Tencent Music Entertainment Group (TME) 2020 Q4 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 2020 Fourth Quarter and Full Year 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 closed. An 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 CEO, who will start the call with an overview of our recent achievements. This will be followed by Mr. Tony Yip, our CSO, who will offer more details on our operations and business development. Lastly, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions.

Please note that this call might contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statement, risk factors and details 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 any new information, future events, changes in 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 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 measures and other non-IFRS measures are uniformly defined by all companies, including those in the same industry.

Now with that, I'm very pleased to turn over the call over to Cussion, CEO of Tencent Music. Cussion?

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

2020 was an extraordinary year with the pandemic impacting all walks of life and the macroeconomy. Yet, it also brought opportunities, expediting Internet penetration, causing a paradigm shift in online content consumption and presenting potentials for online concepts. The past year, we demonstrated strong resilience and agility, our commitment to investment in content, technologies and people as well as innovation in new products and services, solidifying our position as China's leading music entertainment platform and allowing us to build a strong foundation for our music content ecosystem. We closed 2020 on a very strong note and are excited about our next phase of growth along our journey to evolve into an all-in-one online music and audio entertainment destination in China.

First and foremost, in the fourth quarter of 2020, both our financial and operational performance was solid. In particular, our online music services maintained its momentum, registering 29% year-over-year growth in revenues, up from 26% in the third quarter. Specifically, subscription revenues increased by 42% year-over-year. This outstanding performance was driven by a 40% year-over-year growth of paying users, fueled by our effective paywall strategy, diversified bundle membership offering as well as continuous rising user retention rates. With 56 million online music paying users, our paying ratio of 9%, up from 6.2% a year ago, we finished the 2020 ahead of the curve and are confident that this success will continue in 2021 and years to follow.

For nonsubscription revenues in the fourth quarter, we are pleased to report that we recorded triple-digit year-over-year growth from advertising for 2 consecutive quarters. This impressive growth was driven by increasing ad inventory and the improving CPM across our music application portfolio. In the form of (inaudible) apps and (inaudible) apps, we plan to continue developing our overall brand awareness to engage a broader array of advertisers by initiating more creative advertising products such as immersive video ads, reward ads and audio ads. Looking into 2021, as we continue to leverage our in-house and Tencent's renowned advertising strength and capabilities, we expect another year of strong growth from advertising.

Moving next to content. Our continued investment in procuring and developing content has provided our users with a rich, diverse and endless choice of entertainment, which has been a key driving force behind our success. A platform-comprehensive coverage, full category expansion and deepening penetration to further captivate the young demographic, we continue promoting and pursuing trend-setting genres from trend-predictive models to content procurement and promotion. We have significantly increased our copyright coverage in new fixed content, which has contributed to the increasing engagement of our users.

In the fourth quarter, our partnership with leading rap music label such as GOSH and 404 Rapper, resulted in more rap music streamed by younger users as compared to the beginning of 2020. We also made notable breakthroughs in Chinese ancient-style music, total streams for which reached over 100 billion on our platform in 2020. We also made significant progress in cultivating and promoting original music. Let me provide just a few examples.

First, the scale of our Tencent Musician Platform expanded rapidly. In the fourth quarter, the number of participating indie musicians on the platform grew over 100% year-over-year, an outstanding rate in the industry. In particular, the number of exclusive indie musicians was 14x of that in the same period a year ago, showcasing the recognition by indie musicians of our capabilities in promotion, platform support and well-defined incentive programs.

Second, the number of original songs uploaded reached over 1 million on Tencent Musicians Platform by the end of 2020. Doubling the number compared with a year ago, numerous original blockbuster songs were incubated on the Tencent Musician Platform such as Story of the Wanderer, (foreign language), by Ruby (inaudible), with over 1 billion streams within 3 months of its launch. Our industry influence was significantly amplified by Wang Qi was enlisted by CCTV Spring Festival Gala, one of the world's most watched TV programs with more than 1 billion viewers for years, performing his signature song, Shepherd of Keketuohai, (foreign language), which has already gathered phenomenal popularity on our platform. These are great examples of what we can do, using our prestigious industry know-how as well as in-depth insights and data mining abilities to foster and grow original music.

Third, we are proud to share that during the past year, we have dedicated even more financially to the size of the business, which enable over 60% of musicians to more than double their income. Such support will continue in 2021, contributing to a win-win situation for everyone.

Finally, on our Tencent Musician Platform, I'm very proud to say that we deeply care about diversity, and we are doing our best to promote gender equality. Our support of female artists and musicians, traditionally a minority in the music industry, has led to female indie musicians accounting for nearly 40% of total artists on Tencent Musician Platform as of the end of 2020. This is significantly higher than the industry average of around 20%, according to the 2020 China Musician Report.

Our music content leadership has been further cemented by strengthening partnerships with leading music labels and artists. For example, recently and ahead of the schedule, we extended a multiyear strategic licensing agreement with Warner Music and expanded our in-depth cooperation, full forming a joint venture record label in China in future. We have confidence to continue to showcase new-generation artists to music lovers, unlock intrinsic value of music in China and keep contributing to the prosperity and development of the music industry.

