Tencent Music Entertainment Group

NYSE:TME

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, good evening, and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group 2020 Second Quarter Earnings Conference Call. Today, you will hear discussions from the management team of Tencent Music Entertainment Group, followed by a question-and-answer session. Please be advised that this conference is being recorded today.

Now, I'll turn the conference over to your speaker host today, Ms. Millicent T. Please go ahead, ma'am.

[Millicent T., Investor Relations]

Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. Tencent Music announced its quarterly financial results today after the market close. An earnings release is now available on our IR website at ir.tencentmusic.com as well as via Newswire services. Today, you'll hear from Mr. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent updates. He will be followed by Mr. Ross Liang, our CEO; and Mr. Tony Yip, our CSO, who will offer additional thoughts on our product strategies, operations and business developments.

Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements.

All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company's filings with the SEC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law. Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the international financial reporting standard in the company's earnings release and the filings with the SEC. You are reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure, and other non-IFRS measures are not uniformly defined by all companies, including those in the same industry.

With that, I'm very pleased to turn over the call to Cussion, Executive Chairman of Tencent Music. Cussion, please.

[Cussion Pang, Executive Chairman]

Thank you, Millicent. Hello, everyone, and thank you for joining our call today. As we announced on July the 26th, Tencent recently received an Administrative Penalty Decision issued by the State Administration for Market Regulation of the People's Republic of China to SAMR. We sincerely assess the decision and we'll continue to strengthen our operations in accordance with all regulatory requirements, drive innovation and fulfill our social responsibilities.

In compliance with the requirements of copyright license exclusivity, we will operationally focus on the dual flywheels of content and platform to deliver high quality of products and services to users and foster innovation. We have taken several important steps in this regard. Specifically, as Executive Chairman, I'm responsible for enriching our content ecosystem whether licensed or self-produced as well as expanding our capability within the music industry to all the additional value services and solutions to artists and users.

Our CEO, Ross, oversees our platform and product strategies and is responsible for the further deepening TME's partnerships with Tencent's ecosystem. Ross will elaborate on this in a moment. We will continually deepen our partnerships with 100s of music labels to expand our licensed content cost base in alignment with the new requirements and work to provide more and better content offering to over 600 million music users to our multi-brand product portfolio. We are pleased to report that we have been consistently making breakthroughs in diverse music verticals, including new hits, Chinese ancient style, hip-hop, and music for gaming, movies, television programs and variety shows demonstrated by a comprehensive coverage of songs and particularly full coverage of hip-hop variety shows.

We are also writing our profile among the younger generation by expanding cooperation with leading content IPs, whose programs such as the collection of Chinese ancient style [indiscernible] and the rappers alliance [indiscernible] this item has resulted in a sequentially increase end user engagement from young users. While broadening our offering of copyrighted music, we have also been working closely with our upstream value chain, artists and other partners to create and produce more differentiated content. For example, we began to work extensively with Tencent across multiple businesses.

Over the past few quarters, we partnered with prominent artists, such as G.E.M., [indiscernible] and Angela Zhang, Jiang Xiaohan, and co-produced over two dozen chart-topping songs across gaming, film, literature and comic categories. We also recently played a role in co-producing, the film song of the popular movie Cliff Walkers [indiscernible], directed by a highly regarded Chinese film director. From creating the film song itself to leveraging our talent pool to bring up famous artists onboard to perform the song, we were pleased to be able to contribute to this award winning project.

I'm also pleased to share our progress in counterfeiting and promoting indie musicians. During the second quarter of 2021 through the Tencent Musician program, our roaster of indie artist achieved a triple digit year-over-year growth with a strong streams showing consistent increase both year-over-year and quarter-over-quarter.

Musicians view us as a reliable partner, given our well-structured financial incentives, which for the first time include a revenue-sharing mechanism for the [indiscernible] and songwriters. They are also attracted by our efforts to pioneer enhance the copyright protection based on blockchain technology, helping the musicians to uphold copyright without imposing financial burdens on them.

On top of that, our attitude for cultivating blockbuster on the Tencent Musician Program Platform has grown strongly. For example, within three months of its release, we have collaborative plus Python App addons from QQ Music, Kuwo Music and Kugou Music the song coming in late likes to by [indiscernible], accumulated more than one billion streams and inspired numerous upper versions. In the future, we will start to build a closed loop system for musicians, discovery and management through multi-dimensional support, including more financial reward, copyright protection and education and training for musicians all which we in fact our desire and determination to help musicians grow and succeed.

We have also upgraded our platforms’, promotional capability and further developed our actors and repertoire ANR capability. For example, we connected artists and musicians with entertainment program producers and how did our musicians such as [indiscernible] and perform on variety shows such as the [indiscernible], and Young Nobunaga Season 2 [indiscernible]. Providing them a new stage on which to shine.

