TME(TME) - 2024 Q1 - Quarterly Report

Executive Summary Fourth Quarter 2023 Financial Highlights TME reported a 7.2% YoY decrease in total revenues for Q4 2023, primarily due to a decline in social entertainment services, while online music services showed strong growth, with music subscription revenues increasing by 45.3% and net profit growing by 16.9% | Metric | Q4 2023 (RMB) | YoY Change | US$ (million) | | :-------------------------------- | :------------ | :--------- | :------------ | | Total Revenues | 6.89 billion | -7.2% | 971 | | Music Subscriptions Revenue | 3.42 billion | +45.3% | 481 | | Net Profit | 1.41 billion | +16.9% | 198 | | Net Profit Attributable to Equity Holders | 1.31 billion | +13.5% | 184 | | Non-IFRS Net Profit | 1.68 billion | +12.5% | 236 | | Diluted Earnings per ADS | 0.83 | +15.3% | 0.12 | | Music Paying Users | 106.7 million | +20.6% | - | | Monthly ARPPU - Online Music | 10.7 | +20.2% | - | - Total cash, cash equivalents, and term deposits as of December 31, 2023, were RMB32.22 billion (US$4.54 billion)[4] Full Year 2023 Financial Highlights For the full year 2023, TME's total revenues decreased by 2.1% YoY, despite which music subscription revenues saw significant growth of 39.1%, contributing to a substantial 36.0% increase in net profit | Metric | FY 2023 (RMB) | YoY Change | US$ Equivalent | | :-------------------------------- | :------------ | :--------- | :--------------- | | Total Revenues | 27.75 billion | -2.1% | 3.91 billion | | Music Subscriptions Revenue | 12.10 billion | +39.1% | 1.70 billion | | Net Profit | 5.22 billion | +36.0% | 735 million | | Net Profit Attributable to Equity Holders | 4.92 billion | +33.8% | 693 million | | Non-IFRS Net Profit | 6.22 billion | +26.8% | 876 million | | Net Adds of Music Paying Users | 18.2 million | Up from 12.3M in 2022 | - | Management Commentary Executive Chairman's Comments Mr. Cussion Pang highlighted 2023 as a pivotal transition year, noting accelerated growth in music subscription revenue and expanded net profits, driven by online music services mitigating social entertainment headwinds - 2023 marked a pivotal transition at TME, with accelerated year-over-year growth in music subscription revenue and expanded quarterly net profits[5] - Online music services' strong performance mitigated headwinds from social entertainment services[5] - TME is well-positioned for multi-faceted opportunities, underpinned by content and platform dual engines and the online music business's relatively counter-cyclical nature[5] CEO's Comments Mr. Ross Liang focused on efficiency and user experience, noting that deeper insights into users and content enhanced operational efficiency and personalization, and highlighted the positive impact of expanded user privileges and AI-empowered products on subscriber conversion and retention - Laser focus on execution resulted in a year of efficiency, with enhanced operational efficiency through deeper insights into users and content[5] - Expanded user privileges and AI-empowered products contributed positively to subscriber conversion and retention[5] - For 2024, TME remains dedicated to delivering a more compelling user experience and easier access to music across a broader range of use cases[5] Operational Highlights Key Operating Metrics (Q4 2023) In Q4 2023, online music paying users and ARPPU showed strong growth, while MAUs for both online music and social entertainment declined, and social entertainment ARPPU also saw a significant decrease | Metric | 4Q23 | 4Q22 | YoY % | | :-------------------------------- | :--- | :--- | :---- | | MAUs — online music (million) | 576 | 601 | (4.2%) | | Mobile MAUs — social entertainment (million) | 104 | 146 | (28.8%) | | Paying users — online music (million) | 106.7 | 88.5 | 20.6% | | Paying users — social entertainment (million) | 8.0 | 7.6 | 5.3% | | Monthly ARPPU — online music (RMB) | 10.7 | 8.9 | 20.2% | | Monthly ARPPU — social entertainment (RMB) | 78.0 | 169.6 | (54.0%) | Strategic Initiatives TME strengthened its content leadership through extensive partnerships and diverse offerings, enhanced platform value with improved user experiences and multi-device support, and leveraged AIGC for intelligent music discovery and artist creation - Strengthened content offerings with over 200 million music and audio tracks by the end of 2023, including renewed multi-year strategic cooperation with Universal Music Group[8][10] - Enriched mid- to long-tail content with over 3 million songs published by over 480,000 indie musicians through Tencent Musician Platform[10] - Expanded user privileges and improved multi-device experience, including China's largest Dolby Atmos music library and upgraded in-car music experience[9][10] - Integrated