Tencent Music Entertainment Group (TME) 2021 Q2 法說會逐字稿

Ladies and gentlemen, good evening and good morning, and thank you for standing by.

Welcome to the Tencent Music Entertainment Group 2021 Second Quarter Earnings Conference Call.

Today, you will hear discussions from the management team of Tencent Music Entertainment Group followed by a question-and-answer session.

Please be advised that this conference is being recorded today.

Now I will turn the conference over to your speaker host today, Ms. Millicent T. Please go ahead, ma'am.

Thank you, operator.

Hello, everyone, and thank you all for joining us on today's call.

Tencent Music announced its quarterly financial results today after the market close.

An earnings release is now available on our IR website at ir.tencentmusic.com as well as via newswire services.

Today, you'll hear from Mr. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent updates.

He will be followed by Mr. Ross Liang, our CEO; and Mr. Tony Yip, our CSO, who 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 Form 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, changing market conditions or otherwise, except as required by law.

Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in the company's earnings release and the filings with the SEC.

You are reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure, and other non-IFRS measures are not uniformly defined by all companies, including those in the same industry.

With that, I'm very pleased to turn over the call to Cussion, Executive Chairman of Tencent Music.

Cussion, please.

Thank you, Millicent.

Hello, everyone, and thank you for joining our call today.

As we announced on July 26, Tencent recently received an administrative penalty decision issued by the state administration for market regulation of the Peoples Republic of China, the SAMR.

We sincerely accept the decision and will continue to strengthen our operations in accordance with all regulatory requirements, drive innovation and fulfill our social responsibilities.

In compliance with the requirements of copyright license exclusivity, we will operationally focus on the dual flywheels of content and platform to deliver high-quality products and services to users and foster innovation.

We have taken several important steps in this regard.

Specifically, as Executive Chairman, I'm responsible for enriching our content ecosystem, whether licensed or self-produced as well as expanding our capability within the music industry to offer additional value services and solutions to artists and users.

Our CEO, Ross, oversees our platform and product strategies and is responsible for further deepening TME's partnerships with Tencent's ecosystem.

Ross will elaborate on this in a moment.

We will continue to deepen our partnerships with hundreds of music labels to expand our licensed content cost base in alignment with the new requirements and work to provide more and better content offering to over 600 million music users through our [multi-genre] product portfolio.

We are pleased to report that we have been consistently making breakthroughs in diverse music verticals, including new hits, Chinese-inspired hip-hop and music for gaming, movies, television programs and variety shows, demonstrated by a comprehensive coverage of songs and particularly, full-coverage of hip-hop variety shows.

We are also raising our profile among the younger generation by expanding cooperation with leading content IPs with programs, such as the collection of Chinese ancient style, (foreign language), and Rappers' Alliance (foreign language).

This in turn has resulted in a sequential increase in user engagement from young users.

While broadening our offering of copyrighted music, we have also been working closely with our upstream value chain, artists and other partners to create and produce more differentiated content.

For example, we began to work extensively with Tencent across multiple businesses.

Over the past few quarters, we partnered with prominent artists such as (inaudible) and (inaudible) and coproduced over 2,000 chart-topping songs across gaming, film, literature and comic categories.

We also recently played a role in coproducing the theme song of the popular movie Cliff Walkers, (foreign language), directed by a highly regarded Chinese film director.

From creating the theme song itself to leveraging our talent pool to bring on famous artists on board to perform a song, we were pleased to be able to contribute to this award-winning project.

I'm also pleased to share our progress in cultivating and promoting indie musicians.

During the second quarter of 2021 through the Tencent Musician Program, our roster of indie artists achieved triple-digit year-over-year growth with [a strong stream] showing consistent increase, both year-over-year and quarter-over-quarter.

Musicians view us as a reliable partner given our well-structured financial incentives, which, for the first time, includes a revenue sharing mechanism for lyricist and song writers.

They are also attracted by our efforts to pioneer enhanced copyright protection based on blockchain technology, helping indie physicians to uphold copyright without imposing financial burdens on them.

On top of that, our attitude for cultivating blockbuster on the Tencent Musician Program platform has grown significantly.

For example, within 3 months of its release, with collaborative cross-platform efforts from QQ Music, Kuwo Music and Kugou Music, the song (inaudible) accumulated more than 1 billion streams and in spite of numerous cover versions.

In the future, we will try to build a closed-loop system from musicians discovery and management through multidimensional support, including more financial reward, copyright protection, and education and training for musicians, all of which reflect our desire and determination to help musicians grow as a feat.

We have also upgraded our platform's promotional capability and further developed our active and repertoire [A&L] capability.