The next topic that I would like to discuss is the strategic importance of our long-form audio and our initial achievement during the first year of investment. Before going into details, I would like to outline the exciting opportunities the audio services market presents us with and how we can harness them to compete effectively and scale quickly.

Firstly, this market has existed in China for a decade with no clear significant leader yet. Market penetration remains extremely low. Second, this fast-growing market has various potential natural synergies with online music entertainment, giving us a tremendous advantage over vertical players. According to third-party research data, the audio market in China is projected to reach a massive user base similar to that of online music streaming over the next few years. With our massive user base and the complementary nature of music and [audio] genres, we are able to seamlessly convert our music users to audio users, positioning us to emerge as a significant player while ultimately accelerating the penetration of online audio in China.

Thirdly, our strategic alliances with prominent content partners such as the China Literature and other content collaboration within Tencent online entertainment ecosystem will continue to empower us to offer a wide range of content quickly. During the fourth quarter, the number of licensed titles was up by 370% year-over-year, covering a broad spectrum of audio categories such as audio drama, Chinese comedy, parenting and history, apart from the well-loved literature.

Fourth, our two-pronged approach to integrating with our music applications as well as launching a stand-alone application is unique and allow us to effectively acquire users at low cost and scale up quickly. For example, we significantly increased our long-form audio MAUs penetration in the fourth quarter of 2020 to 14.8% from 5.5% for the same period of 2019. Such a hybrid model differentiates us from other players at home and abroad.

Fifth, our recent acquisition of Lazy Audio, which is expected to be consolidated in the first quarter of 2021, will become another driver that will help us forge ahead in the pursuit of growth in the years to come. Our view on long-form audio is strategic and long term. We believe that investment in content, whether licensed audio books or podcasting, [PTC] or UGC, will improve user spent -- time spent, user loyalty and eventually revenue per user. This is evidenced by the 20% sequential increase in average daily user time spent in the fourth quarter. This DAU reached nearly 10 million at year-end of 2020 and is on track to double by 2021. Over the past few quarters, we had a good start in monetizing our long-form audio business, fully effective bundled offerings with our existing music streaming services and attractive pricing for stand-alone audio memberships. With increasingly enriched content and growing users, we will tap into the audio ads to unlock commercial value, which will push our revenue.

We consistently ask ourselves, "What else we can do better to improve user engagement?" In 2020, we further expanded our coverage of a broader set of music usage scenarios, integrating with smart speakers, in-car audio systems, TV and making inroads in the profit performance market. Although not yet included in our reported online music MAUs, during the fourth quarter of 2020, smart devices enjoyed a solid year-over-year growth in user scale, providing additional channels for users to consume more content and interact with us.

In summary, we achieved solid progress across our full business spectrum in 2020 in terms of scale, industry leadership, content diversifications, monetization and innovation. In particular, our online music services with improving economies of scale and diversified revenue streams achieved a high-quality revenue growth and margin expansion throughout the year. In 2021, we expect the strong momentum of our businesses to continue and anticipate a faster revenue growth across the board compared to 2020.

With that, now I would like to turn the call over to Tony, who will discuss other highlights and important areas of focus for our businesses. Tony, please go ahead.

Thank you, Cussion. Hello, everyone. Apart from the key developments discussed by Cussion just now, I will provide additional highlights for our online music services before I move on to the discussion of our social entertainment services.

During the fourth quarter, core users are increasingly engaged with our platform. Despite the sequential decline in music MAUs, average daily time spent per user has increased. This is a result of our concerted efforts to enrich both music and audio content offering as well as the launch of innovative product features and services for Putong Community and TME Live.

Next, I will elaborate more on these efforts. First, as a pioneer in the music fan-based economy, our digital album performance continued to create new milestones, becoming a vital distribution channel for musicians, further distancing ourselves from peers in terms of promotional capabilities. In the fourth quarter, we released many digital albums such as volume.4 by LUHAN, a well-known trendsetting male singer; THE ALBUM by BLACKPINK, a top Asian female band; and In My Thoughts, (foreign language), by Zhang Yunlei, a rising star as a singer and a Chinese comedian. JJ Lin, (foreign language), made 3 digital releases on our platform, including his 14th album, Drifter • Like You Do, (foreign language), which topped multiple music charts on the first day of its release.

To explore new opportunities in the dynamic market, we continue to transform and innovate the fan-based economy in China's music industry. In 2021, we will continue to push the boundaries of our fan-idol connections and lead industry innovation in areas such as digital album, virtual benefits, fan meetings, off-line events and merchandise sales.

Second, in a relentless pursuit of enhancing the user experience, we continuously upgrade our products with music as our home ground to make online music services more social, visual and personalized. In July 2020, we introduced Putong Community in QQ Music, through which we foster cultural communities with youthful and trendsetting content and interactions. We have continued to make it more interactive and appealing, which has led to consistent increases in DAU penetration rate and user retention in the fourth quarter. Our efforts also brought resounding endorsement from younger users with users in the teens and early 20s accounting for a larger proportion of Putong Community users, higher than their presence in QQ Music. In December 2020, QQ Music successfully held Boom Boom Award, a forum that encouraged young people to vote on what was popular in 2020 and offered a glimpse into their views on future trends. It attracted interactions from home and abroad, generating 2 billion instances of social media buzz, driving active users in the Putong Community to a record high.

