Earnings Call Transcript - TME Q4 2021

Operator, Operator

Ladies and gentlemen, good evening, good morning and thank you for standing by. Welcome to the Tencent Music Entertainment Group Fourth Quarter and Full Year 2021 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, Chief Strategy Officer, Mr. Tony Yip. Please go ahead, sir.

Tony Yip, Chief Strategy Officer

Thank you, operator. Hello, everyone and thank you all for joining us on the call today. TME announced financial results today after the market close and the earnings release is now available on our IR website at ir.tencentmusic.com as well as via Newswire services. Today, you will hear from Mr. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent update. Next, Mr. Ross Liang, our CEO, and I, Tony Yip, CSO, will offer additional thoughts on our product strategies, operations, and business development. Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. 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 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 IFRS 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 or other non-IFRS measures are not uniformly defined by all companies, including those in the same industry. With that, I am pleased to turn over the call to Cussion, Executive Chairman of TME. Cussion?

Cussion Pang, Executive Chairman

Thank you, Tony. Hello, everyone and thank you for joining our call today. We concluded 2021 with resolute execution of our mutually reinforcing fuel engine content and platform strategy. As we strengthened our pan-entertainment content ecosystem and enhanced our content production and promotion capabilities throughout the year, we further diversified our business model, grew our market influence, and most importantly, tapped into attracting and engaging users and holistically adjusting to the needs of our major stakeholders. We are also committed to continuous product innovation through which we optimize users’ experience across our four pillars of music entertainment: listen, watch, sing, and play. Ultimately, these initiatives help both our company and the music industry achieve healthy development and prosperity. Empowered by our content strategy and compressing original content production, less licensing, operation, promotion, and monetization, we are expanding our efforts in augmenting the scale and fortifying the quality and competitiveness of our music catalog. To cultivate high-quality artists and songs, and promote a fostering original content ecosystem, we have been focusing on building a more effective set of original content production capabilities, with less industry involvement in original content production and promotion by developing and implementing a host of advices, tools, and technologies. Examples include our 5Sing platform, which provides an online community for lyricists, songwriters, and musicians to pair, communicate and trade. During the demo stage, our proprietary predictive model enables forecasting and data mining for songs with blockbuster potential by determining intricate user preferences and using melody, lyrics, voice, and rhythms, which in turn makes original song production more cost-effective. Furthermore, we have developed a number of content production promotion tools that integrate our internal and external promotion resources, providing a one-stop service to musicians. These advanced tools and technologies allow us to effectively identify and increase support for potential hits. Notable standouts include 'Lonely City Gu Cheng,' which stood at the number one spot in the chart within the Chinese Ancient Style category upon release, triggering a tremendous wave of buzz on social media with nearly 1 billion streams in the fourth quarter, as well as multiple songs posting over 100 million streams in the same quarter, such as 'Perfect Couple.' Deeper interaction with IPs in the broader Tencent ecosystem has also increased the influence of our original music. In 2021, TME joined hands with 46 IPs in the Tencent pan-entertainment ecosystem across gaming, animation, literature, variety shows, streaming and television and more to produce and release 117 original songs. In the fourth quarter, we teamed up with the League of Legends: Wild Rift to launch the industry’s first e-sports music production boot camp, ushering in the beginning of our long-term original content production cooperation with TJ Sports. Further crossover collaborations also produced a hit such as the theme song from the acclaimed romance stream, sung by an acclaimed artist which topped various charts, along with the theme song from the game House of Grimm. We also empower indie musicians by creating a spiritual home for them via our Tencent Musicians platform. As of the end of the fourth quarter, the number of indie musicians on our Tencent Musicians platform