant to the Safe Harbor provisions for the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward looking statements. All forward looking statements are expressly qualified in their entirety by the cautionary statement, 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 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 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. Keshan Tang, CEO of Tencent Music. Keshan? Thank you, Melissa. Hello, everyone. Thank you all for joining our call today. We started the year of 2019 with solid Q1 results. Our revenue grew by 39% year over year, driven by healthy growth on both our online music and social entertainment services. Most notably, paying users for both online music and social entertainment services increased by double digit percentages year over year during the Q1 of 2019. Paying users for our online music services and paying user retention rate grew steadily as we continue to solidify our content leadership, improve product features and enhance our data technology. To further diversify our content, we forged additional partnerships with industry leading music labels engaged in closer collaboration with other labels to promote original soundtrack music, continue to discovering emerging musicians and add more video and long form audio formats to our music content offering. Meanwhile, as the largest online music platform in China, we make further progress in leveraging our all encompassing distribution capabilities and enhancing our playlist to engage users and improve user stickiness. In addition, we drove user interactions and improved the user loyalty by utilizing data analytics and other proprietary technologies to introduce more personalization features and special audio settings. As wireless data network coverages improved and the cost of mobile data usage decreases in China, our users are increasingly consuming music content through streaming services, implying a gradual decline in downloading music content. To capitalize on such changes in our user behavior, we began adopting the pay for stream model and educating users in turn. We are encouraged by early results and confident that our transition towards a pay for streaming model will gradually gain traction in the future. Such materializations will sustain our long term growth for years to come and ultimately create exciting opportunities for the industry. In our social entertainment services, MAUs reached 225,000,000 despite quarter over quarter fluctuations. Such a scale speaks volumes of our market leadership. While encouraging the user experience of our core users, we will step up our WeChat Mini Program initiatives and additional light versions of our apps to reach and attract a broader group of users. By relentlessly sharpening our focus on product innovation and enhancing our user experience, we will further strengthen our ability to engage, grow and maintain our large user base. We also continue to introduce more innovative product features for our social entertainment services. To give you one example, our newly introduced feature titled GrabMI produced a meaningful improvement in operating metrics such as user retention rate in the Q1 of 2019. We are confident that our successful track record as well as our outstanding capabilities in R and D and innovation will enable us to continue expanding our market share in the music centric social entertainment industry going forward. In summary, we achieved a strong financial performance and expanded our user community in the Q1 of 2019. We believe our investment in content, product innovations and technology will continuously enhance user stickiness. Furthermore, they will solidify our platform as an all in one music entertainment destination where users can seamlessly engage with music in a highly social setting. Now I will turn the call over to Tony to discuss the development of our business in more details. Thanks, Natasha. During the Q1 of 2019, both our online music and social entertainment services grew changeling. In online music services, we grew paying users by 27% year on year to 28,400,000. This was accomplished by our continued focus in 3 areas: content diversity, strengthening promotional capabilities and technology advancements. 1st, we continue to implement a multi pronged strategy to enrich content. We have further strengthened our collaboration with upstream partners. In January, we established a partnership with SM Entertainment, a premier music label in Asia, boasting 1 of the largest song repository in South Korea. During the Q1, we also successfully released and promoted songs through Liquid State, a music joint venture label specializing in electronic dance music that we jointly launched with Sony Music in 2018. In this partnership, we have utilized our industry leading distribution and promotional capabilities to popularize new songs successfully. For example, the top selling song in Chinese called Sue was played several 100,000,000 times in the Q1. In addition, we continue to broaden unique content in our library. During the Q1, we successfully obtained the master license to the original music soundtrack of a very popular TV drama titled The Story of Ming Land. 1 of the main theme songs was played approximately 1,000,000,000 times in the Q1. Our content diversification strategy has yielded good results. As of March 2019, the