On March 17, Beijing time, Tencent Music announced its fourth quarter and full year results for 2019. The financial report shows that many core indicators of Tencent Music Entertainment Group exceeded market expectations this quarter, and the overall performance was pretty good. After the earnings report was better than expected, the share price of Tencent Music Entertainment Group rose by 4% after the market.
From the perspective of stock price performance, Tencent Music Entertainment Group's financial results for the quarter still won the approval of many investors. Looking back at the development of Tencent Music last year, its stock price performance is not very satisfactory. At present, the stock price has shrunk from the beginning of the listing, and the overall performance tends to decline.
In this quarter, what core data does Tencent Music perform well? After this financial report is released, can Tencent Music make a bigger breakthrough in its share price? As the strength of NetEase Cloud Music has greatly increased, NetEase, Ali, and Baidu are behind it. Its layout in the online music market is accelerating. What impact will this have on Tencent Music?
Revenue increased by 35.1% year-on-year, net profit increased by 46.5% year-on-year
The financial report shows that in the fourth quarter of 2019, Tencent Music Entertainment Group's total revenue increased by 35.1% year-on-year to 7.29 billion yuan (1.05 billion US dollars); the net profit attributable to the company's shareholders increased to 1.04 billion yuan (150 million US dollars) from the same period last year ), Non-IFRS (Non-IFRS) net profit attributable to shareholders of the company increased by 46.5% year-on-year to RMB 1.34 billion (USD 193 million).
As of press time, the share price of Tencent Music was 11.50 US dollars, after-hours increase was 4.07%, and the market value was 18.068 billion US dollars.
(Picture Snowball)
In terms of business revenue, revenue from online music services was RMB 2.14 billion, an increase of 40.7% year-on-year; revenue from social entertainment services and other businesses was RMB 5.15 billion, an increase of 32.9% year-on-year
Total revenue for the whole year of 2019 was RMB 25.43 billion (US $ 3.65 billion), an increase of 34.0% year-on-year; net profit attributable to the company ’s shareholders was RMB 3.98 billion (US $ 572 million), an increase of 117.2% year-on-year; under non-IFRS ( Non-IFRS) net profit attributable to the company ’s shareholders was RMB 4.91 billion (US $ 705 million), a year-on-year increase of 17.6%.
For the full year of 2019, revenue from online music services was RMB 7.15 billion, an increase of 29.2% year-on-year; revenue from social entertainment services and other businesses was RMB 18.28 billion, an increase of 35.9% year-on-year.
As of December 31, 2019, the total amount of cash and cash equivalents held by Tencent Music was RMB 22.93 billion (approximately USD 3.29 billion), compared with RMB 21.14 billion as of September 30, 2018.
Judging from Tencent Music's financial report, many core data still exceeded previous expectations, which has also become an important driving force behind the stock price rise. Compared with the previous data, the growth level is not very satisfactory, especially in terms of revenue and net profit. Returning to the financial report performance, let's take a look at the performance of Tencent Music and its deficiencies.
The number of paid users increased to 4.5 million higher than the paid value of Tencent music users in the first three quarters still less than Spotify
As an online music platform, the overall size and growth performance of paying users are important data for investors to value their business growth.
During the quarter, Tencent Music ’s online music paying users increased by 47.8% year-on-year to 39.9 million, and the net increase in online music paying users increased to 4.5 million, higher than 4.4 million in the third quarter of 2019, 2.6 million in the second quarter, and the first 1.4 million in the quarter. Among them, online music ARPPU increased by 8.1% year-on-year. Although Tencent Music ’s number of paying subscribers grew this quarter, the growth rate was not fast enough.
The growth performance of paying users directly affects the online music revenue growth of Tencent Music. In Tencent's business revenue, music subscription revenue increased by 60.1% year-on-year to RMB 1.11 billion (160 million US dollars). The important factor affecting the revenue of this business is still the size of paying users. In the fourth quarter, online music ARPPU increased by 4.5% month-on-month and by 8.1% year-on-year. ARPPU has risen to a certain extent this quarter, which has also become an important reason for the growth of music subscription revenue.
Although the performance of paying users and ARPPU is okay, as the number of new users of the entire mobile Internet decreases, the revenue growth of the online music business will also face the challenge of slower growth. On the one hand, although the domestic payment environment is developing in a good direction, and users' awareness of paying for songs is increasing, it is difficult to achieve explosive growth in the short term, and the demand for paying to listen to songs is not very demanding. At the same time, another factor affecting the slow growth of Tencent Music's online music revenue is that the ARPU value is not high. Tencent Music is still very cautious about paying behaviors. It takes time to cultivate the market, and raising prices may cause user dissatisfaction, but it also shows that Tencent The attractiveness of music products is not enough, and the price increase may cause the loss of users.