Large Language Models (LLMs) into music streaming for intelligent music discovery, upgrading features like the virtual DJ[10] - Introduced Venus' AI composition tool to support artists' music creation[10] Fourth Quarter 2023 Financial Review Total Revenues and Cost of Revenues (Q4 2023) Total revenues for Q4 2023 decreased by 7.2% YoY, primarily due to a significant decline in social entertainment services, while cost of revenues also decreased, mainly driven by lower revenue sharing fees from social entertainment | Metric | Q4 2023 (RMB million) | Q4 2022 (RMB million) | YoY Change | | :-------------------- | :-------------------- | :-------------------- | :--------- | | Total Revenues | 6,893 | 7,425 | -7.2% | | Cost of Revenues | 4,252 | 4,978 | -14.6% | - The decrease in total revenues was mainly due to the decline in revenues from social entertainment services and others, partially mitigated by growth in online music services[4][11] - Cost of revenues decreased mainly due to decreased revenues from social entertainment services leading to lower revenue sharing fees, partially offset by increased content costs of royalties and advertising agency fees[12] Gross Margin and Operating Expenses (Q4 2023) Gross margin improved significantly by 5.3 percentage points to 38.3% in Q4 2023, driven by strong growth in music subscriptions and advertising, and the ramp-up of own content, while total operating expenses decreased by 7.0% YoY, mainly due to reduced employee-related and promotional expenses | Metric | Q4 2023 | Q4 2022 | Change | | :-------------------------------- | :------ | :------ | :----- | | Gross Margin | 38.3% | 33.0% | +5.3 ppts | | Total Operating Expenses (RMB million) | 1,266 | 1,361 | -7.0% | | Selling and Marketing Expenses (RMB million) | 255 | 266 | -4.1% | | General and Administrative Expenses (RMB million) | 1,011 | 1,095 | -7.7% | - Gross margin increase was primarily due to strong growth of revenues from music subscriptions and advertising services, and the ramp-up of TME's own content[13] - Selling and marketing expenses decreased mainly due to reduced promotional expenses for social entertainment services, partially offset by increased spending on content promotion[15] - General and administrative expenses decreased primarily due to reduced employee-related expenses[15] Revenue Breakdown by Service (Q4 2023) Online music services revenue surged by 41.1% YoY, driven by strong music subscription growth (45.3%) and increased advertising, while social entertainment services revenue plummeted by 51.6% due to adjustments in live-streaming functions and stricter compliance | Service | Q4 2023 (RMB million) | Q4 2022 (RMB million) | YoY Change | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Online Music Services | 5,022 | 3,559 | +41.1% | | Music Subscriptions | 3,420 | 2,350 | +45.3% | | Social Entertainment Services and Others | 1,871 | 3,866 | -51.6% | - Online music paying users increased by 20.6% to 106.7 million, and monthly ARPPU expanded to RMB10.7, marking its seventh consecutive quarter of growth[14] - The decrease in social entertainment revenues was mainly caused by adjustments to certain live-streaming interactive functions and more stringent compliance procedures[14] Operating Profit, Net Profit, and EPS (Q4 2023) Operating profit grew by 23.5% YoY, reflecting improved operating efficiency, with net profit and non-IFRS net profit also seeing double-digit growth, and diluted EPS increasing to RMB0.83 | Metric | Q4 2023 (RMB million) | Q4 2022 (RMB million) | YoY Change | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Operating Profit | 1,714 | 1,388 | +23.5% | | Net Profit | 1,409 | 1,205 | +16.9% | | Net Profit Attributable to Equity Holders | 1,306 | 1,151 | +13.5% | | Non-IFRS Net Profit | 1,678 | 1,492 | +12.5% | | Diluted EPS (RMB) | 0.83 | 0.72 | +15.3% | | Non-IFRS Diluted EPS (RMB) | 1.00 | 0.91 | +9.9% | - Effective tax rate for Q4 2023 was 17.3%, up from 12.2% in Q4 2022, mainly due to the accrual of withholding income tax[16] Cash and Term Deposits (Q4 2023) As of December 31, 2023, TME's combined balance of cash, cash equivalents, and term deposits increased to RMB32.22 billion (US$4.54 billion) from RMB30.96 billion at the end of Q3 2023 | Metric | As of Dec 31, 2023 (RMB billion) | As of Sep 30, 2023 (RMB billion) | Change | | :-------------------------------- | :------------------------------- | :------------------------------- | :----- | | Cash, Cash Equivalents and Term Deposits | 32.22 | 30.96 | +1.26 | Full Year 2023 Financial Review Total Revenues and Service Breakdown (FY 2023) Total revenues for FY 2023 decreased by 2.1% YoY, while online music services revenue grew strongly by 38.8%, driven by music subscriptions (up 39.1%) and