Tencent Music Posts $127M Loss, 664M Monthly Active Users

Tencent Music posted a $127 million loss in its first quarterly report its a December 2018 IPO. The loss, which the streamer forecast in its IPO prospectus stems from a one time $221 million stock issuance to Warner Music Group and Sony Music Entertainment.

Tencent Music reported 664 million monthly active users and 27 million paid subscriber as of the end of 2018. 

Financial Highlights From the Tencent filing. 

In the three months ended December 31, 2018:

• Total revenues increased by 50.5% year over year to RMB5.40 billion (US$785 million).
• Net loss attributable to equity holders of the Company was RMB876 million (US$127 million), mostly due to a one-off RMB1.52 billion (US$221 million) share-based accounting charge related to the Company's equity issuance to Warner Music Group and Sony Music Entertainment ("music label partners").
• Non-IFRS net profit attributable to equity holders of the Company (excluding the share-based charge in respect of the issuance of ordinary shares to music label partners, amortization of intangible assets and other assets arising from business combinations, share-based compensation expenses, net losses from investments, and fair value change on puttable shares) increased to RMB916 million (US$133 million). 

In the full year ended December 31, 2018:

• Total revenues increased by 72.9% to RMB18.99 billion (US$2.76 billion).
• Net profit attributable to equity holders of the Company was RMB1.83 billion (US$267 million), after the one-off RMB1.52 billion (US$221 million) share-based accounting charge related to the Company's equity issuance to music label partners.
• Non-IFRS net profit attributable to equity holders of the Company (excluding the share-based charge in respect of issuance of ordinary shares to music label partners, amortization of intangible assets and other assets arising from business combinations, share-based compensation expenses, net losses from investments, and fair value change on puttable shares) increased to RMB 4.18 billion (US$607 million).

"Our initial public offering in December 2018 has launched us onto the international stage, elevated the global recognition towards our brand, and endorsed our successful track record," stated Mr. Cussion Kar Shun Pang, Chief Executive Officer of Tencent Music. "During the fourth quarter of 2018, we recorded strong growth across our business lines, including both online music and social entertainment services, and solidified our market leadership. To fuel our growth for the years to come, we are firmly committed to continue investing in premium content offering, innovative products and proprietary technology. Going into 2019, we will continue executing relentlessly our mission to use technology to elevate the role of music in people's lives.  We are confident that our capability in product innovation, investment in technology advancement, and commitment to developing and promoting high quality content should not only augment our market leadership, but also foster the growth and development of the overall music industry."

Mr. Cheuk Tung Tony Yip, Chief Strategy Officer of Tencent Music, remarked, "We are pleased to report that both online music and social entertainment services have continued their healthy growth across the board during the fourth quarter of 2018. Through content enrichment, product innovation, and technology development, we have been able to attract and retain our vast user base and construct a self-reinforcing virtuous ecosystem. In content, we expanded our strategic partnerships with well-known domestic and international music labels as well as produced more proprietary content such as music-centric variety shows. In product and technology, we further enhanced personalization which resulted in increased music consumption driven by recommendations, and also offered more features that enable users to engage with music-related short videos. Our market-leading user base, engaging artist-fans interactivity, and unrivaled content promotion capabilities have formed a unique set of value propositions for content partners to reach an unparalleled audience base within our ecosystem."

"We delivered strong revenue growth during the fourth quarter of 2018 driven by the increase in paying users across our online music and social entertainment services as well as the increase in user spending in social entertainment," commented Ms. Shirley Min Hu, Chief Financial Officer of Tencent Music. "We achieved strong operating cash flow throughout the year. We continued to invest in our content offering, including through partnering with more domestic and international music labels and producing more proprietary in-house content to meet user demands for diverse forms of music entertainment.  We believe that such investments over time will not only improve our user engagement and monetization but also strengthen our competitive advantages."

Company and business Highlights

• TME's key operating metrics continue to grow across both its online music and social entertainment services segments.

• The Company continued to strengthen its content leadership in the fourth quarter of 2018. As of December 31, 2018, the Company's music library included over 30 million tracks from domestic and international music labels. 
• During 2018, the Company continued to enrich its content offering by: (i) expanding the Company's music library through new partnerships with labels; (ii) producing more content in-house, including producing music chart countdown shows and co-producing the music-centric variety show Produce 101, as well as launching live streamed video talk shows; (iii) launching more long-form audio content such as radio shows; and (iv) empowering independent artists through the Tencent Musician platform to distribute high-quality original music content.
• The Company continued to innovate and enhance its products and technology in the following ways to integrate music into users' daily lives: (i) introducing new multilateral interaction features, such as multi-mic singing room, into WeSing; (ii) adding more proprietary audio settings to the existing library to further enhance user experiences; (iii) launching additional technology-driven and innovative short video product features; and (iv) leveraging data analytics to improve personalized recommendations.