Finally, TME Live, our online-merge-offline performance brand continues to bring new opportunities to the company, with a strategic focus on omni-channel promotion and monetization. On the online site, we host monthly concepts for top artists to include new interacts monetization, such as ticketing, VIP privileges, and merchandise to create a holistic and more immersive user experience for online live performances.

On the offline side, TME Live is expanding its footprint with a pent to launch offline initiatives, including daily live performances in key cities, such as Beijing and Shanghai and collaboration with the Tencent Musician Platform and the local tourism industry. We are also working with Playhouse to organize weekly indoor music festivals, merging the offline party experience with rich online features.

With our focused update in content, I will like to pass the call to Ross who is share more about our platform strategies. Ross, please go ahead.

[Ross Liang, Chief Executive Officer]

Thank you, Cussion. Hello everyone. Since I became CEO in April, my focus has been on strengthening our platform’s competitiveness and finding new ways to serve yield source by term, videolization, socialization and community building. Over the past few months, we have made a good progress on this front.

Based on videolization we are applying shared middleware and architecture which is crucial to further enhance video content offering across our platforms. Kugou Music continued to enrich the embedded MVs on its streaming page. And we are pleased to say that it’s stereo penetration is increasing quarter-over-quarter. QQ Music launched a new version feature in [indiscernible] phase in August, with expanded user case and a more diverse content. We anticipate these efforts will increase video views and the amount of time spent by users on our platforms.

Our socialization and community building efforts include our renewed initiatives, all of which are still work in progress. One, we are upgrading the synchronizer listings feature in QQ Music to encourage interaction among friends. Two, we recently launched Putong Planet, which connects user with a common taste in music, more efficiently through target matches to inspire connection among strangers. Three, we are upgrading using online karaoke rooms to make online theme more fun and social engaging. The new version we offer a broader sales of online singing experience, including party size, ranging from solo, and device tool songs and last groups, as well as catering to different needs, such as a singing on demand, singing along on demand, singing practice, inter-room PK, and cross room activities. Four we've also launched a WeSing virtual live streaming room to provide a new entertainment experience combining metaphors live streaming. In the future we will expand metaphors allowing streaming to more use cases, provide richer interaction opportunities and a more imaginative virtual reality experience.

We have also made a progress in partnering more closely with broader Tencent ecosystem, another strategy more supporting our long-term prospects.

During the second quarter we depend on collaboration with Weixin Video Account, which is a important aspect for us to one, enrich the music video content on both TME platforms, but under Weixin Video Account. Two leverage Weixin to fund our promotional compatibility. And three with the location of video traffic to TME platforms, the first private human traffic and the interactions to increase room to full modernization in the future.

As the first step, originally QQ Music for the first time joined force with Weixin Video Account and present Elegant Summer Live, an online event featuring well-known musicians and bands. Our nice start will be strengthened in the actions between artists and users by private domains for musicians, which is in turn will improve music content and actions on each of our platforms.

We will further harness the Weixin for social network to boost user engagement and music-focused collaboration. First, QQ Music launched a new feature which allows users to update their Weixin status with the songs they are listening to, making sharing more dynamic and fun. Second, users can now customize their Weixin ringtones with selecting music from Tencent Music.

By leveraging Weixin Translation's AI technology, QQ Music now supports high-quality translations of English songs into Chinese. Last but not least, we worked with the Tencent Video enhance exposure of video content, for example, within two weeks of release, a well-known Chinese singer, [indiscernible] new released album, Forget Yourself, Forget Time, received half a billion in social platform and its title track published in the QQ Music. We look forward to sharing more examples in future quarters.

Long-form audio is an effective complement to our music product and the content, the portfolio, and the value ideal to user engagement. During the second quarter, we restructured 1 billion units to further streamline our two-pronged product strategy. We continue to enrich our license title and the acceleration of our product and for content diversification. As NBA China also official strategy, music partner, we have partnered with an NBA podcast ecosystem attracting a broad range of sports brands looking for new and creative ways to enjoy sports content, which is improvement long-form audio annual growth over 90% year-over-year in the second quarter.

As one of our industry-leading innovators, we launched our NFT digital site platform based on blockchain technology. Maybe I'll stick to offer more to artists to active users, broader exposure and unlock monetization opportunities. In conclusion, there is a still a lot of work to be done, but a way high we made a good start and [indiscernible].

Now I would like to turn the call over to Tony to discuss business highlights and the important area of focus. Tony, please go ahead.

[Tony Yip, Chief Strategy Officer]

Thank you, Ross. Hello everyone. Online music mobile MAUs were 623 million in the second quarter, despite some churn of casual users resulting in a year-over-year decline, MAUs were up slightly on a sequential basis. In terms of user engagement, core music users have become more engaged with our platform. As total user time spent was up year-over-year and quarter-over-quarter.