Fans Club, (foreign language), a new community-focused channel introduced by Kugou Music in the second quarter of 2020, also received strong recognition, particularly among young users. This is evidenced by more than half of Fans Club users being in the teens and mid-20s with total user time spent increasing 15% sequentially during the fourth quarter.

When it comes to video enrichment, we continue to transform the conventional experience of music streaming. Kugou Music created a video-based music product by pioneering embedded MVs on music streaming page, further catering to the needs of users who are consuming music videos and bringing in a more immersive audio-visual experience. As a result, on a sequential basis, DAUs for embedded MVs on streaming page grew over 70%, and daily total time spent increased by 88%.

With tens of millions of songs available to be streamed, we continue to leverage our proprietary user insights and data analytics to provide users with more personalized experience, which has led to a sequential increase in the proportion of streaming volume driven by recommendations. Technologically, we continue to shine. In the world-renowned [Merits] Global Song Recognition Technology Competition in 2020, Kugou Music was the winner in the audio fingerprinting category, while Kugou Music's predictive model broke multiple world records in the area of patents for prediction. Aided by these technologies, we are able to improve our predictive capabilities on the popularity potential of music before a wide-scale promotion. And in the fourth quarter, we successfully discovered and promoted chart-topping songs such as Wrong Headed, Zhi Mi Bu Wu, and [Swallow Never Rests], (foreign language).

Now let's turn to our social entertainment services, which, in general, maintained a steady performance in the fourth quarter. While live streaming business continued to recover healthily post COVID-19, we think delivered faster growth, thanks to product enhancements to improve its competitiveness and monetization efficiency. First, let me discuss our online karaoke services.

The year 2020 presented WeSing with challenges and opportunities. To take up and respond to competitive pressure, we refocused and made effective adjustments to enhance WeSing's core and differentiated services that are music centric and socially interactive, creating a fun and engaging platform that provides the best online karaoke experience. We are pleased to see recent MAU bottom out during the fourth quarter, and user engagement has improved as active users increased in November, December compared to September, October and are turning increasingly loyal on WeSing platform, making a good start going into 2021. Our first UI design and short-form video recommendation feed on the homepage rolled out in September 2020 continue to gain traction.

To lower the entry barrier and improve performance of recording, we continuously enhance audio and video-recording tools, including multi-genre remix, (foreign language) remix and autotune, (foreign language), making it simpler and more fun to create and publish recordings. Both number of users' published videos and the penetration rate of publishing recordings improved sequentially in the fourth quarter. These efforts boosted content consumption as well as user engagement, which, in turn, enhanced the virtuous cycle of content generation and consumption. Besides, our friend karaoke room has brought the offline karaoke experience online for families and friends to enjoy real-time interactions and facilitate higher social connections. Leveraging the social power of music, friend karaoke room maintained its up-rising momentum and led to a significant increase in user penetration and user time spent of online singing rooms in the fourth quarter, as a result of this operational focus, WeSing has recorded improving average daily user time spent. The bottoming out of MAUs and improved monetization efficiency setting a solid foundation for strong growth in advertising.

Our music-centric live streaming services delivered healthy operating metrics. Besides active performers, our robust content offering, effective and targeted operational initiatives and personalized recommendations helped drive sequential improvement in user retention in the fourth quarter of 2020. We are also pleased with the increasing user engagement as we rolled out diversified live streaming content and attractive performance in categories such as ACG, Chinese ancient style and gaming. In the fourth quarter, Kugou Music live streamings continued to scale up, attracting popular musicians joining the platform and more interactive features added to facilitate social interactions. We are confident that such strong momentum will continue into 2021 and contribute more to our overall growth.

As users' needs continue to evolve, we are constantly looking for new business opportunities and actively pursuing new drivers for our next phase of growth through building an innovative online-merged-offline performance ecosystem. For TME Live, there are a few exciting developments. As of the end of 2020, we successfully hosted more than 50 online live concerts of different styles and genres. In the fourth quarter, TME further expanded its brand's audience by holding 25 live performances for a wide range of influential musicians from both home and abroad. In 2021, we will cultivate a comprehensive performance pipeline to enhance our support of musicians and expand TME Live's coverage beyond top artists and provide a stage for a wider range of musicians to display their talent.

As TME Live continues to increase its popularity and brand awareness, we are attracting rich pipelines of sponsorship to unfold long-term monetization potential. In addition, we successfully hosted the second annual Tencent Music Entertainment Awards, TMEA, ceremony in Macau on January 23, 2021. Within a short 48 hours, it generated 66 trending social media topics, attracting cumulative page views of 18.5 billion across the Internet. The awards should serve to cultivate and promote high-quality music content to the public as well as highlight the cultural virtues of the Chinese music market, benefiting the industry, artists and users alike.

In conclusion, we're pleased with the well-rounded progress that we have achieved, and 2020 was a year defined by our evolution into an all-in one online music and audio entertainment destination in China. With a strong existing foundation, increasingly diversified growth engines and our commitment to long-form audio investment and its future potential, we are confident and look forward to our next phase of exciting growth in 2021 and the years to come.

And with that, I would like to turn it over to our CFO, Shirley Hu, for a closer review of our financials.

