Tencent Music Posts $127M Loss, 664M Monthly Active Users


Tencent musicTencent Music posted a $127 million loss in its first quarterly report its a December 2018 IPO. The loss, which the streamer forecast in its IPO prospectus stems from a one time $221 million stock issuance to Warner Music Group and Sony Music Entertainment.

Tencent Music reported 664 million monthly active users and 27 million paid subscriber as of the end of 2018. 

Financial Highlights From the Tencent filing. 

In the three months ended  December 31, 2018 :

  • Total revenues increased by 50.5% year over year to  RMB5.40 billion  ( US$785 million ).
  • Net loss attributable to equity holders of the Company was  RMB876 million  ( US$127 million ), mostly due to a one-off  RMB1.52 billion  ( US$221 million ) share-based accounting charge related to the Company's equity issuance to Warner Music Group and Sony Music Entertainment ("music label partners").
  • Non-IFRS net profit attributable to equity holders of the Company (excluding the share-based charge in respect of the issuance of ordinary shares to music label partners, amortization of intangible assets and other assets arising from business combinations, share-based compensation expenses, net losses from investments, and fair value change on puttable shares)  increased to  RMB916 million   ( US$133 million ). 

In the full year ended  December 31, 2018 :

  • Total revenues increased by 72.9% to  RMB18.99 billion  ( US$2.76 billion ).
  • Net profit attributable to equity holders of the Company was  RMB1.83 billion  ( US$267 million ), after the one-off  RMB1.52 billion  ( US$221 million ) share-based accounting charge related to the Company's equity issuance to music label partners.
  • Non-IFRS net profit attributable to equity holders of the Company (excluding the share-based charge in respect of issuance of ordinary shares to music label partners, amortization of intangible assets and other assets arising from business combinations, share-based compensation expenses, net losses from investments, and fair value change on puttable shares)  increased to RMB  4.18 billion ( US$607 million ).

"Our initial public offering in  December 2018  has launched us onto the international stage, elevated the global recognition towards our brand, and endorsed our successful track record," stated Mr. Cussion Kar Shun Pang, Chief Executive Officer of  Tencent  Music. "During the fourth quarter of 2018, we recorded strong growth across our business lines, including both online music and social entertainment services, and solidified our market leadership. To fuel our growth for the years to come, we are firmly committed to continue investing in premium content offering, innovative products and proprietary technology. Going into 2019, we will continue executing relentlessly our mission to use technology to elevate the role of music in people's lives.  We are confident that our capability in product innovation, investment in technology advancement, and commitment to developing and promoting high quality content should not only augment our market leadership, but also foster the growth and development of the overall music industry."

Mr.  Cheuk Tung Tony Yip , Chief Strategy Officer of  Tencent  Music, remarked, "We are pleased to report that both online music and social entertainment services have continued their healthy growth across the board during the fourth quarter of 2018. Through content enrichment, product innovation, and technology development, we have been able to attract and retain our vast user base and construct a self-reinforcing virtuous ecosystem. In content, we expanded our strategic partnerships with well-known domestic and international music labels as well as produced more proprietary content such as music-centric variety shows. In product and technology, we further enhanced personalization which resulted in increased music consumption driven by recommendations, and also offered more features that enable users to engage with music-related short videos. Our market-leading user base, engaging artist-fans interactivity, and unrivaled content promotion capabilities have formed a unique set of value propositions for content partners to reach an unparalleled audience base within our ecosystem."

"We delivered strong revenue growth during the fourth quarter of 2018 driven by the increase in paying users across our online music and social entertainment services as well as the increase in user spending in social entertainment," commented Ms.  Shirley Min Hu , Chief Financial Officer of  Tencent  Music. "We achieved strong operating cash flow throughout the year. We continued to invest in our content offering, including through partnering with more domestic and international music labels and producing more proprietary in-house content to meet user demands for diverse forms of music entertainment.  We believe that such investments over time will not only improve our user engagement and monetization but also strengthen our competitive advantages."

Company and business Highlights

  • TME's key operating metrics continue to grow across both its online music and social entertainment services segments.
   