In addition, paying users become more active on our platforms after they have subscribed to our servers when compared to before they subscribe, which means as our paying user base grows, not only does this improve our overall monetization, the level of engagement on our platform coming from this core group of users also increase. We continue to expand our scope of services to the IoT market. As a result, our IoT MAUs recorded a year-over-year growth of 43% during the second quarter. As a new music content consumption channel, IoT enhances our ability to effectively roll out and promote new music content to a wider audience in a broader set of use cases in users' daily lives, making our services more ubiquitous and more convenient to our users.

We're pleased to report that growth momentum in our online music services continued into the second quarter. As a result of effective marketing and continue progress in adding high quality music content into the subscription plan. The number of paying subscribers to our online music services grew to 66.2 million, with record high net adds of 5.3 million paying subscribers during the quarter. Our paying subscriber ratio grew to 10.6% in the second quarter, up from 7.2% during the same period last.

On year-over-year basis, user retention continued to improve and average revenue per paying user remained healthy, reflecting users’ growing willingness to pay for high quality music content. Advertising revenues delivered robust year-over-year growth rate in the second quarter, ad revenue benefited from an expanding pool of advertisers from a variety of industries, increased at inventories and eCPM on a year-over-year basis, as well as optimized app display.

However, growth in the second quarter was lower than our expectation as they were impacted by regulatory guidance on app launch splash screen ads to improve user experience. We will continue to improve the user experience of our ads to comply with the guidance. And we'll also invest in new ad formats to meet the needs of diverse advertisers.

Turning to our online music products, we further refined product positioning within our multifaceted portfolio. For example, we further bolstered QQ Music image as a young and trendy brand. First, we continue to add popular and trendy content to meet the younger generations demand for Chinese Asian style music, hip hop and ACG genres, as well as music within variety shows. Second, we deepened our presence into schools and college campuses through online and offline activities, such as on-campus competitions and graduation ceremonies. Notably, that 2021 QQ Music Graduation Concert spurred nearly 0.5 billion social buzz. Third, our new functions such as synchronized listening and Putong Planet will further boost interactions among users. Finally, as our Putong community has become a cultural hotspot for young users, we are attracting more artists, such as Qin Hao/Shi Qin, a pop star who just released his new album, Unknown Me, on our platform.

Switching gears to our social entertainment services, both MAUs and paying users declined quarter-over-quarter due to intensified competition with other pan-entertainment platforms. In response, Ross elaborated earlier regarding our areas of focus to strengthen our competitiveness, and we look forward to sharing more progress in the future.

For WeSing, in addition to the new WeSing initiatives that Ross just laid out, during the second quarter, we adopted technology to include an immersive chorus accompaniment sound effect to mimic a large-scale graduation ceremony, as well as multi-dimensional scoring system to sharpen our recording tools. These improvements have led to a more enjoyable user experience while recording songs, which in turn spurs increased engagement among users.

For our live streaming services, amidst increasing competition, we will steadily embrace the latest industry guidance and remain firmly committed to promoting a healthy and sustainable ecosystem for our users and performers. In this regard, during the second quarter, we continue to make progress with contributions from QQ Music's live streaming and category expansion, adding trust to our efforts. With a dedicated tab, fueling additional traffic within QQ Music, QQ Music’s live streaming recorded solid growth and it's on track to further scale up into the second half of 2021.

In terms of category expansion, Kugou Live continued expanding its exposure in the Chinese ancient style category with 33 theme events launched in the second quarter alone. One highlight for our live streaming is that we introduced our first cross-platform live streaming event to extract operational synergies across TME’s live streaming platform. In June, Kugou Live and WeSing jointly hosted their first cross-platform competition, giving live streaming performance broader exposure to both platforms and an effective way to tap into a new audience base, effectively increasing the vibrancy of both platforms. This resulted in significantly higher revenue for participating hosts during the event, attracted more paying users to participate, as well as more first-time paying users to send virtual gifts for the first time. Moving forward, we plan to replicate the successful events into new cross-platform opportunities.

With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.

[Shirley Hu, Chief Financial Officer]

Thank you, Tony. Hello, everyone. Let’s just discuss our results from financial perspective. Our total revenue for Q2 2021 were RMB8 billion, up 16% year-over-year driven by strong growth in online music services, particularly in music subscriptions and advertisings. Our online music revenue were RMB3 billion this quarter, up 33% year-over-year. In the second quarter of 2021, our music subscription revenues continues to grow directly with revenues of RMB1.8 billion and a year-over-year growth of 36%.

Net adds of paying users number was 5.22 million in Q2 2021, up 41% year-over-year, which has a set a new record high for net adds paying users. This would result from our continuous improvements in products on the contents, expensive sales channels and effective marketing campaigns. Marketing ARPPU was RMB9 billion this quarter compared to RMB9.3 billion in same period last year as we offer the more effective promotions to drive revenue growth in paying users this quarter.

