Tencent Music Entertainment Group

NYSE:TME

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group Second Quarter 2022 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 will turn the conference over to your speaker host today, Mr. Tony Yip. Please go ahead, sir.

[Tony Yip, Chief Strategy Officer & Head, Ultimate Music]

Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. TME 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. Next, Mr. Ross Liang, our CEO; and I, Tony Yip, the CFO, will offer additional thoughts on our product strategies, operations and business development. Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions.

Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. The company will discuss non-IFRS measures today, which we believe are meaningful metrics for evaluating our performance. Please refer to our earnings release and SEC filings for a reconciliation of these measures to the most comparable IFRS measures.

With that, I'm pleased to turn over the call to Cussion, Executive Chairman of TME. Cussion?

[Cussion Pang, Executive Chairman]

Thank you, Tony. Hello, everyone, and thank you for joining our call today. In June 2022, we celebrated the first anniversary of launching our dual engine content-and-platform strategy. Over the past year, TME has continuously innovated business models and improved our all-in-one music entertainment content and product capabilities to better serve our users and partners. Meanwhile, facing the compact and evolving industry landscape, we continue to explore music intrinsic commercial and cultural value. As always, we strive to nurture our music ecosystem and foster the sustained, healthy development of China's music industry.

On the content side, we steadily unleashed our regional content production capabilities. To that end, we launched a new smart music assistant functionality in May, enabling creators to quickly make decisions through our proprietary PDM predictive model at key stages of the music production process, such as and market appeal potential evaluation. Each of our tools facilitates more efficient production of high-quality work, evidenced by dozens of original songs produced and streamed more than 100 million times in the second quarter. Notably, Blessing of the Three Lifetimes, a song by Hai Lai A Mu dedicated to his beloved partner, was a blockbuster that we produced, promote and help to enlist on the variety show, The Treasured Voice, [Foreign Language]. It dominated major music charts and generated huge social media buzz comprising over 2.5 billion views and 350 million streams in the second quarter. Meanwhile, we continue to refine our original content catalog, focusing on key verticals such as gaming and hip-hop music.

In the second quarter, we collaborated with popular game titles, including Honor of Kings, League of Legends for , and Peacekeeper Elite, among others, and work with well-known artists, including Angela Zhang, [Foreign Language] and to produce 15 chart-topping game songs, notably, the theme song of the Honor of Kings' game character, sung by [Foreign Language] has achieved the highest number of first week streams among all QQ Music game songs released in the first half of 2022. What's more, in the trendy hip-hop genre, we collaborated with the NBA on its 75th anniversary album, the title single Time to Shine, performed by Chinese artist Lay Zhang, and American pro-basketball star Nick Young, became the first Chinese theme song to appear in the NBA finals.

Next, through Tencent Musician Platform, we spared no efforts to cultivate community of indie musicians while creating a positive social impact. Tencent Musician Platform continues to empower musicians with a wealth of online and off-line promotion capabilities and monetization avenues. In the second quarter, we introduced a new service for our musicians to easily mass distribute musical work globally to over 150 popular platforms such as Spotify and YouTube with a single click, which has already brought 190,000 songs by over 10,000 musicians to overseas audience as of the end of the second quarter.

Kugou also now allows musicians to publish their songs easily on mobile phones and to self-host pay-per-view live events with merchandise sales embedded. For instance, we recently hosted a pay online birthday party for musician Liu Yan with a rich pipeline of additional parties yet to be unveiled. What's more, as a long-term support program for musicians, our Force Stage 2022 program launched with the open mic series in April, which has already produced off-line performances by over 70 groups of musicians across 7 cities.

Tencent Musician Platform also plays a pivotal role in exploring China's reach, deeply embedded social and cultural values through music work. Notable examples in the second quarter include: first, new trend in Chinese Ancient Style, an album birthed by up-and-coming and top musicians who gathered to promote Chinese ; second, My Girls, our music creation plan for female musicians designed to promote female independencies and self-awareness; third, our French album, MOSAIQUE a joint effort between our musicians, French musicians and the French Embassy, which was showcased on the front page of Apple Music's recommendation list, further enhancing our musicians' international appeal.

