Tencent Music Entertainment Group ($TME)

Good evening, good morning, and welcome to Tencent News Entertainment Group's First Quarter 2026 Earnings Conference Call. I'm Millicent, Head of IR. We announced our quarterly financial results earlier today before the U.S. market opened. The earnings release is now available on our IR website and via Newswire services. During today's call, you'll hear from Mr. Cussion Pang, our Executive Chairman; and Mr. Ross Len, our CEO, who will share an overview of our company strategies and business updates. Then Ms. Shirley Wu, our CFO, will discuss our financial results before we open the call for questions. Before we continue, I refer you to the safe harbor statement in our earnings release, which applies to today's call as we make forward-looking statements. Please note that we discuss non-IFRS measures today, which all more thoroughly explain and reconciled to the most comparable measures reported under IFRS in our earnings release and filings with the SEC. All participants are moved at this time. After management's remarks, there will be a Q&A session, and please realize that today's call is be recorded. With that, I will now turn the floor over to Cussion, Executive Chairman of TME. Cussion, please.

Thank you, Millicent. Hello, everyone, and thank you for joining our call today. Despite an increasingly competitive landscape, in the music streaming industry, we delivered a steady performance overall this quarter. Our growth is increasingly driven by diversified monetization across the music value chain. With the off-line concert related business, achieving another quarter of triple-digit year-over-year growth. We will continue to accelerate the development of our multidimensional commercialization model. which is deeply rooted in our commitment to outdating arrivements and legitimate music ecosystem. While AI is rapidly expanding the supply of content -- it is also introducing significant market noise and new industry challenges. The profile elevation of unauthorized AI-generated content not only creates headwinds for our music subscription growth, but also undermines creators rights and dilutes the long-term value of the music ecosystem as a whole. In response, we are working closely with creators, rights holders and regulators to lead and champagne robust copyright protection efforts. While the nature of these challenges is unique to the AI era. We have successfully navigated major copyright and IP transitions before and have consistently been at the forefront of those efforts. We remain confident in our ability to adapt, lead by example and help shape the future framework for intellectual property protection in the age of AI. This commitment has further sharpened our focus on what truly drives long-term value and sustainable growth. Today, we are now convenient ever that original human creativity and premium music IPs are the ultimate differentiators. That's why we are evolving beyond traditional streaming services into an integrated music ecosystem that further unlocks the value of piece off IP. This holistic approach is designed to deepen engagement and expand user wallet share. Against this backdrop, we have further optimized our catalog ensuring that our licenses and proprietary content offers valuable emotional responses resonated that uses quite fit. Let me share 2 examples. First, we further enhanced our classic music catalog, capitalizing on the enduring demand and extended life cycles of timeless hits, we recently renewed contracts with label, including JV music, Ninfa recost and Monkey Baby Music Limited. Securing continued access to iconic catalogs from artists such as [ Jo Joan, Karen Moran way Haining ] and Angolan hub, further reinforcing our leadership in premium copyrights. We also deepened our strategic partnership with TF Entertainment. Providing users with a 30-day head start benefit for upcoming releases and exporting collaboration across physical products, live performances and other IP-related opportunities. Second, the streaming share of our in-house new releases has seen a steady rise, reflecting our ongoing efforts to enhance production capabilities A notable example is our collaboration with Sony Pictures on the China Simson to Star fixes, choosing Sinderen for the scientist project Helmer, performed by Jose. The song branded strong traction point release quickly tapping multiple charts across our platforms. Across our business, AI has become a key enabler accelerating time to market, improving production efficiencies and enhancing user experience. Importantly, it complements not replaces human creativity and further reinforce the scarcity and value of premium IPs. Let me walk you through how we are actively embracing AI to further enhance our content ecosystem and in turn, unlock additional value from legacy IPs. It is choose to reship every stage of the creative process. For instance, our one-stop AI music production tool business stimulates the full cycle song writing process of professional musicians from direct compositions and arrangement to local performance and mixing. This empowers creators to produce high-quality work more efficiently and at lower cost. Second, as we bring more legitimate AI-generated music onto our platform, we are pleased to see that high-quality AI works can, in turn, revitalized classic IPs and endure them to younger generations. Some AI covers of classic hits are often among the most popular tracks by reimaginating iconic songs with innovative styles and voco. These will be interpretations sparked renewed interest. Driving listeners back to the original versions and amplifying the visibility and commercial value of legacy IPs. [indiscernible] think Pan-IP related use experiences, we continue to lead industry consumption and grow at scale. Whether through immersive live performances or innovative fan-based economy, we are elevating music influence while deepening water shape, specifically, First, our highly loyal user ecosystem continues to attract leading artists and IPs seeking deeper collaboration. By strengthening strategic partnerships we extend IP value chains through integrated virtual and physical offerings. A key example is our collaboration with J. Chao on his digital album children of the sun. Where we launched the packaged offerings combining the album, SVIP memberships and physical collectibles, supported by a nationwide offline campaign across 45 cities. The release achieved a strong buy retraction, top major charts, surpassed RMB 100 million in sales and drove meaningful SVIP conversions. We also deepened the partnership with leading office, including [ Kwen, Taiwan and Rowan One, ] whose recent releases delivered a strong fan engagement and commercial performances. Second, we also continue to strengthen cross-culture reach to defend offline partnership with leading domestic and international labels and artists. This quarter, we delivered multiple flagship concepts, which drawing over 10,000 attendees, maintaining a strong execution standard in live performances. Notably, Baby Monster's concert in Taiwan, China and NCT rich concepts in Hong Kong, China, attracted both core fans and border audience expanding their reach. Third, we are cultivating our primary across to amplify the global footprint of Chinese music. This is exemplified by [indiscernible] debit world tour across Asia and North America and Gains first large-scale show in Singapore. -- domestically, concerts by real Panaya, TL Janae, Angela Changsha, Jinggang and Shanghai, further define fan engagement. Before concluding, I would like to share our ESG progress. In April, we published over our 2025 ESG report. Over the past years, we stepped up and created empowerment product inclusively and really change sustainability. These efforts reinforce the long-term value and resilience of our ecosystem. As reflected in the ESG rating upgrades and external recognition. In closing, we are encouraged by the progress we have made and the challenges, we are elevating the strategic priority and investment in copyright governance, taking a more resolute to safeguard the long-term health of the music industry. We remain committed to advancing the broader creative economy, unlocking new opportunities and driving enduring long-term value. Now I would like to hand the call over to Ross for an update on our overall platform development. Ross, please go ahead. Thank you.

