Tencent Music Entertainment Group (TME) 2019 Q3 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 2019 Third Quarter Earnings 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 the conference is being recorded today.

Now I will turn the conference over to your speaker host today, Ms. Heather Diwu.

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 will hear from Mr. Cussion Pang, our CEO, who will start the call with an overview of our recent achievements and our growth strategies.

He 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.

Before we proceed, please note that this call may 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 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, 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 International Financial Reporting Standards in the company's earnings release and filings with the SEC.

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

With that, I'm now pleased to turn over the call to Mr. Cussion Pang, CEO of Tencent Music.

Cussion, please.

Thank you, Heather.

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

At TME, CTS is the backbone of our business strategy.

As I recently shared at the Music Matters annual conference held in Singapore, CTS represents content, technology and services which illustrate our commitment to enriching our content offering, deploying proprietary technologies to improve user experience, and providing comprehensive services to partners, artists and users.

With CTS as our core driving force, in the third quarter of 2019, TME achieved a solid financial performance with total revenue increasing 31% year-over-year, which was attributable to accelerated growth from online music subscription and solid growth from social entertainment services.

One of the most recognizable achievements in the third quarter was the continued accelerated growth of our online music services in terms of both paying users and subscription revenues.

Our online music paying users reached 35.4 million, growing 42% year-over-year as we added 4.4 million during the third quarter, picking up further from the strong addition of 2.6 million in the second quarter and 1.4 million in the first quarter of 2019.

More importantly, the high quality of this growth was demonstrated by the ARPPU expansion of 3.5% quarter-over-quarter.

Paying ratio reached 5.4%, up from 4.8% in the last quarter and 4.3% in the first quarter of this year.

Achieving an increase of over 1 percentage point within less than a year demonstrates our strong execution and pave the way for long term, sustainable growth.

This impression -- this impressive performance was primarily attributable to continuous improvement in our user retention rate and a significant increase in the number of paying users driven by pay for streaming, as the willingness of users to pay for our premium music service improved substantially.

As the leader in China's online music industry, we have been closely researching user demand trends, particularly among the younger demographics who show an increasing willingness to consume premium content.

We extended our network penetration of this younger user group by covering hundreds of universities and higher-education institutions.

We also launched target programs for students such as the subscription plan promotional events during summer holiday and a streaming program called a summer fan appreciation, (foreign language), [inviting the idol fever].

Summer fan appreciation is a special edition of our self-produced new song releasing events, which live streams the artists' releasing events.

It boosted the number of video playback of new song releasing events to 280 million in the third quarter, higher than that of the first 2 quarters combined.

On the content front, we also stepped up our investment targeting the younger generation by strengthening genres, including urban, EDM, ACG and Chinese ancient style.

Chinese ancient style has enjoyed the rising trend of popularity among young people as it combines Chinese -- China's traditional culture with popular trends and provides the young demographics a strong sense of cultural identity.

As one example of our investment in trending content, we recently signed a strategic agreement with [Niman Cultural Media], the largest Chinese ancient style music label in China.

Finally, during the quarter, we continue to add long-form audio, such as audiobooks and podcasts, including a rich variety of categories, including audio novels, talk shows and a diverse set of topics on inclusion, education, history and humanity, et cetera.

We are pleased to see the proportion of long-form audio users on our platform record a healthy growth year-over-year.

In fact, in September, average daily time spent on our platform by audiobook users was over 50% higher than an average user.

Another achievement that I would like to highlight was that [below] the third quarter, thanks to our vast user base, deep understanding on music fans and user insight, we continue to improve our platform promotional effectiveness and emerged as a preferred destination of artists to build a fan-based economy.

With digital albums, which support artists in the promotion of their music regardless of whether they are aspiring, up and coming, established, domestic or international, we have a lot of success in creating an interactive setting for content consumption, particularly with the younger demographic who are primary contributors in the fan-based economy.

For example, R1SE, an emerging male band with members selected with a variety show produced by Tencent Video, (foreign language), a male version of the tremendous popular variety show Produce 101, sold almost 1.5 million copies of its first digital album on the first day of its release.

Another example showcasing the power of our fan operation capabilities is Jay Chou's newly released single, Won't Cry, (foreign language).