With our finger on the polls of our users' practices, we continue to zoom in on both trendy and time-honored music experiences. To further enhance the quality and variety of music on our platform as well as our reputation as the go-to destination for verticals such as classical, DJ and hip-hop. We established the strategic cooperative relationships with professional classical art institutions, launched the Kuwo DJ for Everything plan, and build up Kugou's new rap brand, among other initiatives in the second quarter.

One remarkable success was the 2022 hit single, [Foreign Language] by , which dominated charts on many music platforms after his creator joined the DJ for Everything plan, achieving nearly 700 million streams by the end of the second quarter on TME's platform.

Moving on to TME Live, our comprehensive online merge off-line performances brand was presented 132 high-quality live music performances since its debut 2 years ago. In the second quarter, in addition to online live concerts for Roy Wang, among others, TME Live was also proud to breathe new life into 2 legendary series of recorded concerts by household name artists Leslie Cheung, and Jay Chou, supporting the ultra-high-definition visual and sound restorations enhanced by AI algorithms for selected events. These 2 huge hits went rival and dominated the top trending list, accumulating over 100 million unique viewers within the Tencent ecosystem and social media buzz of 6 billion views. Jay Chou's concert also set a new record in viewership for online concerts in the industry and his artist merchandise, including 2 action figures, sold through our Putao Mall and Tencent channels achieved close to RMB10 million in GMV in the second quarter.

TME Live not only serve as an online stage for artists and musicians but also demonstrate our game-changing creativity off-line. Through our TME Live in-house live house tour, we are providing participating artists and users with immersive, interactive experiences. Early starter artists, including , [indiscernible], and [indiscernible] held live events in the second quarter, and tickets for some events were sold out in just 2 hours.

In summary, what matters most to music lovers, music creators and the broader music industry are the primary areas where we will continue to invest and drive innovation, showcasing our ambition to support the sustained growth of the music ecosystem in China. That concludes the process updates on our growing content capabilities.

Now I would like to turn the call over to Ross who will share more about our platform strategies. Ross, please go ahead.

[Ross Liang, CEO & Director]

Thank you, Cussion. Hello, everyone. Moving on to our platform strategy. In the second quarter, we continued to innovate on our 4 pillars of entertainment, namely listen, watch, sing and play, to provide our users with a stage to express their musical tastes and build their sense of identity on TME's platform, which in return deepens the recognition of and the connection with our products.

In terms of listen, in the second quarter, we added a variety of refined product features to provide a more professional music streaming experience. For example, we pioneered the [indiscernible], which displays synchronous lyrics on the mobile home screen when streaming songs. We also rolled out a premium song feature supporting real-time song quality enhancement, which is now available with our Super VIP Membership and has been activated by 85% of the subscribers.

What's more, to further improve users' music discovery efficiency, in the second quarter, QQ Music launched the [Foreign Language] on their home page, which recommends songs to users based on their favorites with the help of personalized album , contributing to new high for QQ Music recommendation, penetration. In addition, Kugou rolled out a new search feature, allowing users to easily find a different version, remix, . We also added features such as loop playback of our selected songs section, and the self-defined music chart preferences, to create a more personalized music streaming experience.

As for watch, we shall add another dimension to users' immersive music entertainment experience. Based on our understanding of users' preferences, the music-related video content we'll provide to Weixin Video Accounts is very popular among users on Weixin, ranking among the best in the music category of Weixin Video Accounts. We also continued to work with Weixin Video Accounts during the second quarter to boost our promotion capabilities especially for indie musicians. The number of our musicians which is connected to Weixin Video Accounts continued to grow by double digits quarter-over-quarter. Meanwhile, our products also released new updates to strengthen ratio experience, including one, customized dynamic image on personal playlist; and two, focus station, which provides a video enhanced listening experience across 3 scenarios, studying, sleeping aid and meditation.