Thank you, Tony. Hello, everyone. Next, I'll discuss our results from a financial perspective.

In the fourth quarter of 2020, our online music services continued its outstanding growth trajectory, particularly in musical subscriptions and advertising, while social entertainment business continued its sales growth despite the economic uncertainty and the changing competitive environment. Our total revenues for Q4 2020 reached RMB 8.34 billion, up 14.3% year-over-year. In Q4 2020, our music subscription business continue to grow rapidly with revenues of RMB 1.6 billion and a year-over-year growth of 42% as a result of user-retention improvements and effective paywall strategy execution. Paying users grew 40%, while monthly ARPPU remained relatively stable year-over-year as we are dedicated to high-quality user growth and protect the value of music in the industry.

Advertising is our key strategy. During the quarter, we continued to increase availability on our platforms, enhanced product quality for our advisers, improved [efficiency] as algorithm improved and expand our sales force. As a result, our advertising revenues were more than doubled year-over-year for the second consecutive quarter. Consequently, our online revenues reached RMB 2.8 billion this quarter, up 29% year-over-year.

Social entertainment services and other revenues were RMB 5.6 billion, up 8.2% year-over-year primarily due to growth from online karaoke. Social entertainment monthly [ARPPU] increased 26%, while paying users dropped 14.3% on a year-over-year basis. Significant growth of our ad business and annual gala achievements both contribute to our increase this quarter.

As discussed last quarter, we have always been focused on monetization improvement. In Q4 2020, our advertising revenues continued to grow, while number of paying users increased sequentially, leading to overall monetization improvement on the platform. Gross margin was 32.4% in Q4 2020, which was unchanged sequentially and down 1.7% compared to same period last year. The year-over-year decrease was primarily due to increased investments in new products and content offerings such as long-form audio, led us still ramping up in terms of revenue generation, and increased revenue-sharing fees to strengthen our platforms competitively. Online music services continue to positively impact our overall margin.

Now moving on to operating expenses. Total operating expenses for Q4 2020 were RMB 1.7 billion and was up 20% as a percentage of total revenues as compared to 19% in the same period last year. Selling and marketing expenses were RMB 373 million, up 15% year-over-year. The increase was due to higher promotional spending and user acquisition expenses to strengthen our product competitiveness and solidify our advantage in music-centric live streaming. Higher costs associated with annual gala event such as Putong Community event raising gala also contributed to the increase.

General and administrative expenses were RMB 906 million, up 21% year-over-year. The increase was driven by increased investment in R&D for product enhancement and technology innovations such as long-form audio, releasing international versions, friend karaoke room, that's all leading to higher employee-related costs in R&D.

Our effective tax rate for Q4 2020 was 5.5%, decreased from 9.3% last quarter, as some of our operating entities in China became qualified for certain tax benefits this quarter, and the cumulative impact was recorded in Q4 2020. Our effective tax rate for full year 2020 was 9.8%.

Our net profit attributed to increased holders of the company was RMB 1.2 billion. Non-IFRS net profit attributable to equity holders of the company was RMB 1.3 billion, and the nonoperating net profit margin was 16.4%.

For full year 2020, our total revenues were RMB 29.2 billion, up 14.6% year-over-year. Net profit attributed to equity holders of the company under IFRS and non-IFRS were RMB 4.2 billion and RMB 5 billion, respectively. As of December 31, 2020, our combined balances of cash, cash equivalents and term deposits were RMB 28.9 billion, representing an increase of RMB 1.2 billion from Q3, which was primarily driven by cash flows generated operations.

Looking forward, we continue to be optimistic about the future of the broader music and audio industry. We are confident in the overall [system] and product pipeline that we are building in the long run. We will keep focusing on new products and features as well as monetization improvements on our platforms while maintaining core company investments.

Advertising is always our key strategy, and we will keep improving ad-product quality effectively and (inaudible). Additionally, we are investing proactively on long-form audio and are excited that the Lazy Audio joined us, which will further accelerate our long-form audio business development.

This concludes our prepared remarks. Operator, we are ready to open the call for questions.

(Operator Instructions) Your first question comes from Eddie Leung from Bank of America.

2 semi-quick questions. The first one is about kind of the proportion of songs. You guys have moved across the paywall. Do you feel we are reaching more of like a high level, which means going forward is increasingly less easy to move an incremental number of songs to the paywall? If not, why not?

And then secondly, it's very interesting that you guys, I think, first time mentioned about the user base on so-called Internet of Things devices, right, in-car audio speakers, et cetera. So could you give us an idea whether these users are basically the same users on your mobile app? Or are we addressing a different set of user base?

Thank you for your question, Eddie. In terms of paywall, at the end of 2020, we are just over 20% in terms of a streaming share of content that's sitting behind the paywall. And we actually don't see there to be a ceiling in the near term, and we continue to expect that by the end of this year, 2021, we continue to increase our paywall at a similar pace as the previous years, which would take us to just over 30% by the end of the year. We want to note that in the fourth quarter, our net adds delivered a very solid performance of over 4 million -- 4.3 million net adds. And we continue to expect our net adds to be strong. In particular, in Q1, we expect the net adds in Q1 to be even stronger than Q4 driven by a very successful paywall strategy and our various marketing campaigns.