For example, we connected lyricists and musicians with entertainment program producers and helped our musicians such as Sunny Lai, (inaudible) and (inaudible) enlisted and perform on top variety shows such as the Treasured Voice 2 (foreign language) and Young Forever Season 2, (foreign language), providing them a new stage on which to shine.

Finally, TME Live, our online merged off-line performance brand, continues to bring new opportunities to the company with a strategic focus on omnichannel promotion and monetization.

On the online side, we host monthly concerts for top artists to include new interactive monetization features such as ticketing, VIP privileges and merchandise to create a holistic and more immersive user experience for online live performances.

On the off-line side, TME Live is expanding its footprint with a plan to launch off-line initiatives, including daily live performances in key cities, such as Beijing and Shanghai, and collaboration with the Tencent Musician Platform and the local tourism industry.

We are also working with PLAY HOUSE to organize weekly indoor music festivals, merging the off-line party experience with rich online features.

With our focus updated in content, I would like to pass the call to Ross, who will share more about our platform strategies.

Ross, please go ahead.

Thank you, Cussion.

Hello, everyone.

Since I became CEO in April, my focus has been on strengthening our platform's competitiveness and finding new ways to serve users better through visualization, serialization and community building.

Over the past few months, we have made good progress on this front.

With respect to visualization, we are applying shared middleware and architecture, which is crucial to further enhance video content offering growth on our platforms.

Kugou Music continued to enrich embedded (inaudible) on the streaming page, and we are pleased to say that its DAU penetration is increasing quarter-over-quarter.

Kugou Music launched a new watching feature in immersive [choice] in August with expanded user case and a more diverse content.

We anticipate these efforts will increase video views and the amount of time spent by users on our platforms.

Our socialization and community building efforts include several new initiatives, all of which are still work in progress.

One, we are upgrading the synchronized listening feature in QQ Music to encourage interactions among friends.

Two, we recently launched Putong Planet, which connects users with a common taste in music more efficiently through target metrics to inspire a connection among strangers Three, we are upgrading, increasing online Karaoke rooms to make online singing more fun and socially engaging.

The new version will offer a broader feel of online singing experience, including different party sizes ranging from solo and dual to small and large groups as well as catering to different needs, such as singing on demand, singing along on demand, singing practice, inter-room (inaudible) and cross-room activities.

So we will soon launch [using] virtual live streaming room to provide a new entertainment experience, combining network and live streaming.

In the future, we will expand network live streaming to more use cases, provide a richer interaction opportunities and a more imaginative virtual reality experience.

We have also made progress in partnering more closely with broader Tencent ecosystem, another strategy supporting our long-term success.

During the second quarter, we [entered] on collaboration with Weixin Video Account.

This is an important step for us to, one, enrich the music video content on both TME platform and Weixin Video Account.

Two, leverage Weixin to expand our promotional capability.

And three, with the location of video traffic to TME platforms, influence private domain traffic and interactions to increase room to -- for monetization in the future.

At the first start, recently QQ Music for the first time joining force with Weixin Video Account and privacy allegiance (inaudible), an online event featuring well-known musicians and bands.

Our next step will be strengthening the interactions between artists and users by private domain formulations, which in turn will improve music content interactions on each of our platforms.

When further (inaudible) musicians provoke social network to boost user engagement and music-focused collaboration.

First, QQ Music launched a new feature, which allows users to update their WeSing starter with the songs they are listening to, making sharing more dynamic and fun.

Second, users can now -- customer make their WeSing (inaudible) by selecting music from Tencent Music.

Third, by leveraging WeSing's translation's AI technology, QQ Music now supports high-quality translations of new English songs into Chinese.

Last, but not least, we worked with Tencent Video to enhance the exposure of video content.

For example, within 2 weeks of release, a well-known Chinese singer, Li Zhen's newly released album, (inaudible), received 0.5 billion social buzz, and its title track (inaudible) hit the QQ Music chart.

We look forward to sharing more examples in future quarters.

Long-form [ph] audio is an effective complement to our music, products and content portfolio and value adding to user engagement.

During the second quarter, we restructured this business unit to further streamline our two-pronged product strategy.

We continue to enrich our license title and accelerated our pipe in adding (inaudible) content diversification.

As NBA China's official strategy, music partner, we have cultivated an NBA podcaster ecosystem, attracting a broad range of sports fans looking for new and creative ways to enjoy sports content.

With this improvement, long-form audio MAU growth over 90% year-over-year in the second quarter.

As one of our industry leading innovators, we launched a largely digital platform based on blockchain technology.

We will seek to offer more tools for artists to -- active users broader exposure and unlock monetization opportunities.

In conclusion, there is still a lot of work to be done, but we have made a good start and our [clean line] of vision are high.

Now I would like to turn the call over to Tony to discuss business highlights, an important area of our focus.

Tony, please go ahead.

