Tencent Music's First Earnings Since IPO Makes Sour Note on Wall Street

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Traders work on the floor on the New York Stock Exchange (NYSE) as the Chinese music-streaming service Tencent Music launches its IPO on Dec. 12, 2018 in New York City. 

Tencent Music's first quarterly financial results since going public in the U.S. has investors slightly worried, with shares dropping over 7 percent in overnight trading after the Chinese tech giant reported both good (revenue increase) and not-great (operating loss, single-digit increase in monthly users) news.

Total revenue for the fourth quarter ended Dec. 31 was actually way up, to the tune of RMB 5.40 billion ($785 million), a 50 percent jump compared to the year-earlier period. Of that tally, $221 million came from Tencent's online music services, driven by subscriptions, sub-licensing and album sales. Paid music services revenue bought in $101 million of that chunk.

Tencent Music's music assets include QQ Music, Kugou Music, and Kuwo Music.

"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," said Cussion Kar Shun Pang, Tencent Music's CEO. "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."

The company recorded a net quarterly loss of $127 million, which it attributes to a one-off $221 million accounting charge related to its issuance of equity to partners Sony Music Entertainment and Warner Music Group.

What may have investors tugging at their collars, however, is a ho-hum 6.8 percent increase in mobile monthly active users for its online music services year over year, from 603 million to 644 million. Paid users of the music apps were up nearly 40 percent, to 27 million. However, those MAUs for the music services are spending less, with average revenue per user dipping 1.1 percent to $1.28/user, compared to the same period a year earlier. ARPU for Tencent's social apps, such as WeSing, enjoyed a 24 percent increase to nearly $19 per user.

Content and licensing fees, as well as revenue sharing, drove the cost of revenues for Q4 by 62.5 percent to $518 million. Gross profit or the quarter increased by 31.7 percent to $267 million.

The company also saw a large increase in operating expenses during the quarter, up 58.1 percent to $197 million. Of that, $79 million was used on marketing and promoting the brand during its IPO rollout.

As of Dec. 31, the company had combined cash and cash equivalents of $2.52 billion.

On Wall Street, shares of Tencent Music (TME) were down more than 5 percent in morning trading, with the price dipping briefly below $17 before recovering to $17.50. That's down from $19.80 per share on Tuesday afternoon.