Tencent Music's 22Q4 Earnings Review: After Cost Reduction, Growth is More Worthy of Attention

The company's performance began to pick up, and the online music service business became the biggest support. In 22Q4, the company achieved revenue of 7.43 billion yuan (US$1.08 billion), a year-on-year decrease of 2.4%, a narrower decline than the previous quarter, and a quarter-on-quarter increase of 0.8%, indicating that the company's performance has begun to pick up. Among them, online music services have become the most important performance support. 22Q4 revenue increased by 23.6% year-on-year to 3.56 billion yuan (516 million US dollars); while social entertainment services and other revenues fell 18.2% year-on-year to 870 million yuan (561 million US dollars).

In terms of profit, the company achieved a substantial increase in profit through large-scale cost reduction and efficiency increase. In 22Q4, the net profit attributable to equity holders of the Company was 1.15 billion yuan (US$167 million, YoY+114.7%), and the non-GAAP net profit was 1.44 billion yuan, YoY+72.8%. The growth of the company's net profit The range increased compared with the previous quarter, showing that the company’s accelerated profit release under the strategy of reducing costs and increasing efficiency. Among them, the 8.1% decrease in operating costs was mainly due to the reduction in the share of social entertainment business and the control of content costs. % increased by 4.2% to 33.0%. Selling expenses decreased by 64.5% year-on-year to 266 million yuan (39 million US dollars), mainly due to the reduction of marketing activities for new user acquisition and more emphasis on the operation of existing customers. General and administrative expenses were only slightly An increase of 2.6%, mainly due to increased investment in research and development to improve the quality of content.

In 2022, the net profit attributable to the parent company will be 3.68 billion yuan (533 million U.S. dollars), a year-on-year increase of 21.4%. Non-GAAP net profit was 4.75 billion yuan (688 million US dollars), a year-on-year increase of 14.4%.

In addition, as of December 31, 2022, the company's total balance of cash, cash equivalents, time deposits and short-term investments was 27.4 billion yuan (3.97 billion U.S. dollars), accounting for 30% of the total market value, and the cash flow is very healthy.

Online music service 22Q4 revenue increased by 23.6% year-on-year to 3.56 billion yuan (516 million US dollars) revenue accounted for nearly 50%. Among them, online music subscription revenue increased by 20.6% year-on-year and 4.5% quarter-on-quarter to RMB 2.35 billion (US$341 million), mainly due to the increase in paying users.

Due to fierce competition, the company's user data is not yet stable. In 22Q4, the MAU of online music users fell by 7.8% year-on-year.

Paid users have grown significantly, but the room for growth is limited. The number of paying users increased by 16.1% year-on-year to 88.5 million, with an increase of 3.2 million month-on-month, and the user payment rate continued to increase to 15.6%. Compared with the medium and long-term payment rate guidance (20%-25%), the future growth space is not too large . At the same time, ARPPU increased by 4.7% year-on-year to 8.9 yuan.

Advertising revenue is expected to continue to pick up. Revenue from online music services other than subscriptions increased 29.8% year-on-year and 2.3% quarter-on-quarter to RMB 1.21 billion (US$175 million). Advertising revenue continued to recover sequentially. The company's advertising monetization models are diversified. In addition to splash screen ads, the company has expanded advertising sources, including introducing sponsored ads (Coca-Cola, KFC, JD.com, etc.) through online and offline activities (including TME Live and TMELAND), Improve monetization efficiency.

For long audio, the number of subscribers doubled year-over-year in the fourth quarter to more than 10 million, driving revenue growth and is not yet expected to be profitable.

In the fourth quarter of 2022, social entertainment services and other revenues fell by 18.2% year-on-year to 3.87 billion yuan (561 million U.S. dollars), mainly due to the impact of short video platforms. At present, the business is expected to continue the downward trend and has not yet seen an inflection point. Social entertainment service MAU fell 16.6% year-on-year to 146 million; the number of paying users fell 15.6% year-on-year to 7.6 million, but increased by 200,000 quarter-on-quarter; monthly ARPPU fell 3.1% year-on-year to 169.6 yuan.

At present, the worthwhile point of social entertainment services is mainly in business innovation, such as audio live broadcast, multi-person audio interaction, etc., which are still being explored, and the commercialization path is still unclear. 22Q4 audio live broadcast revenue increased year-on-year, mainly due to the expansion of QQ Music live broadcast, and Kugou Music further strengthened the connection between its music platform and audio live broadcast after QQ Music. And WeSing's multi-person chorus room audio and video settings continue to enrich the platform's real-time interactive scenes, making the penetration rate and user duration continue to increase.

The company is currently focusing on the operation of existing users, and the number of paying users is expected to further increase. After reducing discounts and promotions, ARPPU is expected to gradually pick up. In addition, considering the future recovery of the macro economy and the diversification of advertising monetization forms, there is still a lot of room for improvement in advertising revenue.

However, the downward trend of the social entertainment business has not yet seen an inflection point. Considering that its revenue accounts for more than 50%, the decline in revenue of this business will still have a negative impact on the company's overall revenue, offsetting the growth of some subscription services.The profit growth in the past two quarters is mainly due to the substantial cost reduction and efficiency increase. In the future, the company will still increase cost control, but considering that the initial cost has been greatly reduced, it is expected that the cost will continue to have relatively limited downward space. Therefore, the profit growth in 2023 is not enough to expect growth to reduce costs and increase efficiency.

To sum up, although the profit growth rate in this financial report is very large, it is mainly achieved through fee reduction. Looking forward to 2023, the company's revenue and profit growth may be relatively limited.