Ladies and gentlemen. Good evening and good morning and thank you for standing by. Welcome to the Tencent Music Entertainment Group 2020 First Quarter Earnings Conference Call. Today, you will hear discussions from the management team of Tencent Music Entertainment Group, followed by a question-and-answer session. Please be advised that this conference is being recorded today. Now I will turn the conference over to your speaker host today, Ms. Millicent Tu. Please go ahead, ma’am.

Thank you, operator. Hello everyone, and thank you all for joining us on today’s call. Tencent Music announced its quarterly financial results today after the market close. An earnings release is now available on our IR website at ir.tencentmusic.com, as well as via newswire services. Today, you’ll hear from Mr. Kar Shun Pang, our CEO, who will start the call with an overview of our recent achievements and our growth strategies. He will be followed by Mr. Tony Yip, our CSO, who will offer more details on our operations and business developments. Lastly, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the Company’s control, which may cause actual results, performance or achievements of the Company to be materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the Company’s filings with the SEC. The Company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law. Please also note that the Company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in the Company’s earnings release and filings with the SEC. You are reminded that such non-IFRS measures should not be viewed in isolation, or as an alternative to the equivalent IFRS measure, and other non-IFRS measures are not uniformly defined by all companies, including those in the same industry. With that, I’m now very pleased to turn over the call to Mr. Kar Shun Pang, our CEO.

Thank you, Millicent. Hello everyone, and thank you for joining our call today. After we released our 2019 Annual Results two months ago. Even though I’m still wearing a mask like last time, I still have a smiling face under the mask and everyone at TME remains very positive. It is because we believe that what we’ve been doing is very valuable to our users and society.

Thank you, Cussion. Hello everyone. Apart from what Cussion just mentioned, there are a few other exciting areas that we want to highlight for both our online music and social entertainment services. For online music services, first we kept stepping up our efforts to promote video enrichment. We emphasized short videos through the upgraded version of Kugou Music. This provides our users an additional dimension of entertainment while increasing the exposure of video content creators on our platform. It has also contributed to improved user engagement, leading to Kugou Music’s increased DAU penetration rate, a daily average user time spent on video content after the upgrade. Second, while music streaming used to be a less socially interactive experience, we continued to push boundaries by building and promoting and engaging user community through our fan-based programs. We invited many artists to personally interact with their fans on our platform. Their engagement in online discussions and participation in song reviews, in turn, have contributed to better promotion results and increased stream volumes of certain songs on a daily basis. Thirdly, we continued refining our data analytics capability and our personalized recommendations. In particular, the personalized playlist continues to receive positive user response. In the first quarter, the DAU penetration rate and average daily streams of personalized playlists more than doubled on a year-over-year basis. Now turning to social entertainment services, while its revenue growth moderated due to the impact from COVID-19, our mobile MAU and paying user growth remained robust, up 13% and 19% year-over-year, respectively. Benefiting from the growth initiatives we took to improve user engagement and positive impact from users spending more time on our online karaoke platform during COVID-19.

