Tencent Music Entertainment Group Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 12, 2025

Key Takeaways

  • Positive Sentiment: We delivered record Q2 revenue of RMB 8.4 billion (+18% YoY) and net profit of RMB 2.5 billion (+38% YoY), driven by robust music subscription, advertising, and merchandise growth.
  • Positive Sentiment: Online music subscription revenues rose 17% YoY to RMB 4.4 billion, with the user base exceeding 124 million and ARPPU up to RMB 11.7, reflecting strong engagement and monetization.
  • Positive Sentiment: Advertising revenue accelerated both YoY and QoQ, powered by innovative ad formats and an ad-based membership pilot, boosting advertiser engagement and eCPMs.
  • Positive Sentiment: The company’s expansion into the fan economy—including a sold-out G-Dragon Macau concert with 36,000 attendees and over 300 offline shows—diversified revenue streams and strengthened fan engagement.
  • Negative Sentiment: Revenue from social entertainment services declined 9% YoY due to tightened compliance and adjustments to live-streaming interactive features.
AI Generated. May Contain Errors.
Earnings Conference Call
Tencent Music Entertainment Group Q2 2025
00:00 / 00:00

Transcript Sections

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Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Good evening, good morning, and welcome to Tencent Music Entertainment Group's Second Quarter twenty twenty five Earnings Conference Call. I'm Milson Tew, Head of IR. We announced our quarterly financial results earlier today before The U. S. Market opened.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

The earnings release is now available on our IR website and via Newswire services. During today's call, you will hear from Mr. Kushan Peng, our Executive Chairman and Mr. Ross Liang, our CEO, who will share an overview of our company strategies and business updates. Then Ms. Shelley Hu, our CFO, will address our financial results before we open the call for questions. Before we continue, I refer you to the safe harbor statements in our earnings release, which applies to this call as we'll make forward looking statements. Please note that we'll discuss non IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in our earnings release and filings with the SEC. All participants are muted at this time. After management's remarks, there will be a Q and A session.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

And please be advised that today's call is being recorded. With that, I'm very pleased to turn the call over to Kushen, Executive Chairman of TME. Kushen, please.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

Thank you, Melissa. Hello, everyone, and thank you for joining our call today. We delivered high quality growth in the second quarter with solid year over year increases in both revenue and profitability. On one hand, our music subscription business remains a core growth driver and continues to gain traction. On the other hand, we are also seeing impressive results from our expanding suite of music related services.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

Key initiatives like advertising, concerts, and artist merchandise all achieved a rapid growth in the second quarter, and that strong momentum is carrying into the third quarter. By cons by constantly enhancing our content ecosystem, expanding our offerings, and fostering new ways for artist fans engagement, we are shipping a ripened all in one music service platform. Now let me share some of the key highlights on the content business. First, we began cooperating with well known Korean labels, the Black Label and H Music for the first time. Further strengthening and differentiated our k pop offerings, We also extended collaboration with renowned Chinese artist Wong Feng, offering both of his classics and latest work on our platform.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

Second, we continue to focus on co creation and original content production to further enrich and diversifying our content offerings. From concept, origin relations, creations to production and promotion, We are actively involved in every stage to build a more dynamic and innovative music ecosystem. A prime example is our recent collaboration with SM Entertainment on NCT's Chinese special EP, Lucid, Can. Our integrated promotions across music festivals, debut concerts, and variety shows attract a large audience. 10,000 music lovers participated in a sing along at the music festival.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

And variety show clips generated over 1,000,000 likes, highlighting the power of the end to end industry collaboration across borders and cultural exchange through music. We also work closely with artists to develop original pieces, like the theme song for the acclaimed of fame, the lychee role, with. This song topped the multiple music charts and garnered extensive praise from national media. Additionally, our strategic partnership with Zhejiang Satellite TV, has further supplemented our music copyright portfolio of popular variety shows, such as the treasure the voice, and shining summer, and opened new opportunities for collaboration in content co creation, musician promotion, and more. We have also shown strong capabilities in staging artists and connect them with the users through other music related service offerings.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

These efforts have further energized our ecosystem, boosted user royalty, and cultivated content creation altogether reinforcing our platform unique position in the e evolving music industry. A few examples. First, we successfully hosted leading Korean artist, G Dragon's first major tour since 2017 in Macau, which attracted over 36,000 attendees to immerse in the cultivated atmosphere, and the events merchandise was quickly sold out. This marked our first large scale international concert production, significantly pushing our industry reputation. Following a strong kickoff, we are scheduled to expand the tour into other regions this year.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

