Tencent Music (TME) Beats Revenue Expectations Despite User Decline

Tencent Music Entertainment Group (TME), a leading Chinese online music and audio entertainment platform, reported a strong fiscal third-quarter 2024, exceeding revenue expectations despite a decline in monthly active users (MAUs). The company announced a **6.8% year-over-year revenue growth**, reaching $1.00 billion (7.02 billion Chinese Yuan), surpassing analyst predictions. However, this growth was partially offset by decreased revenue in social entertainment services, leading to an adjusted earnings per American Depositary Share (EPADS) that slightly missed expectations. The mixed results sent ripples through the market, causing a temporary stock dip following the earnings announcement, despite the company’s strong year-to-date performance.

Key Takeaways: A Mixed Bag for Tencent Music

• **Revenue Beat:** Tencent Music exceeded revenue expectations, posting a **6.8% year-over-year increase** to $1.00 billion.
• **User Decline:** Despite revenue growth, the company experienced a **decline in MAUs**, highlighting challenges in user engagement.
• **Strong Music Subscription Growth:** Growth in online music services, particularly the **20.3% year-over-year surge in music subscriptions**, indicates a positive trend in the company’s core business.
• **Social Entertainment Struggle:** Revenue from social entertainment services saw a significant **23.9% year-over-year decline**, impacting overall earnings.
• **Stock Performance Dip:** Although the company beat revenue estimates, the stock price experienced a **9.74% drop** on Tuesday post earning announcement.

Deep Dive into Tencent Music’s Q3 2024 Performance

Online Music Services: A Story of Growth and Challenges

The online music segment delivered a robust performance, boasting a **20.4% year-over-year revenue increase** to $781 million. This growth was primarily fueled by the impressive **20.3% year-over-year jump in music subscription revenues**, reaching $547 million. This success underscores the effectiveness of Tencent Music’s strategy to enhance user privileges and premium memberships, boosting user loyalty and attracting new paying subscribers. The number of online music paying users increased by a significant **15.5% year-over-year to 119.0 million**. However, this positive trend was counterbalanced by a **3.0% year-over-year decline in monthly active users (MAUs)** to 576 million, signaling potential challenges in user retention and attracting new users. The monthly average revenue per user (ARPPU) for online music, however, showed positive growth, increasing by **4.9% year-over-year to 10.8 Chinese yuan**, demonstrating increased spending by existing paying users.

Social Entertainment Services: A Significant Revenue Decrease

In contrast to the success of the online music segment, Tencent Music’s social entertainment services experienced a substantial **23.9% year-over-year decline in revenue**, falling to $219 million. This decrease coincides with a dramatic **30.2% year-over-year drop in mobile MAUs for social entertainment** to 90 million, suggesting a considerable loss in user engagement in this sector. The monthly ARPPU for social entertainment also declined by **24.8% year-over-year to 64.8 Chinese yuan**, further highlighting the challenges faced by this segment. The company will need to address these challenges through potential product enhancements or strategic shifts within this segment to revive its growth.

Financial Highlights: Improved Margins and Operating Profit

Despite the mixed performance across different segments, Tencent Music showcased improved financial health. The company’s **gross margin expanded by 690 basis points to 42.6%**, primarily attributed to the robust growth of music subscriptions and advertising services, coupled with increased original content production. This improvement directly contributed to a significant **50.5% year-over-year increase in operating profit**, reaching $309 million. Operating cash flow also mirrored this strength at $309 million. The company’s strong financial position is further supported by its substantial cash reserves, with combined cash, cash equivalents, term deposits, and short-term investments totaling **$5.14 billion as of September 30th**.

Management Commentary and Future Outlook

Tencent Music’s Executive Chairman, Mr. Cussion Pang, highlighted the company’s commitment to “quality growth,” emphasizing the synergy between its platform and content ecosystem as crucial for long-term sustainability. He emphasized the positive results driven by the increasing number of music subscribers and the diversification of offered services. CEO, Mr. Ross Liang, further explained the strategic success of enhancing user privileges and premium memberships, directly impacting the expansion of the paying user base. While acknowledging the challenges in the social entertainment sector, the overall positive message from the management team is hopeful regarding the long-term growth potential of the company, largely predicated on the continued success of its core music offering.

Analyst Reactions and Market Implications

While the revenue beat might suggest a positive outlook, the significant decline in MAUs, particularly within the social entertainment sector, raises some concerns. Analysts will be scrutinizing Tencent Music’s strategies to revive user engagement across all platforms. The market’s initial negative reaction, signaling a **9.74% drop in stock price on Tuesday**, possibly reflects these concerns. However, the substantial year-to-date gain of over **32%** suggests investors still hold a significant level of confidence in the company’s long-term potential. The coming quarters will be crucial in observing whether Tencent Music can successfully address the user engagement challenges and maintain a steady growth trajectory.

Conclusion

Tencent Music’s Q3 2024 results present a mixed picture. While the company exceeded revenue expectations, fueled by strong growth in music subscriptions, the decline in MAUs and substantial revenue drop in social entertainment services remains a cause for concern. The overall financial health of the company appears strong, with improved margins and substantial cash reserves. The market’s response reflects the complexity of the situation. Long-term success will depend on the company effectively navigating these challenges and capitalizing on the growth potential of its core online music offerings.