Thank you, Ross.

Hello, everyone.

Online music mobile MAUs were $623 million in the second quarter.

Despite some churn of casual users resulting in a year-over-year decline, MAUs were up slightly on a sequential basis.

In terms of user engagement, core music users have become more engaged with our platform as total user time spent was up year-over-year and quarter-over-quarter.

In addition, paying users become more active on our platforms after they have subscribed to our service when compared to before they subscribed, which means as our paying user base grows, not only does this improve our overall monetization, the level of engagement on our platform coming from this core group of users also increased.

We continue to expand our scope of services to the IoT market.

As a result, our IoT MAUs recorded a year-over-year growth of 43% during the second quarter.

As a new music content consumption channel, IoT enhances our ability to effectively roll out and promote new music content to a wider audience in a broader set of use cases in users' daily lives, making our services more ubiquitous and more convenient to our users.

We're pleased to report that growth momentum in our online music services continued into the second quarter.

As a result of effective marketing and continued progress in adding high-quality music content into the subscription plan, the number of paying subscribers to our online music services grew to 66.2 million, with record high net adds of 5.3 million paying subscribers during the quarter.

Our paying subscriber ratio grew to 10.6% in the second quarter, up from 7.2% during the same period last year.

On a year-over-year basis, user retention continued to improve.

And average revenue per paying user remained healthy, reflecting users' growing willingness to pay for high-quality music content.

Advertising revenues delivered robust year-over-year growth rate in the second quarter.

Ad revenue benefited from an expanding pool of advertisers from a variety of industries, increased ad inventories and eCPM on a year-over-year basis as well as optimized app display.

However, growth in the second quarter was lower than our expectation as they were impacted by regulatory guidance on app launch splash screen ads to improve user experience.

We will continue to improve the user experience of our apps to comply with the guidance and will also invest in new ad formats to meet the needs of diverse advertisers.

Turning to our online music products.

We further refined product positioning within our multifaceted portfolio.

For example, we further bolstered QQ Music's image as a young and trendy brand.

First, we continue to add popular and trendy content to meet the younger generation's demand for Chinese Asian style music, hip-hop and ACG genres as well as music within variety shows.

Second, we deepened our presence into schools and college campuses through online and off-line activities such as on-campus competitions and graduation ceremonies.

Notably, the 2021 QQ Music graduation concert spurred nearly 0.5 billion social buzz.

Third, our new functions such as synchronized listening and Putong Planet will further boost interactions among users.

Finally, as our Putong community has become a cultural hotspot for young users, we are attracting more artists such as [Cai Xukun], a pop star who just released his new album, [Unknown Me], on our platform.

Switching gears to our social entertainment services.

Both MAUs and paying users declined quarter-over-quarter due to intensified competition with other pan entertainment platforms.

In response, Ross elaborated earlier regarding our areas of focus to strengthen our competitiveness, and we look forward to sharing more progress in the future.

For WeSing, in addition to the new WeSing initiatives that Ross just laid out, during the second quarter, we adopted technology to include an immersive chorus accompaniment sound effect to mimic a large-scale graduation ceremony as well as multidimensional scoring system to sharpen our recording tools.

These improvements have led to a more enjoyable user experience while recording songs, which in turn spurs increased engagement among users.

For our live streaming services, amidst increasing competition, we will steadily embrace the latest industry guidance and remain firmly committed to promoting a healthy and sustainable ecosystem for our users and performers.

In this regard, during the second quarter, we continued to make progress with contributions from QQ Music's live streaming and category expansion, adding thrust to our efforts.

With a dedicated tab fueling additional traffic within QQ Music, QQ Music's live streaming recorded solid growth and is on track to further scale up into the second half of 2021.

In terms of category expansion, Kugou Live continued expanding its exposure in the Chinese ancient style category with 33 themed events launched in the second quarter alone.

One highlight for our live streaming is that we introduced our first cross-platform live streaming event to extract operational synergies across TME's live streaming platform.

In June, Kugou Live and WeSing jointly hosted their first cross-platform competition, giving live streaming performers broader exposure to both platforms and an effective way to tap into a new audience base, effectively increasing the vibrancy of both platforms.

This resulted in significantly higher revenue for participating hosts during the event, attracted more paying users to participate as well as more first-time paying users to send virtual gifts for the first time.

Moving forward, we plan to replicate the successful event into new cross-platform opportunities.

With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.

Thank you, Tony.

Hello, everyone.

Next, I'll discuss our results from a financial perspective.

Our total revenues for Q2 2021 were RMB 8.01 billion, up 16% year-over-year, driven by strong growth in online music services, particularly in music subscriptions and advertising.

Our online music revenue were RMB 3 billion this quarter, up 33% year-over-year.