Fourth Quarter 2018 Financial Results

Revenues

Total revenues for the fourth quarter of 2018 increased by RMB1.81 billion, or 50.5%, to RMB5.40 billion (US$785 million) from RMB3.59 billion in the same period of 2017.

• Revenues from online music services for the fourth quarter of 2018 increased by 45.0% to RMB1.52 billion (US$221 million) from RMB1.05 billion in the same period of 2017, which was mainly driven by increased revenues from (i) user subscriptions; (ii) sublicensing music content to third-party platforms; and (iii) sales of digital music albums to users. Revenue from paid music through the sales of subscription packages was RMB695 million (US$101 million), up from RMB505 million in the fourth quarter of 2017.
• Revenues from social entertainment services and others for the fourth quarter of 2018 increased by 52.8% to RMB3.88 billion (US$564 million) from RMB2.54 billion in the same period of 2017, primarily driven by the revenue growth in both the Company's online karaoke and live streaming services. The Company expanded its paying user base and increased user spending in the fourth quarter of 2018 compared to the same period of 2017. 

Cost of Revenues

Cost of revenues for the fourth quarter of 2018 increased by 62.5% to RMB3.56 billion (US$518 million) from RMB2.19 billion in the same period of 2017, primarily due to the increase in content fees and revenue sharing fees. The increase in content fees was mainly attributable to higher in-house production costs as the Company increased investments in the production of high-quality original music content such as music-centric variety shows, as well as increased market price and amount of music content licensed from music labels and other content partners. The increase in revenue sharing fees reflected the increased sales of virtual gifts driven by the growth in the Company's online karaoke and live streaming services.  

Gross Profit

Gross profit for the fourth quarter of 2018 increased by 31.7% to RMB1.84 billion (US$267 million) from RMB1.39 billion in the same period of 2017. Gross margin was 34.0% for the fourth quarter of 2018.

Operating Expenses for the Period

Total operating expenses for the fourth quarter of 2018 increased by RMB497 million, or 58.1%, to RMB1.35 billion (US$197 million) from RMB855 million in the same period of 2017.

• Selling and marketing expenses for the fourth quarter of 2018 were RMB542 million (US$79 million), an increase of 51.4% year over year from RMB358 million in the same period of 2017. The increase was primarily due to increased spending to promote the Company's brands, products, and content offering.
• General and administrative expenses for the fourth quarter of 2018 were RMB810 million (US$118 million), an increase of 63.0% year over year from RMB497 million in the same period of 2017. The increase was mainly attributable to (i) higher employee benefit expenses in connection with the increase of the Company's personnel and employee incentives; and (ii) the professional fees incurred from the Company's initial public offering completed in December 2018.

Share-based payments in respect of issuance of ordinary shares to music label partners

The Company recorded a one-off share-based accounting charge of RMB1.52 billion (US$221 million) in respect of the issuance of ordinary shares to music label partners in the fourth quarter of 2018, which represent the excess of the then fair value of these ordinary shares in October 2018 over the aggregate consideration the Company received.

Operating loss for the Period

Operating loss was RMB970 million (US$141 million) for the fourth quarter of 2018 mostly due to the one-off RMB1.52 billion (US$221 million) share-based accounting charge, compared to an operating profit of RMB650 million in the same period of 2017.

Net Loss and Non-IFRS Net profit for the Period

Net loss attributable to equity holders of the Company for the fourth quarter of 2018 was RMB876 million (US$127 million) compared to a profit of RMB536 million in the same period of 2017, which included the one-off RMB1.52 billion (US$221 million) share-based accounting charge. Non-IFRS net profit attributable to equity holders of the Company was RMB916 million (US$133 million) for the fourth quarter of 2018, compared to RMB667 million in the same period of 2017. Please refer to the section titled "Non-IFRS Financial Measure" for details.

Loss per ADS

Basic and diluted loss per American Depositary Shares ("ADS") was RMB0.56 (US$0.08) and RMB0.56 (US$0.08), respectively, for the fourth quarter of 2018. Excluding the share-based accounting charge in respect of issuance of ordinary shares to music label partners, amortization of intangible assets and other assets arising from business combinations, share-based compensation expenses, net losses from investments, and fair value change on puttable shares, non-IFRS basic and diluted earnings per ADS were RMB0.59 (US$0.09) and RMB0.57 (US$0.08), respectively, for the fourth quarter of 2018. During the fourth quarter of 2018, the Company had weighted averages of 1,563.5 million basic and 1,610.2 million diluted ADSs outstanding, respectively. Each ADS represents two of the Company's Class A ordinary shares.