total number of songs available on our platform increased to over 35,000,000. Beyond the number of songs, we also added more music related videos, talk shows and audiobooks to our content offering. As we increase the number of long form content on our platform, the average play time for such content grew substantially. For example, our Idol Read series featuring book reading by role model artists and top celebrities recorded a double digit percentage increase in total playing time for its 2nd season compared to its 1st season. During the quarter, we introduced the 1st season of This Is Original, an innovative music variety show that discover new music talents. We also co invested in this music variety show together with the producer of The Voice of China. It attracted a large number of contestants to our platform and encouraged them to produce their own versions of the songs featured in the show. We then utilize celebrity endorsements and other social media resources of our platform to help the show become a viral sensation, which has further demonstrated the content development, distribution and promotion capabilities of our platform. We also made further progress in expanding our video content by launching new episodes of our self produced show called Google Music Zone. During the show, well known celebrities discussed the music creations and real life aspirations, successfully reducing the emotional distance between artists and their fans. In addition to viewing their idols, fans could interact with them by competing for viewing fees and sending virtual gifts. As a result, the show's play volume and addition of new users have all doubled in the Q1 of 2019 compared to the Q4 of 2018. 2nd, we continue to strengthen our promotional capability. By leveraging our strength in fan based economy, we provide the unique platform for artists to showcase their talent and reach 100 of millions of music lovers online. We helped several established artists and emerging artists to promote their digital albums and generate impressive sales figures. For example, one newly released digital album by a popular female singer quickly exceeded RMB5 1,000,000 in sales within 2 months. We continue to introduce more proprietary playlists, which categorize the songs by genre, time period, themes, mood and other criteria. We further expanded the number of songs on these playlists, which in turn increased the number of plays and helped users discover new music. 3rd, we continue to invest in 2 major technology areas, audio settings and personalization features. To date, we have introduced more than 5,000 special audio settings. For example, our audio setting that mimics virtual surroundings, we receive positive user feedback. We have used personalization features such as smart tagging, deep learning based playlist recommendation and data analytics to increase user time spent on our platform. In fact, within just 1 year, we have developed some of the most comprehensive tagging expertise in the music industry. Today, our smart tagging technology is capable of categorizing a song by thousands of different criteria. This capability has enabled us to improve the accuracy of our recommendation based on user patterns and preferences. I would also like to highlight the progress we achieved in certain new technologies. In the Q1, our music and song recognition feature gained increasing popularity among users, enabling us to better assist users in the music discovery journey. Capable of creating a digital fingerprint for any given song, this feature locates the songs in our music database to provide the name, artist, lyrics and other song information to our users in a matter of seconds. And lastly, our ringtone feature also continued its rapid ramp up as its user base increased by high double digits in the percentage in the Q1 sequentially. Now let's turn to our social entertainment business. Overall, our social entertainment business recorded healthy growth. Paying users increased by 13% year on year to 10 800,000. Mobile MAU remained steady compared to the Q1 of 2018. ARPPU recorded double digit growth. Our growth was driven by a combination of 3 areas: 1st, product enhancement and innovation 2nd, use of our platform as an effective promotional channel and third, data driven personalization. 1st, let's look at product enhancement and innovation. During the quarter, we continue to introduce innovative ways to engage users of Weixin, the leading online karaoke platform in China. One new feature called Grab the Mic achieved a high user retention rate during the Q1. Grab the Mic allows users to either invite a group of their friends or join a song group with strangers matched with users using our algorithms. Once in a group, users will then hear parts of the same song. They are scored based on time it takes them to identify the song as well as the accuracy of their lyrics and both vocal keys while singing along. This feature helps encourage user interactions and drive user engagement. In addition, we further optimized our recommendation engine that leverages data analytics to match users with singing rooms they are most likely to enjoy. As users perform their favorite songs, they receive virtual gifts from others and increase their scores in our ranking system. This refinement further improved users' song room entry rate. Furthermore, we developed