TME (Minutes): Strong Growth Momentum to Continue into Q3
The following are the$Tencent Music(TME.US) FY25 Q2 Earnings Call Minutes, for earnings interpretation please visit《Tencent Music: A Vertical Bull Stock, An Endless Gold Mine?》
- Review of Core Financial Information
The company achieved high-quality growth in the second quarter of 2025, with strong year-on-year growth in both revenue and profitability, and expects the strong momentum to continue into the third quarter. The online music subscription business remains the core growth driver and continues to attract attention.
(1) Guidance and Future Outlook:
The company plans to expand the tour of top Korean artist G-DRAGON to other regions this year, with more tour locations in the third quarter.
The company plans to invite more popular Chinese artists to join the interactive community "Bubble" to establish deeper and more personalized fan connections.
The future will continue to focus on expanding the number of SVIP members and introducing more enhanced SVIP privileges, such as high-quality content and artist-centered privileges (including free delivery of artist merchandise and priority purchase rights for concert tickets).
The company will continue to invest globally in products and innovative technologies and remains optimistic and confident about the healthy growth prospects of the music entertainment industry and its own business's high-quality growth.
(2) Cash Flow:
As of the third quarter of 2025, the company's total balance of cash, term deposits, and short-term investments was RMB 34.9 billion, compared to RMB 37.7 billion as of March 31, 2025.
(3) Shareholder Return Plan:
This quarter's growth in net profit and diluted earnings per American Depositary Share (ADS) was partly due to the benefits of the company's ongoing stock repurchase program.
(4) Capital Expenditure and Personnel Adjustment Plan:
The financial report did not mention specific quantitative data on capital expenditure plans or personnel adjustment plans, but mentioned that the growth of artist-related merchandise and offline performance business requires higher investment, and the company is committed to investing in new initiatives to create lasting value and impact for music creation and consumption.
II. Detailed Content of the Earnings Call
2.1 Executive Statements of Core Information
(1) Content Ecosystem and User Preferences: The company continues to strengthen K-pop content, collaborating with well-known Korean record companies such as The Black Label, H Music, Starship, YG, and artists like G-DRAGON, while expanding cooperation with Japanese ACG record companies and merchandise projects. At the same time, it deepens local content, collaborating with Wang Feng and jointly producing a special Chinese EP for NCT member CHENLE and the theme song for the movie "Lychee of Chang'an." Korean, English, and Japanese tracks are increasingly popular. The company also uses DeepSeek ERM to evaluate content quality and improve recommendation accuracy.
(2) User Engagement and Monetization: Online music subscription performance is strong, with SVIP subscription users exceeding 15 million, and monthly ARPPU reaching RMB 11.7. High-quality sound and artist-related privileges (such as priority ticket purchase and free delivery of merchandise) effectively drive SVIP conversion, with merchandise quickly selling out. Advertising business accelerates growth.
Total revenue for the quarter reached RMB 8.4 billion, up 18% year-on-year; online music revenue reached RMB 6.9 billion, up 26% year-on-year; music subscription revenue reached RMB 4.4 billion, up 17% year-on-year. Net profit increased by 38%, reaching RMB 2.5 billion.
(3) Technology Research and Innovation: TME continues to use artificial intelligence to enhance user engagement, introducing interactive comment features and upgrading vocal extraction technology (such as AI chorus). Kugou Music pioneered VIPER HiFi sound quality and one-click sound enhancement 2.0. The company expanded its in-car music service alliance, collaborating with Geely, Xiaomi YU7, and Great Wall Motors to create AI-driven music cockpits. Additionally, the company launched the "Hear Guizhou" project, using AI to improve sleep quality.
2.2 Q&A Session
Q: Given the strong performance in the first half of the year, what are the management's expectations for revenue and profit prospects in the second half?
A: We are encouraged by the strong performance of revenue and profit this quarter. The music subscription business remains robust, with a user base exceeding 124 million, and ARPPU showing a steady upward trend. In terms of non-subscription services, advertising business is an important growth driver, with innovative advertising formats widely welcomed. New revenue sources such as concerts and artist merchandise have been scaled up, with second-quarter revenue more than doubling year-on-year, validating the comprehensive music entertainment platform strategy.
Although concerts are subject to short-term fluctuations due to scheduling and other factors, overall optimism remains, focusing on sustainable long-term growth. Given the strong performance year-to-date, full-year revenue for 2025 is expected to exceed previous expectations, with profit having greater room due to improved operational efficiency.
Q: Regarding the recently launched Bubble product, can management share its progress, user feedback, and experience, and assess its potential to become an important product and contribute to revenue?
A: This quarter, the company launched Bubble in collaboration with DearU, aiming to meet the needs of users for communication with artists and enhance the QQ Music user experience. We are currently optimizing the user experience, with particular attention to the fluency of Korean and Chinese translations. In the future, in addition to existing Korean artists, Chinese artists will also be introduced to the community to provide localized services for the Greater China region.
Bubble is bundled with subscription and SVIP business and is expected to become a key driver of SVIP growth. Existing paid users are mostly highly active young users, enhancing confidence in future user growth and commercialization. As a mature overseas social product, Bubble will help the company consolidate QQ Music's social application services. In the future, live streaming and other functions will be added to provide richer commercialization opportunities for the subscription business, with huge commercialization potential.
Q: Regarding the recent collaboration with Ximalaya, can management comment on its potential synergies, such as cost optimization, product service enhancement, and benefits to SVIP products?
A: Due to Chinese regulatory requirements for further approval by regulatory agencies, it is currently difficult to comment specifically on the synergies of the collaboration with Ximalaya. The company's choice to collaborate with Ximalaya is based on a firm belief in the value of long audio. Long audio, as an important content form, has already provided a good complement to the existing music business.