The third pillar of the music entertainment experience we provide is sing. WeSing launched a major version upgrade in July to expand the experience of sing from work into multidimensional performance experience. In the second quarter, we rolled out a 3D avatar functionality, to serve our users identity card in the virtual world and allow them to generate [indiscernible] when recording and singing in the dressed-up avatar on stage. Additionally, in the second quarter, we provided innovative singing tools to stimulate users' interest in music creation and participation for . WeSing [indiscernible] industry's AI-based voice synthesis technology, allowing users [indiscernible] to create a [indiscernible] based on their own [indiscernible], which improved [indiscernible] likeness to its owner as it . Kugou also unveiled its first singer in the voice of Gen Z celebrity Yang Chaoyue, enabling users to customize and synthesize songs with just one click.

Driving on the trend of utilization, we also enhanced our play elements by extending our use cases and the monetization opportunities across music-based virtual interactions. In the second quarter, TMELAND, our immersive virtual sing teamed up with adidas Originals and hosted China's first virtual rap concert, Landing on OZ Future, OZ meaning [indiscernible], including by popular rockers, Jay Park, [Foreign Language] and then MC Jin, as well as . The concert even attracted over 7 million views, setting a new record in viewership for TMELAND. We also continued to upgrade our VR album rooms, which combine listening to songs with a virtual exhibition hall for artists. A total of 13 stars have album rooms since launch, including singer and actress Cyndi Wang, and the musician Liu Shuang, who joined in the second quarter.

As a premier in the application of innovative listen, watch, sing and play functions, QQ Music has continued to improve its year-over-year, a testament to our young content operations and . Our long-form audio serves to round out our music portfolio while simultaneously differentiating our content. Notably, we have been strengthening our brand appearing in sleeping aid content, one of the fastest-growing categories on QQ Music. We have teamed up with professional organizations, music labels, musicians, hotels and other ecosystem partners to provide diverse, professional sleeping aid content made by AI or real-world celebrities and deliver sequential growth in user scale, streaming volume and the time spent in this vertical.

In addition, in the second quarter, we continued to enhance our collaborations with Tencent Video to successfully promote popular audio books and associated IPs such as the third season of [Foreign Language] and [Foreign Language] as these beloved dramas [indiscernible]. TME's long-form audio offers of the same title enjoyed a mass upswing in their streaming volumes.

With that, I'd like to give the floor to Tony to review our business operations. Tony, please go ahead.

[Tony Yip, Chief Strategy Officer & Head, Ultimate Music]

Thank you, Ross. Hello, everyone. In the second quarter, our online music MAU were 593 million, down year-over-year primarily due to reduced marketing spend. However, subscription revenue continued to deliver robust year-over-year and quarter-over-quarter growth, along with paying user growth and a sequential rebound of ARPPU. Meanwhile, we continue to strengthen engagement among our core user cohorts by deploying richer content, innovative product features and continual new iterations.

Our IoT service MAUs continued to achieve double-digit growth year-over-year as we enrich the use cases of our products and establish a collaboration with a broader group of partners. For example, we now partner with the top 50 passenger vehicle and top 15 in electric vehicle manufacturers by sales, bringing car owners the ultimate in-vehicle music enjoyment through new features such as Dolby Surround Sound and thousands of customized sound effects. In addition, through our partnership with Little Genius Smart Watch, which is mostly used by students, WeSing MAU in the smart watch segment grew triple digits year-over-year.

Despite the macro headwinds that weighted on our online music services revenue in the second quarter, subscriptions maintained its growth trajectory with 18% subscription revenue growth year-over-year. We are also confident we can sustain the ongoing rebound of our ARPPU while continuing to boost paying user growth during the remainder of this year.

As a result of macro changes and the resurging COVID-19 outbreak in the second quarter, our advertising revenue softened year-over-year. However, it rebounded quarter-over-quarter, driven by the June 18 e-commerce sales promotions as well as ad sponsorship opportunities arising from TME Live and TMELAND. In addition, we consistently innovated to build a diversified advertising portfolio. Our incentive ad-based free listening mode is making good progress. And during the second quarter, we launched a host of new advertising format and inventories on music charts, search pages, banners and playlists, among others. As we have strengthened our advertising monetization with additional avenues, we also successfully attracted well-known brands such as Sprite, Beijing-Hyundai and Pepsi to sponsor a variety of customized online and off-line live events recently, attracting participation by dozens of popular artists and aspiring musicians in these highly engaging events.