Thank you, Tony. Hello, everyone. In the first quarter of 2020, our revenues were RMB6.3 billion, up 10% year-over-year, driven by 27% growth in online music services revenue and 3% growth in social entertainment services revenue. Online music services revenue were RMB2 billion, up 27% year-over-year. The increase was mainly driven by sustained outstanding performance from music subscriptions, strong growth in advertising services, despite the impact from COVID-19, partially offset by a decrease in sublicensing revenue. Music subscription revenues were RMB1.2 billion, up 70% year-over-year, driven by the continued growth of subscribers and improved ARPPU. The number of subscribers increased 50% and subscribed ARPPU grew 13% year-over-year, reflecting continued success of user retention and content paywall strategies. Social entertainment services and other revenues were RMB4.3 billion, up 3% year-over-year, primarily driven by growth in online karaoke and live streaming services, despite negative impact from COVID-19 adjustments to inactive users in live streaming and a change in the timing of releasing the Annual Gala. Our year-over-year basis paying users grew 19%, demonstrating the rise in our product acceptance. ARPPU decreased 13%, which is primarily due to the impact from COVID-19 as users reduced spending to manage uncertainty. Adjustments to inactive users also had a short-term impact on ARPPU in live streaming. The cost of revenues were RMB4.3 billion, up 70% year-over-year, driven by higher revenue-sharing fees and content expenses. Our gross margin was 31.3% in Q1 2020 and decreased 4.1% from 35.4% in Q1 2019. This was mainly attributable to higher revenue-sharing fees resulting from additional promotions to live streaming paying users to meet guided impact from COVID-19 and adjustments during the active users in live streaming. As well as increased revenue-sharing ratios to online karaoke performance to strengthen our platform competitively. Gross margin for our online music business has improved in Q1 2020 and is expected to keep improving over time as our music subscription revenue grows. Total operating expenses were RMB1.2 billion, up 12% year-over-year. Total operating expenses as a percentage of total revenue was 18.4% in Q1, 2020, increased slightly from 18.1% in Q1 2019. The increase was mainly due to an increase in R&D employee-related costs, as we continue to invest in R&D to expand our product competitiveness, advantage and innovation. Our sales and marketing expenses as a percentage of total revenues remain relatively unchanged from Q1 2019 as a result of our ongoing focus on operating efficiency. Our effective tax rate was 12.8% in Q1, 2020. Our net profit attributable to equity holders of the Company was RMB0.9 billion, non-operating net profit attributable to equity holders of the Company was RMB1.1 billion and non-IFRS net profit margin was 17.5%. As of March 31, 2020, our combined balances of cash and cash equivalents and term deposits were RMB21.9 billion, representing a decrease of RMB1 billion from RMB22.9 billion as of December 31, 2019. The decrease in balances was primarily due to investment in a consortium to procure an equity interest of Universal Music Group during the quarter. Overall, despite the impact from COVID-19, we attribute strong growth in online music services partially in music subscriptions, as well as healthy growth in social entertainment business in the first quarter of 2020. We expect to see year-over-year growth in the next quarter as the COVID-19 pandemic is under control and business is starting to get back to normal in China. From a long-term perspective, we continue to be optimistic about the future of the broad music industry and are confident in the overall ecosystem and product pipeline that we’re building. We’ll continue to focus on enhancing and expanding our product and service offering, including long-form audio while maintaining core content investment. This concludes our prepared remarks. Operator, we’re ready to open the call for questions.

For the benefit of our participants on today’s call, please limit yourself to one question. If you have additional questions, you can re-enter the queue. Our first question today, Eddie Leung of Bank of America. Please go ahead.

Can we ask two questions? The first one is about the progress in moving more songs over the paywall. Could you talk a little bit about the recent progress as far as the outlook for that? And then secondly, any more detail on the potential launch of live streaming within QQ in terms of expanding the coverage of users. Thank you.

Sure, thanks for your question. In terms of the paywall, we have said that as of the end of 2019, our content behind the paywall is approximately 10% of the streaming volume on our platform and internally, we estimate that by the end of this year the paywall should account for approximately 20% of our streaming volume. As of the end of Q1, we are on track to hit that 20% target. However, I think we want to highlight that number one. We’re obviously very pleased with the online music subscription revenue growth growing 70% year-over-year, which is actually the fastest reported growth in our history. We had suffered a bit from COVID-19 impact during the first quarter, so without the impact from COVID-19 we would have grown even faster because users from an MAU perspective tend to consume more karaoke or games or videos when they spend an unusually long time at home. On the other hand, if we were to include music MAU from in-home IoT devices such as smart speakers and smart TVs, which is not currently included in our reported MAU data, our MAU would actually have grown 3.5% on a year-over-year basis. We saw those in-home device consumptions on our platform actually mitigated some of the weaker mobile MAU. As we said before, our focus continues to be driving user conversion from free to pay, and we are making excellent progress in the current quarter’s results.