Aside from strong sales, more than 12 million karaoke song recordings were produced by our WeSing users within 10 days of the release.

The release also generated a massive amount of social buzz with more than 470 million page views on external social media by the end of October 2019.

International assets also enjoy and benefit from our promotional capabilities, which allow them to connect with music lovers in China.

A case in point, the title song of Taylor Swift's new digital album, Lover, sold nearly 6 million copies within 24 hours on our platform after its release.

Another highlight of our fan-based economy on our platform was the successful live streaming for a highly popular boy band called TFBoys of their 6-year anniversary concert.

This concert, called The Fever, was a top 5 -- was the top livestreamed concert on TME platform in terms of fans participations.

Its live feed attracted more than 45 million users and generated over 300 million real-time user interactions.

These are excellent examples, demonstrating our unique strength in building a fan-based economy, inspiring content consumption and providing an additional way for fans to interact with idols and socialize with other fans.

In summary, we were pleased with our solid third quarter results.

Our continued innovation and investment to attract a younger demographic, relentless efforts in content expansion and diversifications, and our ever-strengthening efficiencies in operating a fan-based economy continue to pay off.

Next, Tony will elaborate on how we deploy technology as well as other areas of focus, which will enable us to continue enhancing overall user experience.

We are true believers in integrating music into every aspect of people's life.

Tony, please go ahead.

Thank you, Cussion.

Hello, everyone.

In addition to the strong results from our online music services, our social entertainment services also maintained a steady momentum in the third quarter with a nearly 33% year-over-year top line growth as its paying users and ARPPU grew over 23% and 7% year-over-year, respectively.

Our healthy third quarter financial results were driven by a combination of concerted efforts focused on product enhancement and improving user experience through proprietary technology.

First, on product enhancement and innovation.

As you may recall, during the second quarter, we mentioned we pioneered a product innovation by adding short videos onto the Kugou Music streaming page, which has enabled users to watch short videos while listening to music.

And since then, our short video library has expanded to include a wide range of professionally generated and user-generated videos.

Such an innovation has proven to be popular, with average daily streams of short videos up almost 40% compared to the previous quarter.

For our social entertainment services, we added new interactive features to build a rich and diverse landscape by bolstering our social and young attributes.

We upgraded the universal duet feature, (foreign language), in September, which allows listeners to sing a duet much more easily and, therefore, further lowers the barrier for participation.

This has led to an almost 50% increase in the number of duet participants in October compared to September with nearly half of these new users -- with half or nearly half of them being new users of the duet feature.

In addition, through music-centric social and gamification features, we added new functions within our singing rooms to facilitate social connections among users.

Further, in an effort to cater to the younger demographic's preferences, we introduced WeSing [Lighthouse], (foreign language), allowing users to integrate their off-line stage-singing experience with online social interaction.

With all these features, we strive to provide a common destination for users of similar interests, age or location together and interact virtually or in person in order to create tighter user communities and improve user time spent on our platform.

Another highlight during this quarter was WeSing's partnership with CCTV and Tencent to launch a singing campaign in conjunction with the celebration of China's 70th National Day.

The campaign attracted over 10 million participants, with more than 1 million WeSing users uploading their own karaoke recording of a National Day celebration song through WeSing's quick sing feature.

This feature lowers the barrier for campaign participants and improves user engagement.

The success of this campaign is a testament to our broad user base, demonstrating our ability to make online karaoke more engaging and entertaining.

And lastly, on WeSing, its international expansion we mentioned last quarter continues to show encouraging results, with MAU continuing to grow at a rapid pace of over 30% quarter-over-quarter.

In the third quarter, WeSing consistently ranked #1 among music-related apps on Google Play store in the Philippines and achieved top 2 ranking in Indonesia, Thailand and Malaysia.

We will continue to proactively explore new opportunities to bring our products and services to a larger user base outside China.

Next, I would like to discuss how improved data analytics and the deployment of proprietary technology allow us to offer a superior experience to users.

Aided by leading smart tagging and analytics technology, we have greatly improved our efficiency in content curation and personalized recommendation.

In addition to listening habit-based recommendation, by analyzing audio features with deep learning and by using data mining to screen songs in our library, we can better curate content for different target user groups.

Such efforts have resulted in improved user experience.