4Q18

4Q17

YoY %

 

Mobile MAU - online music[1] (million)

644

603

6.8%

 

Mobile MAU - social entertainment[2] (million)

228

209

9.1%

 

Paying users - online music[3] (million)

27.0

19.4

39.2%

 

Paying users - social entertainment[4] (million)

10.2

8.3

22.9%

 

Monthly ARPPU - online music[5] (RMB)

8.6

8.7

(1.1%)

 

Monthly ARPPU - social entertainment[6] (RMB)

126.7

101.9

24.3%

  • The Company continued to strengthen its content leadership in the fourth quarter of 2018. As of  December 31, 2018 , the Company's music library included over 30 million tracks from domestic and international music labels. 
  • During 2018, the Company continued to enrich its content offering by: (i) expanding the Company's music library through new partnerships with labels; (ii) producing more content in-house, including producing music chart countdown shows and co-producing the music-centric variety show Produce 101, as well as launching live streamed video talk shows; (iii) launching more long-form audio content such as radio shows; and (iv) empowering independent artists through the  Tencent  Musician platform to distribute high-quality original music content.
  • The Company continued to innovate and enhance its products and technology in the following ways to integrate music into users' daily lives: (i) introducing new multilateral interaction features, such as multi-mic singing room, into WeSing; (ii) adding more proprietary audio settings to the existing library to further enhance user experiences; (iii) launching additional technology-driven and innovative short video product features; and (iv) leveraging data analytics to improve personalized recommendations.

[1] "Online music mobile MAUs" for a given month refers to the sum of mobile MAUs of the Company's music services, namely QQ MusicKugou Music, and Kuwo Music, for that month; duplicate access of different services by the same device is not eliminated from the calculation. "Mobile MAUs" for a given month (i) with respect to each of the Company's products (except WeSing) is measured as the number of unique mobile devices, as the case may be, through which such product is accessed at least once in that month; and (ii) with respect to WeSing, is measured as the number of user accounts through which WeSing is accessed at least once in that month; "mobile MAUs" for a given quarter refers to the average of the monthly number of mobile MAUs for the three months in that quarter.

[2] "Social entertainment mobile MAUs" for a given month refers to the sum of mobile MAUs that have accessed the social entertainment services offered by (i) WeSing; (ii) Kugou's live streaming services; and (iii) Kuwo' live streaming services; duplicate access of different services by the same user account or device is not eliminated from the calculation.

[3] "Paying users" for online music services for any given quarter refers to the average of the number of users whose subscription packages remain active as of the last day of each month of that quarter. The number of paying users of online music services for any given period excludes the number of users who only purchase digital music singles and albums during such period because these purchasing patterns tend to reflect specific hit releases, which fluctuate from period to period.

[4] "Paying users" for social entertainment services for any given quarter refers to the average of the number of paying users for each month in that quarter. The number of paying users of social entertainment services for a given month refers to the number of users who have paid at least once for social entertainment services (primarily through purchases of virtual gifts or premium memberships) during that month.

[5] "Monthly ARPPU" for online music services for any given quarter refers to one-third of (i) the quarterly online music services subscription revenues divided by (ii) the number of paying user of the online music services for that quarter. The revenues from subscriptions for the quarters indicated were RMB695 million, and RMB505 million, respectively.

[6] "Monthly ARPPU" for social entertainment services for any given quarter refers to one-third of (i) the quarterly social entertainment and others revenues divided by (ii) the number of paying user of the social entertainment services for that quarter.

Fourth Quarter 2018 Financial Results

Revenues

Total revenues for the fourth quarter of 2018 increased by  RMB1.81 billion , or 50.5%, to  RMB5.40 billion  ( US$785 million ) from  RMB3.59 billion  in the same period of 2017.

  • Revenues from online music services for the fourth quarter of 2018 increased by 45.0% to  RMB1.52 billion  ( US$221 million ) from  RMB1.05 billion  in the same period of 2017, which was mainly driven by increased revenues from (i) user subscriptions; (ii) sublicensing music content to third-party platforms; and (iii) sales of digital music albums to users. Revenue from paid music through the sales of subscription packages was  RMB695 million  ( US$101 million ), up from  RMB505 million  in the fourth quarter of 2017.
  • Revenues from social entertainment services and others for the fourth quarter of 2018 increased by 52.8% to  RMB3.88 billion  ( US$564 million ) from  RMB2.54 billion  in the same period of 2017, primarily driven by the revenue growth in both the Company's online karaoke and live streaming services. The Company expanded its paying user base and increased user spending in the fourth quarter of 2018 compared to the same period of 2017. 

Cost of Revenues

Cost of revenues for the fourth quarter of 2018 increased by 62.5% to  RMB3.56 billion  ( US$518 million ) from  RMB2.19 billion  in the same period of 2017, primarily due to the increase in content fees and revenue sharing fees. The increase in content fees was mainly attributable to higher in-house production costs as the Company increased investments in the production of high-quality original music content such as music-centric variety shows, as well as increased market price and amount of music content licensed from music labels and other content partners. The increase in revenue sharing fees reflected the increased sales of virtual gifts driven by the growth in the Company's online karaoke and live streaming services.  

