Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group 2021 Third Quarter Earnings Conference Call. Today, you will hear discussions from the management team of Tencent Music Entertainment Group followed by a question-and-answer session. Please be advised that this conference is being recorded today. Now I will hand the conference over to your speaker host today, Mr. Tony Yip. Please go ahead.

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 closed. 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, as CSO, 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. Please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company's filings with the SEC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law. Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the IFRS in the company's earnings release and filings with the SEC. You're reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure, or other non-IFRS measures are not uniformly defined by all companies, including those in the same industry. With that, I'm pleased to turn over the call to Cussion, Executive Chairman of TME. Cussion?

Thank you, Tony. Hello, everyone, and thank you for joining our call today. In the third quarter, we continued to implement our dual engine content and platform strategy, which reenforces one and another. Guided by our goal of becoming a leading provider of high-quality content, we are working to expand our all-round capability in music creation, discovery, promotion and monetization, while strengthening our platform's infrastructure and actively collaborating with the broader Tencent ecosystem. These efforts will enable us to unlock greater potential in each component of the music industry value chain and continue to promote the healthy and sustainable development of the music industry in China. With respect to content, our accelerated expansion to music production has delivered promising results. We have designed an innovative and comprehensive process that leverages on our proprietary technology and deep understanding of music trends to systematically create, evaluate and promote music. This process accentuates compounding benefits as we integrate, first, our comprehensive music composition library; second, [ brand machine ] and [ menu ] analytics for artists and repertoire discovery; third, our middle platform that enable refined matching for artist collaboration; fourth, our technical system to demo and evaluate trials to improve ROI; and fifth, flexible promotion channels and resources to enhance promotion efficiencies. By utilizing this process, we aim to produce better music, achieve a short-term creation cycle and better hit weight and realize meaningful cost savings from economies of scale and composition tools. I want to share some recent examples that illustrate this point. First, in the third quarter, through our proprietary process of matching repertoire with suitable singers and producers and promoting on multiple TME and external platforms, we produced [Foreign Language] a hit song which reached the #1 on multiple music charts with streaming volume of over 0.5 billion within…

Thank you, Cussion. Hello, everyone. Moving on to our platform strategy. We are strengthening our platform's capability to enable music lovers to enjoy more video-based content, share their passion for music building our community and have more socially engaging experience. To inspire creation and the innovation of video content on our platform, we continue to build shared [ video ware ] and the infrastructure. First, QQ Music's short video type featuring [indiscernible] and Kugou Music invited analysts on its streaming page achieved a sequential increase in their user penetration. Early indications of our video functionality are very positive. By the end of the third quarter, QQ Music's daily video views and daily unique visitors on our platform reached 100 million and 18 million, respectively, representing triple digital growth rates year-over-year. We are [indiscernible] about its monetization potential while advertising and other avenues going forward as video views ramp up. Second, to better cooperate with Weixin Video Accounts, we are now supporting the one-click video publishing feature across Weixin Video Account, QQ Music, Kugou Music and Kuwo Music and WeSing, making it easier to a musician to reach a broader audience within 1.5 months of its launch. The one-click video publishing feature was adopted by more than 20,000 musicians on our platform. In addition, QQ Music's collaboration in the musician live streaming initially with Weixin Video Account had [ 6,633 ] events and attracted over 10 million viewers in the third quarter. As we aspire to connect people through music, our social and our community building efforts focus on interactions among both [ strangers ] and the brand. We are pleased to see increasing vibrant social interactions on our platform as demonstrated by user utilization of Putong Planet and Kugou's new feature, [Foreign Language], which allows user to swipe through realized…

Thank you, Ross. Hello, everyone. As we continue to execute on our dual engine content and platform strategy in the third quarter, our online music services MAU grew quarter-over-quarter to 636 million, maintaining the progressive recovery trend, which began in the second quarter and bolstering our confidence in the underlying health of our user funnel. Our IoT MAUs reached 74 million in the third quarter with a year-over-year growth rate of 42%, benefiting from the rich and growing variety of products and services we provide on a broad range of IoT devices. We're pleased to see IoT devices becoming an increasingly important and influential music content distribution channel for our platform. Despite some impact on advertising due to recent regulation on splash screen ads, our online music revenues demonstrated strong momentum in the third quarter as users continue to be attracted by our enhanced music streaming experience with a net add of 5 million during the quarter, the number of paying subscribers to our online music services reached 71.2 million, increasing by 38% year-over-year and resulting in a paying ratio of 11.2%. To weather the decelerated growth in advertising, we expanded our advertising products by enabling advertisers to better appeal to audience within music streaming page and search sections. We also rolled out a new monetization model to help artists boost their earnings by sharing advertising revenue with them on streaming page advertisement. To rejuvenate our brand and expand our communication channels with Gen Z users, in the third quarter, we fostered a new culture around Chinese ancient style and hip hop through multiple themed events. We also livestreamed Ariana Grande's Rift Tour Concert, hosted by the popular online game, Fortnite, [Foreign Language], creating an immersive virtual reality experience, including elements of both popular music and games. In addition, we…

