Ladies and gentlemen, good evening, and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group First Quarter 2022 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, Mr. Tony Yip. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. TME announced its quarterly financial results today after the market closed, and 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 updates; next, Mr. Ross Liang, our CEO; and I, Tony Yip, as CSO, will offer additional thoughts on our product strategies, operations and business developments; finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. 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 IFRS in the company's earnings release and filings with the SEC, where you are reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure. The other non-IFRS measures are not uniformly defined by all companies, including those in the same industry. With that, I'm pleased to turn over the call to Cussion, Executive Chairman of TME. Cussion?

Thank you, Tony. Hello, everyone, and thank you for joining our call today. In an era of increasing entertainment choices, and evolving market landscape, a sustained competitive advantage is awarded to those who offer users a differentiated experience. With this in mind, in the first quarter of 2022, we continued to build new professional and personal use cases and interactions around our dual engine content and platform strategy, as well as expand our efforts to augment the scale and fortify the quality and competitiveness of our music catalog. Meanwhile, we strove to enhance user experience through innovations built on our 4 pillars of music entertainment, namely, listen, watch, sing and play, driving momentum for our long-term success and promoting the healthy development of the music industry. First and foremost, we remain committed to energizing original content production, leveraging our technology-driven production capabilities and strength in mobilizing promotional resources. The benefits of our overall content ecosystem are increasingly manifested. With our Xingyao Plan, , and Galaxy Plan , we empowered original content production, leveraging our technology-driven solution to add value across demo and single discovery throughout the production, distribution and promotion phases of these original works. Our high hit rate for original content blockbusters is supported by our middleware platform, which integrates first algorithm-driven screening of lyrics, songs and demos; second, AI voice matching capability built upon a stored library of hundreds and thousands of voices; and third, a targeted promotion system based on real-time data analysis to help artists and songs, who wish to invite audience and go viral. Empowered by these advanced technologies, our artists have created quality pieces as well as trendy ones, serving a wide range of users' cases. Notable standouts in the first quarter included Mirage, , and Drown, , 2 sweeping successes that topped multiple…

Thank you, Cussion. Hello, everyone. Moving on to our platform strategy. In the fourth quarter, we continue to invigorate our ecosystem and innovate around the 4 pillars of our music entertainment experience, listen, watch, sing and play. Beginning with the smallest details, we continuously polish our products to meet the multifaceted needs of diverse cohorts and have strived to create a sense of belonging, making our products an uncompromising must have in our users' daily lives, which we strive to listen our users' core demand, we are providing innovative and professional product features to elevate users' listening experience. Technology is so deeply embedded in our core corporate character that it has become part of our DNA. QQ Music was the first in China to launch advanced listening functions, including the digital music enhancement engine, which can significantly improve sound quality with 1 simple click, and a replay and a gapless playback, which help equalize music volume and deliver us music listening experience between consecutive song plays, particularly compatible with classical music streaming. These new functions have been well received as millions of users incorporate this feature into their daily practice. We have also optimized our smart recommendation filter, and have become more in tune with our users' tastes as demonstrated by QQ Music's recommendation, penetration rate, reaching a new record high by the end of the first quarter, along with recommendation streaming, volume and time spend both recorded stronger double-digit growth year-over-year. In addition, our upgrade QQ Music popularity index with real-time updates on the number of listeners online expanded the music coverage and additional song information has considerable strengthened user sense of participation with their input directly influenced a song or artist prominence. The second pillar of our overall multisensory entertainment experience offering is watch. We are deepening our…

Thank you, Ross. Hello, everyone. In terms of operating results in the first quarter, our online music MAUs were $604 million, down slightly year-over-year. Despite churn of casual users who opted for other pan-entertainment platforms, we are encouraged by the progress we've made in our original content production capabilities, music catalog and innovative product features, which continue to strengthen the engagement of our core user cohort. Our IoT service MAU continued to witness a double-digit year-over-year increase in the first quarter, which was primarily attributable to our comprehensive IoT entertainment content, integrating music, singing, live streaming, long-form module and more. In the first quarter, we work with Little Genius smartwatch, , and multiple electric vehicle manufacturers such as Nio, Weili and to provide Karaoke functionalities on IoT devices. Due to macro headwinds, our online music revenue decreased year-over-year in the first quarter. However, our fundamentals remain healthy, and we successfully sustained our growth momentum in subscriptions. We achieved a net add of 4 million in the first quarter and a paying user penetration rate of 13.2%. At the same time, user retention remained largely stable. For the remainder of 2022, we are committed to delivering a healthy balance between paying user growth and ARPPU, which reflects the quality of growth of our online music business. In the first quarter, as the pandemic weighted on our advertising business, we continue to implement innovative, diverse advertising solutions to unlock more ad revenue potential. To fully leverage our large user base, we are testing a free listening mode where users can listen to songs for 30 minutes for free with every 15 seconds of video rewarded ads that they watch. In addition, our music promotion service and playlist bonus tasks , which allow for accurate targeting of the right audience and increase in…