a feature that allows users to record their own poem readings and add background music from our extensive music library. Going forward, as Kasher mentioned earlier, we will continue to explore WeChat meeting program initiatives and deploy additional light versions of our app to cater to different user preferences and captivate a broader group of users. We also utilized more singing contest features to improve interactions between users and live streaming performance. Such features attracted numerous live streaming performance, enabling them to attract more followers compared to those who did not use this feature. Importantly, the majority of these performers had relatively low public recognition levels in the past. By helping these less popular performers to grow, we further diversified our live streaming performer base to foster a more healthy live streaming ecosystem. We also introduced a new multi performer live streaming model. This model selects a group of popular performers and allocates 15 minutes of performance time to each. Viewers can access a variety of music related live streaming content without having to switch between different show routes. It has been very effective in attracting and converting new users. It has also improved the overall average user time spent significantly. 2nd, more emerging talents found success on our platform while contributing a variety of music content. This year, WeThink Annual Carnival recorded more success in terms of discovering talent as well as pro form a and user participation rate, which were up 49% and 128% year on year, respectively. 1 of this year's top 3 contestants leveraged our WeSing platform as a launchpad to showcase his singing talent, reaching billions of audience and published multiple digital albums. Musicians like him have added high quality content to our library and thereby attracted more users to our platform thus forming a virtuous cycle. Our music centric live streaming platform enabled us to discover and nurture emerging artists too. Another emerging artist, as an example, she was discovered through our live streaming platform and was prompted to develop her professional singing career. She continued to engage with her fans and publish even more new songs through our platform. This in turn expanded our music library. Such examples truly demonstrate our unique position as an integrated all in one music entertainment platform, which allows our users to discover, listen, sync, watch, perform and socialize around music. 3rd, our personalization content recommendation engine continued to drive better user experience. Our data driven personalization engine leverages in-depth analysis to recommend different types of music centric content to users. Recommended content can include songs, radio, short videos and live streaming. The result of this personalization has improved the average time spent on the WeSing app sequentially. In summary, we continued our healthy growth trajectory across all business lines in the Q1. Looking forward, we believe that our vast content library, events data repository and proprietary technology will enable us to attract more users, improve our user experience and increase our monetization capabilities. With that, I would like to turn over to our CFO, Shirley Hu for a closer review of our financials. Thank you, Yohtani. Hello, everyone. For the Q1 of 2019, our revenues increased by 39% year over year to RMB5.7 million. The increase was driven by the solid growth in both our online music and social entertainment business. Revenues from online music services increased by 28% year over year to RMB1.6 billion. This growth was mainly due to the increase in subscription revenue and the sub licensing revenue to other companies, including third party music platforms and the content group. There were also higher digital music album sales in the quarter. Sales of subscription packages contributed to RMB710 1,000,000 in revenue, up from RMB565 1,000,000 year over year. In Q1, we continued to offer promotional deals for long term subscribers, including our master renewal and annual packaging subscribers. On the other hand, premium membership subscriptions gained more weight in our total subscription base. Thus, there was a slight decrease in our AR TPU from RMB8.4 in Q1 twenty eighteen to RMB8.3 in Q1 2019. We have also seen a steady improvement in subscriber retention rate over the past 5 quarters. The improvement of their subscriber retention rate will continue to be our focus in 2019. Revenues from social entertainment services increased by 44% year over year to RMB4.1 billion, primarily driven by revenue growth in our online cloud okay and live streaming services, Our AR PPU in social entertainment services increased by 30% to RMB 129 year over year, while paying user potential rate also improved from 4.3% to 4.8%. We think a new caliber was not only successful in revenue generation and ARPPU expansion during the quarter, but also increased the user participation and provided a stage for artists to improve their performances. Cost of revenues increased by 52% year over year to RMB3.7 billion. The increase was attributable to higher content and revenue sharing fees. The increase in content fees was mainly attributable to the increased market price and the amount of music content licensed from music labels and other content partners