In the third quarter, average daily streams from personalized recommendations doubled from the same period last year.

Furthermore, the percentage of songs saved driven by personalized recommendation also showed meaningful improvement, which is another reflection of the increasing effectiveness of our recommendations.

Similarly, on WeSing, millions of content are generated by our users every day in our algorithm screen through new and existing content to curate content most suitable for different user groups.

The improved content curation and personalized recommendations have led to a 20% increase in both the streaming volume of UGC curated by our algorithms as well as the number of user-to-follower conversion for these UGC creators.

We also made advancements in deploying data to help livestreaming performers improve their ability to reach a broader audience.

For example, we developed a machine-scoring algorithm which helps high-quality performers differentiate their ranking and, as a result, has helped more users discover these performers and increase user time spent.

In addition, with our pairing algorithm, we're able to find and match more relevant and compatible livestreaming performers, facilitating these performers to perform together or engage in a sing-off to make the livestreaming session more engaging which, in turn, garners more appreciation and virtual gifts from users.

We are always on the lookout for innovative ways to improve user experience and meet all kinds of user needs to further strengthen our ecosystem.

For example, our song recognition application called [Floating Radar], (foreign language), enables users, within seconds, to recognize songs embedded in external short videos that they're watching in third-party short-video apps and serves as a gateway to attract incremental users back to the TME platform to listen to the full song when they're consuming short videos elsewhere.

Since the official launch of Floating Radar back in June 2018, we are pleased to say that it is gaining momentum as a very useful music tool.

In summary, we delivered strong execution for both our online music and social entertainment services by focusing on product enhancement and improved user experience through proprietary technology.

Persistent focus on this type of overall deployment and improvement will be key to our sustainability to grow both our platform's popularity and financial performance.

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

Thank you, Tony.

Hello, everyone.

We delivered a strong financial performance in the third quarter with our top line growth of 31%, along with solid operating margins and cash flow.

Both our online music and social entertainment business attributed to strong growth in the third quarter, driving our revenues to increase by 31% year-over-year to RMB 6.5 billion.

Despite the decrease in sublicensing revenues from other music service companies, our online music services revenue was boosted by the strong growth from user subscriptions and the sales of digital music album.

Revenues from online music services increased by 26% year-over-year to RMB 1.8 billion.

During Q3, the number of our online music subscribers increased by 4.4 million from Q2, a record increase since 2016 when we merged with CMC.

Revenues from music subscriptions were RMB 942 million, an increase of 48% from RMB 635 million in the third quarter of 2018.

The growth was mainly driven by the addition of premium content and our pay-for-streaming model and the continuous improvement in subscriber retention rate.

In addition to the strong growth in subscriber numbers, our subscriber ARPPU rose to RMB 8.9 in Q3 from RMB 8.6 in Q2 as more subscribers were attracted to our premium membership.

During Q3, our revenue from sales of digital albums more than doubled from Q3 last year, brought by new and repeat releases from top acts and the top TV shows.

Throughout 2019, we have built up our platform as the go-to destination for top artists to release their digital albums and the fans to interact and support their idols.

Revenues from social entertainment services and others increased by 33% year-over-year to RMB 4.7 billion, primarily driven by revenue growth in our online karaoke and livestreaming services.

We expanded the paying user base of our social entertainment services by 23.2% and increased ARPPU by 7.4% in Q3 of 2019 compared with Q3 of 2018.

Cost of revenues increased by 43% year-over-year to RMB 4.3 billion.

The increase was attributable to higher revenue-sharing fees and content expenses.

The increase in revenue-sharing fees reflected the growth in our social entertainment services.

In addition, we introduced the more professional-generated content into our social entertainment platform through talent agencies and shared a portion of our revenues with these agencies.

The increase in content expenses was mainly attributable to the increased market price and amount of licensed and the produced music content.

Our gross margin was 34% in Q3 2019, improved from 32.9% in Q2.

Although our overall gross margin decreased year-over-year as we increase our content investments, we were able to steadily improve operating efficiency.

In addition, strong growth from our online music business also [contributed] to increase our gross margin.

Now let's turn to our operating expenses.

We have seen improvement in operating leverage on a year-over-year basis.