Thank you, Cussion. Hello, everyone. In our increasing competitive landscape, we are building a more resonate platform cloud by our content and the platform dual engine, driving user directionation, engagement and lifetime value. As we strengthen our competitive edge and further defection ate our offerings. We are transitioning to a membership-based model that goes beyond content subscriptions to deliver more immersive music experiences. I will share more details shortly. For today's call, I would like to primarily focus on 2 areas: User growth and monetization efficiency and improvement resulting from better services. On the user front, maintain health to our final remains our foundation. Let me share some updates. First, we are excited to further deepen our integration with the WeChat ecosystem to broaden reach and streamlined user conversion, by inviting a past leasing video accounts, we first rated a seamless transition from short video music discovery to full triple back on our platform. This also elevates mutation exposure helping them convert casual short video wheelers into alloy fund based on our platform. Second, for [ Hugo, ] welcome Pat pressure is a bit more acute, may allow the virus to interest through more premium and ad memberships. Third, we leverage AI to drive engagement with improved recommendation system, efficient discovery enabled by AI agents and either platelet creation, growth in music assets posted engagement. We also saw potential growth in both AI-driven messaging and playback DAU. At the same time, personalized features such as [indiscernible] player innovations and interactive tools led to a deeper sense of belonging on our platform. To how we are unlocking greater IP value and increasing user lifetime value, we continue to execute exiting care plans. As I mentioned earlier, we launched a new initiative to transition to a membership-based concept with enriched content and rest offerings. Although still in its early stage, we see strong long-term potential in IP-driven offerings through enhanced benefits and integrated rights. First, S&IP membership continue to stay stronger adoption and rotation, thanks to our refined operations and innovative benefits. For example, we are past [indiscernible] an as our first growth platform, IP family brand ambassador. This static partnership significantly enhances the purse value and the public awareness of our premium offerings. In addition, to further direction at our SIP premium offerings, we continue to expand the fund-based benefit and audio privileges. On the content front, we introduced the China Limited addition digital airborne combined with physical collectible for leading K-pop artists such as Black pin, [indiscernible] and iron. On the platform and the product front, we launched the TME Connect, enabling high fidelity audio transmission across multiple devices. [ Coke ] Music launched live house on effects and Qi further deepen the collaboration with Sobi to become the first music platform in China to support Toby SAI audio format. We also extended this immersive experience to CUBE House and off-line audio experience space for artists like Talios Sales, Wangsu long and black ink. Second, we pioneered more IP-centric memberships to capture diverse user demands. A key milestone this quarter was a launch of our on-ground cloud romance universe with Silence on Monsoon, offering priority ticket excise uniter content and artist-centric ports that resonates well with funds. At the same time, we continue to expand Artists reach on [indiscernible] welcome [indiscernible] first Sony Milicartists and enhanced product features such as incadea functionality with further strengthened user engagement and retention. Last but not least, we are unlocking incremental growth by skilling IP-driven offline offerings. Particularly with artist merchandise. For instance, we sold as a sole distributor for transform project to they build physical and other sold-out merchandise, such as [indiscernible] New Year gift box and Huya supports plus collectibles. Beyond merchandise, we brought the idle city of sans China. They build exhibition to life in collaboration with cube during a multidimensional immersive experience for fans. To conclude, while challenges remain, we are confident in our past work, we will continue shipping our competitive edge to strengthen our reverent platform, 1 and attract users difference engagement and unlocks new monetization opportunities. With that, I would like to turn the call over to Shirley our CFO, for a deep down into our financials.

