Tencent Music Entertainment Group (TME) Earnings Call Transcript & Summary

[Audio Gap] The earnings release is available on our website. During today's call, you'll hear from Mr. Cussion Pang, our Executive Chairman; and Mr. Ross Liang, our CEO. He will share an overview of the company's strategies and business updates. will discuss our financial results before we open the quest. Before we continue, I refer you to the safe harbor statement in our earnings release, which applies to this call to include forward-looking statements. Please note that we discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in our earnings release and filings with the SEC. please be advised that today's call is being recorded. With that, I'm pleased to turn the call over to Cussion, Executive Chairman of Tencent. Cussion,please.

Thank you, Millicent. Hello, everyone, and thank you for joining our call today. In the second quarter, we delivered resilient performance while navigating a complex and evolving market. Our second growth engine continued to strengthen. Revenue from marketing and consumption service achieved another quarter of solid growth as we further expanded the value of music IP through live concerts, merchandise and other IP-driven experiences. The addition of Simaaya marks another important step in our content and platform strategy. By bringing music and audio together, we are enriching our content offering, reaching users across more listening occasions and giving them more ways to discover, enjoy and engage with great content. Our strategy is clear. We are strengthening our content ecosystem by deepening strategic partnerships, developing more proprietary IP and extending premium content across a wider range of experiences. First, premium content remains at the heart of this strategy and the recent momentum we are seeing with classic catalogs is a perfect example. Fixed variety shows and concert tools have amplified the reach of this work, making loyal fans more engaged while drawing a new generation of listeners. This has led to continuous growth in their streaming share. Second, we continue to expand our partnerships beyond traditional content licensing. Recently, we deepened our partnerships with Free Music Group.In addition to securing digital-first releases for its top artists, we expanded our collaboration into new areas, including content co-creation, physical offerings and offline experiences. At the same time, we partnered with Hua Fe and TV, Linfair Entertainment and Zhejiang Satellite TV to bring original soundtracks and popular music variety shows to our platform, creating a more immersive connection between music and digital entertainment. These deeper partnerships allow us to work more closely with creators and rights holders across the whole music value chain, enabling us to create more value from premium IP. Third, another key focus is developing more high-quality proprietary content, which is becoming an increasingly important differentiator for TME and giving users more reasons to engage with our platform. Examples include Joseen'sz into Broom, Shanghai, the F song for the 2026 Jiangsu Football City League, L, Bors Little Light from Ordinary days Hugo Music's new brand, Anthem and the S song and insert song for the hit animated theme, all wishes come true, ASEAN, all of which recorded strong streaming performance since the release. Fourth, Ximalaya further strengthens our content advantage with its premium audio books and podcasts. By adding popular categories like online notebooks, history, kids content and education, we can reach users across many other more listening occasions, ultimately enhancing user time spent and engagement within our ecosystem. What really stands out is Ximalaya's ability to create its own kids. Its original productions have consistently driven strong engagement and pay conversion. In fact, 9 of its top 10 new online local titles this year were produced in-house, underscoring both the strength and scalability of its original content capabilities. Just as importantly, owning this hit also means better economics. With the strength of our content and platform ecosystem, deep user insights, expansive services and a strong commitment to upholding copyright protection, a growing number of artists are turning to us as we expand talent development and artist management. This is a natural extension of our ecosystem that creates value for artists we are uniquely positioned to deliver. This is exciting as it empowers us to be more entrepreneurial and innovative in bringing more premium content and IP-driven immersive music experiences to music lovers. First, T wrapper Guy, for instance. As a strategic partner, we have supported him across content promotion, IP development and concert planning, helping him expand into new markets and formats and go from arena shows to stadium concerts. Following the success of his evolution tool in Asia, we launched W, the first Chinese language web stadium tool in China. More than 30,000 fans attended this opening show in Xian. -- is another good example. [indiscernible] once upon a moon tool wrapped up with 2 consecutive sold-out arena shows in Hangzhou and is now reaching international markets, showcasing her rising profile and growing fan base. We are also helping artists expand into new opportunities. For renowned art and Sing [indiscernible], we produced his debut Arena tool, Liu Jenny, and his opening show in Shenzhen sold out quickly during his sales. Second, recently, we invested in the Black Label to deepen our collaboration on a broader range of IP-related initiatives, including artist promotion and merchandise development, helping leading artists to build deeper connections with their audience in China. This strategic partnership reflects our commitment to exploring cross-border opportunities and deepening the fan-based economy. By integrating content creation, music streaming, artist development, live experiences, merchandise and fans engagement, we are able to create more value from premium IP truly bringing the IP to life. We are already seeing encouraging results. IP-related consumption services, particularly live events and artist merchandise, continue to deliver strong double-digit year-over-year growth during the quarter. First, in live entertainment, we host 3 fan meetings in Macau for SM Entertainment's Trainee Group, SMTR25. The event attracted tens of thousands of fans and generated strong merchandise sales. TIMA, our proprietary flagship concert IP for International Music Awards, is becoming a larger and more influential brand in just a second year. Building on last year's success, we scaled up the venue to Kaidakports Stadium in Hong Kong, including audience capacity by more than threefold, capturing music lovers growing enthusiasm. Second, artist merchandise also continued to gain momentum. By bringing together our capabilities in IP development, product design, merchandising and distribution, we are creating more meaningful connections between artists and their fans. During the quarter, we produced [indiscernible] physical albums in both CV and renal formats, complemented by a range of collectibles merchandise that generated strong fan demand. Physical album releases from, and also delivered impressive results. Protecting copyright is fundamental to preserving the long-term value of premium IP. During the quarter, we continued to strengthen our copyright protection efforts through proactive screening and takedown, legal action and closer collaboration across the industry. As AI continues to evolve, we are stepping up our engagement with regulators, music labels, artists and other industry partners to strengthen copyright protection in the new era. By working together across the industry, we believe we can foster a healthier environment for creators, reinforce the long-term value of premium IP and support the sustainable development of the music industry. We remain committed to providing a safe and enjoyable music experience for users of all ages. During the second quarter, with comprehensive upgrades to use across our core products, we created a dedicated library of age-appropriate music, helping younger users discover and enjoy music in a safer and more trusted environment. To conclude, while challenges remain, we believe we are still in the early innings of unlocking the full potential of premium IP. We are excited about the opportunities ahead and remain confident in our ability to deliver sustainable long-term growth. With that, I will turn the call over to Ross.