Our Q2 advertising revenues has strong growth year-over-year, but it was lower than our expectation as they would negatively impact us a new guidance on splash ads issued by regulators to protect the user experience. The year-over-year growth was mainly because we’re practically more closer with Tencent. On the provider side, other interesting solutions to build our customers leading to increased ratability, enhance the efficiency and improved music content.

To comply with the new guidance and mitigate its impact on our revenues, we are directing more resources to explore new, but what has been format such as streaming page pop up and a big page and other innovative products to meet the needs of diverse advertisement, which may take time to bear fruit.

Social entertainment service and other revenues were RMB5.1 billion, up 3% year-over-year, primarily driven by growth in revenues by future live streaming facing the competition from other pan-entertainment platforms. We're making efforts in returning existing and attracting new performance and improving efficiency in redirecting transfer from music platform to live stream platforms.

We are also revamping for the field trust and its volume more diversified initiative to maintain steady revenue field in social entertainment services. Additionally, advertising revenue on music platform will contribute to the year-over-year growth. However, rate of reserve for the growth was slowing down at the business was also active impacted by the new guidance reached by regulator as discussed above.

Gross margin was 30.4% in Q2 2021 nearly 9% year-over-year due to increased revenue sharing resources for racing to strengthen our platforms, as well as increased investments in new product and content offerings, such as the long-form audio.

Now moving on to operating expenses. Total operating expenses for Q2 2021 was RMB1.7 billion and was 21% as a percentage of total revenue, as compared to 19% in the same period last year. Selling and marketing expenses were RMB669 million, up 15% year-over-year. This increase was due to higher use of operating expenses and promotional spending our new products such as long-form audio to enhance our product long-term positioning.

General and administrative expenses were RMD1 billion, up 39% year-over-year, driven by high number of employees – and the technology innovations. For example, we are applying the share the meat waiver and the culture and the way listened to me launch the portal plan night and the real soon on three things virtual live room. Additionally post-acquisition awards and share based compensation expenses were clear management team and amortization of intangible assets arising from the acquisition of Lazy Audio of approximately RMB6 million also contributed to higher general and administrative expenses during the quarter.

Taking out the impact from the acquisition of Lazy Audio, G&A would have increased 30.1% year-over-year. Our effective tax rate for Q2 2021 was 11.5%. Our net profit was RMB871 million and net profit attributable to equity holders of the company was RMB827 million. Non-IFRS net profit was RMB1.16 billion and the non-IFRS net profit attributable to equity holders of the company was RMB1.12 billion.

Non-IFRS net profit margin was 14.5%. As of June 30, 2021, our combined balances of cash, cash equivalents, term deposits and short-term investments were RMB26 billion, representing a decrease of RMB1 billion from Q1 2021, primarily driven by payment for stock repurchase. Cash generated from operating activities had a positive impact on the combined balances.

Looking forward, we spend our investment in sales, production, contract and Tencent Musician Program for foster innovation for multi-development of the online music streaming industry. Along with our invested participants and that so our music, but we will keep focusing on new products such as long-form audio and the revamping existing product future for our long-term growth.

This concludes our prepared remarks. Operator, we are ready to open the call for questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Alicia Yap with Citigroup. Please go ahead.

[Alicia Yap, Citigroup]

Hi, good morning, management. Thanks for taking my questions. I wonder to follow-up on management remarks regarding the potential business operation impact that you are expecting posts the regulatory sign. Would that be more on the subscription trend that you’re expecting or is it more on the difficulty to convert more future paying user? And what kind of offsetting measured in your mind that you plan or have done to minimize the impact? Would it be possible to push more on the premium model with higher online ad revenues potential? Thank you.

[Tony Yip, Chief Strategy Officer]

Thank you for your question. I’ll take the first part of the answer and then perhaps others for management can add. I think as you know to at the end of July, there was a penalty position by the regulatory authorities, pursuant to which among other things, we have to implement an rectification plan to terminate exclusive music copyright licensing arrangements within 30 days from the date of that decision.

We’ve recent – earlier accept that decision and are committed to complying with all the requirements fully in a timely manner, while the decision will have an impact on our music business it is worth noting that all the music that has been available on the platform will continue to be available on the platform to our users. And we’ll focus on strengthening our operations in accordance with the regulatory requirements, we’ll also focus on better serving users through product innovation, which Ross and Cussion has elaborated on. And we’ll also focus on fostering the healthy development of musicians and the music industry as a whole. Let me pause there and see if others in management has others things to add.

[Ross Liang, Chief Executive Officer]

Yes. I just would like to add is that, thank you for the questions. And I think that one of the key competitive edge of TME is we implied the dual flywheels strategies, which means that we agreed not just have the music platform, but again, as you mentioned it, we also is committed to – continue to develop our content ecosystem, which will make us to be in a more long-term healthy development and create values while users. As you mentioned that frankly speaking, we definitely, we will follow the position by the regulators and we will complied on it in a timely manner.