We continue to deepen our content partnership to enrich the user experience and explore additional monetization avenues in digital music. First, accompanying the launch of Jay Chou's, latest digital album, Greatest Works of Art, we tailored diverse activities for his fans such as the customized vinyl record player interface and sound effects, artist's merchandise and interaction in Jay Chou's virtual room. Copies sold exceeded 6 million by the end of July, marking another digital album blockbuster on our platform.

Next, in the second quarter, we entered into strategic partnerships with Time Fengjun Entertainment, the music label of TFBOYS and Teens in Times, avex China and the talented female artist XIN Liu, among others, where our platform has a head start period on the latest music, customized artist merchandise or unique artist-fan interaction events.

Third, we joined hands with YH Entertainment Group, a well-known artist management company to launch Artist Subscription packages for its 13 well-known artists such as Meng Meiqi and Justin Huang, providing customized audio and video content for their subscribing fans.

We also doubled down on our efforts to build a young and trendy cultural community to expand our Gen Z user base. In the second quarter, our campus musician cultivation plan involve our campus, organized the Wish for a Happy Graduation, event and teamed up with artist Mao Buyi and campus musicians Yang Ge to release the song Small World, [Foreign Language]. These initiatives brought inspiring messages to the first group of graduates born in the 2000s, resonating strongly with the new graduates demographic.

What's more, we began to bring off-line music festivals back to our audience in the second quarter, such as Kugou's [Foreign Language] live performance parade, which debuted in Hangzhou in May and the first wave music festival partnered with SAIC Audi, in June, encouraging online live streaming and off-line interactions between fans and musicians. These events are just the beginning of our return to live performances. We have an exciting lineup of off-line experiences planned for the coming quarters.

Now let's turn to our social entertainment services. Its MAU sequentially improved, while paying users declined year-over-year due to competition and industry adjustments. We will continue to improve our competitiveness through ongoing product innovations and new initiatives such as audio live streaming and virtual interactive product offerings.

For WeSing, we launched its latest version with tools to energize the singing experience while lowering the barrier to participate. For instance, the upgrade is one-click voice enhancement feature, customizes voice improvement based on the song's rhythm as well as user's voice, volume and timbre, producing a more natural effect. Along with other upgrades mentioned earlier, these assets paid off as evidenced by the strong double-digit year-over-year expansion in karaoke room penetration and user time spent in the second quarter, in addition to the year-over-year growth in recordings, penetration and user time spent. In the second quarter, WeSing also capitalized on the success of the hit song Lonely Warrior, which debuted on TME and achieved 4 billion streams across our platform since this launch with a nationwide cover contest to convey positive cultural power to school students, attracting a broad group of participants online.

In response to the competition faced by traditional live streaming services, we continue to expand our content verticals and bring more differentiated content to improve user experience. QQ Music live streaming continued to expand the scale of its audio live streaming content offerings, where expanded content across sleeping aid, studying and commuting use cases received wide user acclaim. In the second quarter, it also collaborated with Tencent Musician Platform to organize 39 sessions of the real-time live singing events, Meet, Let's Sing, connecting musicians and their fans and gaining over 10 million viewers. These efforts contributed to double-digit growth in the average daily number of hosts and viewers as well as a year-over-year increase in QQ Music live streaming revenue in the second quarter. We were also successful in exploring overseas markets with audio live streaming activities such as chat rooms, leading to strong revenue growth in overseas markets in the second quarter.

We also delve into the virtual idol and animation live streaming verticals favored by the young generation. WeSing added a new live 3D function, which captures host's expressions and movements in real time and allow the host to use an avatar for live streaming and multi-person interactions. Additionally, Kugou's live streaming hosts, together with its self-owned virtual idol, [indiscernible], and Tencent Animation and Comics, jointly organized a number of events to recommend popular comic IPs to ACG fans through live streaming, during which event's participating hosts recorded triple-digit growth in user time spend and the number of viewers of the live streaming rooms.