Additionally, we organized a serial a series of stadium concerts for Fiona Seat, Shuai Kaiqi, and Rapper Guide, helping them to reach a broader, younger audience. Due to the overwhelming demand, we quickly responded and worked with Tia Ray to schedule additional shows to accommodate fan interest. Second, we have become an important partner for staging and creating live performances for emerging talents. In the first half of the year, we leveraged our proprietary IPs, City Life and Buff Life, to host over 300 offline shows for nearly 100 Tencent musicians. Our cross platform promotions also boost a number of works into trending hits, connecting them with a broader audience of music lovers.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

For instance, after we promoted Xiangxi's first why not wait for the win on soft video platforms, it quickly went viral, sparkling a wave of users generated contents on social media and surpassing 20,000,000 streams on our platform. Third, we created more opportunities for music lovers to meet and interact with artists both online and offline. For example, buyers of Jason Zhang Zhang Jie's physical album, not bad could win opportunities to attend his offline signing events. Such privileges not only deepen the fans engagement, but also helps drive the album's outstanding performance. In late June, we partnered with DAU, a global fan communication platform company, to launch the interactive community bubble on QQ Music.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

Bubble enables users to engage directly with hundreds of k pop artists from labels such as SM, JYP, and Koop Entertainment, providing artists an avenue to share members only content. To cater to a wider audience, we also plan to invite some popular Chinese artists to the community, allowing them to foster a deeper and more personal connections with their fans. Finally, reflecting our commitment to serving the music industry and supporting its healthy growth, we host the third Wave Music Awards, which was decided to honor the most outstanding Chinese music work of 2024. 15 top tier music creators, including Wu Jianfeng, Li Haiyin, and Xiaoke, presented the awards. The chart's professionalism earned the industry wide acclaim and endorsement, amassing over 200,000,000 social media dubious.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

This quarter, we also cooperated with professional institutions, music labels, artists, leveraging AI technology to unlock the social value and hearing power of music. For example, we launched the hearing project featuring natural soundscapes to enhance sleep quality. In summary, our dedication to diversifying music services and delivering well rounded music entertainment has set the stage for long term sustainability growth. With a strong foundation in place, we will continue to enhance our content and platform ecosystem, offer richer experiences, and unlock greater opportunities for both music lovers and stakeholders across the music value chain. Now I would like to turn the call over to Ross for more details on our overall platform development. Ross, please go ahead. Thank you.

Zhu Liang
Zhu Liang
CEO & Director at Tencent Music Entertainment Group

Thank you, Kashyun. Hello, everyone. In the second quarter, our platform demonstrated robust growth driven by our commitment to continuous product improvement and operational excellence. Online music recorded stronger performance supported by a sustained expansion in both our subscriber base and ARPPU. This positive trajectory was underpinned by our innovations across product features, artist merchandise, and artist fund interactions, which has further strengthened our peer among SYP members.

Zhu Liang
Zhu Liang
CEO & Director at Tencent Music Entertainment Group

Overall, user average time span reached a record high, and SYP subscribers is exceeded 15,000,000, a new milestone that reflects the deep trust and loyalty raising our user community. To enhance the I s o IP experience, we introduced a range of new and upgraded features during this quarter. Here are some key highlights. First, high quality sound quality remains the most popular SYP membership benefits. This is effective in fulfilling users' robust demand for more premium and immersive listening experiences.

Zhu Liang
Zhu Liang
CEO & Director at Tencent Music Entertainment Group

In the second quarter, Google Music pioneered a Viper Hi Fi sound quality and a one click audio enhancement to zero. By delivering superior audio fidelity, and louder speaker volumes, we let users easily transform their smartphones into portable speakers. We also upgraded OS extraction technologies with a industry first AI Chorus function. Users can now plug in a live concert, seeing a long experience on anytime and anywhere without the euro fast. Second, to further drive x y p adoption, artist centric privileges became increasingly effective.

Zhu Liang
Zhu Liang
CEO & Director at Tencent Music Entertainment Group

Such achievements are pulled by our deeper collaborations with libraries and artists that unlock a wide range of compelling benefits for our users. Digital albums are a great example. Recently, we premiered and our new digital single, hold me close. So usually. We also launched the new album, player, by integrating you these albums as sign up privileges.

Zhu Liang
Zhu Liang
CEO & Director at Tencent Music Entertainment Group

We significantly posted SOAP con conversions. Another example is priority access to a concert tickets for in demand events. This quarter, SYP users had opportunities to secure tickets for G Dragon and the BLACKPINK's concert put toys, you know, the ones on our platform, sparking significant buzz among music fans. We also co cooperated with both domestic and international artists, include JCT, to release Martha Star Cars series. This initial tips successfully met users growing demand for collectibles.