And also we are seeing that it to have some impact on our operation – our day-to-day operations, but I don’t think that is going to be have too much impact on our, for example, driving our online subscriptions. As you see, I think we are still in a really good momentum, because the users has been educated and they really see the value of music and they are willing to pay for music as long as we are providing high quality content with them.

So we still have the content in that, our online music services, you will be driving in a healthy manner. And also, as I mentioned, we continue to expand our footprint and working together with different industry partners, especially on the content creation side not just upstream for the content production, but we are also doing the downstream, which are organizing more and more like the online and offline music concerts. And this is not just regular concerts, but we also have some creativities and new videos for the online interaction with the users. So I think that obviously dual flywheels strategy will help us to continue to create valuable user in a long-term.

[Cussion Pang, Executive Chairman]

[Foreign Language]

Yes, we also in discussion with Tencent Video to cooperate in the area of joint subscription. That’s a work in progress and we’ll update everyone in the next quarter.

[Millicent T., Investor Relations]

Thank you. Next question?

[Operator]

The next question will come from Alex Poon with Morgan Stanley. Please go ahead.

[Alex Poon, Morgan Stanley]

Thank you management for taking my question. My first question is regarding the exclusive content. Could management share roughly how much streaming volume overall and behind the paywall is driven by exclusive content? And what is the percentage roughly from independent musicians at this moment and how it makes change over time? That is my first question. My second question is regarding user acquisition, because from now on, we won’t have – where we’ll have less exclusive licensed contents. Do we expect we will spend more on user acquisition and how much right now we’re spending on acquiring new users? And apart from EC, just for marketing, do we have to increase more discounts and to attract new users such that how will music ARPU trend in future. Thank you very much.

[Tony Yip, Chief Strategy Officer]

Hi. I’ll answer the first part of the question and then regarding acquisition costs in ARPU, Shirley can address that. We historically have not disclosed the exact percentages of streaming share relating to the various types of content. But we do historically have exclusive content, on the platform and also as part of the subscription plan. Although it’s also worth noting that there is a fair amount of non-exclusive content within the subscription plan also and then specifically, with regards to the indie musicians streaming share that has been growing steadily over time. And we intend to continue to grow that over time as more and more musicians join our Tencent musician platform and we’re committed to supporting that development. And as more and more of them joined to the platform, we are able to discover and work closely with a promising new talent to be able to jointly create music together. So I think that brings new opportunities for us in the content creation area as well.

And then in terms of how it affects our subscribers, I think it’s important to note that the users are have been educated over a long period, over a number of years to subscribe to the music service. It is a fairly consistent monetization model across the industry. And from a regulatory standpoint, we believe the regulators also keen to promote the overall healthy development of the music industry and having a viable and long-term monetization model is an important part of that. And so I think we will continue to focus on delivering high quality products and service to users through this the dual flywheel of content and platform that Cussion and Ross mentioned.

And as we add more quality content, whether it is licensed or whether it is co-produced or perhaps going forward they maybe increasing so production as well, we will be adding more quality – high quality content into this subscription package and as well as more privileges behind the subscription plan to make it an attractive offering to grow the user base. And as of Q2, we continue to see a healthy growth in our net add, which recorded a record high net adds in the second quarter, as well as we continue to see a healthy improvement, a continuous improvement in the retention rate for our subscribers.

[Cussion Pang, Executive Chairman]

Yes. I’ll Alex thanks for your questions. And I will let you add a little bit more color regarding the Tencent musician program. I think we have been doing a really good work since we launched the Tencent Music program back in 2017. So after four years of hard work, I think that we have achieved very remarkable results. And we are seeing that there’s not just in terms of the quality of songs or the number of songs that have been issued through our platform. I think that we are really creating value for the musicians and the music creators.

Like for example, the IP rights protection, we also have irrelative open platform, which can help our users and also the musicians to distribute and register their music with us. And then we help them to distribute through the Tencent ecosystem and also other outside channel as well. Besides we also try to focusing on helping the musicians, they are not there on their own, we try to do some collaboration between the TME and also other professional producers as well. So we try to bring them all together. And the most important thing is to continue to produce high quality of music.

So this is very important that we will continue to do. And also we are always focusing on creating value for the musician as well. We want them to do hard work and be reward. So we also have continued to enhance our revenue sharing and reward system, which led our younger generation musicians to continue to make a living on our platform. And after all this of hard work we have been achieving a lot. And I think that we are in the really good progress. And also the last but not least, I will let you mention is the TME Live.

Since then we have this kind of online and offline concerts and music festivals, which is also letting our Tencent musicians to start to participate in the TME Live event as well, and also in our live event, like the online podcast as well. So there’s a lot of things that we can work. And I – this is strongly believing that it is one of the key competitive advantage of TME as a total ecosystem that we built for our users and also the music creators. So I hope that is this answer will help your questions.