Last, but not least, I'd like to close with a word about our social responsibility initiatives. On Children's Day, we worked with Tencent to launch the Little Red Flower Charity Concert, uniting over 30 groups of artists and musicians in a heartwarming live concert for children with special needs. We also partnered with La Mer to host a special public welfare concert for World Oceans Day. Launching a welfare song, Blue New Life, by Mao Buyi to create environmental awareness around the marine ecosystem. We're proud of these efforts to leverage the emotional power of music to advance our social commitment.

To conclude, as our dual engine content-and-platform strategy move forward, we will continue to use technology to elevate the role of music in people's lives and support the sustained development of the music industry with our strong and growing .

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

[Shirley Hu, CFO]

Thank you, Tony. Hello, everyone. Next, I'll discuss our results from a financial perspective. Our total revenues for Q2 2022 were RMB6.9 billion, down by 14% year-over-year and up by 4% sequentially. In the second quarter of 2022, our IFRS net profit was RMB892 million and non-IFRS net profit was RMB1.07 billion, which represented a sequential increase of 13% as a result of our effective cost control and improved operating efficiency.

In Q2 2022, we are more focused on the return of the promotions for subscription service and continued to strengthen content operations. We achieved costly growth in subscription service. Music subscription revenues grew to RMB2.11 billion, up by 18% year-over-year and by 6% sequentially. Online music paying users grew to 82.7 million, up by 25% year-over-year, [indiscernible] 2.5 million net adds sequentially as we benefit from expanded sales channels and paying users' loyalty resulted from the ongoing efforts we made to users' willingness to pay for music and high-quality content and services we provide. Monthly ARPPU was RMB8.5, representing a decrease from RMB9 in the same period last year and an increase from RMB8.3 in the fourth quarter of this year. Our strategy to grow our music business in a healthy and sustainable way has started to bear fruit and contributable to the continuous growth in music subscription revenue.

Revenues from advertising decreased year-over-year as advertising business continued to be negatively impact by the industry adjustment ended the outbreak of COVID-19. However, advertising revenues grew sequentially as advertising business began to recover moderately from the outlook of COVID-19 since June. The June 18 economic sales promotions also contributed to the sequential increase in advertising revenues. We are proactively expanding added inventories, optimizing and rolling out innovative advertising formats to manage these challenges. We remain confident about long-term growth potential and expect advertising revenues to continue to recover moderately in the second half of 2022.

Social entertainment services and other revenues were RMB4 billion, down by 20% year-over-year as we face an evolving macro environment and intense competition from our platform. To adapt to the changing environment and to stabilize revenue, we have differentiated our content offering by enriching our virtual interactive product offering and enrich cross-platform collaboration. Meanwhile, we continue to invest in audio live streaming and expand our international business, resulting in growth in revenues from audio live streaming and overseas business year-over-year and sequentially.

Gross margin in Q2 2022 was 29.9%, down by 0.5% year-over-year because the decrease in our total revenues outpaced the decrease in our total cost of revenues as some of them remained fixed in nature. Gross margin improved sequentially resulted from our effective control on content costs, including revenue showing fees for live streaming business and improved operational cost expenses. We will continue to take measures to manage costs effectively and improve overall expenses.

Now moving on to operating expenses. Total operating expenses for Q2 2022 were RMB1.4 billion or 20.5% as a percentage of total revenues, down by 0.4% from 20.9% as a percentage of total revenues in the same period last year. Excluding the impact from the expenses related to our application for secondary listing, operating expenses as a percentage of total revenues would have decreased by 1% year-over-year.

Selling and marketing expenses were RMB303 million, down by 55% year-over-year. During the quarter, we continue to take measures to improve the business, closely monitor the ROI of each promotion channel, start to utilize the external promotion channels and leverage our internal traffic to attract users and promote our brands. The reduced marketing spend resulted in loss of some casual users and impacted our music MAUs negatively. However, our music subscription service continued to grow rapidly with sales growth in paying users and the level of user activities.

General and administrative expenses were RMB1.1 billion, up by 11% year-over-year. Excluding the impact of approximately RMB44 million from the expected in Q2 related to our application for secondary listing, G&A would have increased by 6% year-over-year. We continue to invest in product enhancements, technology innovations and more diversified product offerings as well as closely manage employee-related expenses by improving headcount efficiently.