Although our total operating expenses increased by 26.6% year-over-year to RMB 1.2 billion, operating expenses as a percentage of total revenue improved to 19% in Q3 2019 from 19.7% in Q3 2018.

We increased spending on growing our user base and promoting our brands and content in the third quarter.

Selling and marketing expenses for Q3 2019 were RMB 517 million, representing an increase of 19.1% year-over-year.

We continued to expand our workforce during the quarter, which we believe is an efficient investment and is crucial for expanding our leading edge in products and technology.

General and administrative expenses increased by 32.6% year-over-year to RMB 720 million in Q3 2019.

Our effective tax rate was 12.2% in Q3 2019 compared to 8.1% in Q3 2018.

The increase was mainly due to the change in the preferential tax rate of certain subsidiaries.

As a result of foregoing, our net profit attributable to equity holders of the company was RMB 1 billion, and our non-IFRS net profit attributable to equity holders of the company was RMB 1.24 billion.

Our non-IFRS net profit margin was 19% in Q3 2019.

As of September 30, 2019, our combined balance of cash and cash equivalents, term deposits amounted to RMB 21.1 billion, an increase of RMB 1.3 billion from RMB 19.9 billion as of June 30, 2019.

The increase in balances were primarily due to cash flow generated from operations of RMB 1.4 billion.

Overall, we achieved strong growth across our online music and social entertainment business brought by the strength of our products and the premium content offering.

Our investments in premium content has not only brought in sound financial returns but also solidifies the leadership of our platform.

In the coming quarters, we will stay focused on strengthening the synergy between our music platform and the social entertainment platform and continue to invest in long-term growth initiatives.

This concludes our prepared remarks.

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

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

Just 2 quick ones.

The first one is about the fourth quarter basis trends.

As we head into the end of the year, just wonder if you could give us more color on the 2 major segments in the fourth quarter.

And then related to that, remember in fourth quarter 2018, there were higher sales and marketing expenses, quite significantly higher than our third quarter last year, so wondering whether this year we would also see some promotional events in the fourth quarter.

And then secondly, I remember you guys mentioned about content cost increase, half of it are driven by market prices.

So could you share a little bit more color on the increase in content cost related to market prices?

Are we seeing more competition for content?

If so, from which types of companies?

Eddie, let me address your first part of the question, and then I'll let Shirley address the latter parts of your question.

As we mentioned before, we don't -- while we don't provide specific guidance to stay very focused on the long-term growth, I think directionally, from a revenue perspective, we expect our online music revenue to grow at a faster pace on a year-over-year basis in the fourth quarter compared to the third quarter, and that's mostly driven by the trend of continuing acceleration in growth in the subscription revenue within music.

And then in terms of social entertainment revenue, we expect the growth rate in the fourth quarter to be in line with the third quarter.

Now we recognize that, that may be slightly below where we previously thought it would be, and that's primarily because of increasing competition that we're facing with the short-video platforms.

And so what that translates to is that, overall, from a total revenue perspective, Q4 total revenue growth on a year-over-year basis should be slightly better than what it was in Q3.

For the 2 questions, for sales expenses, we think last year, we did some IPO, so the expense will be very high.

And for next quarter, we think compared to the Q2, our sales expenses will a little increase, but the growth rate will be low -- will be lower than the growth rate of revenue.

And for the -- all operating expenses, we think, compared to the Q4 2018, the percentage of total revenue will be lower than last year.

And then in terms of your last question about the market price for licensing, as you would reasonably expect, content price always goes up.

But given the rapid pace of growth of our music subscription revenue, we're actually very pleased to say that at the current pace of growth of our music subscription revenue, it's definitely outstripping the rate of growth in terms of the content price.

One more point I would like to add is since that we are also heavily investing in the technology, that can help us to do the content distribution in a more efficient way.

So we are going to -- since that we have the largest number of songs library in the market right now, we will get the best use of the content that we have on hand and also -- will also help us to do a better work in the future.

Our next question comes from John Egbert with Stifel.

Congrats on the strong results.

The acceleration in paid users and conversion was impressive.

Can you talk about some of the key product initiatives driving increased retention as well as some of your efforts benefiting the top-of-funnel growth?

And it sounds like your partnerships with universities benefited tractions with younger demos in particular.