Thank you, Tony. Hello, everyone. Actually, I'll discuss our results from a financial perspective. Our total revenue for Q1 2022 were RMB 6.6 billion, down by 15% year-over-year and by 20.7% sequentially. In the first quarter of 2022, our IFRS net profit was RMB 649 million, and the non-IFRS net profit was RMB 939 million, which represented a sequential increase of 8% as a result of our focus on operating statements. In the first quarter of 2022, music subscription revenues continued healthy growth with revenues of RMB 1.99 billion and a year-over-year growth of 18% as we benefited from expanding sales channels and paying user using high quality content and the services we provide. Online music paying users grew to 80.2 million, up 32% year-over-year, represented 4 million net add sequentially. Most of the app was RMB 8.3 this quarter compared to RMB 9.3 in the same period last year as we offer more effective promotions to attract the users. Taking out the impact from fewer calendar days in Q1, ARPPU maintained stable sequentially, as we book on the quality growth of our overall subscription revenue. Revenues from advertising dropped on year-over-year, and sequentially, as our advertising being continued to be negatively impacted by the investor adjustment and seasonality. Our advertising revenues were also impacted by outbreak of COVID-19 and the lockdown in some major cities. We are proactively expanding the added inventory, optimizing the display and rolling out innovative advertising formats to manage these challenges. While we expect ad growth will continue to be impacted in the short term due to headwinds from regulation and the regional COVID-19 outbreak, we remain confident about the long-term growth potential and expect advertising revenue to start recovering in the second half of 2022. Sublicensing revenues also dropped on a year-over-year basis and…

Our first question will come from Alicia Yap with Citigroup.

I have a question related to how the lockdowns and the COVID has impacted us. So if management can share or elaborate the overall Tencent Music, how it has been, for example, the prolonged lockdown in Shanghai's impact, any positive impact on the time spend, on the online music stuff or even the social entertainment active user? Specifically, can you also -- have you seen any spike in the user demand or time spend for your long-form audios or the podcast? And then any negative impact from the spending willingness and also the spending behavior.

Sure. In terms of traffic on the music side, as a result of various investments in the innovative features that we have been making over the past several quarters, particularly in QQ Music, we actually did not see any meaningful negative impact from the lockdown. So as we reported during the early remarks, we actually saw a year-over-year increase in the MAU with QQ Music. And then with regards to the social entertainment side, specifically with regards to leasing and the online singing components of that product feature, we actually saw a slight increase in the online singing activities as a result of people spending more time with karaoke during their quarantines. However, with respect to revenues, there was a meaningful impact on the advertising revenue as a result of a large number of our advertising customers being in lockdown situations in major cities. And also, it had an impact on our live streaming revenues because both the hosts are also affected in terms of the activities and affected the users' willingness to spend on live streaming.

Our next question will come from Alex Poon with Morgan Stanley.

My question is related to our music ARPPU trend. Since beginning of this year, we have started scaling back some of the promotions to balance between the growth of net adds and ARPPU growth, and we are also launching new membership programs which has very high ARPPU. So how should we think about the ARPPU trend from second quarter, third quarter, fourth quarter onwards?

Yes. Thank you. Well, I think let me kind of spend a minute to talk about the overall subscription revenue growth because that plays hand in hand with the ARPPU trends. In terms of subscription, our overall goal for subscription revenue year-over-year growth for this year is to achieve close to 20% for the full year. And there are 2 ways to achieve this objective. The previous approach was to focus on subscriber net adds of 3.5 million to 4 million per quarter, which translates to approximately 20% subscriber growth counting from the end of last year. And then ARPPU, that is on a slight downward trend. The new approach that we'll be implementing going forward is to have a better balance between subscriber growth and ARPPU. And we'll work on improving the ARPPU through less promotions and other measures such as super VIP that we mentioned. And as a result, we expect the ARPPU to increase going forward with Q1 as a base. For subscriber numbers, because of the better ARPPU growth, we can have lower quarterly net adds less than the 3.5 million to 4 million range that we previously talked about. But overall, still achieved a close to 20% growth in subscription revenue with a more healthy mix of ARPPU improvement and subscriber growth.

Our next question will come from Xueqing Zhang with CICC.

And my question is related to Tencent ecosystem, especially cooperation with WeChat. Since there is , we see a series of new functions have launched on WeChat. Could management share with us the key directions of cooperation and what functions are particularly helpful? And wondering how does it help with the operational data.