Our effective tax rate for Q2 2022 was 12.2% compared to 11.5% in the same period of 2021. The increase in effective tax rate was mainly due to some of our entities entitled to different tax benefits in 2021 and 2022.

For Q2 2022, our net profit was RMB892 million and net profit attributable to equity holders of the company was RMB856 million. Non-IFRS net profit was RMB1.07 billion, and the non-IFRS net profit attributable to equity holders of the company was RMB1.03 billion. Non-IFRS net profit margin was 15.4%. As of June 30, 2022, our combined balances of cash, cash equivalents, term deposits and short-term investments were RMB25.8 billion compared with RMB25.9 billion as of March 31, 2022.

During the 3 months ended June 30, 2022, net cash generated from operations was RMB1.2 billion, and the cash used in share repurchases was RMB669 million. We also include a net cash outflow of RMB497 million for acquisition of shares in various subsidiaries and associates. Such combined balance was also reflected by the change in the exchange rate of RMBto USD as different balance sheet base.

Looking forward, we will continue to focus on our core business and invest mindfully in new products and services, including long-form audio and international business to maximize our investment returns and future growth potential. Meanwhile, we will continue to implement cost control in areas including revenue sharing fees for social entertainment business, content royalties, operating costs, headcount-related costs and the savings and marketing expenses to improve our overall operational efficiency.

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

[Operator]

[Operator Instructions]. Our first question will come from Alex Poon with Morgan Stanley.

[Alex Poon, Morgan Stanley]

Congrats on a very strong quarter on the profit side. My question is related to gross margin. Gross margin is up about 2 percentage points on a sequential basis in Q2. And despite the social revenue was flat on a Q-on-Q basis, can management explain on each of the segment gross margin trend from Q1 to Q2? And how should we think about the second half?

[Shirley Hu, CFO]

Okay. About the gross margin, this quarter, we take more measures to control costs and improve operational efficiency. And we have started to bear fruit. Gross margin in Q2 increased 2% sequentially. The following factors have a positive impact on gross margin. First, revenue sharing ratio of live streaming have been controlled and continued to decrease sequentially. And the second, we increased the requirement of content cost. We restructured the agreement with some music labels and . That had a positive impact on our gross margin. And the third, to optimize the technology and operation strategy related to bandwidth and storage capability and improve the utilization of our service and equipment, our operational costs decreased sequentially. And fourth, subscription revenue growth and advertising revenue recovery also had a positive impact on gross margin. And we will continue to focus on increasing efficiencies of all business units and the cost items, and we expect our gross margin will be increased in the next quarter.

[Operator]

Our next question will come from Lei Zhang with Bank of America.

[Lei Zhang, Bank of America Merrill Lynch]

Congrats on the solid results. My question is mainly about your music ARPPU. We noticed Q-on-Q with [indiscernible] of music ARPPU and any more color you can share behind it. And how should we look at the ARPPU trend going forward? And related to this, can you give us more color on the Super VIP, like adoption rate, user feedback and the contribution to the ARPPU?

[Tony Yip, Chief Strategy Officer & Head, Ultimate Music]

Yes. In terms of the ARPPU, we saw a sequential improvement from last quarter's RMB8.3 to this quarter's RMB8.50. And that's a result from more effective promotions as well as more discipline in the way that we manage the marketing spend. Our focus, as we mentioned last quarter, is on the quality of the subscription revenue growth as the overall target in that we are aiming to both grow the paying user as well as the ARPPU at a healthy pace. And we've been able to achieve that in the second quarter, and we expect this level of a growth trend for both our subscribers and ARPPU to continue into the rest of the year.

[Operator]

Our next question will come from Alex Yao with JPMorgan.

[Alex Yao, JPMorgan Chase & Co.]

I have a couple of questions on the music subscription side of the business. Can you guys share with us your progress in terms of pushing up the paywall? What percentage of the company now is behind the paywall? What target are you aiming to achieve by the end of the year? And also regarding the nonpaying music, the user experience is becoming are able to listen to less and less content. What are you trying to do with these guys, are you going to let them go? Or do you want to engage them through other strategies and features?