Your second question is about when we are going to launch QQ Music live business. In our plan, we’re going to launch in the second half of this year, targeting to be in June to July. All the team’s working hard and getting ready for the launch, so we’re positive in this area. This year we’re going to test the waters, and once we have prepared everything, I think that it will provide further contribution to social entertainment in the years to come. One more point I would like to add is that even though the pandemic situation has brought some negative impacts on online music’s MAU, we are still seeing that in this quarter we are having a 2% quarter-to-quarter growth in our online mobile music MAU. So we’re doing pretty good and we’re also expecting better recovery after the pandemic situation is under control in China.

Understood. Thank you.

Our next question will come from John Egbert with Stifel. Please go ahead.

On the social entertainment side, obviously MAU growth is very strong despite the COVID-19 impact and pay user growth as well. I’m wondering if you’re seeing any signs of ARPU stabilizing at all through May as things have gotten a little bit more normal. And on the Kugou Changchang, I’m curious what the strategy is there, a separate apps versus an integrated app approach, and how you think subscription and overall monetization for the long-form content, the spoken words side might differ from music as you take the strategy of separating an app.

Okay, thanks for your questions. When talking about social entertainment MAU, yes, we’re having really good results this year, especially during the pandemic situations when more people are spending more time at home and they need certain forms of entertainment. So we’re seeing a very positive result that our active users are becoming more active and even some of the less active users are reactivating their accounts and starting to try out our services. We’re seeing that the overall user behavior is actually changing. Even after the pandemic situation, as people start getting back to their old life, we still hope that our overall app effectiveness for user engagement will remain at a relatively good threshold and persist in the coming months. What we’re thinking about is right now since during the pandemic situation, even though it helped our total active users, we’re seeing that it will have some impact on the revenue side. First of all, some of our live broadcasters may be being quarantined or staying at home, impacting the total number of on-air time during the pandemic period. Additionally, the pandemic is also bringing some negative impact to the overall economy, so our users' willingness to spend on live broadcasting services will be impacted slightly. However, after the pandemic area, we’re seeing that we are actually experiencing recovery right now. So we expect that revenue for the rest of the year will continue to see healthy growth, and the ARPU will also improve.

In terms of Kugou Changchang, starting from this quarter, we have started to include the Kugou Changchang data into our MAU, and the data that you see in our reported filing has been adjusted retrospectively for an apples-to-apples comparison. Kugou Changchang, despite being in the very early stage, saw a modest growth growing from one million MAU last year by over 800% to about nine million MAU this quarter. The strategy there is that TME has a very good track record of executing on a multi-brand product strategy to more effectively cover different user segments. Kugou Changchang is another perfect example, similar to our multi-brand product strategy that we follow on online music. This is because Kugou Changchang allows us to better serve the user demographics that are more closely aligned with Kugou Music than we see in QQ. Overall, social MAU grew very strongly this quarter, but I’d like to add that during the COVID-19 pandemic, as people tend to stay at home, they spent more time on karaoke during that period. Our MAUs and paying users enjoyed a little bit of a boost during Q1, so it would be very normal and reasonable that in Q2, as users return to work and have less time to spend, it will be healthy to see our MAU in QQ normalize back down to a level that is slightly below Q1 and that paying users will probably remain around a similar level in Q2 as in Q1. But overall, from a revenue perspective, we do expect, as Cussion mentioned, our Q2 year-over-year revenue for our social entertainment revenue will be stronger than Q1.

Additionally, regarding the long-form audio strategy with the Kugou Changchang team apps that we just launched, I would like to add some remarks. We’re seeing that long-form audio is a strategic area that we will be focusing on. Our users are used to listening to music and enjoying all other related content on our platform, so it will be very natural for them to spend more time listening to long-form audio content. We only tried this six months ago and achieved very good results, laying a good foundation for us to be more encouraged and started to roll out not just new features or functions on our music platform but also launch our independent long-form audio app as well, which is called Changchang. Although we just launched at the end of April, in less than a month, we have already received very good feedback from users. We’re fine-tuning our product, and at the same time, besides launching the new applications, we’re also rolling some of our new multi-subscription plans with marketing promotions and competitive pricing. We’re seeing positive feedback. We’d like to share more with you in the future regarding long-form audio strategies once we have any updates.