Zhu Liang
Zhu Liang
CEO & Director at Tencent Music Entertainment Group

Third, we elevated the users' engagement by introducing new ways for artists and the fans to connect. For example, beyond launching Babble in May, we partnered with TF Entertainment to livestream teams in time and transform projects top top to concerts. This event's garnered over 33,000,000 viewers, with SYP members enjoying dedicated access to solo camera angles, bringing fans even closer to the artist. We also upgraded our virtual fan community, Penguin Island, introducing special avatar outfits and gestures for SYP members to make online meetups more personalized. During the

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

last one, Huang's birthday and the song releases,

Zhu Liang
Zhu Liang
CEO & Director at Tencent Music Entertainment Group

we hosted a fun team building activities and a live voice call with him attracting over 100 thou thousand users to his Ireland page. Next, as our in car music service gained recognition from SYP members, We broadened our alliance with prominent automakers. For in for instance, this quarter, we formed a comprehensive partnership with Geely and collaborated with Xiaomi on its first SUV, the e seven model. This partnership integrated Dolby Atmos and the premium series sound effects, elevating users' music listening experience. We also built an AI powered music campaign for Great War model, offering personalized on demand features, like AI vocal extraction and the healing music playlist to facilitate a more enjoyable journey.

Zhu Liang
Zhu Liang
CEO & Director at Tencent Music Entertainment Group

Alongside the success of our SOAP offerings, the power of our platform and the innovative ad ad formats led to a a accelerated advertising growth both quarter over quarter and year over year. In particular, we optimized the interactive and the tasks and enriched re redemption reduction benefits, significantly boosting users' engagement and receiving positive feedback from advertisers. Lastly, our initial pilot on 80 ad based membership gained a positive momentum. It gave us more room to provide tailored solutions to advertisers and users with viral needs. Looking ahead, we see great potential in the music entertainment space and are committed to investing in new initiatives that create lasting value and impact on music creation and consumption.

Zhu Liang
Zhu Liang
CEO & Director at Tencent Music Entertainment Group

Along this journey, we will continue to push fundraise, innovate, and enhance user experiences to deliver more premium and immersive experiences to all of our users. With that, I would like to turn the call over to Shirley, our CFO, for a deep dive into our financials.

Min Hu
Min Hu
CFO & Director at Tencent Music Entertainment Group

Thank you, Ross, and greetings to everyone. Let me now turn to our financial results in Q2 twenty twenty five. Our total revenues hit a record high of RMB8.4 billion, up by 18% year over year, successfully overcoming the challenges from adjustments in social entertainment services in recent years. This was driven by continued strong growth in music subscription and advertising services, as well as robust growth from artist related merchandise sales and offline performances. Online music revenues grew 26% year on year to RMB6.9 billion.

Min Hu
Min Hu
CFO & Director at Tencent Music Entertainment Group

Music subscription revenues grew 17 year on year to RMB4.4 billion in Q2 twenty twenty five, driven by continued expansion in subscriber base and the monthly ARPPU. Monthly ARPPU reached RMB11.7 this year compared to RMB 10.7 in the same period of last year, primarily driven by expansion in SYP subscribers and ARPU. As discussed earlier, to enhance the SYP members' experience, we continued to broaden and strengthen SYRP benefits, including enhanced sound quality and effects, artist centric privileges such as free shipping for our merchandise, priority access to concert tickets and artist related merchandise. These efforts collectively have helped to enhance our SYP membership base and achieve higher monthly ARPU this quarter. Advertising revenue continued its strong growth trajectory on both year on year and quarter on quarter basis, primarily driven by the following.

Min Hu
Min Hu
CFO & Director at Tencent Music Entertainment Group

First, our innovative ad formats such as a supported model, keep the gaining traction and significantly contributed to our advertising revenue growth. Second, the six eighteen shopping festival provided a great opportunity to showcase our recent product optimization results, leading to increase the number of advertisers, higher entrance rates and eCPM. Third, advertising also had a strong growth this quarter, which benefit from increased number of offline events and performances. Additionally, Artistry related merchandise sales and offline performance delivered robust results this quarter and further contributed to overall revenue growth in music services. The shipping for the physical album of Xiaozhan this quarter, together with the offerings of artist related merchandise such as Jerkoshir, physical earbuds and the G Dragon's Offshore Nightsticks significantly enhanced the revenues from artist related merchandise sales in Q2.