[Tony Yip, Chief Strategy Officer & Head, Ultimate Music]

Well, first of all, in terms of our subscription package, obviously, I think we continue to be on track as we have more and more discussions with our label partners to add more content into the premium package. And that progress is going well, and we expect there to be more content partners to be added to the paywall in the second half. So I think we will talk more about that as that bears fruit.

And then in terms of the balance between free user experience and paid user experience, we mentioned previously and we also touched upon it this time, is the incentive ad-based free listening mode. We are seeing very good progress on that type of free listening mode. We think that's a good way for us to strike the balance because they will -- as with any entertainment platform online, you're bound to have a portion of users with very low probability of conversion to become a subscriber. And yet, we need to find a way to be able to monetize. And so the incentive ad-based free listening mode is a good way for us to do so.

Right now, within our advertising revenue, close to 10% of that on a run rate basis is generated by the incentive ad-based free listening mode -- free incentive ads more correctly speaking. And that's growing quite well. So we continue to expect that to serve as the balancing factor to provide a good free user experience.

[Operator]

Our next question will come from Alicia Yap with Citi.

[Alicia Yap, Citigroup]

I have a question related to the advertising. So can management share with us sentiment among the advertisers? Which industry vertical actually has recovered strongly and which industry verticals are still leaning quite weak? And then when can we expect the ad revenue to experience we accelerate -- on a year-over-year basis, reaccelerate the growth again?

[Tony Yip, Chief Strategy Officer & Head, Ultimate Music]

Yes. Obviously, I think in the first half, as a result of industry adjustments on the splash ads as well as the pandemic measures, advertising revenue was quite weak in the first half. However, as the pandemic improves as well as the macroeconomic situation improves, we are starting to see moderate recovery of the advertisers demand. Couple that with our ongoing effort to expand our advertising format as well as advertising inventories that we've mentioned, we are expecting to see a recovery of the advertising revenue in the second half.

In addition to kind of the ad formats that we mentioned, such as incentive ad or inventories that we mentioned in the various parts of the platform, we are seeing increasing amount of interest by ad sponsors that are particularly interested in interactive events, events that we organized both off-line and online, such as ones that we do on TMELAND or through TME Live or other sponsored events with Pepsi, Sprite and Beijing-Hyundai, et cetera. In terms of verticals, in this quarter, we see decent demand recovery, particularly from e-commerce, given the e-commerce June season, the consumer staple, specifically categories such as food and beverages as well as the automobile industry.

[Operator]

Our next question will come from Xueqing Zhang with CICC.

[Xueqing Zhang, CICC]

My question is related to TME Live. We saw some other short video platforms have launched the online live performance during the summer. And so just wondering how do we position TME Live? And how do we think about the competition landscape? What's the strategy and monetization plan for this business?

[Cussion Pang, Executive Chairman]

Okay. For TME Live, I think we have a very good plan in having arrangement not just for the top tier artists, but we are also growing the long tiers, the other different verticals as well. We have a really good cooperation with the Weixin Video Accounts. We also strengthened our distribution capabilities for our live projects. As we mentioned during our call, we mentioned about some of the top-tier artists like Jay Chou and also Leslie Cheung trying to do a new release of the traditional, the very popular classical -- the classic concerts, and it arouse a lot of interest from the users. And we also bring in our technology advancing that we help to improve the quality of the overall video and also the audio qualities, so to ensure a better user experience for our users.

We have continued to bring in some of the artists, for example, interactive capabilities to demonstrate in our TME Live program as well. So we have very good confidence, especially we are doing an online and off-line collaborations for our concerts. So all of this will continue to strengthen our TME Live projects, and we definitely see that there's going to be some more great programs to come in the future.

[Operator]

Our next question will come from Wei Xiong with UBS.

[Wei Xiong, UBS]

Congrats on the earnings speed this quarter. My question is around the online music subscription or paying user addition. We see that this quarter, the net paying user addition was a little bit lower than the previous run rate given our focus on the quality growth and also seek the balance between paying users and ARPPU. So I just want to check, how should we think about the run rate of the paying user addition for the second half also next year? And given our focus on the marketing spend to strengthen our cost controls, will that impact the paying user retention?