In terms of your second question on IoT, there's actually a different user group. We see that majority of them are nonoverlapping because it's a different use case. People who listen to music on smart speakers or in-car are fairly different MAUs and DAUs compared to the music platform. So effectively, our IoT strategy is helping us broaden our user base. We note that while the MAU -- online MAU saw a slight decline, which is mainly attributable to a higher churn of noncore users, but on the other hand, our core users actually increased their level of engagement on our platform. And by that, I mean if we look at the average daily time spent for our DAU, which is more representative of our core users, it actually increased year-over-year. And that's a result of all the product enhancements that we've been investing over the past year such as long-audio, embedded MVs on streaming page, Putong Community, TME Live, et cetera.

And it's important to note that our reported music MAU figures do not include the IoT devices such as smart speakers, in-car and smart TV. And the IoT devices MAU actually recorded strong double-digit growth year-over-year in the fourth quarter. And that presents additional opportunities for us, which we'll share more in the future.

Your next question comes from Alicia Yap from Citigroup.

My question is related to your long-form audio. Given the 15% penetration rate, could you share more detail regarding the user profile, and any overlap of the existing music subscriber and also their content of interest? In relation to that, can you also elaborate the various monetization model that you plan to push more aggressive this year? Would that be more on the subscription? Or will that be more on the online app to drive the growth in 2021?

Okay. Thank you so much for your questions. Actually, the long-form audio is a very important strategy. Therefore, TME, we are fully committed to invest in this area. I think this is a very natural way for TME to doing it because we have a very strong competitive advantages compared to the other vertical player in the industry right now.

First of all, we're seeing that this is a very natural extension of music consumption. Because a lot of our music users nowadays, besides listening to music, they will be more easily to be -- extend their time and then listening to more audio programs. So this is a very easy for us to convert our existing listening users into the long-form audio users. So we will save the user acquisition cost in this expand.

Beside this, we are seeing that we have already set up a lot of content partnerships, especially with a very renowned company like the China Literature that we have already set up the strategic partnership last year. We're also starting to team up with other content providers in the industry as well, not just the professional content, but we are also extending our footprint into the podcasting and also other UGC and PGC area.

The third point that I would like to mention is for the TME long-form audio strategies, we are taking the two-pronged approach, which is unique in the industry, which means that on one side, we are going to leverage our music application to have a long-form audio section on our apps. But on this other side, we are also launching out our stand-alone long-form audio application as well. And with the acquisition of the Lazy Audio team, the news that we announced by the end of last year, we actually further strengthen our strength on the stand-alone long-form audio side. So I think that this is a very unique strategy and make us to stand out from the competitions in the industry.

Beside this, we are also continuing to pull in more financial resources. And also, we have set up core team to working on the long-form audio businesses. And I'm sure that in the year 2021, it's going to be another -- a huge step for us. And by doing this, we strongly believing that the long-form audio will create long-term value to the entire group. First of all, it will increase - as Tony mentioned, it will increase the user engagement because their time spent on a platform will be improving and also keep increasing because they enjoy more and more content from our platform. Secondly, because of the different monetization model that we have. For example, we have the premium content, monthly subscription model, we also have the advertising model as well, so we'll further bring in other monetizations' opportunity for us and create strong revenue growth in the future.

Your next question comes from John Egbert from Stifel.

Great. Advertising clearly has a ton of momentum. I think you each highlighted a few of the key drivers of recent strength there. But wondering if you could dig deeper into the runway for future advertising growth by maybe looking at the current state of your business there versus what you might think is possible in the next few years in terms of like ad coverage on your various services, ad load within the screens that you're actively monetizing today, potential for new ad formats to kind of change your capabilities. Anything worth calling out there?

Yes. Sure. Advertising grew at a very rapid pace of over 100% year-over-year for 2 consecutive quarters. And in the fourth quarter, advertising now accounts for the majority of the nonsubscription revenue within online music, accounting for just over 50%, and this is all a result of the investments in the advertising technology and solutions that we made in the last year as well as leveraging Tencent's Group's overall strong ad sales capabilities, which enable us to penetrate into an increasing number of advertisers. We also continue to see room for us to increase our ad load. There is more real estate on our various multiple platforms that provides us with ample inventory. And so far, our ad format have been rather homogenous to the traditional banner as well as flash screen.

But as Cussion mentioned in his earlier remarks, we do intend to broaden our ad format into other ads such as audio ads, reward ads as well as other. And as a result, we expect such strong growth in advertising to continue for the near to midterm.

Your next question comes from Alex Poon from Morgan Stanley.

I want to go back to the music subscription business. So I want to understand about the effectiveness of the paywall. You mentioned about just over 20% by end of last year. And last year, on average, roughly, we have added about 4 million per quarter. I want to understand about if we go from 20% to 30%, does this organic conversion would increase from 4 million to something, say, 5 million would be faster than before? And actually, on top of paywall, you have better user engagement, long-form audio, freemium model, promotions, content, a lot of new tools that you can drive conversion. So try to understand just the first part or the organic effectiveness of the paywall going from 20% to 30% compared with the 10% to 20%. And then these new drivers, how they can -- how much additional growth that can come from these new tools that can convert subscribers?