reached 300,000. With the ongoing improvement of our end-to-end services from song production and domestic and overseas promotion, all the way to artist development, incentive plans, performance resources, copyright protection, and career training, our Tencent Musicians platform has become the platform of choice for many indie musicians, especially young ones, further promoting the variety and diversity of our musicians' ecosystem. First, the Tencent Musicians platform leverages powerful internal and external resources to provide musicians with a rich variety of artistic inspiration and creation scenarios. For example, in the fourth quarter, we cooperated with the Mercedes-Benz music creation initiative, 'She’s Mercedes,' to encourage the use of music to record stories. 340 groups of participating musicians composed 1,290 original songs through the Tencent Musicians platform, highlighting female creativity in music. Second, with multidimensional promotional capabilities, both on and offline, the Tencent Musicians platform has become a hotbed for hit songs, with the enthusiastically shared release of QQ Music's 2021 year-end music review, which we managed the entire production, release, and promotion process, achieving over 20 million first-day streams, setting a streaming day record within the indie musicians category. We also recommended 'Flowers All the Way' by Wen Yixin to multiple offline New Year’s Eve performances hosted by influential TV channels, where we earned widespread acclaim among listeners for its authentic story and inspirational theme, topping the major music charts in the fourth quarter. Notably, daily streams exceeded 15 million directly following these performances. Going forward, our Tencent Musicians platform will carry on handling these advantages and ecosystem resources to foster a richer repertoire of original music and support more indie musicians. Alongside our music production initiatives, we have been enriching our content library to safeguard our comprehensive content offerings. Kugou has made Chinese ancient style a breeding ground for massive IP, launching music charts and other on and offline activities in the fourth quarter. Hip hop has become another value booster for our platform and we are proud to have built a reputation among users and in the industry as a go-to destination to discover hip hop music. Our QQ Music Rappers Alliance brand is built in collaboration with hip hop celebrities and record labels, which we augment with music content, national live tools, and other events. In 2021, we helped the Chinese ancient style and hip hop artists and songs to build a fan base with more than 4,000 songs making their way onto various music charts. Turning to our live events offerings, in 2021, we upgraded TME Live to become an increasingly comprehensive performance platform, reinforcing our overall online and offline content ecosystem. For 2021, TME Live further strengthened its brand and scaled its industry influence by hosting a total of 56 live performances with captivating, interactive and virtual experiences. In the fourth quarter, we organized online shows featuring a rich lineup of domestic and global megastars, such as Joey Yung, Chen Linong, and Adele. Among these, Chen Linong’s Grown 21 birthday concert was particularly innovative and rewarding, given its embedded online payment and artist merchandise options. TME Live has also extended downstream to support the diverse development of our musicians through the Force Stage, which has attracted approximately 10,000 indie musicians, applicants and has been widely followed on social media. We helped our artists gain significant growth in streaming volume and fan base. By the end of the fourth quarter, 25 of our musicians had performed over 120 original works on TME Live’s various offline stages. In the future, we expect to expand more offline events and festivals geared towards up-and-coming musicians, enhancing their influence and efficiency promoting talent through high-frequency performances. As the leading music and audio entertainment platform in China, we have created trendsetting award ceremonies, such as the Tencent Music Entertainment Award (TMEA), to present and reward the industry’s best and brightest artists and their era-defining work. On December 11, 2021, we hosted the third star-studded TMEA in Macau, featuring 46 groups of artists, including Jay Chou, Mayday, Rene Liu, KUN, Teens in Times, and Joker Xue, as well as a successful play of 58 hits. By combining our promotion powers with other Tencent resources, we set an audience record with over 10 million views, far more than the previous two TMEAs. With that, I conclude the update on our progress with content. Now, I would like to turn the call over to Ross who will share more about our platform strategy. Ross, please go ahead.