[Tony Yip, Chief Strategy Officer & Head, Ultimate Music]

Yes. As we mentioned before, our overall goal for the subscription revenue for the online music is to see a healthy growth in overall subscription revenue and not be overly leaning on just either the subscriber or the ARPPU. So we want a healthy growth in both metrics because we think the whole industry will benefit from focusing more on the quality of service as opposed to just on price. And we do believe there's a lot of value in the music subscription service that we offer and that our continuous effort to cultivate the user's willingness to pay for the subscription service that continues to see good results. And so by having more of a balanced approach, we lay a stronger foundation for the long-term growth, which we continue to see there to be a strong potential.

Obviously, at the same time, we are very focused on expanding on the privileges and the service that we offer within the subscription plan. So we mentioned that we continue to add more and more privileges such as, this quarter, we mentioned about the Super VIP whereby for RMB30 a month, which is double the price of a normal premium subscription, you get a lot more. Such as you get access to a large number of digital albums, you get access to the super high-quality sort of music effects, ones that Ross mentioned. When you get access to the WeSing membership, you get access to the long-audio membership, et cetera, et cetera. So we are seeing -- it's early stage, but we are seeing good traction as we roll that out. And people are adopting, and they are appreciating the privileges that we're putting in to those Super VIPs. So for example, the premium sound quality feature, that's adopted by over 80% of people who have subscribed to the Super VIP. And so that also helped us improve the ARPPU in addition to having more discipline in cost control as well as promotional spend.

[Operator]

Our next question will come from with T. H. Capital.

[Unidentified Analyst]

Congratulations on such a good quarter. The cost was related to your much more growth strategy with Tencent. And you guys have already started to do advertising member and content distribution. And I wonder, for our newly added numbers, how many -- what percentage of them comes from Tencent channel? And going forward, as Tencent continues to add the new function like Tencent [indiscernible], et cetera, et cetera, how are you guys going to have a, how to say, long-term cooperation that would enable you guys to have more sustainable users instead of only driven by this hit albums or artists? That's my question.

[Tony Yip, Chief Strategy Officer & Head, Ultimate Music]

Yes. We have very extensive collaboration with Tencent. I can start and perhaps Ross can add additional colors as well. We have extensive collaboration with Tencent, both on the content production side as well as on the music promotion side. On the content production side, we mentioned that we -- almost every quarter, we showcased original songs that are produced either for some of the Tencent such as selected IPs in Tencent games or some of the IPs from Tencent Video, for example. And many of these original content that are either produced by us or coproduced together, they see very good results in terms of popularity on the music charts. That's kind of one big bucket of areas.

The second big bucket of areas are in the form of content promotion. A prime example of that is our deepened collaboration through the Weixin Video Accounts. It's an important means for us to enrich the music video-based content. All of our platforms, be it QQ Music or Kugou or Kuwo, we promote a lot of music-related video content through Weixin Video Accounts. In fact, the content that we provide is ranking amongst the best in the music category within the Weixin Music Accounts sort of music vertical. And so that serve as a way for the music lovers to discover music and after which the users come back to TME platform to continue to explore and enjoy music in a more deepened way.

And then finally, while we don't rely on Tencent channels at all from a user perspective, given our music platform is already very established and we've been in operation for many years, have very established brands, so most of our traffic is organic. We do have more and more collaboration, for example, through our partnership between QQ Music and WeChat -- WeSing. There are more product features collaboration, such as you can now set ring tones on WeSing using music provider by QQ Music. Obviously, you can go back to QQ Music to listen to the songs. You can update your personal profiles using songs provided and being listened to in QQ Music, et cetera. So we are seeing more and more collaboration, and we expect that to continue.

[Operator]

We are now pressing the end of the conference call. I will now turn the call over to your speaker host today, Mr. Tony Yip, for closing remarks.

[Tony Yip, Chief Strategy Officer & Head, Ultimate Music]

Okay. Well, thank you very much for joining our second quarter earnings call. If you have further questions, please feel free to contact the Investor Relations team.

And this concludes today's call. We look forward to speaking with you all again next quarter. Thank you, and goodbye.

[Cussion Pang, Executive Chairman]

Thank you so much. Goodbye.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.