Thank you, Cussion. Hello, everyone. While the competitive landscape continues to evolve, our commitment has not changed, delivering the best music and audio experiences for our users. Every user listen differently. That's why we continue to innovate our products, broaden our user reach and enrich our membership offering. In the second quarter, our focus on user experience translated into stronger engagement with average daily time spent continue to improve, supporting standing growth in membership revenue. Product innovation remains at the heart of everything we do to serve our users. This quarter, we created a more seamless discovery to playback journey through improvements in content discovery and audio quality. Enhanced content discovery features such as swap types and video feeds help users explore more relevant content in a more engaging way. Newly introduced 3D Nikon S in audio also allowed premium users to experience premium sound quality from their very first listen. Thoughtful application of AI also made music discovery more intuitive and personalized. We upgraded our AI agents across QQ Music and Kugou, enabling them to better understanding Nuanced user intent, Aingize personal digs. The AI agents can now instantly create personalized playlists tailored to users' listening needs in the moment. Together, these improvements help users discover more content, boost their time spent on our platform and increase the share of recommendation-driven streams. We are delivering great services is a foundation. Reaching more users is equally important. That's why we are continuing to deepen our integration with the Tencent ecosystem to expand our presence across more user touch points. First, we deepened our cooperation with Weixin Video Accounts by bringing leading labels, top artists and independent musician into its ecosystem. We are creating a more seamless journey from music discovery to full track listing on TME. Collaborations with Weixin Pay also helped our lightweight products such as body Music and Kugou concept, attract users looking for a simple music experience and deepen their engagement. Furthermore, we recently integrated with Weixin's AI agent, Xiaomi. We are pleased that by tapping into Weixin's massive user base, more users can now discover songs, generate playlists, stream music with easy comments and instantly share favorite tracks with friends. Together, these initiatives are expanding our user reach, improving commission and engagement as well as enhancing content distribution across the Tencent ecosystem. Second, we are also extending our user reach beyond mobile and PC into cross-device listing scenarios. During the quarter, we broadened our smart vehicle coverage through deeper collaborations with leading automakers, including Changan, Li Auto and Xiaopeng and introduced LM-powered search to deliver a smarter in-car experience. We are also among the first music platform to integrate with Harmony OS, expanding our reach within its fast-growing ecosystem. Such a move has strengthened our presence among Harmony OS users and positioned us to capture new opportunities for further monetization. We are excited to welcome Ximalaya to the TME family. Music and audio naturally complement each other. They broaden our content offering and create more listing occasions throughout the day. This helps to strengthen our position as a comprehensive music and audio platform. We are still in the early stages of unlocking the full potential of this combination, and we are seeing significant opportunities ahead. By bringing together our complementary strengths, we can deliver compelling content to a much broader audience. We are starting to enrich our SVIP offering with premium audio content to create richer listening experiences. Over time, we also see opportunities to strengthen our advertising business and improve efficiency, leveraging our shared technology and infrastructure. We believe these efforts will create lasting value for our users, creators, partners and shareholders. Finally, we are further elevating the SVIP value position by transforming it into multidimensional experience centered on IP engagement. Premium music remains at its core, now complemented by premium audio and a growing portfolio of IP-driven member benefits. This quarter, digital albums and tailored SVIP package continue to drive stronger member adoption and user engagement. Packages for, Lian and Rise featured popular member benefits such as photo cards and NFC cards. We also expanded our Star Life card lineup by adding artists from the Black label, including Tang, Somi, Mo and A Day project. Meanwhile, collaborations with popular gaming IPs such as Visingaves Mina and Light and Night brought new themed decorations to SVIP users, generating strong user engagement and conversion. Together, these offerings contribute to health growth in our SVIP user base, ARPPU, time spent, retention as well as consumption of other premium ancillary experiences. They reinforce our value position of one membership richer experiences. To conclude, our journey reflects how we have evolved from a gateway for content into a strategic platform that actively shaped the music and audio entertainment landscape. Our focus remains steadfast, creating deeper and more meaningful connections between creators, content and audiences. We are uniquely positioned and confident that we can translate these deep connections into long-term sustainable value across music and audio. With that, I would like to turn the call over to Shirley, our CFO, for a deep dive into our financials.