Ross Liang, CEO

Thank you, Cussion. Hello, everyone. Moving on to our platform strategy, in the fourth quarter, QQ Music, Kugou Music, and Kuwo Music all released major version upgrades, incorporating refreshed product concepts, as well as optimized operations, UI design, and technological innovation. We leverage the companionship that music embodies to invite users to listen, watch, sing, and play, engaging them deeply in these four pillars of music entertainment. To bolster our listen pillar, we strive to provide a better audio experience with innovative listening features and optimize sound quality and effects. The latest version of Weixin allows users to send songs from the TME music library directly to friends on Weixin. Our Leap of Heart Weixin function, which has been adopted by more than 5 million users, enables one user to listen to songs while another user listens along with simple one-click following. Furthermore, our interactive playlist can be joined, built, and edited by multiple users. These cutting-edge functions allow users to break through the barriers of time and place while dynamically integrating listening with social interactions. Technology is a crucial component of the evolution in the listening experience we offer. We continue to optimize the smart recommendation feature on QQ Music to help users discover high-quality music more efficiently, as evidenced by 66% more music streams attributable to the feature in the fourth quarter compared to the same period last year. Additionally, our patented audio processing technology delivers a cool multi-product function through which users can separate songs into adjustable tracks to create individualized listening experiences. We have also refined our vertical operations through Kugou Music’s scenario-based music, which targets users’ wellness needs such as fitness and sleep hygiene. Our sleep-inducing delta brainwave music has been streamed over 26 million times since its launch. Our second pillar adds another dimension to the user experience, making content more memorable. We satisfy the natural expansion of music users’ visual needs with video content, effectively improving the efficiency and accuracy of music discovery while increasing user engagement levels. In the fourth quarter, QQ Music video content sustained its year-over-year growth of more than 100% in both unique visitors and video views. Furthermore, our musicians continuously benefit from our cooperation with Weixin Video Accounts in music promotion. We jointly launched an initiative as a task-based model to incentivize indie musicians to produce original songs and video content in October and initiated a reward-based editing talent for the hit song, 'Love Love' in December. Through our collaboration with Weixin Video Accounts, daily radio views of our musicians' work uploads to Weixin Video Accounts reached 50 million by the end of 2021. Next, for the sing pillar, we introduced in-room memberships and added new video accounts and casual games, such as karaoke, to the latest version of WeSing online karaoke room to make the overall karaoke room experience more fun and socially engaging, leading to a growth in karaoke room adding time spent in the fourth quarter. We also introduced an online service model featuring on-demand vocal accompaniment, which effectively mobilized the karaoke KOLs on the platform and rewarded their singing talent. Finally, we launched our eldercare mode designed to address the seniors’ unique needs with speaker phones, cleaner UI design, and more relevant content. The fourth and final pillar of our comprehensive entertainment offer is play, which we expect will unlock an entirely new class of virtual interactions on TME’s platform. In the fourth quarter, we launched China’s first virtual music playground, TMELAND, and hosted its first online music festival on New Year’s Eve in a 130,000 square kilometer virtual party. Participants flocked to the event to party virtually with their friends and world-renowned DJs in the form of brand-new 3D avatars. We also recently released QQ Music’s M-PETS and Kugou Music’s Music Elf to provide companionship to our music users. Millions of users have already adopted the virtual pets demonstrating their popularity, particularly among the young demographic. Leveraging our ongoing connections with strengthened ecosystems and the resulting broadened promotion capabilities, we attract a wide growth of users and encourage them to enjoy our music and video content through efforts, including, but not limited to, first, we partnered with Weixin Video Accounts to live stream Mayday’s New Year’s Eve concert by TME Live, which captivated a total of 14 million viewers in the Tencent ecosystem. Second, we also recently released Tencent Games on the debut of Eason Chan’s 'Lonely Warrior,' the Chinese theme song for the animation Arcane: League of Legends, which was streamed more than 400 million times in the fourth quarter, reaching number one on multiple music charts. Third, during the release of Tencent Video’s hit drama, 'Sword, Snow, Stride,' TME’s long-form audio offers of the same title were played 1.4 million times daily, with a coordinated growth rate of over 500% during the first month of the show's season. In 2022, TME will keep on strengthening its collaboration with Tencent IP ecosystem and utilizing their methodology in promoting more cases. As we continue to bring our users and the creative evolution of the content and tools, long-form audio has proven itself to be an effective complement to our portfolio of music apps. In the same way, as we cultivate original music content, we are building a closed-loop system for podcasters with initiatives spanning content production, promotion, and monetization. Among our product customers, there are 8 that have achieved the milestone of 100 million community streams, demonstrating the power of our podcaster ecosystem, including 'Podcaster Children Book' noted for its entertainment and educational value. On the content production front, we launched the first-ever audio variety talk show following the trends of audio talk shows to further expand our reach in the audio market. As we continue to cultivate our vibrant podcast ecosystem and expand the production to enrich our differentiated long-form audio content offering, in the fourth quarter, long-form audio MAUs exceeded 150 million, representing 65% year-over-year growth, with significant growth still increasing by 86% year-over-year. Lastly, we are committed to fulfilling our social responsibilities. In the fourth quarter, we implemented multiple charity initiatives, including the release of the 'Hearing the Inaudible' Music charity album recorded with low-frequency songs for people with mid and high-frequency hearing impairment, as well as our 2021 Little Red Flower Music Season campaign, in which more than 500 musicians participated to compose 2,300 songs for charity. Working hand-in-hand, our platform and strategically dynamic content strategies creates a substantial force, immersing our users in a comprehensive music and entertainment experience that covers our platforms, programs, and the latest innovations. With that overview, I’d like to pass the call to Tony to review our business operations. Tony, please go ahead.