[Foreign Language]

[Ross Liang, Chief Executive Officer]

In terms of user acquisition from a platform perspective, our strategy continues to be a multiproduct portfolio approach in a whereby, in addition to the three major music apps across QQ Music, Kugou Music, Kuwo Music as well as WeSing. We continue to incubate and expand our footprint into other segments with new products. And then within each product, the overall strategy is to focus on a videolization, social, as well as community building as an example within Kugou they’ve recently launched a new feature, which allow users to upload and generate video content and also facilitate user interaction around those video content within the music app. And then similarly, QQ music launching immersive full screen video feed to provide an enrich video content within the music platform through these measures we hope to acquire more users.

Now, Shirley please go ahead.

[Shirley Hu, Chief Financial Officer]

Yes. Part of our music services we expect factor that will be stable in the third quarter compared to Q2 we will balance that promotion campaigns and the rapid growth of our subscribers, and we expand our subscriber numbers can have very good performance in that quarter.

[Alex Poon, Morgan Stanley]

Thank you management for sharing the full picture. Thank you.

[Operator]

The next question will come from Eddie Leung with Bank of America. Please go ahead.

[Eddie Leung, Bank of America]

Good morning. Just a question on gross margins. We noticed a slight dip in the gross margin. So we understand that there could be a few reasons, for example, you guys expanding content. In addition we also know that from some other live streaming companies revenue sharing ratio to live streaming hosts in the industry could be increasing. And then finally, we also understand that there has been more long form audio content. So, could you give us a bit more color on few factors how they affect your gross margin and how should we think about it in the upcoming couple of quarters? Thank you.

[Shirley Hu, Chief Financial Officer]

About gross margin, you said that the reasons why our gross margin decreased in the Q2, and in the next quarter, we expect the revenue sharing ratio for leasing will be continually increased and the investment new products and content offerings such as the long-form audio also be increased. So this is the one prospect. And the second, we expect our social entertainment will be under pressure. So this business gross margin is generally higher and so the random mix shift from social to music that will also be some negative impact on our gross margin and for the course of license to copy to drive to cost in the short-term we have not very clearly impact on our cost structure because we think that label and the industry also need a time to trenches there operational. So we believe cost structure will be stable in the near term.

Actually in long-term, we think that the cost structure of music will be changed from high minimum guarantee to positive on our gross margin. So in conclude, we believe in the next quarters, our gross margin will be on the pressure.

[Ross Liang, Chief Executive Officer]

Yes. Perhaps I’ll add a little bit more context behind that as well. I think in terms of the outlook for the full year 2021, we currently expect the total revenue year-over-growth rate to be approximately 10% with online music revenue growth around 30%. And we continue to see healthy operating leverage coming through for online music. So, I think, within the online music business it continues to grow very nicely. While on the other hand social entertainment revenue for the full year is expected to be roughly flat on a year-over-year basis due to the weakness in live streaming as well as the margin reinvestments that Shirley’s talked about.

Now within online music, we continue to expect strong year-over-year growth for subscription revenue with paying user net app continuing to pace off between RMB4 million to RMB5 million per quarter. And then on the other hand, while ad revenue is expected to continue to see strong growth, as we mentioned in the prepared remarks, the growth rate is expected to be lower than previously expected that business is impacted by regulatory guidance relating to the launch at in order to improve user experience.

And then within social entertainment the weakness we’re seeing in live streaming is due to a combination of macroeconomic impact on paying users spending behavior it’s also a result of competition with short video platforms for users and for performers and also a result of conservative adjustments. We are making to the live streaming operations to comply with regulatory directions in the areas of content, safety and tipping behavior. And therefore, I think, you know taking all this into account in terms of margin we do expect the second half to see a further pressure in the margin as a result of the – of what cost pressure in terms of revenue sharing to live streaming performance, the weakness in revenues that have a higher margin in the past, and also we investment into a new business and products.

[Operator]

The next question will come from Thomas Chong with Jefferies. Please go ahead.

[Thomas Chong, Jefferies]

Hi, good morning. Thanks management for picking my questions. My question is about our long-term business trend, given that we are seeing softness in the second half, do we still expect to our long-term subscribers target? And then my second question is about the – do you expect taxation impacts coming from the preferential tax rates that we need to bring about in terms of the net margin side? And on that point I mentioned we’ll also comment about any data protection and privacy issues that we need to think about in our music apps as well as on our advertising business? Thank you.

[Ross Liang, Chief Executive Officer]

I’ll address most of that question and then Shirley can talk a little bit about tax. Well, first of all, in terms of data protection we, we are committed to complying with the relevant regulatory requirements in the areas of data privacy, and data protection. So, I think that’s an important priority within the company and we continue to improve our operations to being compliant. And then in terms of long-term growth trend we’re confident that despite the short-term weakness in some of the business specifically relating to live streaming, we confident about the long-term trend of the business. And as I mentioned the subscript – the net ads for our subscription of between RMB4 million to RMB5 million per quarter continues, we expect that to continue and I think it’s worthwhile also coming back to our long-term strategy, which is the dual flywheels of content and platform, because that’s the plan that we continue to execute on.