Would love to hear more about that strategy and how that evolved.

Okay.

Thank you for your questions.

Yes, we have -- our online music service continued to deliver really good results in this quarter.

And first of all, I think that the most important point is it's demonstrating that our users is willing -- really want to pay for the high quality of content, and the retention rate of our music services keep improving.

From the operational point of view, I think that we continue to enhance our content offerings and also provide a better user experience to our users.

In addition to -- especially this next year, we will continue to expand the content behind the streaming paywall to gradually grow from the high single-digit level in 2019, and we will also add more online and off-line free features to our monthly subscription plan.

Sales and marketing program like bundling with other monthly subscription service of the Tencent ecosystem will also be continued to execute.

We strongly believe that the paying ratio of our online music service will continue to grow in a healthy manner.

Regarding the -- some of the younger-generation users that you mentioned, this is also a very key and important area that we are going to be focusing on.

During the presentation that we just talked about, frankly speaking, we think that the fan-based economy is going to be one of the very important drivers for our business forward, so we will continue to put in more efforts in this area.

And the examples that we have already talked about like Jay Chou, Taylor Swift and also the R1SE example, demonstrating all of the different artists, no matter if they are the top-tier artists, domestic artists or international artists or even the rising stars for the future, also having really encouraging results from our digital album sales.

So all are the key drivers for us, and we are demonstrating that the young generation really like this kind of idea, and we will continue to put in more efforts in this.

And also, let me clarify, sometimes a point that's misunderstood by the market is about the Jay Chou digital album.

In the sales period, the Jay Chou actually helped our digital album revenue as opposed to the music subscription revenue because only users who bought the digital album are able to listen to the song, not even the monthly subscribers for the time being.

After the promotional period -- after the sales period of the digital album, then the song falls into -- behind the paywall.

And then from that moment onwards, the subscriber would then be able to enjoy the song after being a subscriber.

So at the -- in the third quarter, the Jay Chou album launch helped our digital album revenue, but it has not been a big contributor to our subscription revenue, and we expect that to contribute over time.

Our next question is from Alex Yao with JPMorgan.

This is Daniel calling on behalf of Alex Yao.

My first question is on your music subs ARPPU.

It actually shows a very strong sequential growth, 3.5% this quarter, so wondering what's the main rationale behind and how should we think about the trend in the future quarters and our main measure to increase the music subs ARPPU in the future.

My second question is regarding the paywall.

So we have had some content paywall in recent quarters, such as Jay Chou, Eason Chan, et cetera.

But we noticed most label content are still not in the paywall yet.

Could management give us some color on our plans to put music in the paywall in the next 1 to 2 years?

Okay.

Thanks for the questions, Daniel.

Right now, we are focusing on promoting the premium monthly VIP packages, and the result is encouraging, which helped to drive the ARPPU up.

But on the other hand, since the paying users conversion is still our top priority, we expected a flat to slightly increase in the online music ARPPU in the coming quarters.

Regarding the paywall that you mentioned about we were going to continually add in more content behind the paywall, right now, we're just in the high-single digits, and we will continue to add on top of this, but we are going to do it in a gradual manner.

And -- but we are seeing really encouraging results, especially by the strong result of our monthly subscription, and we have the confidence that people is willing to pay for the high-quality content.

About the ARPPU increase, we think, naturally, it means we capture our users and gave good feedback.

They all think our premium content have a big price.

So this quarter, we reduced our promotions.

And only promotion on VIP, premium VIP, saw the ARPPU increase.

And second, our automatic renew package has its price to increase up, so that's all why our ARPPU increased and our subscribers also increased.

Our next question is from Rob Sanderson with Loop Capital.

A couple of questions on -- I just wanted to ask your view on advertising as a source of monetization going forward, both in the online music segment but especially interested in your advertising opportunities within your social entertainment properties.

And then along those lines, it's clear that digital platforms are becoming more and more important in -- and more powerful in the promotion of artists and marketing of artists.

How do you view opportunities like the sponsor recommendations that Spotify recently announced?

And I understand China's digital music ecosystem is quite different than the U.S. and Europe.

But can marketplace concepts like this be successful at this stage of development?

Or are these more later-stage ideas and driving adoption of paid music in a subscription model is more the singular focus for the time being?