Yes. Sure. Music subscription revenues obviously continue to deliver very strong growth at around 42% year-over-year. In particular, the paying users recorded strong growth at over 40% year-over-year, and the solid net additions of 4.3 million, which brings the total paying users to 56 million or 9% paying ratio, which is a substantial increase compared to just about 6% last year. In addition to the paywall strategy that we've mentioned, there are actually many other product investments as well as marketing campaigns that we've embarked on, which are starting to pay benefits. We continue to observe the retention rate of our paying users continue to improve. They've basically been improving every quarter since the first quarter of 2019, so for 8 quarters now, which means that once we've converted a user from free to paying, they are actually remaining as paying for a longer period of time compared to before, and that's also helping us to improve the paying user. And we are able to achieve all this throughout 2020 while seeing an increasing trend in ARPPU, right?

So we are very optimistic in terms of our subscription growth. We expect, like I said, the net adds in Q1 to be stronger than in Q3 -- than in Q4. And I guess for the year 2021, we expected average net adds to be approximately between 45 million per quarter. And -- which would be a strong growth driver to our overall business.

Your next question comes from Alvin Yao from JPMorgan.

I have a follow-up question regarding your paywall strategy. Can you share with us how do you strike the balance between size of the paywall paying ratio and the platform users? Theoretically, you can achieve 100% of the paying ratio if you adopt an Apple Music type of monetization model, i.e., content is only available to paying subscribers, but that will probably come at a big cost in terms of the platform usage or platform MAU. While your current strategy is pushing the size of the paywall gradually while driving up the paying ratio, can you share with us, philosophically, how do you strike the balance? And what are the key consideration to make you more aggressive or less aggressive in pushing the size of the paywall? And over the longer term, what could be the equilibrium level of the paying ratio?

Sure. We -- there is a good balance that we do need to strike between our paywall strategy as well as the free user experience. At this point in time, we continue to see the paywall strategy to be very effective without substantially hurting the free user experience. However, we are investing in new monetization capabilities such as various forms of advertising to help us monetize the free segment of users that, for whatever reason, may be very difficult to convert to premium. And for that -- those particular user, the monetization strategy isn't paywall. The monetization strategy for those user would be advertising. And perhaps, we would provide them with advertising as a way for them to unlock certain benefits, which allow them to access a limited volume of songs behind the paywall. I think that's an example of how we could strike a good balance between free and pay users.

Again, I think we continue to see the paywall strategy to be very effective. We expect the pace of that strategy rollout to be in line with previous 2 years. And because of the various factors that we mentioned, we expect the net adds this year to continue to perform well of approximately 45 million per quarter this year, which is an increase compared to last year.

And one more point that I would like to add is as we mentioned before, educating the users saying that the music to have a value really take time. But we are super excited because in the last 2 or 3 years, we have done a great job, and our users really treasure the music, and also, they are willing to pay for it. But nowadays, when we are educating our users to buying a monthly subscription, they will be -- have the privilege experience. What I mean is they can enjoy all the songs. And they don't need to worry about which kind of songs that they can listen or which songs that they cannot. But at the same time, we are also providing other privileges to them. So besides listening to song, as we mentioned that we also have the TME Live events that we are offered.

So for our monthly subscribers, they will have some privileges. For example, in different special use experience in enjoying the TME Live event. So this is all the things that we keep evolving and keep innovating. And we are targeting to bring a new type of experience for the TME Live in this year. And also, it will help our VIP, which is a monthly subscriber, to have more privileges.

Besides this, we are also focusing on the fans-based economy, so which means that if you are a monthly subscriber, you will also enjoy some of the privileges on fans economy as well. So all of this will be worked together as a total package and let our users really think that being a monthly subscribing VIP, this is the right way to enjoy music and also all other different experience on our platform.

We have been getting a really encouraging result by moving to the retention rate of our monthly subscription. It has already been continually improving. So I think this is a really good signal to us. And we strongly believe that with the combination of putting the songs behind the paywall in a steady pace, together with the premium that I just mentioned, it will really make our subscription model and together with the advertising model as well, if we really work out together and bring a good, healthy development of our revenue in the future.

Your next question comes from Zhijing Liu from UBS.

I have 2 questions. First, how do you (inaudible)...

Sorry, Zhijing. We can't hear you. Do you mind speaking up a little bit?

Yes, yes, yes. Sorry. My first question is, how do you think about the timing for us to promote the freemium model of music apps? Do we see any potential risk of balancing user experience and competition on premium model? And second, can you also share some colors on how long-form audio contributes to overall time spent of our music apps?

Sure. In terms of the timing, we continue to make investments in the various ad formats that leverage to monetize the free user base, in particular, the segment that may be difficult to convert to premium, and that's ongoing. You see us talking about this in the last 1 to 2 quarters. We start to implement some of that as beta test during this year. But in terms of the exact timing of when we will scale up in a larger sense, obviously, we need to observe and how the adoption level and how the -- and the effectiveness level of that.