With respect to content our goal was to build the most comprehensive content ecosystem, covering a broad spectrum of music and audio offering. And so on the one hand, we’ll continue to enhance and broaden our corporation with label partners to expand our content library. And while on the other hand, we’ll also partner with upstream content partners, we’ll partner with artists and indie musicians to co-produce differentiated content or even self produced differentiated content.

And then thirdly we’ll continue to foster the development of indie musicians. I won't elaborate there, as Cussion has talked a lot about. And fourthly, we’ll deepen our cooperation with Tencent Group in the area of content production with businesses like Tencent video, Tencent pictures, Tencent games, China literature to co-produce music content together to better capture the full value of their existing IPs.

In fact, we've already co-produced two dozens of chart-topping songs relating to games, movies, literature, comic, IPs, incorporation with prominent artists such as [indiscernible]. And as we mentioned in the prepared remarks, a theme song of the popular movie [indiscernible] is also a production from TME. So I think that's a comprehensive content ecosystem strategy that we would pursue. And then within a platform we aim to strengthen our core competence around music, audio, and social use experience, specifically, as Ross mentioned there are four main areas, number one in the form of visualization continue to enhance the video features across all of our platforms. And as an example, we launched the video feed within QQ music, an immersive full screen video feed.

And as a second example, we'll continue to deepen the cooperation with Weixin Video Accounts. And then secondly, we'll continue to emphasize on social and community building. And as an example of that QQ music launched the Putong planet, a social feature that connects users with common music taste. And we also launched new features that allow users to update their Weixin status using songs they're listening to. So that's – there's also an opportunity for us to deepen our cooperation in Weixin in the area of social community.

And thirdly, long audio is a highly complementary content and service to our music users. And as we have seen in the past from the actual results, providing audio content to music users actually help increase the stickiness of the platform and increase the overall time spend and more attractive – and provide a more attractive content across both music and audio, which is differentiated compared to other competitors in the industry.

And then I think finally, we continue to operate a multi brand and multi product strategy, each product within the portfolio have its unique positioning that covers a unique user segment that has a very – has this very strong leadership in and we will continue to sharpen the operational synergies that we'll extract across the platforms and R&D efficiencies that were extract across the platform through a middleware architecture building. So I think that's the overall strategy that we intend to pursue and we're committed to executing on that.

[Shirley Hu, Chief Financial Officer]

About the tax rate, we think and we believe that our ETR will be stable in next quarters, because we do not take into consideration of the professional tax rate case the companies are entitled to when calculating our effective tax rates and until the application is approved, so that will be no impact on our net margin. Yes.

[Thomas Chong, Jefferies]

Got it. Thank you.

[Operator]

The next question will come from Piyush Mubayi with Goldman Sachs. Please go ahead.

[Piyush Mubayi, Goldman Sachs]

Thank you for taking my question. Shirley, you talked about how you move away from the current contract structure with the labels. Could you just generally speak about how you positioned on a competitive perspective versus the other company when MSGs are taking into account and how this is likely to evolve? That would be great. That's my first question. Then second, the other company that was looking to go public, they talked about a social ARPU that was significantly about yours. Does that represent the opportunity for you and if so how would you exploit that? Thank you.

[Ross Liang, Chief Executive Officer]

Yes, I’ll talk about the contrast first. First of all, we would like to reiterate that you simply follow the directional piece, and we will continue to renegotiate our licensed contract with our partners in the – and change of exclusive content – in a contract into a non-exclusive contract within a month. So we are now in the progress on to discuss the details with them. And as we note, it will also involve some of the detail discussion regarding this term. So we are in the progress to talk about the details and we really want to settle off in a timely manner.

And also in the other way is, we are also talking to some of the other content partners that we do not have a contract with them before, because they have some of the other exclusive contract with the other platform.

So we will be fully committed to bring in the best quality of music and continue to expand our music library for our users. Besides the licensing contents, we are also committed in doing our self productions and co-production with our partners. And in terms of the margin side, and in terms of the business side, I think that optical produce or self produce content we will have a more superior margin. So this is also will help us to continue to lower our content costs from pass back.

So Shirley, you want to mention about the second time?

[Shirley Hu, Chief Financial Officer]

Okay.

[Ross Liang, Chief Executive Officer]

The social entertainment…

[Ross Liang, Chief Executive Officer]

Yes. So social entertainment is up. We believe – we expected that will be under pressure in the future quarters because we do some adjustment automatically by ourselves because we think the regulator will be tired on this part. So we will change our operational message and make this building more closely in the future. So – and we believe if we – if we come expand the users of our social entertainment platforms such like raising platform and our issue kind of okay, room can be positive in fact nature – our natural. We can have a chance to increase our social entertainment up in next year. So we think we have many, many – and we have many methods to increase this patch such as we can [indiscernible] order performance in our platform such as kind of okay and cook. And we also can use our public [indiscernible] platforms and build more revenue on this path. So we believe in next year with social entertainment revenues can we have a good performance and revenue can be stable. Yes, can be stable and a little increase.

