Tencent Music (Minutes): Room Existed for Profit Margins to Improve

The following is the minutes of Tencent Music's Q4 2024 earnings conference call. For financial report interpretation, please refer to Tencent Music: Small Happiness Reappears During Pressure Period.

I. Financial Performance Indicators

1.1 Q4 Performance

1) Revenue: Total revenue for the fourth quarter was RMB 7.5 billion, a year-on-year increase of 8%. Among them, online music revenue was RMB 5.8 billion, a year-on-year increase of 16%, mainly benefiting from contributions from music subscriptions and advertising; social entertainment and other revenues were RMB 1.6 billion, a year-on-year decrease of 13%.

2) Music Subscriptions: Subscription revenue for the fourth quarter was RMB 4 billion, a year-on-year increase of 18% and a quarter-on-quarter increase of 5%. The number of online music-paying users reached 121 million (+13%), with a monthly ARPPU of RMB 11.1, higher than RMB 10.7 in the same period last year.

3) Advertising: Benefiting from innovations in interactive advertising formats, advertising revenue also showed strong growth.

4) Profit: Quarterly net profit was approximately RMB 2.08 billion (+47%), and Non-IFRS net profit was approximately RMB 2.4 billion (+43%), both setting a quarterly record. This was mainly due to the increased proportion of high-margin businesses such as online music subscriptions and advertising, cost control, and optimization of the social entertainment business structure.

1.2 Annual Performance: Total revenue for 2024 was RMB 28.4 billion (+2%), of which online music revenue was RMB 21.7 billion (+25%), while social entertainment revenue decreased year-on-year. Annual net profit was RMB 7.1 billion (+36%), Non-IFRS net profit was RMB 8.1 billion. As high-margin businesses such as online music subscriptions, original content, and advertising continue to expand, their proportion increases, leading to a rising gross margin quarter by quarter.

1.3 Share Buyback and Dividends: We have completed the previously announced buyback plan and announced a new USD 1 billion buyback plan, effective for two years. At the same time, based on the company's profitability, we will also distribute an annual dividend of USD 273 million. The company's cash reserves are very ample (as of December 31, 2024, holding approximately RMB 37.6 billion in cash and short-term investments), allowing us to maintain a balance between business investment and shareholder returns.

1.4 Company Outlook for 2025:

We will continue to promote high-growth sectors such as online music subscriptions, SVIP privileges, and advertising businesses.

Maintain investment in original content, AI technology empowerment, and international market expansion to further enhance user experience and ecological richness.

3) There is still upward potential for gross margin and net profit margin under the overall business and cost control trends.

II. Management Report2.1 Online Music Business

2024 is a significant year for TME, as we have achieved a return to revenue growth and a notable increase in profit margins, particularly with strong performance in online music services. At the same time, our innovative expansion in the music value chain has reshaped the industry landscape and enriched the ecosystem, not only improving user payment conversion efficiency but also extending the interaction cycle between users and the platform.

In the fourth quarter of 2024, multiple product lines in the online music business made progress. Looking ahead to 2025, we will make extensive efforts to bring greater value to creators and users through the platform.

Our "dual-engine strategy" (enhancing content and platform innovation) allows us to seize more opportunities and improve operational efficiency. The company is very optimistic about future growth, and we have also announced an annual dividend of $273 million and a stock repurchase plan of up to $1 billion, reflecting our confidence in the company's prospects.

TME's core mission is to serve musicians and meet users' demand for high-quality music consumption. Our vast copyright library covers various genres and the upstream and downstream of the industry, providing users with one-stop music services. By the end of 2024, our music library, in collaboration with domestic and international record companies and creative teams, has exceeded 216 million songs, continuing to increase from 200 million songs at the end of the previous year.

2.1.1 To optimize the user listening experience, we have made several upgrades in content and products:

(1) Copyright Expansion: Renewed strategic cooperation with international labels such as SM Entertainment and Kakao Entertainment to expand the high-quality music library, and collaborated in various aspects including high-end peripherals, live performances, and artist-related projects; in-depth cooperation with renowned Chinese musicians such as Dao Lang and Luo Dayou to introduce a large number of classic Mandarin songs and premiere new songs.