On the other hand, external competitive pressures have also begun to pose some threats to Tencent Music. NetEase Cloud Music, Douyin, Kuaishou, etc., are also gaining momentum, trying to gain a place in the growing music payment market. These products have become a force that cannot be ignored in the Internet industry, and short videos have occupied users for longer and longer in the fields of video, social networking, and music.
Tencent music paying users are not growing fast enough. Comparing the data of paid users of music streaming giant Spotify, we can see its shortcomings. As of Q4 2019, Spotify had 271 million monthly active users, and the total number of paying users came to 124 million. By comparing the paid user data of the two platforms, who has more growth value in the eyes of investors, I am afraid that there is also a conclusion in my heart. This is why the current market value of Spotify will be several billions of dollars more than Tencent Music.
Under the pressure of benchmarking music streaming media, Tencent Music has not yet proved to investors that it has a high growth value in the growth of domestic paying users. In addition to the insufficient performance of paying users, Tencent Music ’s copyright expenditure is also an indescribable pain.
Music copyright fees still affect profit growth space under rising high expenditures
The cost in the fourth quarter was 4.81 billion yuan (approximately US $ 690 million), an increase of 34.9% from the 3.56 billion yuan in the same period last year. In the Q1 to Q3 quarters of 2019, Tencent Music's cost expenditures were 3.703 billion yuan, 3.957 billion yuan, and 4.296 billion yuan, respectively. Judging from the chain data, Tencent Music spent more money on a quarter-by-quarter basis. Among them, the sales and marketing expenses in the fourth quarter were 671 million yuan, an increase of 23.8% from the 542 million yuan in the same period of the previous year
(Figure source Lei Di net)
For Tencent Music, in order to attract users to pay for listening to songs, a steady stream of exclusive music library resources is an important weapon for establishing it in the domestic online music market. It is no exaggeration to say that Tencent Music has bought songs both at home and abroad, and it can still be described as rich.
During the quarter, Tencent Music's operating costs remained large. The cost of revenue was RMB 4.30 billion, an increase of 42.9% compared with RMB 3.01 billion in the same period of the previous year, mainly due to the increase in content expenses and revenue sharing expenses. Comparing the data of previous quarters, Tencent Music's expenditure in this sector has not shrunk. So how much does Tencent Music spend on music copyright fees?
In terms of expenditure data, in 2017, Tencent Music obtained the exclusive copyright of Universal Music at the price of US $ 350 million + US $ 100 million in equity. Assuming that the copyright is valid for 3 years, at the exchange rate of 1: 6.90, Tencent Music ’s annual average cost of Universal Music ’s music library is 621 million yuan. The cost is as high as 3.105 billion yuan, while the total revenue of online music in 2018 is only 5.54 billion yuan. From the data point of view, Tencent music investment is not small.
In addition to music copyright spending, which will drag down Tencent Music's data on earnings performance, domestic online music platform NetEase Cloud Music and short video vibrato have increased their efforts to purchase copyright. In August last year, Douyin announced that it has successively cooperated with many record and song copyright companies including Universal Music, Warner Music, Universal Songs, Taihe Music, Warner Shengshi, etc. Douyin has obtained the full music library of these companies. right.
Under the competition for copyright grabs from several major platforms, music copyright fees will remain a high expense in the future. It is still very difficult for Tencent Music to maintain its platform advantages and reduce costs. In the future, if Tencent Music can better control the expenditure on music copyright, the profit margin may be more imaginative.
Social entertainment revenue accounted for a high proportion of Tencent music once again, explosive growth becomes difficult
In this quarter, social entertainment services and other businesses accounted for 70.6% of total revenue. Despite being a streaming music giant, Tencent Music makes more money on social entertainment business. Making money in this business also makes up for Tencent Music's burning money in the online music business, driving the profitability of the entire company, which is the key to Tencent Music's profitability.
From a business perspective, Tencent Music's social entertainment business mainly includes the national K song, the live part of Kugou Music, Kuwo Music, Kugou Live, Kuwo Live. From the data point of view, although the social entertainment business has performed well in terms of revenue, the growth in user size and payment rate has slowed, which means that Tencent Music may face growth difficulties in this business sector. .
