Digital and Mobile

Tencent Music Beats Analyst Expectations in Rebound Q3 Earnings

Tencent Music Entertainment
Rafael Henrique/SOPA Images/LightRocket via Getty Images

Tencent Music Entertainment logo is seen displayed on a smartphone. 

Tencent Music announced its third-quarter 2019 results on Monday (Nov. 11), showing solid growth in paid user subscriptions for its music apps and a rebound in monthly average ad revenue per user. 

The company -- which owns Chinese music services QQ Music, Kugou Music and Kuwo Music -- reported total revenue of ¥6.51 billion Chinese yuan (U.S. $910 million) during the quarter that ended Sept. 30, representing a 31% increase year-over-year. That number also represents a roughly 13% increase over Q2, when total revenues were ¥5.74 billion ($855 million).

Of that total revenue, ¥1.85 billion ($258 million) was derived from Tencent’s music services, a 26% rise year-over-year and 18% increase over Q2. That growth was driven by music subscriptions and sales of digital music albums (revenue that more than doubled from Q3 last year) but offset by a decrease in sublicensing revenues from other music platforms. Revenues from music subscriptions alone were ¥942 million ($132 million), an increase of 48.3% from ¥635 million ($90 million) in Q3 2018 and up roughly 18% from last quarter, when those revenues totaled ¥798 million ($116 million). Tencent chief strategy officer Tony Yip noted on an earning call that while music licensing costs continue to rise, subscription revenue growth was strong enough to outstrip those increases.

On the music side, notable successes included the live-stream of Chinese band the TFBoys?' sixth anniversary concert on Tencent platforms, which attracted over 45 million users and generated more than 300 million real-time user interactions. Additionally, the boy band R1SE -- formed on the Tencent Video reality show Produce Camp 2019 -- sold 1.5 million digital copies of their album on its first day of release. As for Western artists, it was noted that Taylor Swift's "Lover" sold nearly 6 million units in 24 hours on Tencent platforms.

Social successes this quarter included the company's WeSing karaoke initiative celebrating China’s 70th National Day, which saw more than 1 million WeSing users upload their own recording of a National Day celebration song through the karaoke app. Additionally, WeSing’s "universal duet" feature, which was upgraded in September, saw a 50% increase in the number of duet participants between September and October.

Tencent also recorded 12% growth in operating profit year-over-year, from ¥1.06 billion to ¥1.19 billion ($166 million). That’s also a 9% increase over Q2 2019, when operating profit was ¥1.09 billion (US $158 million). Additionally, cost of revenues increased to ¥4.30 billion ($601 million), which was up 42.9% from the same quarter last year. That rise was primarily due to an increase in content expenses (partially thanks to the company's amount of licensed and original music content) and revenue sharing fees. Gross profit was ¥2.21 billion ($309 million), a 12.6% increase from the same quarter last year (¥1.96 billion) and up roughly 14% from last quarter’s ¥1.94 billion ($283 million). Meanwhile, total operating expenses reached ¥1.23 billion ($173 million), up roughly 17% from Q2.

In terms of Tencent’s mobile monthly active users, the company saw only a slight increase of 0.9% year-over-year -- up from 655 million to 661 million -- though that number represents a rebound from last quarter, when MAUs actually decreased slightly from Q1 2019. Meanwhile, paying users of the company’s music apps recorded a much more substantial increase of 42% year-over-year, up to 35.4 million, and an increase of 14% over last quarter.

There was also a rebound in monthly average ad revenue per user from Q2, when ARPPU for Tencent's music services fell slightly year-over-year. In Q3, ARPPU for the company's music services rose 4.7% year-over-year to ¥8.9 ($1.27) and was also up 3.5% from last quarter’s ¥8.6. Additionally, ARPPU for Tencent’s social apps, which includes WeSing, increased from the same quarter last year, rising 7.4% to ¥127.3 (roughly $18.16).

Notably, Tencent Music CEO Cussion Pang noted the company has no plans to raise subscription prices, stating it will instead continue to focus on increasing the paid subscriber base.

“It takes time to educate a user and once they start to pay, we are confident that they’ll continue to pay, as proven [by the fact] that our retention rate right now [continues] improving,” he said on the earnings call. “And I think that we still have a long room for growth in the paying ratio. So this is going to be our priority. “

Tencent closed out the quarter with combined cash, cash equivalents and term deposits of ¥21.14 billion ($2.96 billion), up from ¥19.90 billion ($2.9 billion) at the end of Q2.

Tencent Music missed on earnings last quarter as ByteDance, the parent company of its competitor TikTok continued to spend aggressively on online marketing, most notably on Facebook, to keep the service growing. Indeed, Yip noted that the growth rate in social revenue in Q3 came in slightly below expectations due to increasing competition from other short video platforms. But in recent months, ByteDance has spent less on advertising TikTok, according to Bloomberg, causing its growth to slow down and allowing room for Tencent Music to rebound.

Though Tencent didn't mention its plans to purchase 10% of Universal Music Group (UMG) in Monday's disclosure, it did note the company’s introduction of short videos to music streaming pages; new social and "gamification" features within their social apps; and an extension of their content ecosystem to include long-form audio, professionally-generated and user-generated short videos (average daily streams of which were up almost 40% over last quarter), music-themed variety shows and original music for games, films and TV series.

“From talent discovery, content distribution and promotion, to fan-based economy, our platform continues to benefit from the unique virtuous cycle of synergies between online music and social entertainment,” said Tencent Music chief strategy officer Tony Yip in a press release.

Added Tencent Music CEO Cussion Pang, "We continued our solid performance in the third quarter, driven by healthy growth from both online music and social entertainment services. We are particularly pleased to report accelerating growth of our online music paying users, representing a 42.2% year-over-year increase, as the net increase in the third quarter reached 4.4 million, achieving another quarterly high and outpacing the record growth in the second quarter. More importantly, the high quality of this growth was demonstrated by the ARPPU expansion of 3.5% quarter-over-quarter. This is a strong endorsement of our continuous efforts to unlock the intrinsic value of music through our integrated music platform, and to cultivate the willingness of users to pay for premium music services. Thanks to our vast user base, deep understanding of music trends and user insights, we continued to develop our platform as the go-to destination for artists to build a fan-based economy. This strength, coupled with further investment in various forms of content, technology and services, will solidify our platform as an all-in-one music entertainment destination."