Min Hu
Min Hu
CFO & Director at Tencent Music Entertainment Group

Meanwhile, we continued our strategic initiatives in the offline performance market. This quarter, leading Korean artist, Jie Jiegen, started his first major tour since 2017 and we successfully hosted his concerts in Macro in q two with more locations to come in q three. We also hosted other high profile concerts for artists such as Will Pan this quarter. Social entertainment services and other revenues were RMB 1,600,000,000.0, down by 9% year on year. The year on year decrease was mainly due to the adjustments to certain live streaming, interactive functions, and the most stringent compliance procedures previously implemented.

Min Hu
Min Hu
CFO & Director at Tencent Music Entertainment Group

Our gross margin rose by 2.4 percentage points year on year to 44.4%, primarily driven by the following factors. First, strong growth in music subscription and advertising revenues, together with improved cost efficiency, thanks to our long standing winning relationships with labels and artists, have benefit our gross margin. Second, the market landscape evolves, we successfully lowered our revenue sharing ratio in social entertainment services without materially impacting revenues. Meanwhile, the growth in revenues from apps related merchandise and offline performances, which require higher investment had offset gross margin increase. Moving on to operating expenses, sales and marketing expenses as a percentage of revenues were 2.6%, down from 2.9% in the same period of last year.

Min Hu
Min Hu
CFO & Director at Tencent Music Entertainment Group

General and administrative expenses as a percentage of revenues were 11.1%, down from 30.1% in the same period of last year, reflecting our strong operating efficiency. Majority of our sales and marketing spending have been in the category of content promotion and the channel spending. We will keep monitoring market conditions and increase spending as needed with financial discipline. Our effective tax rate for Q2 twenty twenty five was 17.3% compared to 19.4% in the same period of 2024. We accrued withholding income tax of RMB118 million in the 2025.

Min Hu
Min Hu
CFO & Director at Tencent Music Entertainment Group

In Q2 twenty twenty five, our net profit increased by 38% to RMB2.5 billion and the net profit attributable to active holders of the company increased by 43% to RMB2.4 billion. Non IFRS net profit increased by 33 to RMB2.6 billion, reaching our historical high and the non IFRS net profit attributable to equity holders of the company increased by 37% to RMB2.6 billion. Our diluted earnings per ADS this quarter was RMB1.55, up by 45% year over year and the non IFRS diluted earnings per ADS was RMB 1.66, up by 39% year on year. These results underscore our effective monetization, enhanced operating efficiency and the benefit from our share repurchase program. As of 2025, our combined balance of cash, cash equivalents, term deposits and short term investments were RMB34.9 billion as compared to RMB37.7 billion as of 03/31/2025.

Min Hu
Min Hu
CFO & Director at Tencent Music Entertainment Group

This combined balance was also effect by changes in exchange rate of RMB to USD at different balance due to dates. Going forward, we will keep focusing on expanding our SYIP membership, introducing more under enhanced SYIP privileges, such as high quality content, artist centric privileges, including early access to artist merchandise and the consoles. Meanwhile, we will continue to invest in our products and innovative technologies globally. We remain optimistic in the health growth prospects of the music entertainment industry and are confident about the high quality growth of our business. This concludes our prepared remarks.

Min Hu
Min Hu
CFO & Director at Tencent Music Entertainment Group

Operator, we are ready to open the call for questions.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Thank you, Shelly. If you are dialing in by phone, please press 5 to ask a question and then press 6 to unmute yourself. If you are accessing the call from the Tencent Meeting or Vote Meeting application, please click the raise hand button at the bottom left. For the benefit of all participants on today's call, please remind please be reminded to limit yourself to one question. If you have more than one, please return to the queue.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

If you ask your questions in Chinese, please repeat in English. And the first question comes the line from Lincoln from Goldman Sachs. Lincoln, your line is open. Hello, Lincoln. Can you hear us?

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Yeah. We we can hear you. Your line is open, Lincoln.

Lincoln Kong
Lincoln Kong
Executive Director at Goldman Sachs

Okay. Sounds better. Yeah. Thank you for taking my questions. So congrats on the very strong quarter.