as well as increased investments in the production of high quality origin music content. The increase in revenue should increase reflects the growth in our social entertainment services and the higher percentage of revenue contributed from professionally generated content providers. Our gross margin was 35.4 percent in Q1 2019. We are in the process of ramping up our in house productions and many of the shows was due in the preparatory stage during Q1. Now let's turn to our operating expenses. Our total operating expenses increased by 28% year over year to RMB1 1,000,000,000. Sales and marketing expenses for Q1 2019 were RMB437 1,000,000, representing an increase of 20% year over year. The increase was primarily due to increased spending on branding and the promotion of our content. General and administrative expenses increased by 35% year over year to RMB602 1,000,000 in Q1 2019. The increase was mainly due to the higher employee benefit expenses as we continue to invest in our workforce. There has been a great increase in the size and the pay scale of our personnel in the past quarter. We have seen improvement in operating leverage on a year on year basis. Operating expenses as a percentage of revenue decreased to 18% in Q1 twenty nineteen from 20% in Q1 twenty nineteen. Our effective tax rate was 12.4% in Q1 2019 compared to 9.2% in Q1 2019. The increase was mainly due to the change in the provision ratio tax rate of certain subsidiaries. As a result of foregoing, our net profit attributable to equity holders of the company increased by 70% year over year to RMB987 1,000,000 and our non IFRS net profit attributable to equity holders of the company increased by 15% year over year to RMB1.2 billion. Our non IFRS net profit margin was 20.9 percent in Q1 2019. As of March 31, 2019, our combined balance of cash and cash equivalents and the term deposits amounted to RMB 18,100,000,000, an increase of RMB748 1,000,000 compared to RMB 17,400,000,000 as of December 31, 2018. The increase in the balance was primarily due to cash flow generated from operations of RMB 926,000,000. Our cash and cash equivalents balance was also affected by change in the exchange rate of RMB to USD as differential balance sheet states. The exchange rate was 6.7 to 1 on March 29, 2019 and 6.9 to 1 on December 31, 2018. With our strong profitability and the cash flow, we will continue to invest in our products and the content offering. These investments will help to expand our user base and improve user engagement, both of which are crucial to our sustainable revenue growth in the long term. We are confident that such efforts will create long term shareholder value as well as increase the return on capital for investors. This concludes our prepared remarks. Operator, we are ready to open the call for questions. Yes, ma'am. Thank you. We will now begin the question and answer session. Our first question comes from Eddie Leung with Bank of America Merrill Lynch. Please go ahead. Hi. Good morning, guys. Just two quick questions. Mindy on the user side, just curious, number 1, as we moved more content under the paywall, for example, recently, Jay Chou's songs under the payer as well. Could you comment on the paying user ratio under your music thesis going forward? As I remember, both Ceesund and Tony mentioned about encouraging users paying for streaming. And then the same question is on the MAU of your social entertainment business. Any color on the trend between live broadcasting and WeThink in the Q1? Because we pay attentions to the overall social entertainment MAU, your growth not very strong in the quarter. So wondering how is any or is there any difference between leasing and general live broadcasting? Thanks. Okay, sure. Hi, Eddie, it's Tony. Let me address both of your questions. With respect to the music paying users, I want to reiterate that 27% year over year growth for our music paying user is a very healthy pace. And with the mobile data cost declining, the paying user conversion that are driven by pay for download is facing some headwinds. While the paying users that are driven by pay for stream is actually enjoying a lot of tailwind, as Ka Shing mentioned in his speech. And however, because the pay per stream user base is relatively small, right, because we only started implementing the paper stream model in Q1, it will require some time for that to ramp up. So this is a particular quarter where you see that impact between the netting of the headwinds and the tailwinds playing out the most. Over time into the next quarter and beyond, we expect the paying user growth to improve, right? And now in addition to growing the paying users, we've also made a lot of progress on improving the subscriber retention rate over the last several quarters as Kaushu mentioned. And that's driven by our continued investment in enriching the content offering as well as some of our promotional campaigns on auto renewal program. So our focus is not only on the quantity of end users, but also on the quality of the end users. On the paper stream development specifically, we have made we started implementation of paper stream monetization model with a small selection of content in Q1. While the amount of content being put behind the paper stream paywall accounts for only a very small percentage of our total. This is just the beginning and we'll