Great, thank you.

Our next question today will come from Binnie Wong of HSBC. Please go ahead.

My first question is that I understand the company is exploring many new initiatives, new opportunities, and also like the Changchang and the TME Live targeting UGC content. How do you see our monetization plans in terms of how you plan to monetize these new opportunities and whether you see any cannibalization to our existing app users? Following up on this question, I’d like to know if you’ll be stepping up our sales and marketing or maybe part of development expenses this year with all these new initiatives we’re launching and how will that impact our margin trend this year, please? Thank you.

Okay, very good question. We always focus on trying to encourage, besides professional content, also encouraging our users to create more user-generated content and share it with their friends on our platform. Let me give you an example: we just launched the new version of WeSing, version 7.0, just a couple of weeks ago. The major focus of this version is more on the visualizations of apps. In the past, when people were using the WeSing app with a single song, which is in audio format, they would share it out with friends. Now, besides this, we’re also encouraging our users to create video-based content. With the powerful tools we provide, users can create their own short-form music videos. This is what we’re doing, and we’ve received very good results. Many people have started creating this content, and once this content is displayed to users, it encourages likes, views, and even interactions among our users, creating a social networking effect. This is a very important direction that we’re working on. The reason why we’re focusing on visualization is that through this product design, we encourage interaction among users. They can send virtual gifts or interact during KOL live broadcasts. This creates a monetization cycle. We’re not going to jeopardize our professional content, as we understand that our users have different needs. People enjoy professional content, but they also want to consume content from their friends, which is the beauty of TME. We are a social network, not just a platform that digitizes professional content.

Okay, thank you, Cussion.

Yes, I will answer the question too. About the margin at the gross margin level, we expect gross margin to be stable this year, similar to Q1, because even with the COVID-19 pandemic recovery, our gross margin regarding our old billings will be increased. However, we need to invest in long-form audio and in our next product strategy focused on IP, so the content needs investing. Thus, we expect the gross margin to be stable this year. About operational NAV margin, we believe we’ll manage our promotion fees and marketing expenses, so we think the ratio of these expenses to revenue will be around the same rate as Q1. However, regarding administrative expenses, because we need to invest more in new products and new technology, we will increase R&D expenses and employee costs, so we expect that matching our net margin will decrease slightly compared to Q1 but remain at a reasonable level this year.

Okay, thank you, Cussion and Shirley, very helpful here. Thank you.

Your next question will come from Alex Yao of JP Morgan. Please go ahead.

I have two questions. One is regarding the introduction of an audiobook function into the product portfolio. Usually, industry peers have used audiobooks as an engagement driver, and then monetize the engagement and the usage from audiobooks in their live streaming business. Does the audiobook serve the same growth in your portfolio, i.e., is it more of an engagement driver and less of a monetization driver? Secondly, regarding the social entertainment, the revenue growth rate slow down to 3%, which you attributed to the outbreak of COVID-19. So my question is: what does it take for the revenue growth rate to recover, not just to the 20s into the next couple of quarters? Does this mean you guys don’t need to do anything, and once the impact from the COVID-19 is over, the business will move back to normal growth trend? Or do you need to change the way consumers behave post-COVID-19 outbreak? Can you assure us with the user behavior trend after the social entertainment business in April versus February and March?