In the second quarter of 2021, our music subscription billings continued to grow rapidly with revenues of RMB 1.8 billion and a year-over-year growth of 36%.

Net add of paying users number was 5.3 million in Q2 2021, up 41% year-over-year, which has set a new record high for forecasting net debt of paying users.

This resulted from our continuous improvements in product and content, expanded sales channels and effective marketing campaigns.

Monthly ARPPU was RMB 9 this quarter compared to RMB 9.3 in the same period of last year as we offered more effective promotions to drive rapid growth in paying users this quarter.

Our Q2 advertising revenues had strong growth year-over-year, but it was lower than our expectations as they were negatively impacted by a new guidance on Flash ads issued by regulators to protect the user experience.

The year-over-year growth was mainly because we partnered more closely with Tencent and provided site advertising solutions to serve our customers, leading to increased ad viability, enhanced [experience] and improved CPM.

To comply with the new guidance and mitigate its impact on our revenues, we are directing more resources to explore new advertising formats such as streaming page pop-ups and a [flipped] page and other innovative products to meet the needs of diverse advertisers, which may take time to bear fruit.

Social entertainment services and other revenue were RMB 5.1 billion, up 7% year-over-year, primarily driven by growth in revenues from QQ live streaming.

Facing the competition from other entertainment platforms, we are making efforts in retaining existing and attracting new performers and improving [investments] in redirecting traffic from music platforms to live streaming platforms.

We are also revamping for (inaudible) future and exploring more diversified initiatives to maintain steady revenue scale in social entertainment services.

Additionally, advertising revenue on WeSing's platform contributed to the year-over-year growth.

However, the [rate of] growth was slowing down as the business was also negatively impacted by the new guidance issued by regulators, as discussed above.

Gross margin was 30.4% in Q2 2021, down [nearly 9]% year-over-year due to increased revenue sharing ratios for WeSing to strengthen our platform's competitiveness as well as increased investments in new product and content offerings such as long-form audio.

Now moving on to operating expenses.

Total operating expenses for Q2 2021 were RMB 1.7 billion and was 21% as a percentage of total revenue as compared to 19% in the same period last year.

Selling and marketing expenses were RMB 669 million, up 16% year-over-year.

The increase was due to higher user acquisition expenses and promotional spending on new products such as long-form audio to enhance our product's long-term positioning.

General and administrative expenses were RMB 1 billion, up 39% year-over-year, driven by a higher number of employees in R&D as we invest in product enhancement and technology innovation.

For example, we are applying the (inaudible) and culture and we recently launched the Putong playmate and will soon launch WeSing virtual live room.

Additionally, post-acquisition award and share-based compensation expenses for (inaudible) management team and amortization of intangible assets, addressing -- from the acquisition of Lazy Audio of approximately RMB 6 million also contributed to higher general and administrative expenses this quarter.

Taking off the impact from the acquisition of Lazy Audio, G&A would have increased 30.1% year-over-year.

Our effective tax rate for Q2 2021 was 11.5%.

Our net profit was RMB 871 million, and the net profit attributable to equity holders of the company was RMB 827 million.

Non-IFRS net profit was RMB 1.16 billion and non-IFRS net profit attributable to equity holders of the company was RMB 1.12 billion.

Non-IFRS net profit margin was 14.5%.

As of June 30, 2021, our combined balances of cash, cash equivalents, term deposits and short-term investments were RMB 26 billion, representing a decrease of RMB 1 billion from Q1 2021, primarily driven by payment for stock repurchase.

Cash generated from operating activities had a positive impact on the combined balance sheet.

Looking forward, we'll expand our investment in sales production content and Tencent Musician Program to foster innovation for multi-development of the online music streaming industry along with industry participants and better serve our music users.

Furthermore, we will keep focusing on new products such as long-form audio and revamping existing product features for our long-term sales growth.

This concludes our prepared remarks.

Operator, we are ready to open the call for questions.

(Operator Instructions) And the first question will come from Alicia Yap with Citigroup.

I wanted to follow up on management remarks regarding the potential business operation impact that you're expecting post the regulatory fine.

Would that be more on the subscription trend that you're expecting?

Or is it more on the difficulty to convert more future paying user?

And what kind of offsetting measure that -- in your mind that you plan or have done to minimize the impact?

Would it be possible to push more on the freemium model with higher online ad revenues potential?

Thank you for your question.

I'll take the first part of the answer and then perhaps other from management can add.

I think as you know, towards the end of July, there was a penalty decision by the regulatory authorities, pursuant to which, among other things, we have to implement a rectification plan to terminate exclusive music copyright licensing arrangements within 30 days from that -- from the date of that decision.

We sincerely accept that decision and are committed to complying with all the requirements fully and in a timely manner.