continue to gradually add more content over time. The current focus is on making sure the user experience remain good despite that position and it will take some time for us to promote a broader user adoption. We are seeing encouraging results so far, which gives us the confidence that this is the right strategy that can generate significant value for the company over the long term. So that's on the music side. And then on the social entertainment side, I also want to stress that while the MAU growth is still slow, the overall social entertainment revenue grew at a very healthy pace at 45% year over year. And we recognize that the MAU growth has slowed, but I think one also has to recognize that our MAU base is already very sizable. Now historically, our focus was more on the core karaoke users with relatively higher usage frequency. And as a result, we have been very successful in amassing a large group of such core karaoke users. And hence, we are reaching a high level of penetration within that core user group now. But we already have a well defined plan to address this and to propel the user growth going forward. We will execute a number of initiatives focused on expanding the user coverage beyond the traditional user group. Some of the examples I've already mentioned earlier in the call. For example, we will continue to leverage the WeChat video program that offer a more simplified singing feature to capture more users within a large social network within WeChat. We'll continue to expand our target users through light versions of our app with more simplified product experience tackling pure singing features. We will lower the karaoke usage barrier by allowing user to sing only part of the song such as the chorus instead of the full song and combine that with the one click sound correction feature that we mentioned in the last quarter will both help reduce the usage barrier. And finally, we'll continue to invest in innovative product features to continue to deliver a fun and engaging user experience, such as the multi mic singing room we mentioned in the last quarter that is starting to bear fruit and also the grab the mic new feature that we launched in this quarter. So combining all of that means that we are very confident our user growth plan will start to drive better user growth in Q2. Eddie, this is I would like to add one more point regarding the online music part. As I mentioned before, I think that the focus of us is besides driving the paying ratio, I think it's more it's very important for us to improve the total number of paying users rather than driving the higher ARPU at this moment. So since as everyone of us may knowing that, pay for streaming is more expensive than pay for downloads, since that download is just like a 1 off charge, the streaming is more like a monthly return charge. So what we are doing is we will be prudent in handling this education process and make sure that we are going to have the best content and letting more free pages to our service as well to make sure that our users will be adopting to the new business model in a regular manner. So as we smoothly execute the transition over from time to time, while we expected that we are not driving just a number of user base, but AR TPU will also grow as well. So I think that is going to create a very healthy future for us in our business model on the online music slot. Okay. Thanks. Thank you. Our next question comes from Wang Chen with Goldman Sachs. Please go ahead. Thanks management for taking my questions. So one quick question is about our cost of revenue and the margin trend. So we mentioned that we are moving some some behind the paywall and we have seen a very healthy trend on the paying ratio side. So I'm just wondering whether this such move will kind of like change our cost structure as well in term of our agreement with the label company. Thanks very much. About music content cost, this quarter, our music content cost is increased compared to that of Q1 in 2018 and it has come from market price increase and we signed more contract with labels and content providers partners. And we also continued in wrapped in our self made content such as music centric shows and self made songs. We can see we get some achievements in this era. This quarter, we have self made songs named Please Say Hello for us, singed by a popular pop artist, He Yi Han and they get ranked in top 20 amount 2020 in our most played some chart. So we can see we can get more from our sales made content. And in 2019, we expect our music our online music revenues will continue to increase allow our expectation before. But Just like Kaushu mentioned, we will focus on our subscriber increase and use the initiatives to encourage paying user retention rate and put more pay streaming content in paying for. So our subscribers will increase very healthy, but AR TPU is not now freeze, we are importing the focus. So we estimated that AR TPU will be steady will be steady compared to the last year. And the other very important point, generally speaking, our license revenue will be not difficult to forecast because it's not enrolled only by our offer and it is determined by the 3rd music platform, their purchasing strategy and financial resources. From the marketing information now, maybe some the first half platform will give up some content. So our sublicense revenue