Q1 2024 Earnings Summary
- Tencent Music Entertainment (TME) achieved a record-high quarterly net addition of 6.8 million subscribers in Q1 2024, significantly exceeding expectations and demonstrating robust user growth. The total number of music paying users reached 113.5 million, contributing to a strong start for the year and indicating potential for continued subscriber growth throughout 2024.
- The company's gross margin improved for the eighth consecutive quarter, reaching 40.9% in Q1 2024, up 7.8 percentage points year-over-year and 2.6 percentage points sequentially. This significant improvement was driven by strong growth in online music subscription and advertising revenues, operational efficiencies, and effective cost management, suggesting sustained profitability enhancement.
- TME is leveraging AI-powered initiatives to enhance user engagement and retention, including AI-powered recommendation systems and content creation tools. The implementation of large language models and AI-generated content has already led to improved user retention rates and positive feedback, indicating that technological innovation could drive future growth and operational efficiency.
- Potential slowdown in subscriber growth: Management expects that net additions should return to more normalized and sustainable levels over the next few quarters after an exceptional Q1 driven by seasonality and promotional activities. This indicates that future subscriber growth may slow down compared to previous periods.
- Decreasing non-subscriber traffic affecting advertising revenue: As the number of paying subscribers increases, traffic from non-subscribers continues to decline. Since advertising revenue relies significantly on non-subscriber traffic, this reduction may limit the growth potential of advertising revenues unless the company optimizes ad solutions further.
- Increased marketing expenses may pressure margins: The company plans to increase marketing expenses in Q2 2024 to regain channel traffic and promote self-developed content. This rise in expenses could put pressure on profit margins in the near term.
-
Gross Margin Outlook
Q: How did gross margin improve, and outlook for 2024?
A: Management reported gross margin of 40.9% in Q1, an increase of 7.8% year-over-year and 2.6% quarter-over-quarter. This improvement was driven by significant growth in music subscriber and advertising revenues, efficient content cost management, and increased self-owned content. They expect gross margin to continue increasing in Q2 and the second half of 2024. -
Net Adds and ARPPU Trends
Q: What are the expected net adds and ARPPU trends for 2024?
A: Management is confident that total net adds in 2024 will exceed initial projections, being greater than 2022 but slightly slower than 2023. They expect ARPPU to continue expanding year-over-year, with slight growth in the second half compared to the first half. Last year's rapid growth was due to scaling back discounts, and they remain committed to long-term ARPPU expansion. -
Sales and Marketing Expenses
Q: How will sales and marketing trends impact margins ahead?
A: Marketing expenses decreased year-over-year and quarter-over-quarter in Q1 due to seasonal factors. Management expects marketing expenses to rise in Q2 but for full-year 2024 to be in line with 2023. They believe net profit and net profit rate will improve as revenue grows and expenses stabilize. -
Advertising Revenue Outlook
Q: What is the outlook for advertising revenues and new formats?
A: Management reported strong growth in advertising revenues in Q1 and expects this momentum to continue into Q2. Key revenue contributors include e-commerce, gaming, content, and fast consumption industries, especially during major events like the 6.18 Shopping Festival. They are introducing diversified advertising formats and business models to enhance user retention and revenue. -
AI Initiatives and User Retention
Q: How are AI initiatives impacting user engagement and retention?
A: Management highlighted that AI models have helped improve recommendation and search capabilities, leading to better user retention. They launched open-source, self-developed video and audio models, and collaborated with Tencent AI to introduce a music generation model. These initiatives, including organizing an AI-enabled concert with the Shanghai National Orchestra, are enhancing content delivery. -
Long-Term Outlook
Q: How does management envision TME in 3–5 years?
A: Management emphasized a long-term, sustainable development strategy, focusing on building their content ecosystem and expanding internationally. They aim to balance quarter-by-quarter growth with long-term goals, ensuring good investor returns through dividend policies and share buybacks at the right moments. -
Offline Concerts Strategy
Q: What is the strategy for offline concerts and business models?
A: Management is committed to building their own IP through music festivals and award ceremonies, incorporating both local and international artists. They organize top-tier artist live tours and smaller events to incubate new musicians. Business models include ticketing, advertising sponsorships, merchandise sales, and integrating online and offline experiences through their Super VIP plan.
Research analysts covering Tencent Music Entertainment.