Lincoln Kong
Lincoln Kong
Executive Director at Goldman Sachs

So my question is about the outlook. So given that to the first half, we have a very solid momentum. So how should we think about the second half in terms of our revenue and as far as the profit outlook? Thank you.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

Thank you so much, Lincoln, for your questions. And, actually, we are really encouraged by this quarter's solid and more well rounded performance with both of our top line and also bottom line coming in strong. While our music subscription business remain robust, we will continue to focus on the high quality growth. As mentioned before, our subscriber base right now has already reached over a 124,000,000, and the pace for the net ads may fluctuate from quarter to quarter. But we do have the confidence that it will continue to have a high quality growth in a healthy and dynamic manner.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

And for the ARPPU, I think we are seeing a steady upward trend as we continue to enhance our offerings and the value we provide to users. We believe these efforts will further strengthen our value propositions and users' willingness to pay over time. So besides a good performance in the subscription business, I think the traction that we are seeing in our non subscription services are also very exciting. On one hand, the advertising continues to be an important growth driver, innovative and formats tailored to different user cohorts are particularly welcomed by it by the advertisers. And on the other hand, as we keep innovating and collaborating with more artists and labels, the new revenue streams from concerts and artist merchandise are becoming more scalable.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

So in the second quarter, revenue were more than doubled, from a year over year basis, which really, validates our strategy of building a comprehensive music entertainment platform. So for the visibilities, as you can properly understand, the concerts, for example, we experienced some short term quarter over quarter fluctuations as they're involving in a lot of things like scheduling, venue selections, and other logistical coordinations. But overall, we are really optimistic and focused on driving a sustainable long term growth. So in a nutshell, for the full year of 2025, I think backed up by the solid performance year to date, we now see the revenue expected to come in higher than our previous expectations. With our focus on the operational efficiencies, we see more room for bottom line improvement as well. Thank you for your questions.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

You, Christian. The next question comes from Alicia Yap from Citigroup. Alicia, please.

Alicia Yap
Alicia Yap
Equity Research Analyst at Citigroup

Hi. Good evening, management. Thanks for taking my questions. Congrats on the solid results. I have a questions on Bubble.

Alicia Yap
Alicia Yap
Equity Research Analyst at Citigroup

So can management share with of your recently launched Bubble? You know, what is the user feedback and user experience so far for this new product? And can Bubble, become a meaningful product, in the coming future with, potentially decent revenue contribution? Thank you.

Moderator

Thank you very much. Thanks for your question. First of all, the company has been very happy that we worked with dear you in this quarter to release the product named the Bubble. Talking about the reason why we launched this service. The reason is because we have the feedback from the entire user group.

Moderator

There are some of the fans groups. Right before bubble, it would be very challenging for them to communicate with the artist they follow. So within the QQ Music, we still would like to continue to enhance the user experience. So that's the reason we continue to strengthen our cooperation with of launching such a service in this quarter. So once the Babel community is being launched and we continue to optimize its base experience to the user, especially the translation and the language proficiencies reading the South Korean language and Chinese, This is a feature that we do see very wide recognition from the user feedback.

Moderator

So as Kaushan stated in his statement, besides the South Korean artist from the three labels we're working now, in the near future, we're also gonna introduce the Chinese artist to the Babel community. In that way, we will be able in the greater China region of providing the user experience that is within the human touch and the broad coverage and what then Bubble used to have. This is also the expectation from our partner. But at the same time, we also have the bundled service for Babel and the subscription and SVIP business. And we do hope such a bundled service would become a key growth driver for the future SVIP growth.

Moderator

According to the existing user profile, we can see many of the pay to go user. They are still the young users. So in the near future, they also demonstrate a very high activity. And this trend also allow us to build more confidence for the future user growth and commercialization. As many of you may notice, indeed, Bubble is a well established social product in overseas market.

Moderator

And we surely believe having Bubble on board will help us to continue to consolidate our QQ Music and to help TME to continue to launch socialized apps and the service in our existing music business. I surely believe as we continue to introduce Chinese artists into bubble community, and we're also going to add additional features, for example, like live streaming. In that way, we will be able to provide a retail commercialization opportunities to our entire subscription business in the near future. I also would like to emphasize for Babu to a very important step for us to embrace the social entertainment. And because we do notice the customer need such a service, and we do believe it has a great potential for its future commercialization.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Thank you. And the next question comes from Thomas Chong from Jefferies. Thomas, please.

Thomas Chong
Thomas Chong
Managing Director at Jefferies

Hi. Good evening. Thanks management for taking my questions, and congratulation on a very strong set of result. My question is about our recent deal with Simalaya. Can management comments about the synergies with Simalaya, such as, like, cost optimization enhancement in product offerings, and any areas that we can benefit the SVIP offerings as well? Thank you.