Thank you, Ross and greetings, everyone. Let me now turn to our financial results and the challenging environment, we have delivered financial results in the first quarter 2 with 7% year-on-year revenue growth. Revenues from mutilated services grew 12% year-on-year, driven by solid growth in revenues from membership services and off-line performance related to services, supplemented by growth in revenues from advertising services. Revenues from membership services were RMB 4.6 million, up by 7% year-on-year. In the first quarter of 2026, this quarter, we started to presenting membership service revenues to be better reflected the nature of our mentorship business. Revenues from membership services primarily consist of membership fees paid for membership benefits and privates we see new related services. Over time, some IP-related benefits such as participate merchandise and out plan performances have emerged as a key driver adoption. Additionally, our newly launched and class membership product rates bank assurance and is a great example for innovation, integrated product was counted in the platform strategy. These collaborations we have built with the strategical artists across music promotion of line performances, artists aerated merchant banks and Bank Club membership provides more immersive experience for base and help enrich privileges of our membership programs, building win-win relationships for everyone. Additionally, we delivered a solid year-on-year growth in advertising revenues, driven by growth of ad-supported model and a sponsorship advertising. Our increased number of paying users and the then applicational users created more challenges for our advertising business in the increasingly competition market. We have taken actions and improved ad exposure, lower entry barriers and of the more engaging in active ad costs for users. As our engaged growth engine, top line performances related services have achieved strong results in Q1. We have positioned our strategic artics such as well plan, [indiscernible] the guy on high-profile stages across the mast and overseas markets effectively is pending the global influence and further unlocking the long-term commercial value. Also, [indiscernible] hosted flagship cancers with leading KPO groups, including Brabant and NCP reach. Revenues from social and channel services and others were RMB 1.4 billion, down by 11% year-on-year. Our gross margin in Q1 2026 was 4.9%, up by 0.8 percentage points year-on-year. The year-on-year increase was primarily due to increase in revenues from membership services and advertising services. Along with decreased channel fees. Additionally, we are happy to see cost-efficient improvement for IP-related services. In the long run, we are confident that our gross margin will remain competitive in the industry, although it may back to ad quarter-over-quarter due to seasonality. Moving on to operating expenses. They amounted to RMB 1.2 billion, representing 50.3% of our total revenues in Q1 2026, compared with 15.5% in the same period of last year. Savings and marketing expenses were RMB 271 million, up by 36% year-on-year. In response to the competition and to mitigate the impact of user charge, we increased the channel spending this quarter. Operationally, we have improved the relevance of target audience while keeping high ROI network in the industry. Going forward, we expect to dynamically adjust our channel spending strategies according to evolving market conditions with our requirements. Meanwhile, we expect to increase content promotion and continue to provide high-quality content to our users, which comparably helps users on our platform. General and administrative expenses were RMB 140 million and remained relatively stable compared with the same period of 2025. Our net profit attributable to equity holders was RMB 2.1 billion compared with RMB 4.3 billion in the same period of 2025. As we have recognized a gain of RMB 2.4 billion in the disposal associated in the first quarter of 2025. Our diluted earnings per ADS this quarter were RMB 1.34. This quarter, we started disclosing non-IFRS metrics adjusted EBITDA to better reflect our core business operation results for Q1 2026, our adjusted EBITDA was RMB 2.8 billion, up by 10% year-on-year. Non-ops net profit attributable to equity holders of the company was RMB 2.3 billion, up by 7% year-on-year. As of March 31, 2026, our combined balance of cash, cash equivalents, term deposits and short-term investment was RMB 41 billion, as compared to RMB 38 million as of December 31, 2025. This combined balance was backed by changes in the exchange rate of RMB to USD at different balance sheet base. In March 2026, we declared a cash dividend of USD 12 coordinary share or USD 0.24 for ABS for the year ended December 31, 2025, and the cash payment to the direct dividend of USD $317 million was made in April 2026. In addition, as part of our long-term commitment to shareholder returns, we plan to complete the 2-year stock repurchase program that we announced in March 2025 on time. Finally, I'll conclude with some remarks on the outlook. Looking ahead, where challenges exist, our long-term strategy and commitment to investment in content and technology remain unchanged. We continue to focus on IP development for the long run sales of our business and industry. And so comprehended collaborations with our strategic partners, we will continue to bring new benefits and privileges to our users and create more innovative products. All these factors enable us to build a richer and more dynamic milk and entailment ecosystem. This concludes our prepared remarks. We are now ready to open the call for questions.

