Tencent Music Entertainment (TME), China’s largest music streaming company, posted a strong first-quarter performance as the local economy grew at a faster-than-expected pace.
The Shenzhen-headquartered company, which operates music services QQ Music, Kugo and Kuwou, added 6.8 million paying subscribers in the first three months of 2024, ending the quarter with 113.5 million paying subs, versus 106.7 million at the end of 2023. TME said this marks the largest quarter-over-quarter net increase to date.
On a year-over-year basis, TME’s paying users expanded 20.2% year over year from 94.4 million, the company said in its latest earnings report released Monday (May 13).
“Subscriber growth in this quarter significantly exceeded our expectations,” Cussion Pang, Executive Chairman of TME, told analysts during an earnings call.
“The increase in the number of paying users was primarily due to increased users’ willingness to pay for appealing membership privileges, expanded content, and attractive interactive features,” TME said in its press release. The company also cited its optimized promotion campaigns during Chinese New Year among the reasons behind the growth in its paying subs.
Meanwhile, Min Hu, TME’s Chief Financial Officer, attributed the subscriber growth to the company’s “enriched content offerings and enhanced member privileges such as Dolby Atmos upgrades,” which “have made our products more attractive.”
“Subscriber growth in this quarter significantly exceeded our expectations.”
Cussion Pang, Tencent Music Entertainment
Driven by the growth in its paying subs, TME’s revenue from music subscriptions jumped 39.2% YoY to RMB 3.62 billion (USD $500 million), which TME attributed to further expansion in the online music paying user base and healthy average revenue per paying user (ARPPU). TME clocked a monthly ARPPU of RMB 10.6 ($1.47), up 15.2% YoY from RMB 9.2. In Q4 2023, ARPPU stood at RMB 10.7.
However, TME’s ARPPU remains significantly lower compared to more developed markets. Spotify boasted a monthly ARPPU of €4.55 ($4.91) in Q1.
But with the sharp increase in its paying subs during the quarter, TME’s overall revenues from online music services climbed 43% to RMB 5.01 billion from RMB 3.50 billion in the year-ago period. In addition to the strong performance of its music subscription services, the company also witnessed a boost from advertising services.
“The increase in the number of paying users was primarily due to increased users’ willingness to pay for appealing membership privileges, expanded content, and attractive interactive features.”
Tencent Music Entertainment
While the company did not disclose its actual revenue from advertising services, Min Hu said, “Advertising revenue also had a strong year-over-year growth, primarily due to the growth in ad-supported advertising.”
“We upgraded our incentive ad experience and provided more attractive interactive features to our users, which helped the improvement in entrance rate. We continue to innovate and diversify our product suite and advertising formats.”
TME added that it “reinforced partnerships with record labels to broaden our music library’s comprehensiveness and popularity.” During the quarter, the company renewed its partnership with Time Fengjun Entertainment, or TF Entertainment, gaining 30-day early access to new songs by TF Entertainment artists and adding Dolby Atmos upgrades for popular idol groups like TFBOYS.
The company also renewed its partnership with HIM International Music to bring more C-pop content to its platform.
TME highlighted the growing number of blockbuster songs that it produced during the quarter, including original soundtracks for trending TV dramas In Blossom and The Legend of Shen Li, which garnered over 150 million streams on its platform within 30 days of release. Additionally, it partnered with artists and indie musicians to create songs on social media, such as RIVER FLOW by TIA RAY and What I Anticipate Is Not Snow by Zhang Miaoge.
Earlier this month when it filed its 2023 annual report, TME said its artificial intelligence-powered technology “PDM” can now predict “the next hit song” on its QQ Music platform.
Despite the significant growth in music revenue, TME’s overall financial picture was not entirely rosy. The company’s social entertainment services division, which includes online gaming, continued to book a sharp decline in revenue. This trend mirrors the broader market, with analysts pointing to a Chinese government crackdown on online gambling as a key factor affecting both TME and its main rival, NetEase Cloud Music.
TME’s social entertainment revenue saw a substantial drop of 49.7% YoY in Q1 to RMB 1.76 billion from RMB 3.50 billion.
“Our focus on high-quality growth also yielded solid net profit margin expansion. By broadening content and introducing more tailored platform offerings that resonate deeply with users, we continue to strengthen our vibrancy and competitiveness in this dynamic industry.”
Cussion Pang, Tencent Music Entertainment
“The continued decrease was mainly the result of adjustments to certain live-streaming interactive functions and more stringent compliance procedures we implemented beginning in the second quarter of 2023, as well as increased competition with other platforms,” said TME.
This decline contributed to the 3.4% YoY decrease in TME’s total revenue for the quarter, which stood at RMB 6.77 billion.
However, TME continued to report increased profit margins in Q1. Operating profit grew 41.9% YoY to RMB 1.96 billion, which it attributed to “improved operating efficiency and effective cost controls.” Net profit for the quarter surged 27.5% YoY to RMB 1.53 billion.
Cost of revenues declined 14.8% YoY to RMB 4.00 billion as a result of decreased revenues from social entertainment services with a lower revenue sharing ratio that led to a drop in revenue sharing fees. TME said this was partially offset by increased content costs of royalties and payment channel fees.
“Our focus on high-quality growth also yielded solid net profit margin expansion. By broadening content and introducing more tailored platform offerings that resonate deeply with users, we continue to strengthen our vibrancy and competitiveness in this dynamic industry,” said Pang.
Ross Liang, CEO of TME, added: “We are pleased to see a steady user base recovery thanks to our optimized operations efforts. Through enhanced algorithms, product features and AIGC applications, we are consistently creating more compelling music experiences that deepen users’ engagement on our platform.”
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