Tony Yip, Chief Strategy Officer

Thank you, Ross. Hello, everyone. In terms of operating results in the fourth quarter, our online music MAUs were RMB615 million, representing a 1% year-over-year decline, primarily due to churn of our casual users served by other pan-entertainment platforms. In the fourth quarter, our IoT services achieved year-over-year MAU growth of 39%. The growth was primarily attributable to our diverse content and our broad variety of smart IoT devices, which continue to enhance our ability to roll out and promote new music content. Despite the impact on advertising and digital album sales from industry headwinds, our online music revenues maintained sustained growth in the fourth quarter, mainly driven by continuous growth in subscriptions, with a net add of RMB5 million during the fourth quarter, and paying user penetration reached 12.4%. At the same time, user retention remained largely stable. Advertising revenue growth moderated and was negatively impacted in the fourth quarter due to industry adjustment. Meanwhile, we continue to devise creative ad solutions to serve brands’ diverse needs, such as the branded playlist launch in the fourth quarter. We will continue to innovate our product portfolio and diversify monetization models to better serve users and artists. Along this line, we launched the artist subscription, which is an add-on subscription giving users access to customized video and audio content and other privileges from specific artists while helping artists grow a dedicated hardcore fan base. Moreover, in the fourth quarter, we introduced retail items from a growing lineup of collaborative artists. Sought-after items in the fourth quarter included Jay Chou’s Limited Edition Action Figure and Roy Wang’s physical album, 'Summertime,' which sold 260,000 physical copies, setting a new industry record and fulfilling fans' increasing desire to collect physical albums. Throughout 2021, we increased our efforts to build communities at the forefront of trendy culture and strengthened our brand image with a youth-oriented portfolio of products and campus initiatives. Our pioneering app, 'Music,' is particularly popular among the younger generation. We upgraded it to Version 2.0 in December 2021, which features a fresh and sleek UI design and allows listeners to swipe through video-based music content with a smart recommendation function. To meet Gen Z’s demand, we also developed a number of on-campus initiatives such as a record label for campus musicians. And our on-campus campaign, '2021 Campus Voice,' is aimed at discovering promising campus musicians, such as JoSAA and JCTX, along with their chart-topping original songs. Now let’s turn to our social entertainment services. MAUs and paying users were lower quarter-over-quarter amid increasing competition and changing macro environment. While rolling with the ups and downs inherent in this environment, we are working on continued product innovations and building more verticals in social entertainment. For WeSing, which has singing at its core, we are establishing a content generation ecosystem that makes user participation easier and more fun. We now provide users with a virtual stage background and avatar for video recording, as well as the option to create a personalized short video by simply recording their voices with a semi-finished video supplied by WeSing. We also improved core functionality to allow even the shiest user to join a course while retaining anonymity by not displaying their face. This simplified creation process has led to an improved video publishing rate and increased user enjoyment in the fourth quarter. In terms of our international expansion efforts, we entered into a definitive agreement in March 2022 to acquire a controlling stake in M&E Mobile Limited, which currently operates Japan’s leading karaoke app, Pokekara, to enrich our karaoke experiences and broaden our reach in international markets. For our live streaming services, in response to increasing competition, we plan to heighten our focus on differentiating content offerings by expanding our audio live streaming content, cultivating talented music broadcasters, hosting platform events, and enriching our virtual interactive product offerings. We are utilizing our live streaming platforms to provide our musicians with a foundational starting point for their careers, while presenting us with options for talent discovery and cultivation. QQ Music Live streaming is giving more and more musicians a voice and a stage through audio live streaming, evidenced by the consistent quarter-over-quarter growth in the number of streamers and users. In 2021, a total of 12,000 musicians live-streamed on QQ Music's live streaming platform. Meanwhile, Kugou Live is building a professional training ground for talented live streaming hosts with high potential by mapping out customized career solutions for them. In the fourth quarter, musicians discovered by Kugou Live released 64 new songs, with over 1 billion total playbacks combined, including Wen Yixin’s 'Flower All the Way' and 'Please Slow Down.' The power of our platform and ecosystem was also showcased in our Tencent Music Live Ceremony (TMLC), the industry’s first integrated cross-platform live streaming competition event. It brought a double-digit increase in traffic to our live streaming platforms and generated a new record of 630 million social media views. While traditional live streaming is facing challenges, we believe the metaverse reimagines a new era of interactive entertainment. In addition to the virtual playground TMELAND and virtual pets we just mentioned, virtual idols are another area where reality increasingly merges with fantasy. Our self-created Chinese ancient style virtual idol was successfully adopted in a wide range of cross-field use cases in the quarter, including collaborations with popular games, emojis, and merchandise packages, conference hosting, offline performances and more, showcasing the viability of virtual IP monetization. In summary, our effective, growing deal engine content and platform strategy puts us in the driver’s seat for the music industry’s sustained prosperity as we continue to engage and stimulate users while satisfying our stakeholders’ multifaceted needs. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.