Gross Profit

Gross profit for the fourth quarter of 2018 increased by 31.7% to  RMB1.84 billion  ( US$267 million ) from  RMB1.39 billion  in the same period of 2017. Gross margin was 34.0% for the fourth quarter of 2018.

Operating Expenses for the Period

Total operating expenses for the fourth quarter of 2018 increased by  RMB497 million , or 58.1%, to  RMB1.35 billion  ( US$197 million ) from  RMB855 million  in the same period of 2017.

  • Selling and marketing expenses for the fourth quarter of 2018 were  RMB542 million  ( US$79 million ), an increase of 51.4% year over year from  RMB358 million  in the same period of 2017. The increase was primarily due to increased spending to promote the Company's brands, products, and content offering.
  • General and administrative expenses for the fourth quarter of 2018 were  RMB810 million  ( US$118 million ), an increase of 63.0% year over year from  RMB497 million  in the same period of 2017. The increase was mainly attributable to (i) higher employee benefit expenses in connection with the increase of the Company's personnel and employee incentives; and (ii) the professional fees incurred from the Company's initial public offering completed in  December 2018 .

Share-based payments in respect of issuance of ordinary shares to music label partners

The Company recorded a one-off share-based accounting charge of  RMB1.52 billion  ( US$221 million ) in respect of the issuance of ordinary shares to music label partners in the fourth quarter of 2018, which represent the excess of the then fair value of these ordinary shares in  October 2018  over the aggregate consideration the Company received.

Operating loss for the Period

Operating loss was  RMB970 million  ( US$141 million ) for the fourth quarter of 2018 mostly due to the one-off  RMB1.52 billion  ( US$221 million ) share-based accounting charge, compared to an operating profit of  RMB650 million  in the same period of 2017.

Net Loss and Non-IFRS Net profit for the Period

Net loss attributable to equity holders of the Company for the fourth quarter of 2018 was  RMB876 million  ( US$127 million ) compared to a profit of  RMB536 million  in the same period of 2017, which included the one-off  RMB1.52 billion  ( US$221 million ) share-based accounting charge. Non-IFRS net profit attributable to equity holders of the Company was  RMB916 million  ( US$133 million ) for the fourth quarter of  2018, compared to RMB667  million in the same  period of 2017. Please refer to  the section titled "Non-IFRS Financial Measure" for details.

Loss per ADS

Basic and diluted loss per American Depositary Shares ("ADS") was  RMB0.56   (US$0.08)  and  RMB0.56   (US$0.08) , respectively, for the fourth quarter of 2018. Excluding the share-based accounting charge in respect of issuance of ordinary shares to music label partners, amortization of intangible assets and other assets arising from business combinations, share-based compensation expenses, net losses from investments, and fair value change on puttable shares, non-IFRS basic and diluted earnings per ADS were  RMB0.59  ( US$0.09 ) and  RMB0.57   (US$0.08) , respectively, for the fourth quarter of 2018. During the fourth quarter of 2018, the Company had weighted averages of 1,563.5 million basic and 1,610.2 million diluted ADSs outstanding, respectively. Each ADS represents two of the Company's Class A ordinary shares.

Cash Flow

Net cash provided by operating activities for the fourth quarter of 2018 was  RMB1.93 billion  ( US$281 million ), compared to RMB253 million of cash used in operating activities during the same period of 2017.

Cash and Cash equivalents

As of  December 31, 2018 , the Company had combined cash and cash equivalents of  RMB17.36 billion  ( US$2.52 billion ), compared to RMB5.17 billion as of  December 31, 2017 . The increase in cash and cash equivalents was primarily due to cash flow generated from operations of  RMB5.63 billion  ( US$819 million ) and proceeds from the Company's issuance of ordinary shares, including those issued under its initial public offering, of  RMB3.50 billion  ( US$509 million ) and puttable shares of  RMB422 million  ( US$61 million ) in 2018, partly offset by cash used in investing activities.

Full Year 2018 Financial Results

Revenues

Total revenues for the full year of 2018 increased by  RMB8.00 billion , or 72.9%, to  RMB18.99 billion  ( US$2.76 billion ) from  RMB10.98 billion  in the same period of 2017.