(2) Supporting Artist Creation: Developed industry insights and resource integration strategies to assist artists in creating and releasing works. For example, we collaborated with Angela Chang to create and promote "Competing with the World," which received excellent reviews on platforms like QQ Music and Kugou Music; we also produced theme songs and OSTs for film and television works such as "Nine Layers of Purple" and "The Great Feng Patrol," rapidly spreading across both music and film and television platforms.

(3) Innovative Pan-Entertainment Experience: Integrated fan interaction and peripheral sales through online and offline methods. For instance, we produced physical albums and digital versions for Xiao Zhan and Zhang Yixing to be launched simultaneously, held New Year's concerts for well-known artists like Mayday, and conducted online live broadcasts, achieving significant promotional effects across multiple platforms.

(4) SVIP Membership: Enhanced sound quality and personalized experiences to meet core user needs, achieving a dual increase in membership numbers and ARPPU. For example, early exclusive releases of JJ Lin's latest album and high-definition viewing rights for Mayday's online concert are SVIP privileges that have strong user appeal. In 2025, we plan to continue expanding SVIP benefits in areas such as priority ticket purchases for concerts, meet-and-greets, and limited-edition peripheral products.

2.1.2 At the same time, our ESG efforts have also made progress:(1) Support for Female Musicians: In 2024, we supported approximately 192,000 female musicians, gradually building a more diverse and inclusive music community.

(2) Public Welfare and Ecological Protection: In collaboration with educational departments and NGOs, we launched the "Write Songs for Pandas" project to raise awareness about biodiversity through music.

2.1.3 Product and Function Progress

As our content continues to enrich, we are more focused on enhancing products and user experience, as well as innovating diverse music consumption scenarios, thereby driving strong growth in the online music service business. In the fourth quarter, the number of paid users continued to expand, and ARPPU also increased year-on-year and quarter-on-quarter. SVIP membership is also progressing well, with paid users being more active and ARPPU remaining high.

Key initiatives include:

(1) Algorithm and Recommendation Upgrades: Through intelligent algorithms, we make it increasingly convenient for users to collect playlists, with the average daily listening duration reaching a new historical high. The play volume and user collection driven by recommendations (yoy +10%) are also continuously growing. The new versions of QQ Music and KuGou Music are more personalized in interface interaction, better aligning with user habits.

(2) Sound Quality and Audio Processing: We utilize AI to enhance sound effects and voice separation technology, providing SVIP members with a high-fidelity music experience, matching the most suitable playback effects, and allowing users to obtain pure accompaniment with one click, enabling them to sing along or listen to the accompaniment anytime.

(3) Scenario Expansion: We partnered with Amap, Baidu Maps, and others to launch navigation scenario music, developing in-car karaoke, voice interaction, and other functions, integrating them into the entertainment systems of multiple electric vehicle brands; the PC side has also made more innovations in playback interface and functions, enhancing users' cross-device music experience.

(4) AI Empowerment: We introduced "DeepSeek" technology and AI creative assistance features to help users quickly generate customized songs, rewrite comments, etc. We also launched a virtual fan community, allowing artists and fans to interact in real time, strengthening fan loyalty and energizing the community atmosphere. Additionally, the "interactive and incentive-based advertising" format has achieved good results, significantly contributing to the growth of the advertising business.

In summary, in 2024, we conducted technological upgrades in music content production, promotion, and consumption, opening up imaginative space for future innovations. In 2025, we will continue to embrace AI to create more attractive product forms for a wide range of users and musicians, achieving sustainable user and revenue growth.

3. Analyst Q&A

3.1 About the Overall Performance Outlook for 2025 and Growth Rates of Segmented Businesses

Q: Can management share the growth prospects and directions for 2025, especially regarding music subscription revenue, net increase in paid users, expectations for non-subscription business revenue (such as advertising), and views on the trends of gross margin and net profit margin?

A: In 2024, online music services drove the company's overall high-quality growth, with subscriptions and other related businesses (artist peripherals, concerts, etc.) performing excellently, and advertising also making considerable progress; the attractiveness of SVIP has increased, proving our sufficient execution capability and laying a solid foundation for further development in 2025In 2025, we will continue to focus on the music value chain layout, providing users with a diversified and highly engaging music experience; revenue and profit are expected to have further room for improvement.

In Q4 2024, the company's gross margin was approximately 43.6%, a significant increase of 5.3 percentage points year-on-year. High-margin businesses such as online music subscriptions and advertising have driven the overall gross margin strength; the expansion of self-produced content, optimization of content costs, and reduction in social live-streaming revenue-sharing rates have also contributed positively.