I’ll address the second part of the question regarding social entertainment and then perhaps Shirley can talk more about the audiobook segment afterward. While social entertainment revenue grew only 3% year-over-year primarily as a result of COVID, we strongly believe the worst is behind us, and we do expect the growth rate to recover in Q2. Like we said, we expect the Q2 year-over-year growth rate for revenues to be stronger than Q1. Most of that is driven by organic growth as paying users are more willing to send virtual gifts with the economy reopening and the content supply returning to a normal level, as Cussion mentioned earlier regarding some of our live streaming performances returning to work at a more regular level in Q2. The growth will come organically from our Kugou Live, Kuwo Live, and to some extent, WeSing as well. While we believe our social entertainment business remains healthy and solid, we are also committed to broadening and expanding it beyond our current offerings, including the launch of QQ Music live streaming in June. We will continue to expand our live streaming content categories to include gaming and categories like ACG or matchmaking. We’ve also made tremendous progress in April by announcing a strategic cooperation with Tencent Games, allowing Kugou Live to live stream all of Tencent’s popular games. These are growth initiatives that will help us drive further development beyond organic growth, which we expect to shine through in the numbers towards the second half of this year rather than in the second quarter.

I’ll answer the question about the audiobook functions. You’re absolutely right that the audiobook function, or we call it long-form audios, is primarily an engagement driver for us. As I mentioned before, it’s very natural for our users to listen to music on our platform; therefore, it’s easy for them to listen to a different format of content like long-form audio. When we offer this type of content, it helps increase the time spent by our users, which has been proven during the last six months since we soft-launched the service. So I think this is very healthy for our platform. Though we have a significant amount of MAU, we do not rely on long-form audio features for acquiring new users, but we aim to get our users more engaged and increase their time spent, which is our primary objective. Once we can achieve more active users, many monetization avenues can open up. For instance, we have a monthly subscription VIP plan with very attractive pricing for our users, which encourages them to spend more, along with the usual music subscription. We also have an à la carte model where users can choose to pay for specific long-form audio content. In the future, we anticipate more advertising revenue as well, since there are many opportunities to drive ad dollars on the TME platform. Additionally, we also expect our KOLs who provide long-form audio content to engage in live broadcasts, which has been receiving positive feedback. If offered on QQ Music or Kuwo platforms, we are seeing trends developing, and that’s another potential area to drive further business development. There are many ways for us to monetize in the long-form audio space, which is why we emphasize this area so much and will continue making investments here.

This new engagement requires time for refinement and adaptation by our users. So we expect meaningful revenue to arise from this next year.

As a reminder, we ask questioners to please limit themselves to one question. If they have additional questions, please re-enter the queue. Our next question is from Alex Poon of Morgan Stanley. Please go ahead.

You touched on the overall gross margin of the company being stable. If I want to split between music services and social entertainment margin, how would the trend look like? For music margin, I understand that the master agreement with one of the top three labels is expiring. Can you give us an update on that, and what are you hoping to achieve from that negotiation? How does that impact your cost structure, and will the new agreement have any implications on other domestic labels' cost structures in the future? Thank you very much.

Sure, Alex. I’ll address the question about licensing and then Shirley can address the margin question going forward. We are in the middle of negotiations with one of the three major labels. As we mentioned in the past, our focus is on reaching an outcome where there is no longer a master license; it would be a non-exclusive arrangement. In terms of the cost structure in the past, it has primarily been a fixed cost minimum guarantee driven structure. What we’re striving towards is ensuring that the components of the cost that are revenue-share-based are larger than in previous contracts and that the fixed cost base in terms of minimum guarantee is lower compared to the last contract. Overall, this would represent an improvement from where we were previously. In the long run, we believe that, from an absolute dollar perspective, licensing costs should increase over time, but in relation to the revenue growth rate from music subscription revenue, we are confident that we will see operating leverage kick in within the music business despite growth in licensing costs. I also want to remind everyone that while there is much focus on our three main majors, the five biggest labels account for less than 30% of our streaming volume. We actually have a diversified content supply, which is quite different from what we see in the West. Importantly, we’re committed to building an independent musician ecosystem through the Tencent Musician platform. You could see the results coming through, as Cussion mentioned, with the number of songs being uploaded or the number of people signing up to the platform doubling. Increasingly, some of that content is being licensed to us on an exclusive basis through the Tencent Musician platform, which is growing even faster. Overall, I think our content portfolio will be broad and comprehensive, with top labels partnering with us. We are confident in achieving reasonable and profitable outcomes for both parties going forward.