[Operator Instructions]. The first question comes from the line from Lincoln Kong from Golman Sachs.

[Foreign Language]. [Interpreted]. Just now, first of all, congrats on the good performance -- and just now you said you're going to take a holistic approach also use of whole ecosystem to improve our business. question, first of all, is about the revenue guidance for the remainder of 2026. Give us an outlook on the member and not number ship business and what are key drivers for future growth and especially as we know that the competition remains intense, and especially for the membership businesses. And speaking of the ecosystem, we have noticed that the sense has been approved by the regulator and it can give us an update on how we can improve our performance in the whole ecosystem.

[Interpreted]. First of all, I'd say a few words about the guidance for the remainder, despite the challenge of environment to achieve the steady performance in Q1, this is attributed to our economy platform to an strategy, which has helped us build an irreplaceable one-stop music and attend system. This quarter, our non-membership growth was robust and our performance-related businesses once again achieved attributed year-on-year growth. However, competitive pressure remains significant. This quarterly price competition within the industry, coupled with the ramp issue of pirated content driven by AI has introduced uncertainties regarding future revenue growth of traditional streaming services. Moving forward, our operational focus will center on 3 key areas. First of all, strength and enforcement to prevent AI from becoming execute for infringement. In response to industry chaos, we have established a dedicated rice production mechanism to resolutely safe at the legal interest of our platform, core owners and creators. We welcome innovation that we'll do everything in our hour to suppress some washing and other infringing behaviors. Second, expanding top of [indiscernible] through deeper integration with the trance ecosystem. April this year, we entered into a deep partnership with WeChat channels. operating short-form video with music consumption which at China users can now jump directly to Q2 music with 1 thing to click when they discover music, they like. This creates a seamless -- a seamless connection from discovery to listening, collection and high-quality consumption while providing user creators with greater promotion and exposure opportunities. Third, leveraging our flourishing ecosystem to solidify the one-stop music consumption mindset. It is of accumulation has provided us not only with the massive library of premium content, but also with the creators behind hits and the loyal fan base that follow them. To fully unlock the long-term value of this ecosystem, we were broadening our competitive advantage through 2 dimensions: IP expansion and value deepening. Well, first, expanding the IP matrix, while continuously expanding our metrics of partner artists, we're also building our in-house artist system, currently, our ecosystem features numerous talented artists. The second is extending the value chain, established in an in-house artist system allows us to flexibly integrate the entire industrial chain from music creation to commercial licensing and brand collaborations, significantly improving IP monetization efficiency. Taking our strategic partnership with [indiscernible] as an example, our collaboration has evolved from early digital reuse rights to organizing concert tours and selling fiscal merchandise. This quarter, we also launched our first fan-based membership service, being a dedicated artist-centric fan experience that includes priority entry and unique fan benefits. Looking at a year as a whole, we expect some short-term volatility in growth rate for membership and advertising business due to competition, but we will try to be proactive in state guarding our copyright try to divert more traffic from the ecosystem. In the long run, we remain optimistic about our comprehensive IP-based monetization and which we expect to maintain steady growth. We just received a notice of the approval from SAMR. And along with the Tencent Group, TME and Tencent Group will strictly requirements of trader commitments to ensure the transaction, transaction will be proceeded accordingly and label.