So I'll just spend a quick minute to do a short-term translation in the interest of time. We continue to deepen our cooperation with WeChat with the overall objective of letting music to become an important part of the social use cases. And as Ross mentioned, there are a number of areas of our corporation. It includes things like in the Weixin profile, you can change the profile based on the music that you've been listening on. In the Weixin audio call ring tone, you can now customize using music from QQ Music. During Weixin chat, you can directly share music from QQ Music. And then also with regards to video account, which we've mentioned in the prepared remarks, we continue to see very rapid growth in the operating metrics such as daily video views. And with respect to live concert, that's also a key area that we are looking to expand our cooperation in. We have done a number of very successful live concert events such as ones with Leslie Chong, Mayday, et cetera. And increasingly, these events would have a monetization element such as ad sponsorships and others. So overall, we provide a very healthy music content vertical to help enrich the video account content ecosystem for Weixin. In return, Weixin provide us with very complementary promotional capability, and we also help them with artist partnership to strengthen that partnership.

Okay. Besides the content distribution and promotional capabilities that we mentioned that we work together with Weixin, I think there's one more important point is we are working with them really closely on the program development side. So such as online concerts, we are not just distributing it, but we are also working on the detailed production to ensure a high quality of online music concerts will be delivered to our users. So this is the top priority of the TME team and also the Weixin Video Account team as well. We have been in the Tencent corporate umbrella for a long time, and we work together peer-to-peer, side-by-side. So I think that we are really working together to create synergies. And we are looking forward to have a lot more, very high-quality content will be provided through this platform. Besides video, the top tier are these concerts. We are also working on the long tiers and also some of the really high potential musicians content as well. So a lot more wonderful content can be expected in the future, and we have a lot more to come.

Our next question will come from Eddie Leung with Bank of America Merrill Lynch.

Could you talk a little bit about the outlook for your live streaming business for the rest of the year, especially given recent regulations in host taxation problem, as well as protection of minors?

In terms of the outlook for the full year, in the last earnings call, we said that for the full year 2022, we were expecting total revenue year-over-year to decline, to be around mid-single digit. And obviously, that was prior to a number of recent regulatory announcements, such as ones you mentioned, as well as from the very recent impact from the pandemic measures. And without those impacts, obviously, the previous guidance would have continued to apply. However, following these recent pandemic measures, as well as latest regulation, specifically the live streaming one that you talked about, which comes into effect in June, we're likely to see live streaming revenue be impacted for the rest of the year because the new regulation and the new restrictions around tip ranking as well as around PK, i.e., competition between -- performance during live streaming sessions, don't come into effect until next month. We're not yet in position to quantify that impact for you at this point. We -- because the details will depend on the actual detailed execution and the implementation of those restrictions. And we'll be working very closely with the regulator to figure out exactly how best to be fully compliant. And then to offset some of these challenging pressures, obviously, we will continue to invest in building new opportunities to mitigate. And these opportunities in social entertainment line mainly around audio live streaming where some of the restrictions recently announced are less prevalent in audio live streaming. And then secondly, with international expansion within our social entertainment business that we see opportunities in Southeast Asia, Japan as well as the Middle East. And then lastly, in the longer run, as we continue to build out our metaverse experience through our first pioneering virtual music playground, TMELAND, we'll continue to host more and more exciting and interactive virtual events to pioneer a new form of social entertainment.

Our next question will come from Wei Xiong with UBS.

My question is on margins. Management mentioned about a few factors that affected our gross margin just now. So just wondering how should we think about the gross margin trending in the next few quarters? And also together with our focus on efficiency improving this year, any areas we see still have potential for further cost savings? And how will that impact the net margin for this year?

Okay. Gross margin is 28% in Q1, down by 0.8% sequentially. The main reason is advertising revenue dropped quickly and has higher contribution gross margin. During Q1, there are some positive factors on gross margin. revenue sharing ratio of social and Tencent business have been controlled and decreased sequentially. Second, adapted to new macro environment, we increased the ROC requirement of content across. We restructured the agreement with some music labels and stayed positive trend back, that has a positive impact on our gross margin. And looking forward to 2022, we expect our gross margin will be increased in the next quarter if our social entertainment revenue can be stable. We will focus on increasing business with all business units and cost items. And for the operating margin cost and expense control to improve operation, this business is one of our top projects this year. We have taken tight control on selling and marketing expenses in Q1, resulting in 51% decrease on a year-over-year basis. We will further monitor our eye of each promotion channel and manage the internal and external resources more effectively to improve the business of selling and market expenses. And for high account management, we will continue to invest in new products and new buildings, such as long-form audio, international business and the musician program. We will now pay more attention to improve the profitability of business and products such as optimizing organizational alignment and improving the headcount efficiency. And looking forward to 2022, we expect our adjusted net profit can be increased sequentially, but adjusted net margin can meet or above of 2021, and our music business can breakeven on operational level. That's all.

Our next question will come from Ronald Keung with Goldman Sachs.