Regarding the gross margin for online music, we expect it to improve in the long run. There are two reasons for this. First, at this moment, monetization rates on the music side are still in an early stage; we expect our revenues from music will increase rapidly, including subscription revenues, digital sales, and advertising revenues. This is one reason. Second, we will manage the licensing costs, and we hope part of those costs will be revenue-sharing based and reduce the minimum guarantee. However, this will take time to achieve our goal, so we believe that gross margin for music will increase over time. Concerning the social entertainment gross margin, we expect this part to recover in the next quarter as the epidemic subsides. The revenue-sharing ratio will increase slightly in karaoke, resulting in increased gross margin for social entertainment. Overall, we expect that the gross margin will improve compared to Q1.

Our next question will come from Wendy Chen of Goldman Sachs. Please go ahead.

My question is about the changes in the music industry amidst COVID-19 and the subsequent work-from-home trend. As we’ve seen, the way users consume music may change, and some upstream players might suffer during the lockdown. So I’m just wondering what investment strategy you have to further drive music monetization post-pandemic. For instance, are you looking at monetizing those live concert streaming products or the IoT product? Thanks very much.

Thanks for your questions. You are correct; during the COVID-19 pandemic, more people stayed home, and the pattern of consuming music changed. I think we’re seeing a positive impact because, not just right now but also a year or two before, we started to expand our footprint in providing music services through IoTs and other home appliances like smart TVs. This laid a good foundation for helping our users enjoy music anywhere at their convenience. Although the daily lives of our users have changed with some negative impacts on overall activeness, we still performed well in Q1 2020 with quarter-to-quarter improvements in total MAUs. In the future, as users have begun trying out music services through IoTs or other platforms, they will likely continue this behavior. This will open new potential areas for us, and we’ll continue maintaining strong partnerships with IoT manufacturers and other platforms. Regarding monetization, we’ve seen continuous good feedback growing our subscription base, which increased by 70%, marking a record high. Our paying ratio is currently at 6.5%, and we expect it to continue growing in a healthy manner. There is a possibility that we may even achieve a higher paying ratio in the future. We’re also developing new forms of online entertainment during the home-stay period. We successfully launched the TME Live program during the pandemic, and we organized five online concerts with top-tier artists. This is not an easy task because it’s not merely letting an artist record a song at home but arranging live performances, which last about 1.5 hours. We’ve had excellent feedback from users and top-tier artists like JJ Lin, who sees great value in it. We will continue to enhance the experience, making it more suitable for the younger generation and for online user behaviors, and we will look for various ways to monetize these online concerts, including online ticketing and encouraging more real-time interactions between artists and audiences. There are many new business opportunities emerging even during this global pandemic, and we are committed to providing innovative services that keep our users entertained.

Our next question will come from Thomas Chong of Jefferies. Please go ahead.

I have a question regarding competition and revenue sharing with broadcasters. Given that we’re seeing more content in our social ecosystem, can you comment on how we plan to incorporate short-form video into broadcasting competition with other peers in the future, and how that should inform our revenue-sharing ratio with podcasters, considering we’re thinking about the GP margin being relatively stable year-on-year for the full year? Thank you.

Okay, I’ll take the competition question. Look, I’ve talked a lot about video enrichment across multiple apps on music as well as on WeSing. We are not trying to become a short video platform, let me be clear. We aim to enrich video content formats so that we can serve user needs better because users want to consume music, but they also desire to consume music-related video content. In the past, we weren't able to fulfill that need, so going forward, we want to enrich video categories while allowing users to consume music-centric video on the platform so they don't have to leave that platform for external content. In addition to that, I’d say that in terms of video, it’s not just short video. For example, we have a show like a mini variety show called MR RADIO on QQ Music. It is now into its second season, having achieved great success, with total streams for the two seasons combined reaching almost 600 million. This is not streamed externally; the audience comes from our platform. This format is akin to a radio talk show, and the two seasons attracted over 100 groups of artists. Our promotional efforts for this show have yielded positive user engagement. We’re also broadening our UGC offerings so in the Kugou Music app, for example, you will increasingly see while listening to songs that the system will recommend relevant background videos for users to consume. I believe this strategy—enriching the engagement for music-centric content—is beneficial in prompting increased engagement and time spent on the platform.