Shirley Hu, Chief Financial Officer

Thank you, Tony. Hello, everyone. Next, I’ll discuss our results from a financial perspective. In the fourth quarter of 2021, our online music service revenues continued to grow, driven by rapid growth in music subscriptions. Social entertainment business was negatively impacted by competition and the changing macro environment. Our total revenues for Q4 2021 were RMB7.6 billion, down by 9% year-over-year. Our online music revenues were RMB2.9 billion this quarter, up 4% year-over-year. In the fourth quarter of 2021, the music subscription business continued to grow rapidly with revenues of RMB1.95 billion and a year-over-year growth of 24% as we benefited from expanded sales channels and paying user loyalty due to high-quality content and services we provide. Online music paying users grew to 76.2 million, up 36% year-over-year, representing a 5 million net add sequentially. Monthly ARPPU was RMB8.5 this quarter, compared to RMB9.4 in the same period last year as we offered more effective promotions to attract users and cultivate their revenue to pay for music. Revenues from advertising dropped on a year-over-year basis as our advertising business continued to be negatively impacted by industry adjustments, but increased sequentially due to seasonality. We have taken several steps to mitigate the impact, such as enhancing product quality, adding more creative ad solutions like branded playlists and partnering more closely with Tencent to reach more advertisers. These initiatives will bear fruit over time and mitigate short-term headwinds, and we remain positive about our advertising business in the long run. However, licensing revenue and the sales of digital albums also dropped on a year-over-year basis and sequentially. Social entertainment services and other revenues were RMB4.7 billion, down by 15% year-over-year as we face intense competition from other pan-entertainment platforms and a changing macro environment. To adapt to the challenging environment and stabilize revenue still, we have differentiated our content offerings by expanding our audio live streaming and enriching our virtual interactive product offerings, such as TMELAND. We are also expanding our international footprint for our WeSing business as discussed earlier. Gross margin in Q4 was 28.8%, down by 3.6% year-over-year due to the following factors: first, gross margin for WeSing declined as we increased revenue showing ratio during the year; second, given the continuous growth in music subscription revenues, our revenue mix shifted with revenues from online music, which generally have a lower gross margin, accounting for a higher percentage of revenue; third, revenues from audio live streaming, whose gross margin was relatively low, also grew and accounted for a higher percentage of revenues. In addition, increased investments in new product and content offerings, such as long-form audio, also impacted the margin. Now moving on to operating expenses. Total operating expenses for Q4 2021 were RMB1.8 billion or 24% as a percentage of total revenue as compared to 20% in the same period last year. Selling and marketing expenses were RMB750 million, down by 3% year-over-year. During the quarter, we continued to make efforts in managing external channels effectively and better utilizing our internal traffic. Excluding the impact from TME event of 2020 which was held in Q1 2021, selling and marketing expenses would have dropped even more. General and administrative expenses were RMB1.1 billion, up by 18% year-over-year, driven by a higher number of employees in R&D as we invested in product enhancements, technology innovation, and more diversified product offerings. Excluding the impact of publicly RMB66 million from the acquisition of Lazy Audio, G&A would have increased by 10% year-over-year. Our effective tax rate for Q4 2021 was 11.5%. Our net profit was RMB577 million and the net profit attributable to active holders of the company for Q4 2021 was RMB536 million. Non-IFRS net profit was RMB873 million, and the non-IFRS net profit attributable to active holders of the company was RMB832 million. Non-IFRS net profit margin was 11.5%. As of December 31, 2021, our combined balance of cash, cash equivalents, term deposits, and short-term investments were RMB24.7 billion, representing an increase of RMB236 million from Q3 2021. In March 2022, we won the bid to acquire certain land use rights in Shenzhen at RMB1.05 billion, and the first half of the consideration was already paid. Next, I’ll briefly discuss our performance for the full year 2021. Our total revenue for 2021 was RMB31.2 billion, up 7% year-over-year. Revenues from online music services were RMB11.5 billion, up 23% year-over-year, to which the music subscription revenue is a large contributor. Our music subscription business grew rapidly throughout the year with annual revenues of RMB7.3 billion and a 31.9% annual growth rate. Revenues from social entertainment services declined slightly by 0.1% year-over-year, given the increased competition and the changing macro environment. Net profit attributable to shareholders of the company under IFRS and non-IFRS was RMB3 billion and RMB4.15 billion, respectively. Finally, I’ll close my prepared remarks with some comments on the outlook for 2022. In 2022, our core music business, particularly music subscriptions and advertising, are expected to grow and reach operating regimen for the full year 2022. We are taking various actions to improve ARPPU and expect to see a slow recovery in 2022. Additionally, we are closely monitoring content costs with increased requirements on our ROI. For social entertainment services, with challenges from competition and the changed market environment, we are tightening our cost controls and adjusting revenue-sharing ratios to maintain healthy gross margins while keeping revenue scale. Furthermore, from a company-wide perspective, we are focusing on our core business and are taking actions to control high costs and the relative expenses, improve headcount efficiency, and closely monitor ROI to reach to each channel for marketing expenses. Finally, under the overall market environment, we continue to invest mindfully in new products and services, including long-form audio and international business, with a focus on investment returns and future growth potential. This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Operator, Operator

Our first question comes from Eddie Leung with Bank of America. You may now go ahead.

Eddie Leung, Analyst

Good morning and thank you for taking my questions. We noticed the user base declined sequentially in the fourth quarter. So just wondering heading into the first quarter of 2022 given the current COVID situation aspect, could you share with us the traffic trend you are seeing? And then more similarly to that, could you also talk a little bit about the traffic or usage, not just the user base, but for example, the number of streams, the time spent by users in 2021 despite the slow growth of your user base? So, just wondering if all of these features and content development on the platform have any impact on the usage of the existing users? Thank you.

Tony Yip, Chief Strategy Officer

I’ll take a first crack, and then perhaps Ross can also supplement. In terms of our online music MAU, we saw a slight decline of 1% in the fourth quarter on a year-over-year basis, primarily as a result of churning of some of our casual users served by pan-entertainment platforms elsewhere. But I think it’s important to note that within the mix of that music MAU, QQ Music actually saw a year-over-year increase in its MAU, whereas Kugou Music and Kuwo Music saw a bit of a decline. The reason for that difference is because QQ Music is the first flagship app to fully and completely implement our four pillars of music entertainment experience: sing, watch, listen, and play to its full extent, with more community features and social focus among the younger demographics. And so we’re pleased to see that these initiatives are starting to bear fruit. As we work towards streamlining and making more product enhancements along the same lines also to Kugou Music and Kuwo Music, we are hopeful that we’ll see some improvements in the MAU throughout the rest of the year.