advertising, but social entertainment services revenue declined significantly by 34.2% due to operational adjustments | Service | FY 2023 (RMB million) | FY 2022 (RMB million) | YoY Change | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Total Revenues | 27,752 | 28,339 | -2.1% | | Online Music Services | 17,325 | 12,483 | +38.8% | | Music Subscriptions | 12,100 | 8,700 | +39.1% | | Social Entertainment Services and Others | 10,427 | 15,856 | -34.2% | - Online music paying users increased by 19.8% to 100.9 million, and monthly ARPPU expanded to RMB10.0[20] - The decrease in social entertainment revenues was mainly caused by adjustments to certain live-streaming interactive functions and more stringent compliance procedures[21] Cost of Revenues, Gross Margin, and Operating Expenses (FY 2023) Cost of revenues decreased by 8.2% YoY, primarily due to lower revenue sharing fees from social entertainment, leading to a gross margin improvement of 4.3 percentage points to 35.3%, while total operating expenses decreased by 9.7% YoY with reductions in both selling & marketing and G&A expenses | Metric | FY 2023 (RMB million) | FY 2022 (RMB million) | YoY Change | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Cost of Revenues | 17,957 | 19,566 | -8.2% | | Gross Margin | 35.3% | 31.0% | +4.3 ppts | | Total Operating Expenses | 5,018 | 5,557 | -9.7% | | Selling and Marketing Expenses | 897 | 1,144 | -21.6% | | General and Administrative Expenses | 4,121 | 4,413 | -6.6% | - Gross margin increase was primarily due to strong growth of revenues from music subscriptions and advertising services, and the ramp-up of TME's own content[22] - Selling and marketing expenses decreased mainly due to reduced promotional expenses for social entertainment services[26] - General and administrative expenses decreased primarily due to reduced employee-related expenses and expenses related to the Hong Kong secondary listing incurred in 2022[26] Operating Profit, Net Profit, and EPS (FY 2023) Operating profit for FY 2023 increased significantly by 36.4% YoY, driven by improved operating efficiency and cost controls, with net profit and non-IFRS net profit also showing strong double-digit growth, and diluted EPS reaching RMB3.11 | Metric | FY 2023 (RMB million) | FY 2022 (RMB million) | YoY Change | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Operating Profit | 6,059 | 4,443 | +36.4% | | Net Profit | 5,220 | 3,839 | +36.0% | | Net Profit Attributable to Equity Holders | 4,920 | 3,677 | +33.8% | | Non-IFRS Net Profit | 6,223 | 4,907 | +26.8% | | Diluted EPS (RMB) | 3.11 | 2.27 | +37.0% | | Non-IFRS Diluted EPS (RMB) | 3.74 | 2.93 | +27.6% | Other Corporate Information Share Repurchase Program As of December 31, 2023, TME had repurchased 25.3 million ADSs for a total consideration of US$174.5 million under its US$500 million Share Repurchase Program announced in March 2023 - Repurchased 25.3 million ADSs for US$174.5 million under the US$500 million Share Repurchase Program[27] Social Responsibilities TME collaborated with local governments and Tencent Charity in Q4 2023 to organize music events, such as the Shenzhen-Linzhi Music Festival, to promote cultural and economic development in ethnic minority regions and boost rural tourism - Collaborated with local governments and Tencent Charity to organize music events, like the 2023 Shenzhen-Linzhi Music Festival, to promote cultural and economic development in ethnic minority regions[28] Exchange Rate Information All RMB to USD translations in the announcement were made at a rate of RMB7.0999 to US$1.00, based on the noon buying rate on December 29, 2023, as per the Federal Reserve Board's H.10 statistical release - All translations from RMB to USD were made at the rate of RMB7.0999 to US$1.00, the noon buying rate in effect on December 29, 2023[29] Non-IFRS Financial Measure Explanation TME uses non-IFRS net profit to evaluate operating results and for financial decision-making, believing it helps identify underlying business trends by excluding certain expenses like amortization of intangible assets, share-based compensation, and net losses/gains from investments - Non-IFRS net profit helps identify underlying trends by excluding amortization of intangible assets, share-based compensation expenses, net losses/gains from investments, and related income tax effects[30][33] - Non-IFRS net profit should not be considered in isolation or as an alternative to IFRS measures, and may not be comparable to similarly titled measures presented by other companies[31] About Tencent Music Entertainment Tencent Music Entertainment Group is China's leading online music and audio entertainment platform, operating popular apps like QQ Music, Kugou Music, Kuwo Music, and