While the decision will have an impact on our music business, it is worth noting that all the music that has been available on the platform will continue to be available on the platform to our users.

And we'll focus on strengthening our operations in accordance with the regulatory requirements.

We'll also focus on better serving our users through product innovation, which Ross and Cussion have elaborated on.

And we'll also focus on fostering the healthy development of musicians and the music industry as a whole.

Let me pause there and see if others in management have other things.

Yes.

I just would like to add -- Alicia, thank you for the questions.

And I think that one of the key competitive edge of TME is we employ the dual flywheel strategies, which means that we do not just have the music platform.

But again, as we mentioned it, we're also committed to continue to develop our content ecosystem, which will make us to be in a more long-term healthy development and create value for our users. .

As you mentioned, frankly speaking, we definitely will follow the decision by the regulators, and we will comply on it in a timely manner.

And also, we are seeing that it will have some impact on our operational day-to-day operations.

But I don't think that is going to be -- have too much impact on our, for example, driving our online subscriptions.

As you see, I think we are still in a really good momentum because the users have been educated and they really see the value of music, and they are willing to pay for music as long as we are providing high-quality content to them.

So we still have the confidence that our online music services will be driving in a healthy manner.

And also, as I mentioned, we continue to expand our footprint and working together with different industry partners, especially on the content creation side, not just the upstream for the content production, but we are also doing the downstream, which are organizing more and more like the online and off-line music concerts.

And this is not just regular concerts, but we also have some creativities and new features for the online interaction with the users.

So I think that all of this -- the dual flywheel strategy will help us to continue to create value for users in the long term.

(foreign language)

Yes.

We're also in discussion with Tencent Video to cooperate in the area of joint subscription.

That's a work in progress, and we'll update everyone in the next quarter.

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

My first question is regarding the exclusive content.

Could management share roughly how much streaming volume overall and behind the paywall is driven by exclusive content?

And what is the percentage roughly from independent musicians at this moment?

And how will this mix change over time?

That's my first question.

My second question is regarding user acquisition because from now on we will have less exclusive license content.

Do we expect we will spend more on user acquisition?

And how much right now we are spending on acquiring new users?

And apart from sales and marketing, do we have to increase more discounts to attract new users such that how will our music ARPU trend in the future?

I'll answer the first part of the question and then regarding acquisition costs and ARPU, Shirley can address that.

We historically have not disclosed the exact percentages of streaming share relating to various types of content.

But we do historically have exclusive content on the platform and also as part of subscription plan, although it's also worth noting that there is a fair amount of nonexclusive content within the subscription plan also.

And then specifically with regards to the indie musicians streaming share, that has been growing steadily over time, and we intend to continue to grow that over time as more and more musicians join our Tencent Musician platform and we're committed to supporting the development.

And as more and more of them join to the platform, we are able to discover and work closely with the promising new talent to be able to jointly create music together.

So I think that brings new opportunities for us in the content creation area as well.

And then in terms of how it affects our subscribers, I think it's important to note that the users have been educated over a long period, over a number of years to subscribe to the music service.

It is a fairly consistent monetization model across the industry.

And from a regulatory standpoint, we believe the regulators are also keen to promote the overall healthy development of the music industry and having a viable and long-term monetization model is an important part of that.

And so I think we will continue to focus on delivering high-quality products and service to users through the dual flywheel of content and platform that Cussion and Ross mentioned.

And as we add more quality content, whether it is licensed or whether it is coproduced or perhaps going forward and maybe increasing self-production as well, we'll be adding more quality -- high-quality content into the subscription package and as well as more privileges behind the subscription plan to make it an attractive offering to grow the user base.

And as of Q2, we continue to see healthy growth in our net adds, which recorded record high net adds in the second quarter as well as we continue to see a healthy improvement -- a continuous improvement in the retention rate for our subscribers.

Yes.

Alex, thanks for your questions and I would like to add a little bit more color regarding the Tencent Musician Program.

I think we have been doing really good work since we launched the Tencent Musician Program back in 2017.

So after 4 years of hard work, I think that we have achieved very remarkable results.

And we are seeing that it's not just in terms of the quality of songs or the number of songs that has been distributed through our platform, but I think that we are really creating value for the musicians and the music creators like, for example, the IP right protection.

We also have developed open platform, which can help our users and also the musicians to distribute and register their music with us, and then we help them to distribute through the Tencent ecosystem and also other outside channel as well.

Besides, we also try to focusing on helping the musicians.

They are not on their own.

We try to do some collaboration between the [lyricist] and also other professional producers as well.

So we try to bring them all together.

And the most important thing is to continue to produce high quality of music.

So this is very important that we will continue to do.

And also, we are always focusing on creating value for the musician as well.

We want them to do their hard work and be rewarded.