[Cussion Pang, Executive Chairman]

[Foreign Language] Okay. So the two points, first within the social entertainment ARPPU, the Kugou live stream in ARPPU has – is historically higher, whereas we think ARPPU is historically lower and we sing live streaming we are actively building a middleware architecture that leverages the Kugou capability onto we sing live streaming so that we could improve in efficiency. While the focus is more on the paying users for WeSing, through the middleware architecture building we hope to extract increase efficiency and thereby should add some value to the overall revenue generation. Secondly, we pioneered for the first time in the industry recently across platform, live stream, PK competition across Kugou live and WeSing. Specifically that happened in June where we hosted the first ever cross-platform competition, it gives the live streaming performance an opportunity to tap into the other platforms audience, and thereby increase the exposure. And the result we've seen is a significant increase in the revenues of participating performance, as well as attracting more paying users to participate, even those that have never sent virtual gifts on the platform. They're attracted to participate for the first time, and so we hope to replicate that successful event into more cross platform opportunities.

And I'll also add that within social entertainment, our plan specifically within leasing is that we're undergoing a major product revamp to improve user retention. And the revamp is centered around strengthening WeSing’s core competence around singing and social interactions.

And WeSing we'll be upgrading the online karaoke room, to make singing more fun and socially engaging. The new version of the karaoke room would offer a wider suite of singing features from solo to duet, to small group singing to large group singing, as well as to cater, for to allow the audience to pick the song they want the main singer to sing or allow the audience to sing along together with the main singer, as well as to enable cross singing room interaction.

WeSing would also soon be launching a virtual live streaming room, to pioneer a new entertainment experience that brings live streaming into a metaverse like environment and in the view future of, but what, in that environment performance can choose the avatar to perform the live streaming and interact with audience in this virtual setting. And so in the future, we'll expand this metaverse like environment to more use cases and provide richer interaction opportunities and more imaginative virtual interactive experience.

[Piyush Mubayi, Goldman Sachs]

Thank you, Tony.

[Operator]

The next question will comes from Alex Yeo with JPMorgan. Please go ahead.

[Alex Yeo, JPMorgan]

Good morning. And thank you management for taking my question. Just a couple of a quick follow-up on the previous questions. Number one, regarding the usage weakness on the social entertainment sites, are we losing the WeSing users or these users are still on Kugou, Kuwo? We are losing their usage and times spend on the live streaming activities on the platform. And number two I think Tony, you mentioned the revenue outlook for the social entertainment for the full year is a flat which implies the second half revenue will decline on year-over-year basis. Can you guys help us understand the monetization weakness into second half because on one hand you guys mentioned the increasing monetization efforts, such as a core server PK [ph] initiative across the key live streaming platforms, but on the other hand, if I'm not mistaken Shirley mentioned, you guys are moderate – doing different strategies and moderating the monetization on these platforms. Any color on the revenue weakness into second half for social entertainment will be helpful. Thank you

[Tony Yip, Chief Strategy Officer]

Sure. From our social MAU perspective the year-over-year decline is across both the WeSing as well as live streaming and the key reason for that is competition coming from other plan, pan entertainment platforms, such as a short video. And, we we've talked about the action plans and the product revamp and the areas that we'll be doing to retain to better retain users and acquire – we acquire the traffic. In terms of revenue weakness in the second half of social entertainment. The weakness as I mentioned, is primarily relates to macro – relates to live streaming revenue weakness in the second half. That's a result of a threefold first, the macroeconomic impact, on a paying user spending behavior and on secondly continued competition specifically from, in particular from short video platforms for users and also competition for performance.

And then thirdly, we also making conservative adjustments to the live streaming operations in order to comply with the stricter regulatory directions that we are facing as an industry overall. So I think the impact of these items obviously, have a bigger impact and, we're mitigating these impacts through a number of measures that we talked about, such as the cross-platform competitions, such as the new features that a new product revamp that we're doing within social entertainment, but that would take time to fully compensate.

[Operator]

We are now approaching the end of the conference call. I would now like to turn the call over to your speaker host today, Ms. Millicent T. for closing remarks. Please go ahead, ma'am.

[Millicent T., Investor Relations]

Thank you everyone for joining us today. If you have any further questions, please feel free to contact IR team. This concludes today's call, and we look forward to speaking to you again. Thank you and goodbye.

[Ross Liang, Chief Executive Officer]

Thank you.

[Tony Yip, Chief Strategy Officer]

Thank you everyone.

[Shirley Hu, Chief Financial Officer]

Thank you.

[Operator]

This concludes today's conference call. Thank you for attending today's presentation. You may now disconnect.