Q2 2024 Earnings Summary
- Resilient online music subscription growth with increasing ARPPU: Despite macroeconomic uncertainties, TME's online music subscription business remains robust due to its affordability and value to users. The company reported over 10 million net subscriber additions in the first half of 2024 and an increase in monthly ARPPU to RMB 10.7, up from RMB 9.7 in the same period last year. The launch of the Super VIP (SVIP) membership, priced at approximately RMB 40 per month, is expected to further drive ARPPU growth and enhance margins. Management is confident in achieving mid to long-term subscriber targets and sees the SVIP as a future growth driver.
- Strong advertising revenue growth with innovative formats: TME's advertising revenues have shown strong year-over-year growth, driven by new advertising formats such as ad-supported advertising and offline concert sponsorships. Even though some advertisers may reduce spending due to macroeconomic factors, TME is still experiencing good momentum, particularly in sectors like tourism and events related to offline concerts. The company expects advertising revenue to continue performing well in coming quarters.
- Continuous improvement in profitability and margins: TME's gross margin and net margin have grown for nine consecutive quarters. The company expects further improvement in both gross profit margin and net margin due to a combination of factors, including growth in high-margin online music services, increased ARPPU from SVIP memberships, enhanced operational efficiency, and effective cost management. Management forecasts that the net profit and net profit margin growth will outpace gross profit margin growth, indicating strong profitability trends moving forward.
- Tencent Music Entertainment anticipates slower net subscriber additions in the second half of 2024, with expectations that net adds will be smaller compared to the first half, potentially impacting user growth momentum.
- The company's strategy relies heavily on increasing ARPPU through its new SVIP membership plan, priced at RMB 40 per month, but the adoption rate and penetration of SVIP remain uncertain, as management has not provided specific targets or disclosed detailed metrics.
- Revenues from social entertainment services decreased by 43% year-over-year, and management foresees continuous challenges in this segment due to competition, macroeconomic factors, and regulatory pressures, which may continue to negatively impact overall revenue.
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Profitability and Margin Outlook
Q: How will gross and net margins trend in the future?
A: Management expects both gross margin and net margin to improve compared to last year. Gross margin will benefit from growth in subscription and advertising revenues, efficiencies in copyright and IT costs, and increased contribution from self-produced content. Net profit and net margin are expected to grow faster than gross margin, driven by continued cost optimization and operational efficiency improvements. -
Second Half 2024 Outlook
Q: What is the outlook for top-line growth and profitability in H2 2024?
A: Management remains confident in achieving healthy and positive revenue and profit growth in 2024. Online music growth will continue to be solid, fueled by both net subscriber additions and ARPPU expansion. Although net adds in H2 2024 will be smaller compared to H1, ARPPU is expected to grow at a more noticeable pace, improving margins. Advertising revenue is expected to perform well due to growth in ad-supported advertising and sponsorships of offline events. Challenges in the social entertainment segment will be largely offset by the solid growth from online music. -
Impact of Macro Headwinds
Q: How will macro uncertainties affect different business segments?
A: While the macroeconomic downturn presents challenges, TME's online music subscription is a low-cost entertainment that remains affordable to users, so it's not significantly impacted. Advertising is performing well, especially in sectors like tourism and offline concert sponsorships. Overall, the macro environment does not have a significant impact on TME, and management remains confident in long-term healthy growth. -
ARPPU Growth and SVIP Plans
Q: How does management plan to increase ARPPU, and what's the progress on SVIP?
A: Future ARPPU growth will be driven by the SVIP (Super VIP) plan. SVIP offers enhanced privileges, including early access to music, higher sound quality like Dolby Atmos and Audio 3D 2.0, and seamless device-to-device listening. The SVIP membership fee is around RMB 40 per month, providing more room to offer better benefits compared to regular subscribers. Management expects ARPPU to expand noticeably in H2 2024 and into 2025, which will help improve margins. -
Membership Net Adds and Paying User Penetration
Q: What are the trends in membership net additions and long-term paying user penetration?
A: Management aims to maintain steady and solid user base growth, focusing on high-quality subscribers and user retention. While net adds in H2 2024 may be smaller than in H1, the company remains confident in achieving its mid- and long-term subscriber targets. They will balance subscriber growth with revenue and profit goals to ensure sustainable development. -
SVIP Penetration Trajectory
Q: How will SVIP penetration among paying users evolve in coming years?
A: SVIP is growing from almost zero and has shown satisfactory growth so far. Management expects continued steady growth in SVIP subscribers due to enhanced sound quality and exclusive privileges. They plan to disclose further data and strategies regarding SVIP in future earnings calls. -
Competitive Landscape
Q: Are there any changes in the competitive landscape?
A: The competitive landscape remains stable with the usual market players. TME focuses on enhancing content, user experience, and platform capabilities to maintain its market position. Management believes that by doing business right and following their strategy of combining content and platform, they will keep their competitive edge.