Any color there would be helpful.

Okay.

So in terms of the advertising opportunity, actually, I think we mentioned this a couple of quarters back.

We actually see there to be a massive opportunity in terms of advertising potential, not only just within our social entertainment services but probably more so in the online music services.

And that's because within online music, we have a much larger user base with a very long time spent.

And as you probably would know, if you compare our product experience with our Western peers, free users are still not subject to as many ad blockage, in fact, a very, very low ad load at the moment.

And so that has a lot more room for it to run.

And then in terms of the second question about whether we see marketplace as something that will work in China, look, I think we haven't spent a lot of time talking about it, but we actually think there is room for the marketplace model to work in China as well.

In fact, the Tencent Musician Program is -- it follows a similar concept, which is our effort to promote more independent artists to go mainstream by giving them much easier access to our large user base, providing programs for them to improve their music, helping connect them with the right mentors and music labels to work with as well as helping them promote and monetize the music onto our platform.

And so that's also part of our industry value chain strategy to extend beyond just recommendations and more towards the indie musician market.

Yes.

And also, as we always talk about, in TME, we want to make music ubiquitous to our users.

So we cover many different use cases.

For the advertising, I think especially in the in-car audio systems or the smart speakers and other scenario that we are -- currently, we have a number of very successful business partnerships with those manufacturers and service providers.

So I think that we will also provide other audio-based advertising opportunity for us in the future.

Our next question comes from Wendy Chen with Goldman Sachs.

Congratulation on the solid subscriber growth.

My question is related to our next quarter color that's given by Tony.

There's a great relief to see that our subscriber growth momentum is continuing.

And if we see the ARPPU is, let's say, relatively stable, I assume majority is contributed by the subscriber growth.

So just wondering what action or management have been taken to sustain the subscriber growth into the next quarter or potentially even accelerate.

And if I may, on the subscriber growth in this quarter, can management share some color on how much of this is contributed by pay-for-streaming business model for Jay Chou, tell us, with premium content, et cetera, versus the campaign we have done.

And very lastly, on the social entertainment.

We see that in the third quarter, it seems the MAU growth had been relatively muted compared to last quarter, only 3 million, and also ARPPU has seen slight Q-on-Q decrease despite the assist of peak summer season.

So just wondering, is there anything in this quarter in particular that result in a relatively weaker social?

Sure, Wendy.

You mentioned Jay Chou again.

Once again, Jay Chou is a fantastic partner of ours, and we really appreciate the opportunity with working with him on releasing his digital album.

But like I said, Jay Chou actually helped with our digital album revenue in Q3, and the music actually isn't behind the paywall for subscribers within Q3 yet.

And so over time, that effect would play out.

And then in terms of what the company has done to drive music subscription, it's our effort to continue to improve our retention as well as pay-for-streaming pays off.

For example, we continue to attract subscribers with our premium content offering.

That is the most high quality and comprehensive in the market.

Our personalized recommendation provides the right content that users like and, as a result, giving them more chance and increased likelihood for them to be willing to pay for it.

Our initiatives to promote a higher adoption of our auto-renewal subscription program as well as our paywall pay-for-streaming strategy that Cussion mentioned, which started beginning of this year with 0% of our content being behind the paywall, and now we expect it to reach high single-digit percentage and -- by year-end.

So all these efforts contribute to the paying subscriber growth.

And then in terms of the social entertainment, it is facing increasing competition from short-video platforms, which is capturing an increasing percentage of user time spent.

And as a result, this has started to impact the MAU and revenue growth pace.

And to address this, in addition to the growth initiatives that I mentioned in the last quarter, we will be further stepping up our investment in the user growth plan within the social entertainment segment, which entails a fairly comprehensive program such as penetrating younger demographics, partnering with schools and universities and off-line singing competitions, partnering with movie studios, television studios and game studios to campaign around original theme songs that are released with these topical hit content that are popular amongst the younger demographics.

We'll also be -- while we're not a short-video platform, but we will also be providing more and better quality short-video content to fulfill our users' need for music-centric short videos so that they consume music-centric short videos within our platform.

And to this end, we have the benefit of being able to leverage Tencent's vast amount of short-video content that are already available within the Tencent ecosystem.