Ross Liang, CEO

Thank you, Tony. I’ll do a brief translation. So Ross is talking about the main challenges facing our MAU with respect to Kugou Music, primarily because of the long history of the app. It has more room for improvement. In particular, this year, we’ll focus on smart recommendations, better operations amongst our music catalog, expanding into more vertical scenario-based listening such as exercising and sleeping scenarios, and focusing more on Gen Z, younger demographics. And with all these initiatives, we hope to stabilize the MAU decline and overall, with QQ Music starting to see growth, particularly around its iOS user base given this improving brand image among the young demographics. We do expect this to be able to stabilize some music MAU for the rest of the year.

Operator, Operator

Our next question comes from Alicia Yap with Citigroup. You may now go ahead.

Alicia Yap, Analyst

Hi. Good morning, management. Thanks for taking my question. I have a question, follow-up on the outlook. So in light of the latest macro environment and also the competition, any color management could share with us how the business is trending into the first quarter this year? And also over the course of 2022, any qualitative color on how we should expect the online music growth rate and also the social entertainment revenue growth rate? And specifically, if you could also provide some color on the expectations for online advertising revenue growth this year. Thank you.

Tony Yip, Chief Strategy Officer

In terms of our outlook for Q1, we currently expect total revenues on a year-over-year basis to decline by around mid-teens. In particular, live streaming continues to face competition in a challenging macro environment. And secondly, we’re in the process of adjusting our advertising business model to embrace a changing environment and industry adjustments. And thirdly, former licensing contracts have been renewed as non-licensing contracts and these have an impact on sublicensing revenue falling away this year. For the full year 2022, we currently expect total revenue on a year-over-year basis to decline by around mid-single digits. While all the above factors also apply, we do expect to see a recovery from these factors in the second half. In addition, for the full year, we expect to be able to grow online music subscribers by approximately 20% on a year-over-year basis. That translates to an average quarterly net adds in online music subscribers of between 3.5 million to 4 million. Now we understand the – I think we have to position the context of the very strong growth over the past few years is obviously due to all of the things that I have mentioned. We prioritized growing the subscriber base ahead of ARPPU. As a result, we have seen some ARPPU decline. For example, in Q4, our ARPPU declined by 9% year-over-year. However, we continue to believe there is ample growth potential for subscription services over the long run, and that view remains unchanged. But as we plan ahead for this year, we want to focus not only on the quantity of the subscriber growth but also on the quality of the overall revenue stream. So we will look to take a more balanced approach in growing subscribers and maintaining a more stabilized ARPPU. Additionally, we will seek to supplement our subscription revenues with advertising revenues, both of which we expect to have ample long-term growth potential within our business despite short-term headwinds as it relates to advertising. Through a variety of cost management initiatives to improve efficiencies, we believe our non-IFRS adjusted net margin is expected to be in line in 2022 compared to 2021. In particular, as Shirley mentioned, as a result of very healthy growth in our core online music business, which is online music subscription and advertising, excluding long audio, we expect to continue to see an improving margin trend and achieve profitability at an operating profit level for the core online music businesses, excluding long audio.

Operator, Operator

Our next question comes from Alex Poon with Morgan Stanley. You may now go ahead.

Alex Poon, Analyst

Thanks, management for taking my question. My question is related to our overall net margin into 2022 and 2023. Previously, because we have our live stream business and social entertainment business, higher-margin business, growing slower than our music, there is a mix change and resulting into lower net margin. How should we think about the trend in 2022, because just now you also mentioned that we are controlling some of the revenue-sharing ratios and headcount, etcetera. Can we see some stabilization in the decline in net margin sometime in 2022? Thank you.

Tony Yip, Chief Strategy Officer

Shirley, do you want to take that?

Shirley Hu, Chief Financial Officer

Okay. We expect that the net margin in 2022 will be stable compared to that in 2021. Online music revenues will continue to grow as paying users increase and advertisement revenues improve. We expect paying users to increase by 3.5 million to 4 million each quarter. We will balance between ARPPU and paying user increases expected throughout the year 2022. Additionally, we are tightening controls to manage costs to achieve increased ROI on our content investments. The gross margin of online music will continue to increase in 2022, and we expect that the music business will breakeven at the operational level. However, social entertainment revenue will be under pressure in 2022 due to competition from other platforms and macroeconomic factors. We will control the revenue-sharing ratio of WeSing to increase its gross margin. The gross margin of the live streaming business on Kugou and the Kuwo platform will also remain stable. Additionally, we expect that all streaming and international businesses will experience considerable growth, but the revenue ratio of new businesses is higher than that of video live streaming, which has a negative impact on gross margin. One main reason for pressure on the gross margin in 2022 will be the change in revenue mix, as revenues from online music and audio live streaming increase while revenues from high-margin businesses like live streaming decrease. Regarding operational expenses, we will meet ROI requirements and control marketing and sales expenses while eliminating non-potentially profitable projects. For long-form audio, we will continue investing in this new business while experimenting with various ways to expand monetization and control content costs. We expect long-form audio to reach breakeven gross margin levels. Therefore, we believe when we implement all these strategies, our net profit margin will remain stable in 2022 compared to 2021. In 2023, we believe we can increase our net profit margin.