  • Revenues from online music services for the full year of 2018 increased by 75.8% year over year to  RMB5.54 billion  ( US$805 million ) from  RMB3.15 billion in the same period of 2017. This growth was primarily driven by increased revenues from (i) user subscriptions; (ii) sublicensing music content to third-party platforms; and (iii) sales of digital music singles and albums to users. Revenue from paid music through the sales of subscription packages was  RMB2.50 billion  ( US$364 million ), up from  RMB1.84 billion  in 2017.
  • Revenues from social entertainment services and others for the full year of 2018 increased by 71.7% year over year to  RMB13.45 billion  ( US$1.96 billion ) from  RMB7.83 billion  in 2017, primarily driven by the revenue growth in both the Company's live streaming services and online karaoke service. The Company's paying user base and user spending continued to grow in 2018 as compared to 2017.

Gross Profit

Gross profit for the full year of 2018 increased by 91.0% year over year to  RMB7.28 billion  ( US$1.06 billion ) from  RMB3.81 billion  in the same period of 2017. Gross margin for the full year of 2018 was 38.3%.

Operating Expenses and Operating Profit

Total operating expenses for the full year of 2018 increased by 63.2% year over year to  RMB3.97 billion  ( US$578 million ) from  RMB2.43 billion  in the same period of 2017.

  • Selling and marketing expenses for the full year of 2018 increased by 87.7% year over year to  RMB1.71 billion  ( US$249 million ) from  RMB913 million  in the same period of 2017. The increase was primarily due to increased spending to promote the Company's brands, products, and content offering.
  • General and administrative expenses for the full year of 2018 increased by 48.5% year over year to  RMB2.26 billion  ( US$328 million ) from  RMB1.52 billion in the same period of 2017. The increase was mainly attributable to (i) higher employee benefit expenses in connection with the increase of the Company's personnel and employee incentives; and (ii) the professional fees incurred from the Company's initial public offering completed in  December 2018 .

Share-based payments in respect of issuance of ordinary shares to music label partners

The Company recorded a one-off share-based accounting charge of  RMB1.52 billion  ( US$221 million ) in respect of the issuance of ordinary shares to music label partners in the fourth quarter of 2018, which represent the excess of the then fair value of these ordinary shares in  October 2018  over the aggregate consideration the Company received.

Operating Profit for the Year

As a result of the foregoing, operating profit increased by 28.0% to  RMB2.04 billion  ( US$297 million ) for the full year of 2018 from  RMB1.59 billion  in 2017. Operating margin decreased to 10.7% for the full year of 2018 from 14.5% in 2017 mostly due to the one-off  RMB1.52 billion  ( US$221 million ) share-based accounting charge recorded in the fourth quarter of 2018.

Net Profit and Non-IFRS Net Profit for the Year

Net profit attributable to equity holders of the Company for the full year of 2018 increased to  RMB1.83 billion  ( US$267 million ) from  RMB1.33 billion  in 2017, after the one-off  RMB1.52 billion  ( US$221 million ) in share-based accounting charge.  Non-IFRS net profit attributable to equity holders of the Company for the full year of 2018  increased to  RMB4 . 18 billion ( US$607 million ) from  RMB1.91 billion  in the same period  of 2017. Please refer  to the section titled "Non-IFRS Financial Measure" for details. 

Earnings per ADS

Basic and diluted earnings per ADS were  RMB1.19  ( US$0.17 ) and  RMB1.16   (US$0.17) , respectively, for the full year of 2018. Excluding the share-based accounting charge in respect of issuance of ordinary shares to music label partners, amortization of intangible assets and other assets arising from business combinations, share-based compensation expenses, net losses from investments, and fair value change on puttable shares, non-IFRS basic and diluted earnings per ADS were  RMB2.71   (US$0.39)  and  RMB2.64   (US$0.38) , respectively for the full year of 2018. During the full year 2018, the Company had weighted averages of 1,538.2 million basic and 1,579.6 million diluted ADSs outstanding, respectively.

[Author: Bruce Houghton]


Tags: Music, US, Tencent, Sony Music Entertainment, Bruce Houghton, Company, The Company, Warner Music Group, Kugou, Kuwo, Tencent Music, Sony Music Entertainment Tencent Music, Cussion Kar Shun Pang, Cheuk Tung Tony Yip, Shirley Min Hu, QQ Music Kugou Music, Non IFRS

Source:  http://feedproxy.google.com/~r/typepad/DqMf/~3/7M8E1pMvzPw/tencent-music-posts-127m-loss-664m-monthly-active-users.html



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