Tencent Music’s Q2: User Growth and Entertainment Decline

Tencent Music Entertainment Group (TME) unveiled its unaudited financial performance for the second quarter, concluding on June 30, 2023. The report presents a revenue of $1 billion USD, showcasing a 5.5% year-on-year growth, with net profit attributable to equity holders reaching $180 million USD, reflecting a remarkable year-on-year growth of 51.6%.

A noteworthy element of the report is the significant expansion within TME’s online music services sector. This growth is attributed to a diverse range of initiatives aimed at solidifying the company’s resonance among music enthusiasts. These initiatives encompass enhanced listening features, recommendation functions, innovative IoT applications, and individualized experiences through AIGC ventures, contributing to heightened user engagement throughout the quarter.

A pivotal moment for TME was the achievement of revenues from online music services surpassing those of social entertainment services for the first time in the company’s history. Simultaneously, an all-time high paying ratio and ARPPU within the online music services segment were recorded. The financial report unveils an impressive 47.6% year-on-year revenue growth in online music services, equivalent to US$586 million. This surge constitutes 58.3% of total revenues and is primarily driven by substantial growth in music subscription earnings, complemented by augmented returns from advertising services.

An important highlight is TME’s accomplishment of surpassing the historical milestone of 100 million online music-paying users in June. Additionally, the average monthly count of paying users for this quarter reached 99.4 million, reflecting a 20.2% year-on-year increase and a quarter-on-quarter growth of 5.0 million. This growth is attributed to the company’s responsiveness to evolving music consumption patterns among users, driving a continuous enhancement of the music experience to meet elevated standards and preferences for quality.

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Key Highlights from TME’s Latest Report:

  • Healthy Financial Growth: TME reported total revenues of US$1.01 billion, marking a 5.5% year-on-year expansion driven primarily by robust online music services. Revenues from music subscriptions witnessed a 37.2% year-on-year growth to US$399 million. Net profit attributable to equity holders of the company recorded a 51.6% year-on-year increase, totaling RMB 1.30 billion (US$179 million). Despite potential impacts on social entertainment service revenues in the latter half of 2023 due to enhanced measures and risk controls, TME retains optimism about delivering year-on-year net profit growth for 2023, anchored in the strong performance of online music services, ensuring the company’s enduring development.
  • Exciting Performance in Online Music Subscriptions: Through strategic operational enhancements, enriched subscriber privileges, and compelling music content, TME achieved growth in paying users, reducing churn rates, and enhancing user retention. This led to a record-breaking 99.4 million paying users reached in Q2 2023. The monthly ARPPU experienced consistent growth over five consecutive quarters, peaking at RMB 9.7. Effective promotional activities, sustained user retention, and appealing member privileges contribute to this rise.

The financial report underscores TME’s dedication to cultivating a vibrant content ecosystem, exemplified by the Tencent Music Entertainment Awards 2023, partnerships with esteemed labels and artists, and the integration of AIGC music-making tools to aid indie musicians in production, transactions, and promotional activities within the Venus platform.

The report emphasizes that the revenue increase is primarily driven by the rapid growth of online music service income, encompassing subscription and advertising revenue. Notably, online music service revenue witnessed a 47.6% year-on-year surge, reaching 580 million RMB, constituting 58.3% of total revenue. This growth encompasses a 37.2% year-on-year increase in online music subscription revenue, amounting to 2.89 billion yuan, with a user base of 99.4 million and a net gain of 5 million compared to the previous period. The average monthly income per paid user for online music services increased from $1.2 to $1.3 USD, with the expansion of paying users and average payment amounts supporting the growth.

Moreover, the report highlights advertising services’ diverse product portfolio and innovative ad formats, maintaining strong appeal to advertisers across various industries and verticals, including noteworthy spending from the e-commerce, gaming, and tourism sectors.

However, as Tencent Music Entertainment Group, a long-term “revenue powerhouse,” the social entertainment sector has experienced a significant decline in this quarter.

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According to the financial report, the revenue from social entertainment services and other services in the second quarter decreased by 24.6% from $552 million in the same period of 2022 to $417 million. “This decline is mainly due to our proactive measures in service enhancement and risk control management, aiming to provide a more music-focused user experience,” explained Tencent Music Entertainment Group.

Tencent Music Entertainment Group‘s CEO, Peng Jiaxin, stated, “Our online music service revenue (580 million USD) has surpassed social entertainment service revenue (420 million USD) for the first time, marking another significant milestone in the company’s development process.

But compared to the joy of the rise in online music services, the decline in the revenue share of social entertainment services could be a bigger concern for Tencent Music Entertainment Group. Because the field of online music services, it is generally similar to other paid membership fields such as long videos, after experiencing rapid development, it will also enter a period of stability, with a ceiling on the membership scale.

In the social entertainment landscape of Tencent Music Entertainment Group, there are main features such as “全民K歌” (Everyone Sings) and music live streaming. The decline in this area is not only due to Tencent‘s proactive risk management but also fierce competition from the market. Short video platforms with more abundant traffic have taken away a larger market share in the live-streaming field, making it difficult for Tencent Music Entertainment Group‘s music-focused live-streaming business to compete with comprehensive platforms.

In the second quarter report, Tencent Music Entertainment Group also explicitly pointed out the downturn in social entertainment services, which will have a negative impact on Tencent Music’s total revenue for the full year of 2023.

Our performance in the second quarter of social entertainment services was weaker than expected, and this business will continue to face pressure in the second half of 2023. Therefore, we anticipate a low double-digit year-on-year decline in total revenue for the third quarter of 2023, and a mid-single-digit percentage decline in total revenue for 2023.

In the second quarter, Tencent Music Entertainment Group implemented cost reduction measures to increase efficiency and lower overall operating expenses. The financial report shows that its total operating expenses decreased by 11.4% year-on-year to $170 million, with the percentage of total operating expenses to total revenue decreasing from 20.5% in the same period of 2022 to 17.2%. Cost reduction measures mainly involved reducing sales and marketing expenses, while improved personnel efficiency led to a decrease in related personnel expenses.

Tencent Music Entertainment Group still maintains a stable cash flow. As of June 30, 2023, the total balance of cash, cash equivalents, and time deposits held by Tencent Music was $4.18 billion USD, compared to $3.9 billion USD on March 31, 2023. This growth is primarily due to cash flows generated from operating activities.