Cash Flow

Net cash provided by operating activities for the fourth quarter of 2018 was RMB1.93 billion (US$281 million), compared to RMB253 million of cash used in operating activities during the same period of 2017.

Cash and Cash equivalents

As of December 31, 2018, the Company had combined cash and cash equivalents of RMB17.36 billion (US$2.52 billion), compared to RMB5.17 billion as of December 31, 2017. The increase in cash and cash equivalents was primarily due to cash flow generated from operations of RMB5.63 billion (US$819 million) and proceeds from the Company's issuance of ordinary shares, including those issued under its initial public offering, of RMB3.50 billion (US$509 million) and puttable shares of RMB422 million (US$61 million) in 2018, partly offset by cash used in investing activities.

Full Year 2018 Financial Results

Revenues

Total revenues for the full year of 2018 increased by RMB8.00 billion, or 72.9%, to RMB18.99 billion (US$2.76 billion) from RMB10.98 billion in the same period of 2017.

• Revenues from online music services for the full year of 2018 increased by 75.8% year over year to RMB5.54 billion (US$805 million) from RMB3.15 billionin the same period of 2017. This growth was primarily driven by increased revenues from (i) user subscriptions; (ii) sublicensing music content to third-party platforms; and (iii) sales of digital music singles and albums to users. Revenue from paid music through the sales of subscription packages was RMB2.50 billion (US$364 million), up from RMB1.84 billion in 2017.
• Revenues from social entertainment services and others for the full year of 2018 increased by 71.7% year over year to RMB13.45 billion (US$1.96 billion) from RMB7.83 billion in 2017, primarily driven by the revenue growth in both the Company's live streaming services and online karaoke service. The Company's paying user base and user spending continued to grow in 2018 as compared to 2017.

Gross Profit

Gross profit for the full year of 2018 increased by 91.0% year over year to RMB7.28 billion (US$1.06 billion) from RMB3.81 billion in the same period of 2017. Gross margin for the full year of 2018 was 38.3%.

Operating Expenses and Operating Profit

Total operating expenses for the full year of 2018 increased by 63.2% year over year to RMB3.97 billion (US$578 million) from RMB2.43 billion in the same period of 2017.

• Selling and marketing expenses for the full year of 2018 increased by 87.7% year over year to RMB1.71 billion (US$249 million) from RMB913 million in the same period of 2017. The increase was primarily due to increased spending to promote the Company's brands, products, and content offering.
• General and administrative expenses for the full year of 2018 increased by 48.5% year over year to RMB2.26 billion (US$328 million) from RMB1.52 billionin the same period of 2017. The increase was mainly attributable to (i) higher employee benefit expenses in connection with the increase of the Company's personnel and employee incentives; and (ii) the professional fees incurred from the Company's initial public offering completed in December 2018.

Share-based payments in respect of issuance of ordinary shares to music label partners

The Company recorded a one-off share-based accounting charge of RMB1.52 billion (US$221 million) in respect of the issuance of ordinary shares to music label partners in the fourth quarter of 2018, which represent the excess of the then fair value of these ordinary shares in October 2018 over the aggregate consideration the Company received.

Operating Profit for the Year

As a result of the foregoing, operating profit increased by 28.0% to RMB2.04 billion (US$297 million) for the full year of 2018 from RMB1.59 billion in 2017. Operating margin decreased to 10.7% for the full year of 2018 from 14.5% in 2017 mostly due to the one-off RMB1.52 billion (US$221 million) share-based accounting charge recorded in the fourth quarter of 2018.

Net Profit and Non-IFRS Net Profit for the Year

Net profit attributable to equity holders of the Company for the full year of 2018 increased to RMB1.83 billion (US$267 million) from RMB1.33 billion in 2017, after the one-off RMB1.52 billion (US$221 million) in share-based accounting charge.  Non-IFRS net profit attributable to equity holders of the Company for the full year of 2018 increased to RMB4.18 billion (US$607 million) from RMB1.91 billion in the same period of 2017. Please refer to the section titled "Non-IFRS Financial Measure" for details. 

Earnings per ADS

Basic and diluted earnings per ADS were RMB1.19 (US$0.17) and RMB1.16 (US$0.17), respectively, for the full year of 2018. Excluding the share-based accounting charge in respect of issuance of ordinary shares to music label partners, amortization of intangible assets and other assets arising from business combinations, share-based compensation expenses, net losses from investments, and fair value change on puttable shares, non-IFRS basic and diluted earnings per ADS were RMB2.71 (US$0.39) and RMB2.64 (US$0.38), respectively for the full year of 2018. During the full year 2018, the Company had weighted averages of 1,538.2 million basic and 1,579.6 million diluted ADSs outstanding, respectively.