And then this question comes from Alicia Yap from Citi.

[Interpreted]. My question is related to subscription. Can management share some details about the subscription tiering split. What is the growth status for the advertising subscription user. And also what are their retention rate and the contribution and the growth potential from those newer subscription like the fan club and bubble. Will this become a meaningful driver for the blended ARPU growth in the future? And then with the pending approval of the [ HMA ] transaction, any preliminary planned on the long-form audio subscription plan in the future?

[Interpreted]. First of all, the positioning of TME this year is to make a one-stop music service platform. Well music and [ QQ Music ] has been developing for over 2 decades. And over the years, we have been expanding our business based on navi. So for 3 years, we have evolved from doing traditional streaming business to a broader category of business. As to your question about user retention for different tiers of users, we have not disclosed this number. But in general, it is various. The design of a multi-tier member system is to meet demands of different kind of users. For light users, or not those very active users who are using like free and ad-supported approach to improve intention and tap their commercial value. Basic music service is mainly for the users who have a relatively high map for music and also for those sticky users. For those deeper value users like our products like FinCloud bubbles are for those users who have a more diversified demand. I believe in the future, the IP-based music subscription, not just music subscription but also the auto subscription business, including like book listening or kids audios, this IP-based content will create bigger commercial opportunities and also improve our retention. All in all, in the future, we will continue to build an IT-based one-stop music service platform. And with all of this, we can continue to improve user retention and tap more business opportunities. And this is very core that provides the most value compared with our competitors.

And the next question comes from [indiscernible].

[Interpreted]. My question is about member services. We noticed that this quarter, if you look at where year-on-year growth, that's very good. But if you look at quarter-over-quarter, it's going down slightly. I was just wondering what is the reason behind? Because as far as I can tell, this business doesn't seem to have a very strong seasonality. And probably, I guess, is because Q1 is a relatively low season. But apart from the seasonalities, is there any other possible reasons like competition, some turns of users or some higher-value users are changing their packages from like high packages to some cheaper packages? And could you also give us some like guidance of the future quarter-over-quarter growth for fixed business.

[Interpreted]. Well, first, I want to respond to your question by saying it's not because some SVIP members have chosen some lower or cheaper packages or because of the turn of users. As you can tell that our SVIP member is still growing steadily. So our medium- to high-value users are still there. Well, as you mentioned, this Q-o-Q slight decline is mainly because of the completion on the streaming, music streaming business and especially for those free and ad-supported members. We observed some phenomenon in the market that deviate from the business essence, some other competitors are using AI to quickly fill their music vibrates and trying to use the aggressive strategy to divert traffic and users into their platform, and they're also fighting for those light users. Well, we noticed that this is a very important moment for the industry because such behavior is an exhaustion of the economic value of this industry and also they are consuming their own business value. In this environment, as we started in the beginning, we will stay focused on building a one-stop comprehensive music service platform. We provide monthly subscription music services on 2 music platforms, [indiscernible] music. The users on Google platform is more price sensitive and promotion sensitive and well in face of multiple choices and these kind of users are easily flown away. Well, this will have some impact on the new membership growth on CUBE platform. Well, in this context, we have to use a free and ad-supported mode to reduce a barrier to entry. Google concept version is also posting a very robust growth in the first of this year because we're adopting a more flexible pricing and the content to retain these live users. QQ Music is relatively more comprehensive platform. So the overall operational data on Q2 music platform is steady and healthy. The overall value of users on this platform is even increasing. The recent release of the collaboration between WeChat channels and QQ Music will further consolidate our competitive batch. Lastly, our off-line performance or experience or multidevice user experience and scale remain to be our competitive edge, which provides a solid base for us to further tap commercial opportunities.