will be decreased in Q2. Okay. Thank you, Charlie. So next question please. Our next question is from Alex Yao with JPMorgan. Please go ahead. Hi, good morning, management, and thank you for taking my call. I would like to follow-up with a previous question regarding the paying ratio for music streaming business. Can you elaborate a little bit more on what exactly subscription relatively more attractive or more appealing to the streaming user and then relatively less attractive to the download users. Also, can you give us a rough breakdown in terms of the split within your paying user between users that are driven by download behavior and the users that are driven by streaming behavior? And lastly, given the current dynamic content strategy, etcetera, etcetera, how should we think about the paying ratio increased pace over the coming quarters? Thank you. Yes. Thank you for your question. So in terms of the music paying user, I want to clarify one point. The subscription package is 1 subscription package. It doesn't differentiate between download or streaming. However, within that one subscription package, the reason that drive user to convert to be from a free user to a subscriber, there are different reasons. Some users are driven by the need to download the song, while other users may be driven by the need to stream the song even without the download. What drives that depends on what content they encounter. So for example, if they're listening to if they want to listen to a song that is sitting behind the pay for streaming paywall, where you could only listen to it after being a subscriber, we consider that conversion to be driven by pay for streaming. Whereas if a user wanting to download a song that is only available behind the pay for download paywall and that user is driven from a free to be a subscriber. We consider that conversion to be driven by a painful download. So what we were trying to explain is because of the mobile data cost coming down gradually over time, the number of conversions that are driven by downloads are slowing. Whereas on the flip side, the number of conversions that are driven by streaming is actually increasing, right, by quite quickly. But because of sheer volume of the number of users that are driven by streaming are still relatively small compared to the pay for download driven users, you're not yet really seeing the positive benefit of that is not yet so obvious in the paying user growth. And so we expect as that scale of Pay for Stream user base to increase, we expect the music paying user growth to show more meaningful and more obvious benefits starting in Q2 and beyond, right? Now we don't obviously, we don't provide specific breakdowns into numbers. But I think with the directional comment that we're providing, one should have a reasonable understanding that this is in with respect to our music paying users, Q1 is a particular quarter. Starting in Q2 and beyond, we expect the growth rate to improve. Okay. Next question please, operator. Absolutely. Our next question is from John Egbert with Stifel. Please go ahead. Great. Thanks for taking my question. In March, we saw that iQIYI started sharing VIP membership benefits with Kugo users. And the deal reminded us of Spotify's partnership with Hulu in the U. S. That's been widely viewed as a win win deal. So I'm wondering if you can share any additional information about the partnership in terms of how the economics might work, how it might show up in your reported metrics, if at all, and what you're hoping to achieve with it? And is this maybe the start of many different partnerships to try to increase your paid conversion rate? Thanks. Yes. I think we mentioned maybe in the last quarter as well is that the bundling campaign is something that is ordinary course of business for us. We do bundle with other online video platforms. We also bundle with mobile data card. We bundle with a number of different other subscription services. I think from our perspective, it is a marketing campaign. It's a marketing campaign that help us cross sell our subscription plan into new user base of other platforms. And so it's a win win for both. When that happens, we do count the subscribers onto our numbers as well. But I want to bear in mind that this is more a marketing campaign that we implement from time to time. It is not a forever joint bundling initiative. So this quarter, you may see us partnering with one particular platform and next quarter, you may see us partnering with others. And that's part of our strategy to make sure that we optimize which partner that we partner with. So far, we're seeing good results from such bundling and it's ordinary course of business. That's helpful. Thank you. Okay. Next question please. Yes. Our next question is from Han Joon Kim with Deutsche Bank. Please go ahead. Great. Thank you for the TransDasco question. I want to follow-up on the user shifting from page download to page streaming. Do you see any peripheral kind of difference in user behavior perhaps in relation to album sales or the amount of songs being streamed or whatnot that leads to enhanced kind of lifetime value of the user for pay to stream versus pay to download? Thank you. Hanju, do you mind repeating the question? We had trouble hearing you just now. Sure. I'm trying to understand whether as you observe the pay to stream user versus