Moderator

Regarding our deal with, according to the regulation in China, we're still waiting for the further approval from the regulatory authorities. So now it would be very difficult for us to make any corresponding comment. But the reason why we go for the Simaraya deal is because for the management team and for the whole company, we always believe in the value of long form audio. Long form audio is a very important content form. To us, it's already play a complementary role to our existing music business.

Moderator

At least from our own perspective for the book listening, the individual members as well as advertisement and also the long form audio content in different music apps, we do see that nice progress being made on the subscriber base as well as commercialization. And we also see that consumption of the long form audio and its penetration ratio with SVIP continue to go up. So if the deal goes smoothly in the near future, I surely believe that no matter for the subscription revenues or the ad revenue, we will have every opportunity to continue to grow our user base. If there's any further progress regarding this deal, we will also disclose the information to the market in due time.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Thank you. And the next question comes from Morgan Stanley, Lou Yang. Yang, your line is open.

Yang Liu
Yang Liu
Analyst at Morgan Stanley

Thank you. Congratulations for the very strong results. I have a question on the other music revenue. Do does management believe that in the long run, this part of the business will account for bigger pie of the total revenue? And what will be the impact to the gross margin?

Yang Liu
Yang Liu
Analyst at Morgan Stanley

Because we understand that advertisement is a very high margin business, but how about offline performance concert and merchandise, the overall impact to gross margin? Thank you.

Moderator

Thank you very much. And the company is adopting the strategy of having content and the platform at the same time. It is all in one development. Well, regarding the earth like cancer as well as the fence economy, I think it's gonna to be a very important direction for us to go in the near future. It is also part of our our strategic business.

Moderator

So in the long run, the awesome music gonna to be a key for our future development. Well, let's talk about the fancy economy. As you may see, it is actually subjected to the schedulings of the artist as well as the merchandise shipment. From the revenue perspective, fancy economy, the revenue continued to ramp up, but it will have some fluctuation. I mean, the seasonal fluctuation.

Moderator

The same as Earth like concert and events. Due to the artist scheduling as well as the venue selection, there might be some seasonal fluctuations. Well, regarding the GP margin, I have to admit for fancy economy ended up by concept, indeed, both GP margin are relatively low. So it will have some impact on the overall GP margin of the company. But generally speaking, on one side, we will continue to to ramp up the JP margin.

Moderator

For example, we have ever increased subscriber base, and we also have more revenue from the advertising business, and we embrace the social entertainment. But at the same time, all those factors are indeed blessing our GP margin. So generally speaking, according to our existing observation of the Fancy Economy and the Earth like concept, I have to see that compared with our existing online music, no matter for the subscription business or advertisement business, the revenue contribution from defense economy and the offline concert is relatively small. As its revenue contribution is relatively small, so its impact over the JP margin is also small. I also mentioned about the revenue seasonalities for defense economy and the Airfly concert.

Moderator

In certain reason, when the revenue from both service are relatively high, it will surely fluctuate the overall GP margin. But, overall speaking, we're still very con we're still very confident on the uprising trend of our GP margin. I also would like to make a comment on caution. And beside what has been mentioned by Shirley, I have to say that we never take the Earth like events concept or even the fancy economy and the merchandise as a sub separate business. We take it as a business that can be complementary to our existing online business.

Moderator

So we actually leverage the privileges generated from the offline business to continue to support the healthy growth of our online musical business. To TME, as we have already mentioned, we have the content and the platform, the two way in one body strategy. And we hope that in the near future, such strategy will help us to explore more possibilities and the competitive edge. I also like to make a comment. I'm boss.

Moderator

And I think in this quarter, we plan to launch the SVIP annual membership card for the shopping malls, especially for the merchandise product. In other words, provide a discounted offering of the merchandise we have in our shopping malls. Fundamentally speaking, it is within the same nature as the ecommerce membership card. We hope by initiating such a great strategy, we will continue to improve the profitability of the merchandise.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Thank you. And the next question comes from Alex Yao from JPMorgan. Alex, please.

Alex Yao
Alex Yao
Co-Head of Asia Technology, Media & Telecommunications at JP Morgan

Thank you management for taking my question and congrats on solid quarter. Just want to follow-up with this fancy economy developments. As you guys expand from online music distribution into the broader fancy economy, including artist related merchandise, offline performance, connectivity between artist and fans, etcetera, etcetera. Where do you see as the biggest opportunity, and what do you see as the biggest challenge, let's say, on a one to two years view? Thank you.