Thank you, Ross, and greetings, everyone. Let me now turn to our financial results and an evolving competitive industry landscape. We delivered steady financial results in the second quarter of 2026 with 6% year-on-year revenue growth. Total revenues were RMB 8.9 billion, up by 6% year-on-year, primarily driven by strong growth in revenues from music-related services. The consolidation of TME contributed approximately RMB 0.4 billion to our overall revenues in the second quarter of 2026. Revenues from music-related services grew 11% year-on-year, driven by solid growth in revenues from membership services and off-line performance-related services. Revenues from membership services were RMB 4.8 billion, up by 8% year-on-year. In the second quarter of 2026, our SVIP membership program continues to expand. Our diversified SVIP privileges such as artist membership sales, Pass and Star Life Pass continued to drive SVIP user adoption and revenue growth. This quarter, we collaborated with our SVIP ambassadors to offer spatial packages and improve our SVIP adoption. The consolidation of Ximalaya also contributed to revenue growth in membership services. Within marketing and consumption services, offline performance-related service delivered robust results as we successfully staged several concepts for our strategically collaborated artists, including Science and [indiscernible]. Sales of digital albums also achieved solid performance, primarily driven by the launch of album Ching of the Sound. We continue to prioritize our IP-related offerings and build deeper collaborations with strategic artists across music promotions, offline performances, artist merchandise and digital albums. In a challenging macro environment and the competitive market, our advertising business, especially the ad-supported model experienced some headwinds. We continue to take actions to improve ad exposure, enhance entry reach and experience and offer more engaging interactive products for users. We are also deepening collaboration with the Tencent ecosystem to reach more users. The consolidation of Ximalaya contributed to revenue growth in advertising positively, and we see growth potential in this area through leveraging our expanded content and shared resources and technologies. Our gross margin in Q2 2026 was 44.2% compared with 44.4% in the same period of last year. Revenue mix impacts our gross margin. Offline performance-related services continue to grow. We are happy to see continued cost efficiency improvement for offline performance-related services. The consolidation of Ximalaya after considering the amortization of intangible assets recorded under purchase accounting had a favorable impact on overall gross margin this quarter. We are confident that our gross margin will remain competitive in the industry over time. Moving on to operating expenses. They amounted to RMB 1.3 billion, representing 14.5% of our total revenue in 2026 compared with 13.7% in the same period of last year. This quarter, we adjusted our channel spending strategies by reducing channel spending and deeping collaborations with the Tencent ecosystem. For example, we strengthened our cooperation with Weixin Video Account for content distribution and user composition and collaborated with Weixin Xia to drive traffic to our lightweight IP. The consolidation of including the amortization of intangible assets recorded under purchase accounting drive the increase in operating expenses. Going forward, we expect to dynamically adjust our channel spending strategy for all our business according to market conditions and our requirements. Our net profit attributable to equity holders was RMB 2.5 billion compared with RMB 2.4 billion in the same period of 2025. Diluted earnings per ADS were RMB 1.7 2026, our adjusted EBITDA was RMB 3.3 billion, up by 5% year-on-year. IFRS net profit attributable to equity holders of the company was RMB 2.7 billion, up by 4% year-on-year. As of June 30, 2026, our combined balance of cash, cash equivalents, term deposits and short-term investments was RMB 44.2 billion as compared to RMB 41 billion as of March 31, 2026. This combined balance was affected by changes in exchange rate of RMB to USD at different balance sheet dates. In addition to our strong operating cash flow, we maintained diversified finance options to meet our strict expenditure requirements. Under the share repurchase program announced in March 2025, we have repurchased 43.5 million from the open market for a total cash consideration of USD 400 million in the second quarter of 2026. As part of our long-term commitment to shareholder returns, we remain on track to complete the 2025 stock repurchase program on time. Looking ahead, we continue to focus on the development of SVIP membership, creating more innovative products and providing more diversified benefits and privileges to our users. We also keep investing in quality content and IP development to build a comprehensive content ecosystem. Additionally, we continue to deepen collaboration with Tencent ecosystem. The combination of brings exciting opportunities for us as our company and audio platform. All these factors pave the way for long-term health growth of our business. This concludes our prepared remarks. We are now ready to open the call for questions.