I want to ask on the pricing side on subscription. Given that the ARPPU has fallen over the past -- sequentially over the past few quarters. So with the COVID impact, with the macro impact, yet we do think the competition has been quite rational. So I want to hear about the pricing trend outlook? When will we see a stabilization in ARPPU for subscription? And also any iterations on -- iteration on long-term paying subs targets?

Yes. I think as I previously mentioned, the new approach that we'll be taking with our subscription revenue is to have a better balance between subscriber growth and ARPPU growth. And even though our recorded ARPPU for Q1 saw a slight sequential decline, that was mainly a result of the lower number of days in Q1. If we adjust for that, the ARPPU for Q1 versus Q4 is actually fairly stable. And on the -- in using Q1 as a base, we are actively working on improving the ARPPU through, obviously, less price promotion, as well as through other measures such as bundling super VIPs and other measures as well. And so we'll be expecting the ARPPU to increase as a trend with Q1 as a base. And we talked about the subscriber as well because of our goal to achieve overall close to 20% of subscription revenue for the full year, and with the rising ARPPU, we can have a slightly lower quarterly net adds less than the 3.5 million to 4 million range that we previously talked about. But still, we should be able to achieve close to 20% target of subscription revenue growth for the full year.

Yes. I think we are encouraged by the strong growth of our online music subscription business and especially under the macro headwinds. And also, we are achieving a pretty good -- the subscription rate is over 30% right now. I think that we will continue to pull in more high-quality content into the subscription plan, which help us because we really learned that a lot of users really express the value of music content so that they are willing to pay for it. In terms of the ARPPU, we can also drive it by, for example, launching out some of the new VIP plans with new privileges to our users, which has a higher price tag than the regular one that we have. We can also have many different ways to drive the monetization. For example, we can also work with different business partners to work on the new channels for production -- for promotion as well. So that, I think, that overall, the online music subscription business for TME is we are still developing in a really healthy manner.

Our next question will come from Thomas Chong with Jefferies.

Given the amount of cash that we have at the end of Q1, and when we look into our strategies going forward, how should we think about the priority in terms of cash usage? Are we going to do some more M&A in international market share buyback or considering dividends? And may I also ask about the progress on the Hong Kong listing by way of introduction?

Yes. In terms of our cash utilization, obviously, I think we would be very disciplined and prudent with our cash management. We have announced that we'll continue, and we intend to fully complete our share repurchase program by the end of this year. As of the latest date just shortly before the earnings release, we have already spent over 670 million on share buyback since March last year. And as a percentage of our current market cap, that's a very sizable amount. And at this stage, we have no intention to declare a dividend. With respect to M&A, we will continue to be prudent and assess strategic opportunities, both overseas, as well as domestically in areas that are complementary to our core music, as well as social entertainment businesses. And in terms of the Hong Kong listing, last quarter, we talked about that we have already started in pursuing the Hong Kong secondary listing. We are currently in an active execution phase, and we will strive to move things forward in an expedited manner and obtain the necessary regulatory approvals in due course. And to the extent there are major developments, we will be making the appropriate announcement at that time.

Our next question will come from Charlene Liu with HSBC.

I wanted to ask about new ads monetization model. I think in the last quarter, you mentioned a freemium mode, which allows users to unlock user, to unlock music subscription services by watching ads. Can you share with us the progress on this in terms of user penetration and feedback from ads clients more generally? And do you have any long-term target in revenue from this mode?

Yes. Sure. Advertising overall saw some impact as a result of obviously recent regulation around the splash screen ads, as well as the pandemic measures, specifically a large number of our large advertisers are actually based in major cities. And as a result, obviously, I think the advertising revenue has been affected, and we've seen a decline on a year-over-year basis in the first quarter. However, if we look at the sort of subcategories within our advertising revenues, we are seeing positive momentum in selected new ad formats. An example of that is the video incentive ad that you mentioned and that we talked about previously. We continue to increase the penetration rate of new ad products, the video incentive ad specifically, which is gaining very positive momentum. And the revenue of this new format is growing sequentially despite the difficult overall ad environment. It's now a sort of low single-digit percent of our advertising revenue at the moment, but we would expect it to grow and to become a much more meaningful portion over time. In the long run, despite the short-term challenges, we do expect a lot of potential in the advertising business, and we expect a recovery into the second half. We do see certain sectors that are stronger than others. For example, the FMCG kind of traditional consumer staple products continue to perform well, as well as online games as people spend more time on online games during quarantine. And conversely, areas such as cosmetics, so electronics and e-commerce, in general, saw a bit of a weakness in the advertising verticals.

We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Mr. Tony Yip, for closing remarks.

Yes. Thank you, everyone, for joining us today. If you have further questions, please feel free to contact our Investor Relations team. And this concludes the call today. We look forward to speaking with you again next quarter. Thank you and bye for now.

Thank you. Bye.

Thank you. Bye.

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