In 2025, while maintaining an ROI-oriented approach, we will continue to invest in online music, content promotion, AI technology, and other areas. Revenue is expected to accelerate growth, and the adjusted net profit margin is likely to continue to improve.

The main forms of advertising include "splash ads" and "ad-supported models"; with the continuous introduction of incentive-based and interactive advertising, we can more precisely reach target users.

We expect healthy growth in advertising in 2025, with advertisers covering multiple industries such as fast-moving consumer goods, luxury goods, and gaming. We will continue to optimize delivery efficiency and deepen monetization among free DAU users.

3.2 Balance of Net New Users and ARPPU in Online Music

Q: In the fourth quarter, there was a net increase of about 2 million paid users in online music. Can this growth rate be maintained? What is the retention rate of Super VIP? Can ARPPU continue to increase?

A: In 2025, we remain confident in overall revenue and profit growth, while also considering the scale of paid users and ARPPU. We will not sacrifice long-term growth for short-term scale by excessively lowering prices. Currently, we are investing significantly in content differentiation, and ARPPU remains leading in the industry.

Basic members (in the range of 15-18 yuan) will continue to support price increases through content and service upgrades; SVIP (which offers high sound quality, exclusive concert rights, additional content, etc.) performed better than expected in Q4, with both user numbers and ARPPU reaching new highs.

Metrics such as daily average song listening and SVIP activity are at historical highs. We will continue to improve product and customer operation quality, driving stable retention and expansion of paid users.

3.3 Offline Performance Market and User Willingness to Pay

Q: I would like to understand the current consumer demand and willingness to pay for concerts. Are ticket prices for offline concerts trending upwards or downwards?

A: In the past two years, the live performance market in China has grown strongly, with many concerts and music festivals by top artists selling out instantly. User demand for the live atmosphere and interaction has significantly increased, which also leads to additional purchases of related products.

We expect this market to remain robust in 2025, with ticket prices relatively stable, but overall quality requirements for performances are increasing, accelerating the survival of the fittest in the industry. TME will collaborate with outstanding teams in the industry to strive to provide high-quality performances and deliver a better experience for users.

3.4 AI Strategy and Investment

Q: Can you discuss the specific product or functional layout for AI in 2025? What is the impact on revenue or profit? And what is the planned scale of AI investment?

A: We mainly utilize Tencent's large model ecosystem (such as "DeepSeek"), which has already implemented deep language and recommendation functions in products like QQ Music, such as helping users generate personalized playlist comments and AI coversThe "AI voice separation" feature has received a good response in karaoke and pure accompaniment modes, and we will continue to focus on high-quality sound, intelligent audio effects, text-to-speech, and other technologies in the future.

Large model inference consumes significant computing power, but our costs are controllable, and we will explore new growth points in broader application scenarios and invest moderately.

3.5 Quarter-on-Quarter Performance of Social Entertainment Revenue

Q: Social entertainment business revenue has been declining quarter-on-quarter for the past few years, but this time there is an improvement. What is the reason? Is it due to the increased share of 全民 K 歌， or is it seasonal recovery?

A: There have indeed been seasonal fluctuations and compliance policy impacts in the past, but in the fourth quarter, we launched new interactive features such as energy collection and prop collection in the 酷狗直播 scenario, which performed beyond expectations.

全民 K 歌 itself has also achieved good results in functional innovation and membership value enhancement, with video live streaming and karaoke room businesses gradually stabilizing.

For 2025, we believe that the overall social entertainment sector may still face certain pressures, but we will continue to innovate to offset the decline and strive for stability or slight improvement.

3.6 Capital Allocation and Shareholder Returns

Q: The company has just announced a new round of dividend and repurchase plans. How do you consider capital usage? Will the dividend yield be maintained in the future?

A: The company operates steadily with ample cash flow. On one hand, we will make long-term investments in original content, AI technology, and internationalization; on the other hand, we also fully pay attention to shareholder returns.

TME has completed two rounds of repurchases and will initiate a new two-year $1 billion repurchase plan. Following last year's first dividend, we plan to further increase the dividend amount this year, with a significant increase in absolute value. In the future, we will continue to balance business investment and shareholder returns based on operational conditions and future development plans.

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