In terms of ARPU, the monthly ARPU of the social entertainment business has also been growing slowly in the past three quarters, with almost no growth in 19Q1. In the case of online music business losses, social entertainment business MAU and payment rate levels are extremely difficult to increase, the ARPPU of the social entertainment business is the key to leading Tencent Music's total revenue growth, and the rate of improvement will become an important indicator of revenue growth.
In the view of the US stock research agency, the decline in the social entertainment business that affected Tencent Music is mainly due to the limited demand for product payment and the pressure of competition. This business also has a great disadvantage, with low threshold and excessive competition in the field of live broadcasting. The live broadcasting business mainly competes with Huya, YY and Douyu. Relative to video pay-per-view dramas, due to the lack of strong interactivity and sensory stimulation, it is difficult for the payment level of music to reach the level of other types of live broadcasts, and it is difficult for Tencent Music to tap into greater commercial value.
After a period of rapid growth, Tencent Music ’s social entertainment business has also fallen into a growth bottleneck. The number of users has grown to the end, the payment rate has been slowly increased, and ARPU due to the characteristics of music live broadcast also has little room for improvement. In the long run, rewards and gifts are not rigid demands. The increase in payment rates is limited. The ARPPU value has now reached a high level. Investors will also worry about whether the business can support the market value of Tencent Music.
After realizing that there are development bottlenecks, Tencent Music is also seeking new opportunities. In order to tap more realisable space, in the first quarter of 2020, Tencent Music and Reading Group signed a five-year strategic cooperation agreement. This action also means that Tencent Music has greater ambitions in long audio, but whether it can bring high returns depends on the follow-up market feedback.
Capital blessings, Netease cloud music moves frequently and Tencent music are fighting
From the perspective of financial performance, Tencent Music's core data growth performance is facing different levels of problems, which may also be an important reason that affects its stock price is not optimistic about the capital market. However, in view of the outside world, in addition to dealing with internal problems, Tencent Music's rise in the future is likely to increase the threat to it in the future.
In September of last year, Alibaba announced that it has participated in the $ 700 million round of financing for NetEase Cloud Music as the lead investor. So far, NetEase Cloud Music has received strategic investments from Ali and Baidu, and NetEase Cloud Music has also been mentioned as a more important position within NetEase, which also makes it a lot of major moves in business development. According to the Q4 quarterly financial data disclosed by NetEase, the rapid growth of NetEase cloud music revenue drove the fourth quarter net income of innovation and other businesses to 3.72 billion yuan, an increase of 18% year-on-year.
NetEase Cloud Music achieved a breakthrough in revenue growth, which is a hidden danger for Tencent Music, which means that it is likely to grab more market share. Judging from the series of products launched by NetEase Cloud Music, its actions in the online music market are more proactive than in the past. Under the blessing of capital, NetEase Cloud Music has the opportunity to try.
Last year, NetEase Music's investment in music copyrights was further increased, and competition with Tencent Music to rob paying users was heating up. Recently, NetEase Cloud and Studio Ghibli reached a copyright cooperation and obtained full authorization of well-known animated popular music works including "My Neighbor Totoro", "Thousand and Thousand Seeking", "Hall's Moving Castle" and "Pony on the Cliff". In addition to snatching the revenue from online music services brought by paying users, NetEase Cloud Music is also learning Tencent Music and actively exploring opportunities for other businesses to monetize.
Whether it is Yuncun, LOOK live broadcast, or voice live broadcast product Sonic, word of mouth, free K song product Yinjie, from its business layout, it has more business with Tencent Music, which shows that NetEase Cloud Music is also trying The diversified monetization path around the music ecosystem is similar to the path taken by Tencent Music. With NetEase Cloud Music's independent financing, it may also have a larger goal in the future, which will increase the pressure on Tencent Music's market value and stock price growth in the future.
Conclusion
As the first listed subsidiary of the Tencent Department, Tencent Music has high expectations from the outside world. After all, from its development model, Tencent Music has no small room for growth in the online music market, and the penetration rate of domestic paid listening songs There is still a lot of room for growth, and these are important favorable factors for Tencent Music's future development.
This financial report is not the performance of the core data is higher than expected, which also shows that Tencent Music has the opportunity to maintain stable growth in revenue and net profit, but only how to achieve greater breakthroughs in important data in the future, and further establish its role in paying users Barriers to competition may be the driving force behind the rapid rise in its share price.
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