Thank you, Tony. Hello, everyone. Next, I'll discuss our results from a financial perspective. Our total revenues for Q3 2021 were RMB 7.8 billion, up 3% year-over-year. Our online music revenues were RMB 2.9 billion this quarter, up 24% year-over-year. In the third quarter of 2021, our music subscription business continues to grow rapidly with revenues of RMB 1.9 billion and a year-over-year growth of 30%. This resulted from our continuous improvements in products and content, expanded sales channels and the effective marketing campaigns. Monthly ARPPU was RMB 8.9 this quarter, compared to RMB 9.5 in the same period last year as we solidify our competitive advantages and offered more effective promotions to cultivate users' willingness to pay for music. Our Q3 advertising continued to grow on a healthy pace. During the quarter, we added more advertising product options to mitigate the impact from the new guidance on [indiscernible] issued by the regulator in the second quarter this year. We also partnered more closely with Tencent to reach more advertisers and improve EPM. Social entertainment services and other revenues were RMB 4.9 billion, down by 6% year-over-year as we faced more intense competition from other entertainment platforms and tightened regulatory environment. To cope with the competition, we are making efforts in retaining existing and attracting new performers by utilizing our internal growth platform traffic to attract more users and keep revamping product features and launching new initiatives to maintain steady revenue scale. Gross margin was 29.6% in Q3 2021, down by 2.8% year-over-year, which was better than expected. The decline was due to the following reasons: Firstly, with the continued growth in subscription revenues, revenue mix shifted as revenue from online music accounts were higher percentage of revenue whose gross margin were generally lower; secondly, [indiscernible] increased on a year-over-year…

[Operator Instructions] Your first question comes from Eddie Leung from Bank of America.

Just a question perhaps following up on Shirley's point about current costs. Given the regulatory changes as well as growing independent musicians' content, how should we think about the outlook of the [indiscernible] or the gross margin related to the online music users, not in the near term, but more of like a trend.

Okay. We will continue investment on the musician platform, and that will be -- give us a content advantage for our products. And a part of the content's regulator, our content will be [ changed to ] non-inclusive license. So in the short term, that will be having no material effect on our gross margin. But in long term, that will be -- have a positive impact on our gross margin. And -- okay.

Your next question comes from Alex Poon from Morgan Stanley.

My question is regarding our music subscription business. So from music net adds perspective, we have hit the high end of our guidance range 5 million in the last 3 quarters, every quarter. With the better user engagement now, we have seen MAU up sequentially in 2Q, 3Q and also user acquisition cost is down. And we also recently launched a new QQ Music app recently. How should we think about the paywall ARPPU and net adds outlook in the coming quarters? Is it possible we can do better than 5 million in the coming quarters?

In terms of the music paying users, we're very pleased to see that it surpassed the 70 million milestone to reach 71.2 million in the third quarter. It recorded very strong growth of 38% year-over-year. Net adds was very strong at 5 million, bringing the paying ratio to 11.2%. The music subscription revenue continues to deliver strong growth at 30% year-over-year. And we've achieved all this while, at the same time, being able to improve on the retention rate of the paying users. Music ARPPU recorded a slight decline as we offered some promotions in response to the changing competitive landscape. Although our music ARPPU will continue to be at a premium compared to industry peers. And as a result of the price promotion it actually gives us more room to be flexible with regards to putting premium content behind paid subscription while still being able to achieve the 4 million to 5 million quarterly net add goal that we set out, which continue to be the case.

Your next question comes from Thomas Chong from Jefferies.

My question is about the advertising outlook. Can management share about the view on the future advertising outlook and the key categories across QQ Music, Kugou, Kuwo in the dynamic industry environment?