And finally, given WeSing -- WeSing's biggest strength is its social network, we will be stepping up investment in expanding its social network.

And so over the coming quarters, users will continue to see a lot more new features that help them better connect with their friends and discover new people with similar interests.

And we'll make it easier for users to, for example, join a singing room or singing duet or engage in a good chat or enrich in the number of things they could do while they're in a singing room or conducting a group chat, all those things to make it a more social experience and to broaden their social network.

So all in all, we're confident that user growth will return over time as we execute all these growth initiatives that I discussed.

And also -- and all this is just on the domestic front, by the way.

In terms of our overseas growth initiatives, WeSing continues to do extremely well, as I mentioned, ranking #1 in Philippines, #2 in Indonesia, Thailand and Malaysia.

And having said all this, it's important not to lose sight of the fact that our social entertainment revenue continues to grow at a 33% pace this quarter, and our online music business continues to do extremely well with a continuation of the accelerating growth trend.

And in Q4, we believe our momentum of growth subscriber will continue, and ARPPU will be stable compared to the Q3.

(Operator Instructions) Our next question comes from Zhijing Liu with UBS.

I have only one question, is that online video companies has mentioned a possibility of price hike in 2020.

Do you have similar plans for next 2 years?

I think that is not our key focus to higher our price at this moment.

We just keep trying to drive the paying ratio.

It's going to be our top priority because it takes time to educate a user.

And once they started to pay, we are confident that they will continue to pay as proven that our retention rate right now has been -- keep improving.

And I think that we still have a long room for growth in the paying ratio.

So this is going to be our priority.

Our next question comes from Thomas Chong with Jefferies.

I have a question about the regulatory environment.

Can the company comment about how we should think about the government speculations in the next few years that you may think of, if any?

And I have a quick follow-up about the competition from short-form video.

Can management comment about why the competition from short-form video happened right now and also anything that you think they are more differentiating than -- that we are yet to catch up?

I'll address the point about the competition first.

I think we're starting to see more of the impact from competition because of both the short-video platforms and our social entertainment platform of very large scales.

And for example, with WeSing, not only is it high penetrated within first -- Tier 1 and Tier 2 cities, but it also has a strong foothold in Tier 3, 4 and 5 cities.

And so as we see the short-video platforms extending their footprint into all tiers of cities, we're increasingly seeing competition for user time spent as a result.

And karaoke is one form of entertainment, short video is another form of entertainment.

And in this sense, we are also facing competition for share of time.

And then in terms of the regulatory environment, we are -- obviously, I think everyone are very focused on.

The regulatory environment is increasingly being tightened.

But nevertheless, we are fully committed to working very closely with the regulators to ensure a healthy development of the music industry.

And in particular, our efforts in copyright protection has been very well recognized by the industry.

And also, we are very compliant in terms of the sublicensing requirements that are imposed on us.

And so I think from our perspective, we -- I think music is in a slightly better operating environment compared to potentially other sectors.

Yes, even though we are facing some of the competition from the short-form video platform, but I still think that for TME, the social entertainment service still differentiates from our competitors with this unique virtuous cycle of value creation.

First of all, we can leverage on our user base and the strong capabilities of our music platform and online karaoke platform.

And we will be able to discover some of the young talents, help them and grow them to become the aspiring performers in the future.

Quickly, let me give you 2 examples.

One of the stars, who is called iKON, who stars on our WeSing platform, has started his career in Kuwo ['14] and have attracted over 14 million fans on our platform.

And one of his popular songs was ranked #1 on our Yo!

Bang music chart of TME.

And also, his 2 hit songs have recorded over 100 million streams on our QQ Music and WeSing platform.

And the other example is [Hu Liu Liu], who is also one of the well-known performer of Kugou livestreaming platform and has successfully released 2 hit songs with over 1 billion streams on our platform.

So all are the key differentiators of our social entertainment services, and we are forming the future style of tomorrow and also we can -- through all this kind of efforts, we can attract more users who love music to go to our platform to enjoy music.

Our next question comes from Eileen Jiang (sic) [Ellie Jiang] with Macquarie.

I just have a quick question on the WeSing.

So the management talked about our great performance in the overseas market.

So how do we plan to monetize this overseas market in longer term?