And the next question coming from Mizuho, Wei Fang.

[Interpreted]. Well, thank you very much. We noticed that the GP margin this year actually is growing a little bit for the quarter. I'm just wondering, in this case, we do change your overall -- if the whole year guidance around GPM. Because I remember last quarter's call said that the overall year's GP market will stay flat or even decreasing slightly. And we also noticed that the sales -- selling expenses actually increased a bit. Is that because of the like the deeper collaboration with Tencent ecosystem. I'm just wondering this cost ratio, is it one-off or?

[Interpreted]. Well, if you look at Y-o-Y in Q1, we've had a very good GP margin, mainly because of the following risks. Number 1 is in Q1, we see a continuous growth of membership and ads business, which contributes positively to our market. Well, despite the fact that the IP-related business is growing very rapidly in terms of the overall contribution to revenue and especially if we look kind of our brokering business is growing exponentially and its proportion of overall contribution to the revenue is also going up. And we also call our off-line performance and event business. Through that, we have accumulated lots of experience and improved the operational efficiency, so overall, the IP-related business impact on the GP margin is close to 0. The rigid cost control also generated very good results on [indiscernible]. Well, if you look at quarter-over-quarter, the rise of GP margin is mainly because of the seasonality of IT-related business because if you look at Q1, the contribution from this business is far lower than Q4 last year. Because it generates some positive impact over the GP margin and offset the impact of the seasonality reasons of membership and advertising business. Well, as to the -- our expectation over future revenue growth, we expect to have a cheap margin on par with last in Q2. In the long run, we expect some slowdown of the growth rate from membership and advertising business. but we will adopt a very rigid cost control measures by reducing our resource allocation to low value, less effective content and plus the reduction of cafes from Apple Store. And all of this will provide enough room for the resiliency of our profits. To adopt project basis, our product basis measures to control costs and also, we'll use our content platform content platform strategy, online plus offline and also improving increasing the percentage of contribution of our own proprietary IP business. And with all of these measures, we can maintain a steady profit. In the long run, we are very confident to stay at the front line of our margin in the industry. Well, as to the question about the selling expenses in Q1, it went up by 36% year-on-year. That's mainly because of the intensifying competition in the industry. And in face of such intensifying competition, we have to strategically increasing our expenses in user acquisition for our music platforms. We're using different channels like by backbans to acquire higher-value users and we're also using the light card artists to acquire more high-quality high-value users. In the meantime, we're also promoting our proprietary content, increased music exposure and also increase the core competitiveness of our own content. With all of these measures, we try to increase the stickiness of our users. With the Tencent ecosystem this year, we will allocate some strategic resources with which have channels, and we will help which channels we establish is on music system. We will work with the top-tier musicians, singers and studios, and we will do some joint promotions and even releases with them so as to create and improve the overall efficiency of our collaboration. We expect that in the future with the virtualization of the WeChat channels music platform plus our own content contribution, and we will achieve a win results on 2 platforms. For the whole year, the selling expense will have a reasonable rate, which will be in line with our previous year guidance. And we'll -- in the following, of course, we will not be growing as fast as 36%.

Okay. Thank you, Shirley, and thank you, everyone, for the interest of Toll. I will wrap up today's call. If you have any further questions, please feel free to contact the IR team. And this concludes today's call, and thank you again, look forward to speaking next quarter.

Thank you.

Bye-bye.