Yes. Advertising accounted for approximately half of the music non-subscription revenue this quarter, but it actually could have been higher. And advertising has seen some slowdown as a result of the regulatory impact that we have outlined. However, we continue to see positive year-over-year growth rate on the advertising revenue, and we believe the impact would only affect us in the short term. As we digest the regulation changes and introduce more advertising products and build out our advertising business in general, we see advertising as a substantial opportunity with strong growth potential going forward. The growth sectors that we are seeing include cosmetics, consumer electronics and food products. Sectors that are more impacted by industry regulatory changes, in general, such as finance and gaming, represent only a very low percentage of our advertising revenue. And as a result, we are less impacted than the overall industry.

Your next question comes from Alicia Yap from Citigroup.

My question is related to the social entertainment competition. In terms of the competitive landscape, just curious, from management view, if the social entertainment live streaming business could see a revival of growth in the coming quarters following the product upgrades and enhancement? Or do you -- does management think this is more or less a more mature and stable industry and potentially could see some declining trend going forward? So any color on how management thinks about this revenue growth outlook for Social Entertainment segment would be appreciated.

As reported in the third quarter, we saw a slight year-over-year decline in the growth rate of the Social Entertainment revenues. And in response to that, we continue to revamp the leasing product, namely the online karaoke room to make singing more fun and socially engaging. We've launched multiple features, including the large chorus, acapella, multi-variant adaptations, which we mentioned. We also enable more intra room and as well as cross-room interactions. And all these features have engaged a large number of users. WeSing have also launched a virtual live streaming room to pioneer a new 3D live entertainment experience into the metaverse environment. In addition to WeSing, we see strong pockets of growth within large streaming such as audio live streaming, which is a very complementary use case to our core music listening experience. We're seeing strong growth across both user numbers as well as revenue, and we continue to grow our audio live streaming business in China as well as to leverage that experience to further expand our overseas market as we have seen strong growth and monetization potential there. And then in terms of QQ Music live streaming, which is a fast-growing and emerging pockets of growth within our live streaming business, users, performers and revenues all continue to ramp up with revenues of QQ Music live streaming growing at over 100% year-over-year. It has attracted 10,000 musicians to live stream and enable musicians to connect and interact with the fans via live streaming. QQ Music live streaming currently accounts for mid- to high single digit of the social entertainment revenues. And is -- and between QQ Music live streaming as well as audio live streaming as well as our international expansion opportunity, we see effective ways to be able to offset some of the decline in the more traditional live streaming businesses.

[Operator Instructions] Your next question comes from Wei Xiong from UBS.

We see that your long-form audio business continued to make a very good progress this quarter. So if we take a slightly longer view of this business, how should we think about the revenue potential and the margin profile for this business in the next 2 to 3 years?

Long-audio is a highly complementary service to our core music product as well as music content portfolio. As we have seen by experience, it is very accretive to user engagement and time spent. We continue to enrich the licensed titles, podcasts as well as continue to build the UGC content ecosystem to enhance our audio content offering. Examples that we've mentioned include the Source Snow Stride, [Foreign Language], which has become a very popular self-produced content blockbuster, accumulating a large number of audience. We also continue to enhance our content library by offering audio content from Rock & Roast, [Foreign Language]. And QQ Music has also launched an open platform to improve podcasters' ability to create and upload podcast-related content and allow them to share content to TME as well as to other platforms with a few simple clicks. And as a result, we have seen a very strong growth in long-audio MAU to exceed 140 million, which recorded growth of 89% year-over-year. And in addition, we continue to grow the monetization opportunity within long-audio. And we see, in the long run, opportunities both across audio subscription, which we have recorded over 5 million paying users in the third quarter, as well as audio advertising, as we build out the lon- audio business. And while it remains to be a negative gross margin contributor this year and likely into the next few quarters as well, we do expect the long-audio business to be a profitable business beyond that.

Your next question comes from Charlene Liu from HSBC.

I would like to know whether you can -- obviously, the [indiscernible] expenses came in better than expected. And I was wondering if you can give us some guidance on how should we think about sales and marketing and cost of sales going forward in the next quarter and entering into 2022?

Okay. [ About sales ] and marketing expenses, this quarter, I -- we [ thought of ] many ways to control these expenses. First, we reduced [ direct ] expenses to acquire users because we use our internal capital efficiently to attract more users. And face to the competition, we need to use our [indiscernible] efficiently. So we will add more content and internal capital to attract more users. And looking forward, we think we will continue to control our sales and marketing expenses. And we expect that will be getting more good results in the future. Yes.

We are now approaching the end of the conference call. I'll now turn the call over to your speaker host, Mr. Tony Yip, for closing remarks.

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

Thank you.

Thank you.