Operator, Operator

Our next question comes from Charlene Liu with HSBC. You may now go ahead.

Charlene Liu, Analyst

Thank you for taking my question. Actually, they have already been asked. I am good now. Thank you very much.

Operator, Operator

Our next question will come from Wei Xiong with UBS. You may now go ahead.

Wei Xiong, Analyst

Sure. Thank you, management. I just want to follow-up on the point of the online music user growth, because we have seen that number has consistently grown at the high end of your target for the past year. So, I wonder could you share what’s driving that very robust growth? And which channels do you see having the most effective way in terms of acquiring new paying users? And in terms of the paying ratio because we have a target of 20% growth this year, is there a target for the paying ratio if we look at the long term and what kind of ceiling that we are looking at here? Thank you.

Tony Yip, Chief Strategy Officer

Yes. In terms of driving our long-term growth in the subscriber base, there are actually many tools that we can leverage. Obviously, providing premium content and attractive content and also providing a high quality of service to our subscriber base is very important. This includes privileges that users are able to access, such as unique access to digital albums or unique content offered by TME Live. In addition, we are actively expanding multiple channels and exploring joint partnerships with external parties as well as opportunities internally. For example, we engage in cross-selling campaigns between music subscriptions and long-form modules. We also participate in joint campaigns with external parties as well. Additionally, as our IoT business reaches a large enough scale and continues to grow at a fast pace, the subscription for IoT devices could act as an effective cross-marketing campaign for us. Periodic price promotions are also an important driver. As I mentioned, I think it’s important to see that the context of the very strong growth over the past few years is obviously due to all the aforementioned measures. We have prioritized growing the subscriber base over ARPPU over the past three years. We are at a stage where we believe the entire industry will benefit, not just TME, by focusing more on quality of service and less on price promotion. This will create more lasting value for music subscription services that users will learn to appreciate over time and help lay a stronger foundation for the long term. Therefore, we seek to strike a better balance between growing our paying subscribers and maintaining non-paying free user base, which still comprises a vast majority of our user base. This will also allow us to effectively generate monetization opportunities from the free user base and adapt to the competitive landscape. One example of the new ad monetization model we are currently beta testing among a small group of users is that some free users have an option to opt in to watch a video ad in exchange for accessing the subscription service for a short period of time. For example, if you watch a 30-second or 60-second ad, you might be able to unlock the subscription service for 30 minutes or 60 minutes. The benefit of that is we can generate ad revenues from users who may otherwise be difficult to convert to subscribers. After experiencing the premium subscription service, it may actually increase their conversion rate to become subscribers. Thus, this approach allows us to generate advertising revenue while increasing the overall quality of our users.

Cussion Pang, Executive Chairman

We will also be focusing on the advertising-based business model as well.

Tony Yip, Chief Strategy Officer

Yes. I think as Cussion mentioned, that’s right. At the same time, we—this approach will allow us to better manage between growing our paying subscribers and also maintaining our non-paying free user base, which is still a vast majority of our user base. By effectively generating monetization opportunities from the free user base, this strategy also provides us with more flexibility to adapt to a prospective competitive landscape. One example of the new ad monetization model we are currently beta testing among a small group of users is that for free users, some of them have the option to watch a video ad in exchange for unlocking the subscription service for a short period of time. For example, if you watch a 30-second or 60-second ad, you might gain access to the subscription service for a period of time. The advantage of this strategy is that we can generate advertising revenues from users who may otherwise be difficult to convert to subscribers. After these users experience the premium subscription service, it may encourage them to convert to subscribers, thereby increasing advertising revenue while enhancing user engagement.

Operator, Operator

The next question comes from Thomas Chong with Jefferies. You may now go ahead.

Thomas Chong, Analyst

Hi. Good morning. Thanks management for taking my questions. May I ask about our M&A strategies for this year? Given we have just closed a deal with a controlling stake for an entity in Japan. And also just want to get a sense about how would the deal impact the Q1 revenue? And my second question is about, in the press release, we talked about coming back to Hong Kong by way of introduction. Just want to get a sense about our management in this regard and the timeline that we should be anticipating. And then my final question is about social entertainment revenue. When should we expect it to stabilize in the future? Thank you.