So we also have continued to enhance our revenue sharing and reward system, which led our young-generation musicians to continue to make a living on our platform.

And after the 4 years of hard work, we have been achieving a lot and I think that we are in the really good progress.

And also, the last but not least I would like to mention is the TME Live.

Since that we have this kind of online and off-line concerts and music festival, we can also letting our Tencent Musicians to start to participate in the TME Live event as well and also in our live event like the online podcast as well.

So there's a lot of things that we can work.

And I just strongly believe in that this is one of the key competitive advantage of TME as a total ecosystem that we built for our users and also the music creators.

So I hope that this answer will help your question.

(foreign language)

In terms of user acquisition from a platform perspective, our strategy continues to be a multiproduct portfolio approach whereby in addition to the 3 major music apps across cooking music QQ Music, Kugou Music, Kuwo Music as well as WeSing, we continue to incubate and expand our footprint into other segments with new products.

And then within each product, the overall strategy is to focus on video-lization, social as well as community building.

As an example, within Kugou, they recently launched a new feature, which allows users to upload and generate video content and also facilitate user interaction around those video content within the music app.

And then similarly, QQ Music launched an immersive full-screen video feed to provide and enrich video content within the music platform.

Through these measures, we hope to acquire more users.

Shirley, please go ahead.

Yes.

About the app on a musical basis, we expect that will be stable in the third quarter compared to Q2.

We will balance the promotion campaigns and the rapid growth of our subscribers, and we expect our subscriber numbers can have very good performance in next quarter.

The next question will come from Eddie Leung with Bank of America.

Just a question on gross margin.

We noticed a slight dip in the gross margin.

So we understand there could be a few reasons, for example, you guys expanding content.

In addition, we also know that from some other live streaming companies, the revenue sharing ratio to live streaming hosts in the industry could be increasing.

And then, finally, we also understand that there has been more long-form audio content.

So could you give us a bit more color on the few factors, how they affect your gross margin?

And how should we think about it in the upcoming couple of quarters?

About gross margin, you said that the reason why our gross margin decreased in the Q2 and in the next quarters.

We expect the revenue-sharing ratio for WeSing will be continue to increase, and the investment on new products and content offerings such as the long-form audio also be increased.

So this is the one aspect.

And the second we expect our social entertainment will be under pressure.

So this business gross margin is generally higher so the revenue mix shifted will from social to music.

That will also be some negative impact on our gross margin.

And for the exclusive license content drive cost, in the short term, we have not very clearly impact on our cost structure because of we think that the label and the industry also needed time to change their operational.

So we believe the cost structure will be stable in the near term.

But in long term, we think that the cost structure of music will be changed from high minimum guarantee to revenue sharing that will be positive on our gross margin.

So in conclude, we believe in the next quarters our gross margin will be under pressure.

So I'll add a little bit more -- yes, perhaps I'll add a little bit more context behind that as well.

I think in terms of the outlook for the full year 2021, we currently expect the total revenue year-over-year growth rate to be approximately 10% with online music revenue growth around 30%, and we continue to see healthy operating leverage coming through for online music.

So I think within the online music business, it continues to grow very nicely.

While on the other hand, social entertainment revenue for the full year is expected to be roughly flat on a year-over-year basis due to the weakness in live streaming as well as the margin reinvestment that Shirley talked about.

Now within online music, we continue to expect strong year-over-year growth for subscription revenue with paying user net adds continuing the pace of between 4 million to 5 million per quarter.

And then on the other hand, while ad revenue is expected to continue to see strong growth, as we mentioned in the prepared remarks, the growth rate is expected to be lower than previously expected.

That business is impacted by regulatory guidance relating to the launch ads in order to improve user experience.

And then within social entertainment, the weakness we're seeing in live streaming is due to a combination of macroeconomic impact on paying users' spending behavior.

It's also a result of competition with short video platforms for users and for performers and also a result of conservative adjustments we are making to the live streaming operations to comply with regulatory directions in the areas of content, safety and tipping behavior.

And therefore, I think taking all this into account in terms of margin, we do expect the second half to see further pressure in the margin as a result of the upward cost pressure in terms of revenue sharing to live streaming performance, the weakness in revenues that have a higher margin in the past and also reinvestments into our new business and products.

The next question will come from Thomas Chong with Jefferies.

My question is about our long-term business trend.

Given that we are seeing softness in the second half, do we still stick to our long-term subscribers target?

And then my second question is about is there any taxation impact coming from the differential tax rates that we need to think about in terms of the net margin side?

And on back front, can management also comment about any data protection and privacy issues that we need to think about in our music apps as well as on our advertising business?

I'll address most of that question and then Shirley can talk a little bit about tax.

Well, first of all, in terms of data protection, we are committed to complying with the relevant regulatory requirements in the areas of data privacy and data protection.