Our next question will come from Alex Ziyang of Macquarie. Please go ahead.

So management, how do we think about the balance between user growth and ARPU under the current social segment? Looking beyond the second half, as we’re gradually recovering from COVID-19, how do you think the new features like games and QQ live streaming will impact ARPU in the longer term? Thank you.

Sure. It’s important to recap the Q1 metrics, as it helps to inform our future outlook. We saw an increase in paying users and a slight decrease in ARPU on a year-over-year basis, primarily due to COVID's impact. We noted increases in time spent on online karaoke, which drove both MAU and paying users. However, many of those paying users tend to have lower ARPU compared to live streaming paying users, which dragged down the overall ARPU. Additionally, live streaming paying users were economically affected by COVID and displayed less willingness to spend, leading to two impacts on revenue. As we head into the next quarter and beyond, obviously, in Q2, the growth in online karaoke paying users will not be as high as in Q1 because the exceptional stay-at-home demand returns to a more normal level. Therefore, in Q2, we anticipate a stable level of paying users, slightly higher growth compared to Q1, which is completely normal when considering the transition back to the former lifestyle. Overall, we expect growth beyond Q3 and into Q4. From an ARPU perspective, given that the economy is reopening and live streaming paying users return, we anticipate ARPU will increase sequentially compared to Q1, and we believe this is a healthy trend. We also note that MAUs will normalize in Q2, but still remain at a very strong level.

I’ve a question. It was great to see continued acceleration of music subscription revenue in the past two quarters. How sustainable is this strong traction, especially considering that music subscription addition had a slight deceleration in Q1?

I’ll take that. In Q1, I talked about the impact of COVID-19 on music MAU, and consequently, the paying user base was affected because, during extended periods at home, users tended to consume more karaoke or online games and videos. Nevertheless, we grew subscription revenue by an impressive 70% year-over-year, which is our fastest reported growth. For Q2, as recovery kicks in, we anticipate that our year-over-year growth rate for overall online music revenue will exceed that of Q1. The growth will be driven by ongoing rapid subscription revenue growth. Additionally, we expect that net addition of music paying users in Q2 will exceed that of Q1 and thus result in a high year-over-year growth rate similar to that of Q1. Regarding ARPU, we observe strong growth on a year-over-year basis as a result of previous investments that we made last year, including promotional efforts around auto-renewal subscription plans. The first month's discount for auto-renewal signing incentivizes users, but the price returns to the normal rate afterward, impacting near-term ARPU but ultimately increasing long-term ARPU. We’re benefiting from those promotional efforts from previous quarters. Given our low penetration of 6.5% among paying users, it's likely that we could improve subscriber growth while keeping ARPU stable. If the ARPU remains flat, it would be indicative of our promotional investments aimed at achieving long-term ARPU growth, which is favorable.

Yes, one more point I’d like to add is that the retention rate of our monthly subscription continues to grow. We continue to see really healthy rates, and once the retention rate improves, it will further enhance our paying ratio as well.

Thank you.

Our next question will come from Tian Hou of T.H. Capital. Please go ahead.

I have a question regarding TME Live. After watching the concert, I felt pretty excited about your business. Since you’re stepping up and expanding into new territories within music, I wonder if that is part of your ongoing plan and whether you have a pipeline for it moving forward. Additionally, how do you plan to monetize it? Each concert can attract hundreds or even millions of audiences, but if not monetized effectively, it could waste potential resources. I imagine Tencent will have many advertisement opportunities if integrated well. So I would like to know your strategy for this going forward, including any ongoing pipeline.