Moderator

Talking about the the biggest opportunity, as Kushan has already mentioned, fundamentally speaking, the company is still committed of building a comprehensive service platform, including the copyright content, the merchandise, as well as privilege. So we believe that fans economy is not something separate. It's already within our system. So at least for the company, what we truly care about is leveraging the merchandise as well as the Airfly concept to continue to forge a deep bond between the Airfly and online platform. In that way, we will be able to continue to grow our subscriber base.

Moderator

This is something the company already counted on. So now and we do enjoy great advantage on copyright, but what we do is trying to further expand our advantage in copyright in both China and internationally, and we hope what we could be is a comprehensive music entertainment service to our user. Regarding the challenge, and I think to some extent, we really need to make sure the size and development of the platform can help us to make sure we have integrated development for both content and privileges. Another opportunity I do notice that for this quarter, we organized the concert for GD Dragon. It was staged in overseas countries and very likely to have extra stations in Southeast Asia market.

Moderator

And at the same time, besides providing the Airfly concert and we also have the merchandise as a comprehensive service. This will help us to continue our international expansion.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Thank you. And the next question comes from Macquarie, Ellie Zhang. Ellie, please.

Ellie Jiang
Ellie Jiang
Head of Asia Internet & Software at Macquarie Group

Good evening, management. Thank you for taking my question, and congrats on the strong result. We we are very encouraged to see all of these exciting developments and initiatives. So my question is really on our long term positioning. Could management share, how we foresee our longer term revenue mix and how this could further evolve, especially seems like we are, you know, expanding into more diversified kind of music offerings.

Ellie Jiang
Ellie Jiang
Head of Asia Internet & Software at Macquarie Group

And also taking a much longer term view, how do you see TME positioned on the entire entertainment value chain? Thank you.

Moderator

Well, regarding the overall positionings of the company as office, we are still gonna to leverage our one body two wing strategies. That is the platform plus the content ecosystem to continue to advance our strategy. As we have a very steady development for the live streaming music platform business, I do believe in the near future, the key source of the revenue and profit are coming from our online music business. Well well, regarding the advertisement business, it is also another highlight of our overall business. So in the longer run, I believe the advertisement revenue growth are even gonna to be kind of faster than the online music revenue growth.

Moderator

But indeed, both are all very important growth driver with our online music revenue. Well, regarding the social entertainment, our revenue has already been stabilized. But in the near future, we will have new growth driver as Shirley and Rose has already introduced to you. Besides the content, we also have the performance, of, like, concert, fancy economy, including the artist merchandise. Those were also continued to contribute revenue to the company with nice growth.

Moderator

So generally speaking and for TME, we're still gonna to take a development or retention in the near future. Our key focus is to continue to develop the company based upon our existing model, where at the same time, we were also going to keep an eye on the new business, for example, long form audio as well as our international business expansion. I surely believe they will also provide extra acceleration for our existing business. Thank

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

you. And the next question comes from Wei Xiong from UBS. Please, your line is open.

Wei Xiong
Wei Xiong
Equity Research Analyst at UBS Group

Sure. Good evening, management. Thank you for taking my question and congrats on a solid quarter. So earlier, management mentioned the strong advertising revenue growth year on year, which was partly helped by a newly launched ad based membership. So could management share more detail about the revenue and subscriber contribution from this new membership?

Wei Xiong
Wei Xiong
Equity Research Analyst at UBS Group

And what's the operational strategy to scale it up and maximize the revenue opportunity here without affecting the conversion to the standardized subscription plan? Thank you.

Moderator

Actually, I think the fast growth of the advertisement business is coming from the online advertising rather than the ad based membership growth. Therefore, in the near future, I think at least for the advertisement business, incentivized based advertisement is still going to be the key in the next few years. Different from the standardized free advertising, the incentive based advertisement is for all the users. It is a common and a general incentives model to all users. So we are still confident in the future growth from the incentive based advertisement business.

Moderator

Actually, with the existing user base of the incentivized ad business, about two months ago, we started to pilot on the advertisement membership format. Just now, I have already mentioned for ad based membership, the is relatively low, but it can provide a differentiated solution to different user groups. So I think in the near future, for ad based membership plus our standard member as well as SVIP, it's a three tier membership system. It can help us to continue to broaden the size of our subscribers and to the user. So this is indeed a very important strategic operational directions for us to go.

Moderator

That's the reason for the past two months. We actually attach great importance to the content of the platform. But I have to say it's still in the infancy stage. If there's any nice progress being made in the near future, we will surely share it with all of you.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

We still have some questions, and we'll take the last two. So Roger from Barclays, your line is open. Roger, please. Hello, Roger. Can you hear us?