WeSing, with a mission to create endless possibilities with music and technology - TME is the leading online music and audio entertainment platform in China, operating QQ Music, Kugou Music, Kuwo Music, and WeSing[34] - TME's mission is to create endless possibilities with music and technology, enabling users to discover, listen, sing, watch, perform, and socialize around music[34] Safe Harbor Statement The press release contains forward-looking statements made under the 'safe harbor' provisions of the U.S. Private Securities Litigation Reform Act of 1995, which involve inherent risks and uncertainties that could cause actual results to differ materially from expectations - The press release contains forward-looking statements made under the 'safe harbor' provisions of the U.S. Private Securities Litigation Reform Act of 1995[35] - Forward-looking statements involve inherent risks and uncertainties, and actual results could differ materially from those contained in any forward-looking statement[35] Investor Relations Contact Contact information for Tencent Music Entertainment Group's Investor Relations is provided for inquiries - Investor Relations Contact: ir@tencentmusic.com, +86 (755) 8601-3388 ext. 818415[36] Financial Statements Consolidated Income Statement The consolidated income statement provides a detailed breakdown of revenues, costs, expenses, and profits for both the fourth quarter and full year ended December 31, 2023, compared to the prior year | Metric | Q4 2023 (RMB million) | Q4 2022 (RMB million) | FY 2023 (RMB million) | FY 2022 (RMB million) | | :-------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Online music services revenue | 5,022 | 3,559 | 17,325 | 12,483 | | Social entertainment services and others revenue | 1,871 | 3,866 | 10,427 | 15,856 | | Total revenues | 6,893 | 7,425 | 27,752 | 28,339 | | Cost of revenues | (4,252) | (4,978) | (17,957) | (19,566) | | Gross profit | 2,641 | 2,447 | 9,795 | 8,773 | | Total operating expenses | (1,266) | (1,361) | (5,018) | (5,557) | | Operating profit | 1,714 | 1,388 | 6,059 | 4,443 | | Profit for the period/year | 1,409 | 1,205 | 5,220 | 3,839 | | Profit attributable to equity holders | 1,306 | 1,151 | 4,920 | 3,677 | | Diluted Earnings per ADS (RMB) | 0.83 | 0.72 | 3.11 | 2.27 | Unaudited Non-IFRS Financial Measure Reconciliation This section reconciles IFRS net profit to non-IFRS net profit for both the fourth quarter and full year 2023, detailing adjustments for amortization, share-based compensation, investment gains/losses, and related tax effects | Metric | Q4 2023 (RMB million) | Q4 2022 (RMB million) | FY 2023 (RMB million) | FY 2022 (RMB million) | | :-------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Profit for the period/year (IFRS) | 1,409 | 1,205 | 5,220 | 3,839 | | Amortization of intangible and other assets | 111 | 126 | 445 | 498 | | Share-based compensation | 183 | 178 | 736 | 834 | | Losses/(gains) from investments | 23 | — | (7) | (141) | | Income tax effects | (48) | (17) | (171) | (123) | | Non-IFRS Net Profit | 1,678 | 1,492 | 6,223 | 4,907 | | Non-IFRS Net Profit Attributable to Equity Holders | 1,575 | 1,438 | 5,923 | 4,745 | | Non-IFRS Diluted EPS (RMB) | 1.00 | 0.91 | 3.74 | 2.93 | Consolidated Balance Sheet The consolidated balance sheet presents TME's financial position as of December 31, 2023, and December 31, 2022, detailing assets, equity, and liabilities | Metric | As of Dec 31, 2023 (RMB million) | As of Dec 31, 2022 (RMB million) | | :-------------------------------- | :------------------------------- | :------------------------------- | | Total assets | 75,536 | 67,009 | | Total equity | 57,202 | 49,127 | | Total liabilities | 18,334 | 17,882 | | Cash and cash equivalents | 13,567 | 9,555 | | Term deposits (Non-current) | 8,719 | 6,530 | | Term deposits (Current) | 9,937 | 11,291 | | Financial assets at fair value through other comprehensive income | 6,540 | 3,168 | Condensed Consolidated Statements of Cash Flows The condensed consolidated statements of cash flows provide an overview of cash generated from operating, investing, and financing activities for both the fourth quarter and full year ended December 31, 2023 | Metric | Q4 2023 (RMB million) | Q4 2022 (RMB million) | FY 2023 (RMB million) | FY 2022 (RMB million) | | :-------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Net cash provided by operating activities | 1,977 | 2,494 | 7,337 | 7,481 | | Net cash used in investing activities | (193) | (1,108) | (1,863) | (1,446) | | Net cash used in financing activities | (576) | (383) | (1,538) | (3,419) | | Net increase in cash and cash equivalents | 1,208 | 1,003 | 3,936 | 2,616 | | Cash and cash equivalents at end of period/year | 13,567 | 9,555 | 13,567 | 9,555 |