And then in terms of long-form audio, I think it's important to understand that there's a lot of natural synergies between music and audio. And just like in the radio era, users are very used to listening to both music and audio content together. And similarly, we actually see that dynamic playing out in online platforms. And so when we provide audio content to our music users, they don't switch up and listen less to music in order to listen more to audio. They actually end up increasing the total time spent. And therefore, it's actually very -- it puts us in a very advantageous position in being the leading music platform going into audio. And with the addressable market expected to reach to a similar size of music users, the large several hundreds of millions in the next few years, we're very optimistic about the audio market, as Cussion mentioned. And that's why we actually think, together with our content strategy within audio that Cussion talked about, our monetization strategy as well as our two-pronged integrated music and audio app as well as stand-alone audio app strategy, I think all this would play very well to provide us with ample growth opportunity in the next few years.

Your next question comes from [Eastern Yu] from [Eden and Company].

So the first question is also on long-form audio, just following up on the last question. Can management shed some light on how these users' paying habits are compared to the music-only users? And I hear other analysts ask about our target penetration rate for the near term for long-form audio, so do we have some number that we can share? And my second question is on the podcast. So does the company have a plan to sign-in creators for exclusive content in the podcast space?

Yes. In terms of target users for long-form audio, I think Cussion mentioned that we've reached about 10 million DAU, and you could see that our MAU reached about 90 million by the end of last year. And we expect our user base to double by 2020 -- end of 2021, right? So that's the near-term target. And by no means we're done. We actually think the total addressable market, as I just mentioned, is very, very large for audio market, similar size to the music market, in the high several hundred million in terms of scale, and that will play out over the next few years. And we also see there to be ample monetization opportunity.

The -- and it's different depending on the types of audio content. For example, audio books, which we've talked about in the past being the biggest content category within the audio consumption, that's obviously primarily driven a lot by subscription, right, chapter by chapter, and that plays very well in terms of synergies with our music subscription because we could bundle our music subscription plan with the audio subscription plan. And on the other hand, there are other forms of audio content, which are much more suitable for audio advertising. And so we're also seeing that play out. And as our MAU and DAU grow, we see ample opportunity in both of these 2 categories.

For the podcast content that you mentioned, actually, we are also closing talks with different content providers. I think there's a different tier of content that we try to bring into our platform. First of all, which is similar to what the strategy that Spotify is doing. They are also talking to some of the top-tier access or maybe podcasters. We are also in talks with some of them. Some of them maybe -- is from these industries, and some of them is providing other content for more entertainment's area. So the top tiers, we are in talks. And we are also working on the long tail as well because our platform is really big. And I think that one of the competitive advantage that we have is we have different user platform like the Kugou Music, Kugou and Kuwo. And all of their target audience will be a little bit different in terms of their positioning. So they can tailor make a different kind of, first of all, the professional content or the user-generated content according to the lead of their own audience.

So I think that we are really open right now and having a lot of talks and especially heavily investing in the content side for, not just our long-form audio, but also podcast as well.

Your next question comes from Binnie Wong from CICC (sic) [HSBC].

Sorry. This is in Binnie Wong from HSBC. So my few questions here, very quick one. I just want to follow up with Shirley here in terms of the investment because I think in the previous 2 years, we talked about that we are already investing a lot in the user acquisition and also a new form of business. So I just wanted to understand that how much of this initiative should we expect to see more meaningful revenue contribution into 2021. Just one question.

And just one quick follow-up in terms of live streaming. So we see some of your short-video players have also been -- seeing that live streaming growth has also been softening from last year or different reasons, right? But then if you look at -- into 2021, how do we position in live streaming? Because I think that also, if you look at like ARPPU, also paying ratio, there's something -- like how can we maintain a more competitive level in the live streaming business? And how do you see, in 2021, this will trend, given that this is still one of our most meaningful earnings driver?

Sure. In terms of live streaming, I mean social entertainment broadly, revenue grew by 8% year-over-year as a result of, obviously, a more difficult base effect comparison comparing to the pre-COVID Q4 last year but also impacted by the lingering weakness in the macroeconomic situation, which affected the paying users' willingness to spend. However, on the other hand, we are encouraged to see a continued recovery in our traditional Kugou Live and Kuwo Live in an organic sense. And in addition, we're also broadening the content category to include ACG, China Asian style but also around music. And that's the key point because even though you may be benchmarking us against other peers, but it's important to stress that our live streaming is differentiated. It is the most music-centric compared to other peers, and that continues to provide us with differentiation in terms of attracting performers as well as users.

In addition to that, we obviously have -- we're very pleased to see the continued scale up in Kugou Music live streaming, which will continue to see an increasing contribution to our social entertainment revenue into '21 as well as we're also encouraged to see that WeSing's DAU and MAU decline clearly bottomed in Q4 and beginning to see sequential growth in December, January compared to September, October, for example. And so as a result, we -- as we look into the full year 2021, well, I mean in terms of total revenue growth, we actually expect our total revenue growth to be growing at a faster pace at close to 20% compared to 2020's 14%. And that's a result of faster growth rate in both online music as well as social entertainment.

Yes. And also for the social entertainment side, besides the live streaming, I would like to spend a little bit of time talking about the WeSing platform, the (inaudible). Actually, it's a very unique platform that TME have and especially make us to stand out in the industry.

And last, I think that we are doing actually the evolution and trying to make it to be more up to the current needs of the users. So what we are doing is actually, I think that singing is still a very strong demand from our users. So we are focusing on making the singing experience even better than before. We lower the content production's entry barrier, and we create a lot of tools and helping our users to make their content better and let them to share on the social platform.