Sure.

So with WeSing at the moment, our focus is on expanding our user base and footprint.

It's still very early stage with only -- it's been less than a year since we started on this journey of international expansion.

But over time, as you would imagine, WeSing is very experienced in coming up with innovative ways of monetization, for example, through virtual gifting, by having friends send virtual gifts to other friends while commenting on their karaoke song recording.

We have singing rooms monetization that we talked about previously.

There are also UGC livestreaming features.

So all of those are applicable, but at the moment, our focus is on garnering a bigger use of footprint at this stage.

Our next question comes from Alex Liu with China Renaissance.

Just 2 quick questions here.

First, when we're talking about the [comp and] cost trend heading into next year, how should we think about the company's strategy on pricing negotiation in the next round of agreement renewal?

And secondly, just on the livestreaming part of the business, we obviously see some competition.

Just want to see how this trend will impact sort of the revenue growth trend into the next year, 2020.

Any guidance would be very helpful.

For the cost trend, we think we have a good sign on the music side because we have seen that the cost increase reach is lower than our subscriber growth rate.

That is a good news.

And for the revenue sharing fees, we think maybe we will continue our trends in Q3.

There is a little increase in the next quarter.

And then in terms of 2020 outlook, I'm afraid that we have to reserve that for our discussion in the next quarter's earnings call.

Our next question comes from Tian Hou with T.H. Capital.

Congratulation on the good earnings.

My question is regarding your investment for the growth initiatives.

So you mentioned overseas, you mentioned more pay -- converting paying users, so many initiatives.

I wonder how that's going to impact your margin.

And so that is the -- my main question, how that's going to impact your margin.

We have captured all this investment in our cost.

So we think we can continue to keep the gross margin stable in the next quarter.

Our last question comes from Binnie Wong with HSBC.

So my question is actually on -- if you look at the -- on the conversion side, like if you look at the -- actually, on the conversion side of the user and also on the retention because I think management has been mentioning that retention has been quite good, can you -- will you be able to give us some color in terms of like quantifying it, say, maybe the users that have been up?

I just want to say, on the online video platform, they were sometimes commenting that, say, for users that have been subscribers that have been signing up for the last 12 months, how many months have they been continuously be on?

So I don't know if there's any metrics on retention you can comment on.

And then down the road as that -- because we see also the nice growth in your social entertainment side, how do we leverage the user data that we -- user profile that we get there?

And then as management had mentioned that we are stronger in terms of promoting, like feeding the users with the songs that they want, right, so it's about a better targeting.

So I think that technology side is something that investors have been closely looking at, so a color on these fronts would be great.

Sure.

So while we don't disclose the specific data in terms of the retention rate, I think by virtue of observing our growth trend in our music subscribers and the fact that it is continuing to grow at a faster and faster pace, that should give everyone the confidence that the retention rates are, in fact, improving at a very, very healthy pace.

Otherwise, they wouldn't -- it wouldn't be possible for us to grow the subscribers at such a healthy pace.

And then in terms of the data front, we have a massive amount of data on our platform, not just because we have a very large user base but also because we have a very long operating track record.

QQ Music and Kugou Music have been in operation for over 15 years.

And so over time, we've accumulated a lot of information on particular listening preferences, music trends.

And that's on the user side.

And in addition, we're also investing very heavily into analyzing data on the content side.

There's -- the content curation that I talked about in the prepared presentation early on this call, we are able to help better curate the content that are suited to a particular target group.

And thereby, we're seeing a better, improved favorite rates and improved listening volume of those groups of users.

And I'd also like to say that being part of Tencent, obviously, give us an additional benefit of having access to their social graph, and you see that as a key feature on the home page of the WeSing where users are able to connect with their friends instantly, even if you're just a new user onto the platform.

And obviously, that gives us a lot of benefit in terms of understanding what the friend circles are listening to and what kind of content are more suited for that particular group of users.

We are now approaching the end of the conference call.

I will now turn the call over to your speaker host today, Ms. Heather Diwu, for any closing remarks.

Thank you, everyone, for joining us today.

If you have any further questions, please feel free to contact TME's Investor Relations team through the contact information provided on our website, or TPG, the company's Investor Relations partner.

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

Thank you, and goodbye.