Tony Yip, Chief Strategy Officer

Sure. In terms of M&A, we adopt a very prudent approach to capital management. We are constantly on the lookout for attractive M&A opportunities. We focus on strategic investment opportunities that provide synergies and that are complementary to our core businesses. The recent acquisition of M&E Mobile Limited fits that criteria. They operate the leading online karaoke app, Pokekara in Japan. This acquisition complements our experience in managing the world’s largest online karaoke product and also allows us to broaden our international footprint into Japan, where we previously did not have a presence. In terms of the Hong Kong listing, we aim to provide our shareholders with an additional trading venue and protection amid changing regulatory environments. We have already commenced the process of pursuing a secondary listing in Hong Kong through a listing by way of introduction. It is important to note that this is a direct listing without offering new shares. The intention is to allow shareholders to enjoy the benefits of an additional listing without the impact of dilution. As for timing, we are working diligently, but we need to obtain several regulatory approvals and will continue to expedite the process. We will make appropriate announcements as there are major developments. Lastly, regarding the trends in social entertainment revenue, we still face challenges in the first quarter. Generally, Q1 is always a difficult quarter due to the Chinese New Year holidays, during which many live streaming hosts take a break, leading to weaker revenue. Additionally, there are changes to industry adjustments around taxation that have effectively increased the cost of doing business for many live streaming hosts, which has led some to adjust their activity levels. Overall, we aim to stabilize the decline, and we believe Q1 will be a challenging period. However, as we look into the rest of 2022, we anticipate a gradual recovery, referencing Q1 as a low base. The initiatives we are enacting to drive that recovery include a continued revamping of online karaoke rooms in WeSing. In the last quarter, we mentioned that we are adding casual games like 'Karaoke Farm' and 'Karaoke Town' to diversify our revenue streams. Furthermore, we are enabling more inter-room and cross-room interactions, which resulted in our recent online karaoke room revenue achieving year-over-year growth in the fourth quarter, even while traditional live streaming revenue within WeSing recorded a decline. The second area of major initiatives is audio live streaming, which is a complementary use case to our core music listening experience. We are seeing good growth in both user base and revenues, and expect to grow our audio live streaming business in China, as well as leverage our expertise to expand our presence overseas and monetize through audio live streaming in our overseas products, such as WeSing and our newly acquired Pokekara, along with M&E’s product portfolios. QQ Music live streaming also leads the way as a flagship in audio live streaming, with revenues experiencing strong double digits in year-over-year growth. Throughout 2021, we attracted approximately 12,000 musicians to live stream, making our platform a go-to place for musicians to connect and interact with their fan base. We anticipate holding a good double-digit year-over-year growth rate for 2022 in our audio live streaming.

Cussion Pang, Executive Chairman

Regarding the M&A strategy, I want to emphasize that our goal is not merely to pursue financial investments, but to invest in companies that have synergy with our core business. The recent acquisition of Pokekara is a strong example, as it supports our overseas development of the WeSing platform. This project is something we look forward to. Besides the platform side, we are also focusing on content investments as well. Over the past 3-4 years, we have proactively engaged in the joint production of music content with various music labels. We have also begun investing in some music labels and setting up joint ventures. This is another illustration of our M&A strategy, focusing on building synergistic businesses that align with our core strategies. With our strong cash base, approximately RMB25 billion in our accounts, we will continue to seek optimal uses for our advantages. When the right opportunity arises, we are more than willing to make further investments to aid the company's growth and ensure our long-term success. However, again, we will approach this prudently.

Tony Yip, Chief Strategy Officer

Operator, we have time for one final question.

Operator, Operator

Okay. Our final question comes from Xueqing Zhang with CICC. You may now go ahead.

Xueqing Zhang, Analyst

Thank you. Thank you, management for taking the question. My question is related to TMELAND. We launched TMELAND at the end of last year. This quarter’s earnings conference call was also held at TMELAND. Can management share more color about TMELAND? How does it help to develop our business and how does management see the music industry’s opportunity in the metaverse? Thank you.

Tony Yip, Chief Strategy Officer

Ross, would you like to add color?

Ross Liang, CEO

In terms of TMELAND, it is our flagship metaverse initiative into the virtual world. There are many use cases of TMELAND. The first is that we will be using it as an event hosting venue for special events, such as one that we hosted in collaboration with a prominent artist. There will also be special settings customized for particular artists. We will partner with more and more artists to develop unique settings for them. We will also be hosting virtual concerts for these artists, some of which may feature avatars performing in this environment. Secondly, we will apply TMELAND technology into the online karaoke room, as well as virtual nightclub settings. This will encourage users to interact with one another in these virtual environments, creating new user engagement and monetization opportunities. Thirdly, we are planning for QQ Music to see an upgrade incorporating metaverse features, where users have their own individual rooms to curate their music for their visitors. These visitors can experience music together and play instruments collaboratively. Additionally, for artists, we will be creating virtual showrooms where partnering artists can showcase their albums, allowing users to explore and listen to their music under different audio effects. Overall, we aim to create a parallel virtual world mirroring the physical world as much as possible, bridging the gap between our current 2D platforms and 3D environments. Thank you for all the questions and for joining us today. Please feel free to contact TME’s Investor Relations team if you have additional questions. This concludes today’s call, and we look forward to speaking with you all again next quarter. Thank you and goodbye. Thank you.

Shirley Hu, CFO

Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.