So I think that's an important priority within the company, and we continue to improve our operations to being compliant.

And then in terms of long-term growth trend, we're confident that despite the short-term weakness in some of the business specifically relating to live streaming, we're confident about the long-term trend of the business.

And as I mentioned, the net adds for a subscription of between 4 million to 5 million per quarter continue -- we expect that to continue.

And I think it's worthwhile also coming back to our long-term strategy, which is the dual flywheels of content and platform because that's the plan that we continue to execute on.

With respect to content, our goal is to build the most comprehensive content ecosystem, covering a broad spectrum of music and audio offering.

And so on one hand, we'll continue to enhance and broaden our cooperation with label partners to expand our content library.

And while on the other hand, we'll also partner with upstream content partners, we will partner with artists and indie musicians to coproduce differentiated content or even self-produced differentiated content.

And then thirdly, we'll continue to foster the development of indie musicians.

I won't elaborate there as Cussion has talked a lot about.

And fourthly, we'll deepen our cooperation with Tencent Group in the area of content production with businesses like Tencent Video, Tencent Pictures, Tencent Games, China literature to coproduce music content together to better capture the full value of their existing IPs.

In fact, we've already coproduced 2 dozens of chart-topping songs relating to games, movies, literature, comic IPs in cooperation with prominent artists such as Deng Ziqi and Yang Yunqing.

And as we mentioned in the prepared remarks, a theme song of the popular movie (foreign language), it's also a production from TME.

So I think that's a comprehensive content ecosystem strategy that we pursue.

And then within our platform, we aim to strengthen our core competence around music, audio and social user experience.

Specifically, as Ross mentioned, there are kind of 4 main areas: number one, in the form of video-lization, we continue to enhance the video features across all of our platforms.

And as an example, we launched the video feed within QQ Music, an immersive full-screen video feed.

And as a second example, we will continue to deepen the cooperation with Weixin Video Account.

And then, secondly, we'll continue to emphasize on social and community building.

And as an example of that, QQ Music launched the Putong Planet, a social feature that connects users with common music taste.

And we also launched new features that allow users to update their Weixin status using songs they're listening to.

So that's -- there's also an opportunity for us to deepen our cooperation in Weixin in the area of social and community.

And thirdly, [long] audio is a highly complementary content and service to our music users.

And as we have seen in the past from the actual results, providing audio content to music users actually help increase the stickiness of the platform and increase the overall time spent and more -- attract and provide more attractive content across both music and audio, which is differentiated compared to other competitors in the industry.

And then I think finally, we continue to operate a multi-brand and multi-product strategy.

Each product within the portfolio have its unique positioning that covers a unique user segment that has its very strong leadership in.

And we'll continue to sharpen the operational synergies that we'll extract across the platforms and R&D efficiencies that we'll extract across the platform through middleware architecture building.

So I think though that's the overall strategy that we intend to pursue, and we're committed to executing on that.

About the tax rate, we think and believe that our ETR will be stable in next quarters because we do not take into consideration of the professional tax rate companies are entitled to when calculating our effective tax rate until the application is approved.

So there will be no impact on our net margin, yes.

The next question will come from Piyush Mubayi with Goldman Sachs.

Shirley, you talked about how you move away from the current contract structure with the labels.

Could you just generally speak about how you're positioned on a competitive perspective versus the other company when [MSGs] are taken into account and how this is likely to evolve, that would be great.

That's my first question.

And second, the other company that was looking to go public, they talked about a social ARPU that was significantly above yours.

Does that represent an opportunity for you?

And if so, how would you exploit that?

Yes, I talked about the contract first.

First of all, we would like to reiterate that we will strictly follow the direction of this, and we will continue to renegotiate our license contract with our partners in the -- and change of the exclusive content -- contract into a nonexclusive contract within a month.

So we are now in the progress to discuss the details with them.

And as you note, it will also involve some of the detailed discussion regarding the business term.

So we are in the progress to talk about the details, and we really want to settle all of this in a timely manner.

And also in the other way is we are also talking to some of the other content partners that we do not have a contract with them before because they have some of the other exclusive contracts with other platform.

So we will be fully committed to bringing the best quality of music and continue to expand our music library for our users.

Besides the license content, we are also committed in doing our sales production and coproduction with our partners.

And in terms of the margin side and in terms of the business side, I think that our coproduced or self-produced content, we will have a more secure margin.

So this also will help us to continue to lower our content costs from this aspect.

So Shirley, you want to mention about the second half, the social and economic?

So about social in terms of app, we believe -- we expect that we will be under pressure in the future quarters because we do some adjustment automatically by ourselves because we think the regulator will be [tighter] on this part.