In terms of audiobooks, personal memberships, advertising, and long audio content in various music applications, subscription user base and commercialization have made good progress. Long audio consumption and its penetration rate in SVIP continue to rise. If the transaction proceeds smoothly, the company believes there will be opportunities to continue expanding the user base. Any progress will be promptly disclosed to the market.
Q: How does management view the long-term share of "other music revenue" in total revenue? What is its impact on overall gross margin, especially the impact of offline performances and merchandise business?
A: The company adopts a strategy of synchronized and integrated development of content and platform, offline concerts and fan economy in "other music revenue" are important strategic directions for the future. In the long run, this part of the business is key to future development. Fan economy revenue continues to grow, but there are seasonal fluctuations due to artist schedules and merchandise delivery.
The gross margin of fan economy and offline concerts is relatively low, which will have some impact on overall gross margin. However, because its revenue contribution is relatively small, the impact on overall gross margin is also small. The company is confident in the upward trend of gross margin by increasing the subscription user base, advertising revenue, and developing social entertainment.
Offline business is a complement to existing online business, supporting healthy growth of online music. This quarter, the company plans to launch an SVIP mall annual card, offering merchandise discounts, aiming to improve merchandise profitability.
Q: As the company's business expands from online music distribution to artist merchandise, offline performances, and broader fan economy such as artist-fan connections, what are the biggest opportunities and challenges in the next one to two years?
A: The biggest opportunity lies in building a comprehensive service platform integrating copyright content, merchandise, and privileges. Fan economy does not exist independently but is integrated into the existing system. The company aims to use merchandise and offline activities to deepen the connection between artists and online platforms to continuously expand the subscription user base.
By expanding domestic and international copyright advantages, the company strives to become a comprehensive music entertainment service provider. This quarter, organizing overseas concerts for G-DRAGON and providing merchandise will assist in international expansion. The main challenge is ensuring that platform scale and development can effectively integrate content and privileges.
Q: In terms of diversified music products and long-term perspective, what are management's expectations for long-term revenue composition? How does TME view its positioning in the entire entertainment value chain?
A: The company will continue to advance development using the "one body, two wings" strategy (platform plus content ecosystem). Looking ahead, the online music business will be the main source of revenue and profit, especially benefiting from the stable development of live music platforms. Advertising business, as another highlight, is expected to grow at a rate that may even surpass online music revenue in the long term.
Social entertainment revenue has stabilized, while performances, offline concerts, and artist merchandise as fan economy will become new growth drivers. TME will continue to develop based on the existing model and actively focus on new growth points such as long audio and international business expansion, which will provide additional acceleration for existing business.
Q: Regarding the newly launched ad-supported membership, can management share its specific contribution to revenue and subscription users?
A: The rapid growth of the advertising business mainly comes from online advertising, rather than the contribution of ad-supported membership. In the coming years, incentive advertising will remain key to the advertising business, as it is a universal incentive model, and we are confident in future growth.
The company has utilized the existing incentive advertising user base and began piloting the ad membership model about two months ago. Although the profit margin of ad-supported membership is relatively low, it can provide differentiated solutions for different user groups. Currently, this model is still in its infancy, and any further progress will be shared promptly.
Q: How will the company expand and maximize revenue opportunities for ad-supported membership without affecting the transition to standardized subscription plans?
A: In the future, ad-supported membership will form a three-tier membership system along with standard membership and SVIP. This strategy aims to help the company continuously expand the subscription user base and user scale. This is an important strategic operational direction, and the company has focused heavily on platform content construction over the past two months.
Although this model is still in its infancy, the goal is to maximize its revenue opportunities by providing differentiated solutions without affecting the existing subscription model. Any significant progress will be promptly disclosed to the market.
Q: Considering existing growth opportunities, can the trend of profit outperforming revenue growth (thanks to successful sales, marketing, and general administrative expense reductions) continue in 2025 and 2026? How does the company view operational leverage?
A: The company's market expenses (especially sales expenses) are mainly used for content and channel traffic acquisition, which will be adjusted according to market competition, and will continue to invest in music content and channel promotion. R&D expenses will focus on empowering the industry with new technologies and the innovation opportunities they bring. The company expects the absolute value of operating expenses in 2025 to increase compared to 2024, but the rate of expense growth will always be slower than revenue growth. This means the company will retain sufficient growth space for net profit margin and net profit, demonstrating continuously optimized operational leverage.
Q: Please share detailed information on SVIP penetration rate, ARPPU trend, and overall retention rate, and explain the sustainability of this growth?
A: The growth of SVIP penetration rate is not mainly driven by time or a single event, and the release of new albums may bring slight growth. Currently, the company has 50 million SVIP members and 124 million subscription users, with SVIP penetration rate, ARPPU, and retention rate all showing upward trends, meeting expectations.
The key driver of SVIP growth comes from high-quality sound, long audio content, and digital products, as well as the conversion of regular members to SVIP. This growth is rooted in solid business development, such as the bundling of new albums with SVIP, which has reached expectations and is included in continuous growth, ensuring a strong growth trajectory for SVIP.
Q: What is the management's primary task in promoting sustainable revenue growth for the super fan economy?
A: To ensure the sustainability of the fan economy business, the company prepares activities and schedules 6 to 12 months in advance to operate artist-related business in a stable and sustainable manner. The team is committed to maintaining rapid growth in merchandise sales even in the absence of major offline concert events. The company has achieved steady growth in merchandise sales and is committed to ensuring fan economy revenue grows as expected to maintain its sustainable development.
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