Yes, thank you for your questions. We also feel excited about TME Live and the events we’re organizing. Indeed, you’re correct; we’re not just providing music services through mobile apps. We've already expanded our footprint and aim to build an entire music entertainment ecosystem, which is also our long-term strategy. The TME Live events demonstrate our emphasis on providing memorable experiences for our users. First of all, there is still much for us to learn; organizing live events is not merely broadcasting. We can adopt various new formats to enhance the experience, including social interactions that can take place during our shows. For example, if you're a fan of JJ Lin, before the concert starts, you might participate in voting for which songs he will perform. Moreover, during the online concert, numerous interactions can occur. We can engage users by sending virtual gifts to their favorite idols and incorporate gamification elements for their enjoyment. These are some monetization methods we will implement. By organizing such events, we aim not only to entertain but also to monetize effectively through varied innovative approaches. As we’ve already conducted five online concerts that are well-received, we are gathering experiences and fine-tuning our models. The enthusiastic feedback from users and artists shows that there’s a lot of potential for future collaborations. By continuing to develop this model, we will achieve substantial results.

Our next question will come from Alex Lu of China. Please go ahead.

I have one question. Given the user demographic differences between QQ Music and Kugou, how does the management envision QQ Music live streaming to differ from the current Kugou live streaming in terms of product design, content vertical, and user paying patterns? Thank you.

Sure, I think we’ll be able to discuss this in greater detail upon the QQ Music live streaming service launch. Broadly speaking, our aim is to continue the multi-brand product strategy across music that we've taken, which allows us to target different user segments. Importantly, the live streaming business within QQ Music will be more complementary to the user base for QQ Music. It will have a stronger focus on independent musicians, allowing us to work closely with those musicians to promote music interactively. This approach ensures that our multi-brand strategy expands our reach, covering a broader population in China, which is vital due to the significant diversity within the nation. Thus far, each brand and product serve slightly different target user segments.

Additionally, user switching among QQ Music and Kugou Music is minimal. Therefore, our plan to roll out live broadcasting on QQ Music platform will allow us to serve our QQ Music users better without cannibalizing Kugou Music live business.

Thank you.

Our next question will come from Hans Chung of KeyBanc. Please go ahead.

I have a couple of quick questions. The first one is just following up on the Kugou Music live streaming question. What are your initial thoughts on the potential addressable user scale and paying users? Will it be similar to what we currently have for Kuwo Music live streaming or could it be even bigger or less? My second question is regarding the social entertainment business, can the management team elaborate on the progress of recovery? You mentioned that there was some recovery in this quarter; what trajectory do we see going from the end of March, into April into early May? What do we expect the year-over-year growth trajectory for revenue to be at the end of the year compared to pre-COVID-19 levels? Thank you.

Certainly, let me address the recovery and the addressable user question. While I want to stress all responses will include forward-looking statements: What we’re saying is based on the evidence that we see, we expect the second-quarter revenue growth for social entertainment to be stronger than Q1, indicating recovery. Regarding the addressable market: the live streaming sector is a multi-hundred billion RMB market—it’s gigantic. We are well positioned within the music-centric live streaming space and plan to maintain our presence there. Given that the potential for live streaming is enormous, we can only continue to grow alongside the overall market growth. Comparing it to Kugou Live, it's fair to say we’ll not reach that level in the near term because Kugou Live has been in the market for many years, wherein we expect to grow gradually. Nevertheless, the potential is certainly promising. Overall, just to wrap it up, as we’ve stated, we look forward to seeing continued positive momentum for online music. We expect second-quarter revenue growth to surpass Q1, driven by ongoing robust growth in subscription revenue. As for social entertainment revenue, we also expect Q2 to outperform Q1, thus, we anticipate our total revenue growth will be stronger than it was in Q1. Let’s put the COVID-19 impact behind us and look forward to improved results as we advance into Q2 and beyond. Okay, thank you everyone.

Thank you so much for your time.

And ladies and gentlemen, this will conclude today’s conference. We thank you for attending. If you have any further questions, please contact TME’s Investor Relations team. We look forward to speaking with you again next quarter. Thank you and goodbye.