[Operator Instructions] And the first question comes from [indiscernible]

So my question is -- there are two questions. So the first question is on IP-related business. So IP has been a key driver for our revenue in the first half of 2026. And I was wondering how will the IP-related business drive the revenue growth for the rest of this year? And how is the momentum outlook looks like there. And the second question is really on Ximalaya consolidation. So now that Ximalaya is already part of the TME Group, how should we think about the financial outlook after Ximalaya consolidations and its impact to the TME financials in the second half of this year?

[Interpreted] Well, about your first question is about IP-related business. As you can see that we have achieved a solid growth in our Q2 results, that is mainly due to our many years of deployment of our forward-looking strategies. We have already built a differentiated platform that fibers content bus platform that combines both of online services and products, also combines virtual and non virtual products. So this is a complete music ecosystem, and that also can fully leverage the diversified IPs, which you can see also that we have a lot of contribution from marketing and consumption-related services. And all of this have calculated a lot to this quarter's results. For this year, competition, we do see some typewinds from the competitive area, be it membership and as business. But our IP-related services to employing like concerts and performance are experienced in steady drop, mainly because of the following reasons. Number one is our IDP supply. Apart from our in-house research and development, we're also carrying out a lot of the deep collaboration with external suppliers and which help us build the high-quality IPs across the board. Second, you can also see that in terms of content collaboration, Apart from that, the promotion, distribution and merchandise is derivative products will also in a very good position. Number 3 is the diversified monetization for our platform. It would not only provide performance concerts are merchandised and through our member benefits, it could also contribute more to the increase of our SVIP numbers. And all of this have helped us build a very solid competitive moat. About your second question on Ximalaya, we are very pleased to have Ximalaya to be part of TME family. And with Ximalaya on board, we have already build a one-stop music plus audio platform, which help us amplify the user base and also enrich the user profile and also time spent on our platform. So overall, in the medium to long run, we can see that Ximalaya is joining to TME family will also unlock more potential of future growth, and this has also set a solid base for future growth.

And the next question comes from Lincoln Kong from Goldman Sachs.

My question is about the Subscription business. So basically, in the first half or second quarter, if we're excluding Ximalaya, we do see some moderation in revenue growth. So how should we think about the prospects into the second half of the year? What's sort of the growth trend for SVIP or the overall ARPU to contribute to the overall growth? And can management also elaborate a bit more on the latest status in terms of the competition, especially against [indiscernible]

[Interpreted] Well, with the competition in hand, we can see that the growth in music business is long neck. Well, it's mainly some impact on traffic. But as we said, the most important thing is our collaboration with WeSing Video app. We're also very pleased to see that TME is already taking charge of the music business operation under WeSing Video Account. And the connection between WeSing Video Accounts and people app has already been very [indiscernible]. Well, if you look at revenue-wise, our high-value users or SVIP has not been by affected. What has been most -- have affected is for those casual on light metrics? So if you look at our subscribers, we got to stabilize our SVIP base and try to put more benefits into the SVIP package to increase its total number of things. Well, this includes like Cussion said, merchandise performance concerts and with Ximalaya, we can also provide more high-value long-form audios. Compared with our peers, our core music business is still having a solid housing growth. Well, to acquire more light users, we also having the potential from those light and small apps, especially [indiscernible] music, Kuwo concept and the Kuwo free version, which we released visit this quarter. We believe through our collaboration -- a deeper collaboration with WeSing Video Account by stabilizing our main business and tapping more potential from high-value service. I believe we can stay in a very good position against the competition. In terms of competition, TME has never been upset from competition over the years. So the most important thing for us is to do our own job well. Well, compared with our peers with the consolidation of Ximalaya, we already finished our position from a music platform to a music plus audio comprehensive service platform. Third with our peers in the future on TME platform, we can provide more enriching content, more channels and also more benefits that cover both online and off-line. No matter what happens then competition will stay firm on our own track of development. We also believe that our business will continue to have stable and steady development.

And the next comes from Alex C. Yao.