So I think that what we're doing is not just doing user engagement, but we have 2-way user interaction. This is very important. And besides, we are also bringing in the short-form recommendation feed on the (inaudible), the WeSing platform, which is really allowing us to increase the people to consume more audio- and video-based content. So I think this is some of the evolution that we have made and really make -- overall, the user base is really bottomed out, and we are seeing a positive trend in the early 2021.

So I think that for the year to come, especially for the social entertainment side, besides all the live streaming development and also the revenue outlook, I think that (inaudible) is also another platform that we would be strongly focusing on. And this is also the unique, very special platform that TME have when compared to our competitors.

Your next question comes from Thomas Chong from Jefferies.

And congratulations on a solid set of results. Just now, let's talk about our thoughts about the 2021 revenue growth. May I also ask about how we should think about the margin side or how we should think about the trend in terms of the expenses, given that we also have a number of areas for investment? On that point, can you also comment about our M&A strategies as well as the regulatory environment in China as we further expand our scale?

Sure. Well, I'll first touch upon the regulation and M&A, and then I'll let Shirley take the marketing question.

In terms of regulation, we continue to maintain a very constructive relationship and a close working dialogue and relationship with the relevant authorities. Even when the relevant authorities issues any new rules, we're committed to work closely with them to comply with the applicable laws and regulations because our overall goal is to work towards promoting a healthy growth and development of the China music industry. And TME has been in operation for 16 years, over 16 years, and we faced multiple new regulations throughout our corporate life. And we are experienced in dealing with new regulation, and we are fully committed to comply with relevant authorities.

And then in terms of M&A, as you can see, we recently announced the acquisition of Lazy Audio, which is an integral part of our long-form audio strategy, which is highly strategic and long term, which we're very committed to. You see us continuously set up increasing amount of joint venture to venture into content development with our label partners. We set up -- we announced that we will set up a joint venture with Universal. And then just today, we're announcing that we're setting up a joint venture with Warner, and that's following a very successful JV that we've already had with Sony. Then all these will lead us to continuously improving our content development and promotional capabilities, which is also very synergistic to our music platform and music distribution business.

So we'll continue to explore M&A opportunities around our core music and audio platform, and we'll deploy capital in a disciplined manner.

Yes. In terms of the M&A, I really think that is a really exciting journey for us because our theory is not just to win financial investment, but instead, we really want to have a very strong business cooperations with our partners. As Tony mentioned, the joint venture of music labels really worked out. I remember that around 3 years ago, when we talked about the first mutual label JV with Sony Music, we just bring it out, and then I'm so glad that we have the support of the 3 majors. And then Sony really joined hands with us. And nowadays, if you guys are recognizing that we are just rolling out a number of really good songs in these few days, especially, we have a very close partnership with Tencent Games in rolling out the theme song for the top -- the first anniversary. And we actually roll out the project together with some really renowned worldwide artists like the DJ (inaudible) and also with [Jolie] (inaudible) which is also another very popular female artist in Asia.

So I think this is some of the -- we started to bear the fruit. And so I think that is something that will really make us too excited because we are not just doing some financial investment. But instead, we are creating wonderful music content that was widely accepted and being placed by the industry and also especially by our users. As we mentioned during the last quarter, you saw the announcement, we are also going to have another JV with Universal Music. The setup is now in really good progress. The management is on board already. And we have a different positioning for this music label, and I'm looking forward to have -- creating more great songs for the industry in the future.

And today, we announced another joint venture, which is with Warner Music. I think we will follow all -- (inaudible) and really make us to show that TME is really open, and we would like to team up with all the industry player in order to make -- it's going to be a win-win situation and create better content for our users. So this is very exciting for us.

So maybe, Shirley, you can talk about the margin side.

Okay. About the gross margin, in Q4 2020, our gross margin is 32.4%. That is relatively stable compared to that of Q3 and meet our expectation. In Q4, the growth -- the rapid growth of subscription revenue and advertising revenue have a positive impact on our gross margin. And in Q4, we will provide the live streaming gala, so we will provide more promotion activities and (inaudible) for the performers. So the revenue sharing of the -- the revenue sharing of such entertainment is increased. It concludes the Q4 gross margin is stable.

Looking forward to 2021, we expect the first -- the growth of subscription revenue and the advertising revenue will be -- continue to have a positive impact on our gross margin. And second, we will keep an eye on the industry. We will control our revenue sharing fees of social entertainment. So except these 2 points, we will invest more on our new products and new features such as long-form audio and the podcast ecosystem. In conclusion, in 2020, we will invest more on new products and pave way for our long-term growth.

And so just to close out, I think we are very pleased with this quarter's results with online music subscription revenue continuing its rapid growth. And we believe China's online music industry continue to be in a long-term secular growth trend that will provide us ample opportunities in the future. And our outlook in 2021 remains very positive. We expect total revenue growth to accelerate compared to 2020, close to 20%, driven by faster growth rate in both online music and social entertainment services.

Great.

Okay. So thank you, everyone, for joining us today. This concludes today's call, and we look forward to speaking to you again in the next quarter. Thank you, and goodbye.

Thank you so much.

Thank you.

Thank you.