the pay to download user, whether you see any other kind of behavioral changes to the pay to stream user in the sense that maybe they consume digital albums more or they happen to listen to songs more. Anything that would allude to that the lifetime value of a paid to stream user is higher than the paid to download users? Sure. Well, I think one very helpful fact pattern that we're observing is that the pay for stream user tend to consume more content through our recommendation Because they're streaming more, they are listening less to songs that they've downloaded in their personal asset list or the personal folder, right? So as a result, it actually gives our platform more opportunity to help them discover new music. And with more opportunity for us to help them discover new music, it actually strengthens our ability to promote new songs and increases the chance of us to promote other songs that may be sitting behind the paper streaming paywall. And so I think that's a clear differentiation between users that typically listen to the downloaded song in their personal folder versus user who stream more. Exactly. And all of these streaming users is more active. And in terms of the time spent on our platform is also higher when compared to the others, original users who is listening to the song. So I actually agree that once we are going to try and have the transition done, or more and more users going to be listening to streaming music through our platform, they will be more active and also they will be have a more open mind and willing to willing to accept more new songs that was recommended by us according to their preferences. Thank you, Christian. Next question please. Certainly. Our next question comes from Wendy Huang with Macquarie. Please go ahead. Thank you. Just a few housekeeping questions. First, can you maybe share the pain user breakdown between the business and then you say the live streaming Kugo Live? And secondly, just wanted for the paper streaming business model, so do you expect that to cannibalize your paying positions in the near term? If so, for how long that's within your expectation? Thank you. Wendy, do you mind repeating the first part of your question? Yes. The first question is want to get some breakdown of the paying user between the karaoke app we've seen and also the live streaming app, Kugo Live. Okay. Yes. So we don't provide specific breakdowns, but I think it's fair to say that the paying user growth for both live streaming and karaoke are growing. And in terms of your second question, whether there's any cannibalization between paper stream and paper download, it's certainly no, because it is addition for us. As we mentioned, the paying users that are driven by pay per stream is actually enjoying a lot of tailwind, right? With the major trend of mobile data coming down, a lot more users are consuming music through online streaming. And as a result, we're actually enjoying the benefit of increasing conversion from a free user to a paid user by catching them with content that is only available to stream behind the paywall. So we're actually seeing that as a positive for us that helps us grow our music paying users over time. Okay. Next question please. Absolutely. Our next question is from Binnie Wong with HSBC. Please go ahead. Hi, good morning management. Thank you for taking my questions. My question is actually two questions here. One is on the margin trend. Recall earlier in the year, we talked about like the investments into content and also, of course, into the paid streaming. And we also see the collaborations a a company has been having with other platforms. So can you remind us in terms of basically following in the rest of the year? Because if you look at the 1Q 2019, we see that gross margin is still relatively hold up to rather higher end of the range we talked about earlier in the year. So can you remind us in terms of our content investment, how that should be impacting our margin trend? And then second is that a follow-up question basically on the online music paying user growth, right? As you mentioned about that in March 2019, going forward? And what is the result you have been seeing? Because I think that has been launched in March, right? So by now, about a like 2 months already. How have you been seeing the paying user growth affecting like positive impact to paying user growth? And how does that impact our gross margin basically as well? Thank you. Sure. Let me tackle the first part, the second part of your question about adding more content behind the Paypal stream and Paywall, and then I'll let Shirley answer your question about the margin. As I mentioned, we've implemented the paper streaming monetization model in Q1 by selectively putting some of the content behind the paper streaming paywall. We actually see very encouraging results so far in terms of driving more and more conversion from free to pay. But as I want to keep stressing, this is early stage. We've just begun that transition in Q1. But the early results give us a lot of confidence that this is the right strategy that we will continue to implement and will generate a lot of value for the company over the long run. And that's the reason why we think starting in Q2 and onwards, the music paying user growth should be better than Q1 is precisely because of the encouraging results that we