Analyst

Thank you, management, for taking my question, and congrats and congrats on very solid quarter. So my question is on operating expenses. For the last couple of quarters, our bottom line continued to outpace our top line growth, thanks to very successful cost reduction in terms of sales and marketing expenses and then G and A expenses. Should we see this trend to continue for the rest of '25 and '26 given that we have identified so many growth opportunities that management has talked about? How should we think about our operating leverage from this point on? Thank you.

Moderator

Thank you very much. Thanks for your question. Our monthly expenses, especially the sales expense, is actually be used for the promotion of the content as well as traffic gain for the channel. Well, for both, we were gonna to make an adjustment according to the market competition. As of now, what we do is to continue our investment for the musical content promotion investment as well as the music channel promotion.

Moderator

Well, regarding the R and D expenses, we will always keep an eye on the new technological empowerment to see how the new technology will bring the industrial innovation and the new opportunities. And we do foresee that compared with 2024 and the absolute value of the operational expenses will grow compared with the baseline of 2024. By the way, we'll make sure we control the expenses growth would always be slower than the revenue growth. In other words, we still leave enough growth for the net profit rate and the net profit.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Okay. In the interest of time, we'll take the last question from Maggie from CLSA. Maggie, please.

Analyst

Thanks for taking my question and congrats on the very impressive set of results. My question goes back to online music subscription business. Can you share a bit more on the Super VIP penetration, its ARPU trend and the overall retention rates in this quarter and overall? We noticed that many of the drivers behind Super VIP penetration are time based or event driven type of activities. Just wondering how shall we think about the sustainability of such growth?

Analyst

What will be management's top priority in driving a sustainable revenue growth in the super fan economy? Thank you.

Moderator

Thank you very much. But first of all, I think there will be some misunderstanding here I need to clear. And first of all, the key growth driver of SBIP penetration ratio is not on time or not on any single event. It just happened to be when there's a new song or new albums being released. There might be some marginal growth from this release.

Moderator

Well, as already been stated in our prepared remarks, we now have 50,000,000 SVRP members and 124,000,000 subscribers. And you can then calculate the SVIP penetration ratio where we also going to see the penetration ratio will continue to go up, including the ARPPU and retention, they are all ramping up. And we're like and happy to see the growth trajectory is in line with our expectation. Well, actually, the key growth driver are still coming from the premier sound quality as well as the long form audio content as well as the digital item. We're to some extent, we also have the revenue members who's been converted into the SVIP.

Moderator

So the fundamental logic of SVIP growth are still coming from our well consolidated business growth. For example, the new album, and the sales of the this album with our SVIP is already hitting our expectation. We're no longer to record it as a single album sales. So that's the reason I think our SVIP will continue to grow in a very robust manner.

Moderator

To the second part of the question regarding whether the fancy economy business is going to be sustainable. As I have already mentioned, we did many preparations at least six months to twelve months before the event happened for the scheduling. In that way, we will be able to make sure we will be able to run the artist related business in a more robust and a sustainable manner. One more additional comment to our team is if there's no major of like concept event happens, it's definitely to maintain a rapid growth of the merchandise sales. As you may see, we already have a steady growth on that.

Moderator

What we are committed to do is to make sure our fence economy revenue will continue to grow as we expected.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Thank you, and thank you everyone for joining us today. If you have any further questions, please feel free to reach out to the IR team. This concludes today's call, and thank you once again, and look forward to speaking to you next quarter. This concludes today's call.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

Thank you so much.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Thank you.

Cussion Kar Shun Pang
Cussion Kar Shun Pang
Executive Chairman at Tencent Music Entertainment Group

Bye bye. Bye bye.

Millicent Tu
Millicent Tu
Head - IR at Tencent Music Entertainment Group

Bye bye.

Executives
    • Millicent Tu
      Millicent Tu
      Head - IR
    • Cussion Kar Shun Pang
      Cussion Kar Shun Pang
      Executive Chairman
    • Zhu Liang
      Zhu Liang
      CEO & Director
    • Min Hu
      Min Hu
      CFO & Director
Analysts
    • Lincoln Kong
      Executive Director at Goldman Sachs
    • Alicia Yap
      Equity Research Analyst at Citigroup
    • Moderator
    • Thomas Chong
      Managing Director at Jefferies
    • Yang Liu
      Analyst at Morgan Stanley
    • Alex Yao
      Co-Head of Asia Technology, Media & Telecommunications at JP Morgan
    • Ellie Jiang
      Head of Asia Internet & Software at Macquarie Group
    • Wei Xiong
      Equity Research Analyst at UBS Group
    • Analyst
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