So we will change our operational methods and make this business more healthy in the future.

So -- and we believe if we can expand the users of our social entertainment platforms such like Weixin platform and our ratio room can be a bit positive, in fact.

Naturally, we can have a chance to increase our social entertainment app in next year.

So we think we have many methods to increase this part, such as we can accord a larger order performance in our platform, such as kind of okay and the Kugou.

And we also can use our public domain (inaudible) kind of okay platforms and build more revenue on this part.

So we believe in next year, our social entertainment revenues can be have a good performance.

And revenue can be stable, yes, can be stable and a little increase.

(foreign language)

Okay.

So 2 points.

First, within the social entertainment ARPU, the Kugou Live streaming ARPU is historically higher whereas the WeSing ARPU is historically lower.

And within live streaming, we are actually building a middleware architecture that leverages the Kugou capability on to WeSing live streaming so that we could improve efficiency.

While the focus is more on the paying users for WeSing through these middleware architecture building, we hope to extract increased efficiency and thereby should add some value to the overall revenue generation.

Secondly, we pioneered for the first time in the industry recently a cross-platform live streamer [PK] competition across Kugou Live and WeSing.

Specifically, that happened in June where we hosted the first ever cross-platform competition.

It gives the live streaming performers an opportunity to tap into the other platforms' audience and thereby increase their exposure.

And the result we've seen is a significant increase in the revenues of participating performers as well as attracting more paying users to participate.

Even those that have never sent virtual gifts on the platform, they're attracted to participate for the first time.

And so we hope to replicate that successful event into more cross-platform opportunities.

And I'll also add that within social entertainment, our plan, specifically within WeSing, is that we're undergoing a major product revamp to improve user retention.

And the revamp is centered around strengthening WeSing's core competence around singing and social interaction.

And we think we'll be upgrading the online karaoke room to make singing more fun and socially engaging.

The new version of the karaoke room would offer a wider suite of singing features from solo to duet, to small group singing to large group singing as well as to cater for -- to allow the audience to pick the song they want the main singer to sing or allow the audience to sing along together with the main singer as well as to enable cross-singing room interaction.

WeSing would also soon be launching a virtual live streaming room to pioneer a new entertainment experience that brings live streaming into a metaverse-like environment.

And in the future, in that environment, performers can choose their avatar to perform their live streaming and interact with audience in this virtual setting.

And so in the future, we'll expand this metaverse-like environment to more use cases and provide richer interaction opportunities and more imaginative virtual interactive experience.

The next question will come from Alex Yao with JPMorgan.

Just a couple of quick follow-up on the previous questions.

Number one, regarding the usage weakness on the social entertainment side, are we losing the WeSing users.

The work on these users are still on Kugou core.

We are losing their usage and the time spent on the live streaming activities on the platform?

Number two, I think, Tony, you mentioned the revenue outlook for the social entertainment for the full year is flat, which implies the second half revenue will decline on a year-over-year basis.

Can you guys help us understand the monetization weakness into second half because on one hand, you guys mentioned the increasing monetization efforts such as core server [PK] initiatives across the key live streaming platforms.

But on the other hand, if I'm not mistaken, Shirley mentioned you guys are modeling -- doing different strategies and moderating monetization on these platforms.

Any color on the revenue weakness into second half or social entertainment would be helpful.

Sure.

From our social MAU perspective, the year-over-year decline is across both the WeSing as well as live streaming.

And the key reason for that is competition coming from other plan -- pan-entertainment platforms, such as short video.

And we've talked about the action plans and the product revamp and the areas that we'll be doing to retain -- to better retain users and acquire -- reacquire the traffic.

In terms of revenue weakness in the second half for social entertainment, the weakness, as I mentioned, primarily relates to live streaming revenue weakness in the second half.

That's a result of threefold: first, the macroeconomic impact on paying user spending behavior; and secondly, continued competition, specifically from -- in particular, from short video platforms for users and also competition for performance; and then thirdly, we're also making conservative adjustments to the live streaming operations in order to comply with the stricter regulatory directions that we are facing as an industry overall.

So I think the impact of these items obviously have a bigger impact and we are mitigating these impacts through a number of measures that we talked about, such as the cross-platform competition, such as the new features that -- a new product revamp that we're doing within social entertainment, but that will take time to fully compensate.

We are now approaching the end of the conference call.

I would now like to turn the call over to your speaker host today, Ms. Millicent T., for closing remarks.

Please go ahead, ma'am.

Thank you, everyone, for joining us today.

If you have any further questions, please feel free to contact the IR team.

This concludes today's call, and we look forward to speaking to you again.

Thank you, and goodbye.

Thank you.

Thank you, everyone.

Thank you.

This concludes today's conference call.

Thank you for attending today's presentation.

You may now disconnect.