see. About the margin, this quarter our margin is in line with our expectations and in the future coming quarters, we expect the sub license revenue will be decreased. And I have just to say that some platform will receive sodium content from our platform. So that will be some slightly effect on our gross margin in whole year. And for the especially for the Q2, the sub license revenue will be decreased from this quarter. And our revenue expectation will be lower of this quarter will be lower of the whole year expectation. So this will be impacted the gross margin in Q2. But in our top line, gross rate will be reaccelerated in the second half year. So we think our gross margin will be recover and go through our estimation of whole year. So that's for the gross margin. Yes. Let me just add that we do not provide specific guidance in terms of the numbers because we want to stay very focused on growing the company over the long term rather than being distracted by short term fluctuations. However, I think directionally, as Shirley mentioned, we expect the Q2 to show better growth in terms of operating data, especially with respect to social entertainment and MAU driven by the execution of our user growth plan that I've outlined. In terms of total revenue, we expect Q2 to be we expect Q2 growth rate to be slightly softer than Q1 growth rate before the growth rate reaccelerate again in Q3 and beyond. And that's mainly driven by like what Shirley mentioned, some of the 3rd party music platforms may reduce the amount of content they sublicense from us. And so while this put pressure on the sub licensing revenue in the short term, in Q2 specifically, it actually is very positive for our platform in the long term because our content leadership becomes even more obvious. Yes. I think it's very important for us to emphasize the point that in order to ensure the long term success of TME, we have to keep investing in the content enhancement even though we have the largest content library available in the market right now. And additionally, we also need to put more resources investing in our product innovation as well. So it will give us more competitive advantage in the future. So we are not just focusing on quarter to quarter performance, but instead we are focusing on a more long term value generations for the company. Okay. In the interest of time, we'll take the last question, operator. Yes. Our last question is from Hans Chung with KeyBanc Capital Markets. Please go ahead. Good morning, management team. Thank you for taking my questions. So I have two quick questions. One, just following on the paying ratio question. So given the initial results, so what's our observation about the churn rate for the online music, the paying subscribers? And then second question is, it seems like we may have some growth acceleration in social entertainment MAU. And then but given that we given the high base and then and seems like we have seen a slowdown in the overall user base. So just beyond like even beyond Q2, how should we think about the user growth in social entertainment, I mean, at least 12 months to 6 months? Thank you. Yes. Okay. Thanks for the questions. And I'll take the first part of the question is regarding the online music side. And I will let Tony to talk about the social networking, the social entertainment. First of all, I think we are confident and keen to drive and achieve a healthy music subscriber count by providing the best content outstanding product experience to our users. As I've mentioned before, through the ongoing efforts and the hard work of our team, we have already achieved a very good result and there has been significantly steady improvement on our subscription retention rate over the last 5 quarters actually. The actual figures is around 60% of retention rate in the quarter 4 of 2017 and right now we are around 70% in Q1, Q1 2019. So I think that we are doing a really good job in terms of user retentions and especially for the online music services. And Tony maybe you can talk about social and entertainment side. Sure. Yes, I think as I briefly outlined in the past, our focus with social entertainment has more been on the core karaoke users with high usage frequency. And obviously, that puts a limit on how high the penetration rate could go because there's only so many people who needs to think about royalty a lot every day. But we already have a well defined plan to address this And we've already started executing on some of the steps and we expect to see some of the positive results filtering through starting in next quarter. I won't repeat those initiatives again, but I think those initiatives would be more than sufficient to help drive the user growth going forward, not just a single quarter. I think overall, the theme is that we want to broaden our user coverage beyond the high frequency user into the less traditional users, perhaps even to the casual users through a series of measure that lower the usage barrier that enables them to find it more convenient to sing, to enjoy content, to improve content as well as share with friends. Okay. Thank you, everyone, for joining us today. If you have any questions, please feel free to reach out to us through our IR website at ir.10centimeter.com. This concludes the call, and we look forward to speaking with you again next quarter. Thank you, and goodbye.