Kuke Music Holding Limited (KUKE) Q4 2020 Earnings Call Transcript

Kuke Music Holding Limited (KUKE -2.80%)
Q4 2020 Earnings Call
Apr 15, 2021, 8:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and good evening ladies and gentlemen. Thank you, and welcome to Kuke Music Holding Limited fourth-quarter 2020 earnings conference Call. [Operator instructions] I will now turn the call over to the first speaker today, Ms. Claire Choi PR director and IR of Kuke Music Holding Limited.

Please go ahead, ma'am.

Claire Choi -- Press Release Director and Investor Relations

Thank you, Harris. Hello, everyone. Welcome to our fourth-quarter 2020 earnings call. Thanks for joining us today.

On the call with me today, they are Mr. Yu He, Kuka's founder, chairman, and CEO; and Ms. Sun, the president of Kuke Music; Mr. Tony Chen, the CFO of Kuke Music.

Mr. Yu and Ms. Sun will give a general overview and then, Tony, will discuss the financials. Following the prepared remarks, our team will be available to answer your questions.

You can refer to our fourth-quarter 2020 financial results on our IR website at ir.kuke.com. You can also check up replay of this call when it becomes available in a few hours on our IR website. Before we start, please note that this call may contain forward-looking statements made pursuant to the safe harbor provision for the Private Securities Litigation Reform Act of 1995. This 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 this forward-looking statements.

All forward-looking statements are expressly qualify in their entirety by the cautionary statement risk factors and the health of the company filings with the SEC. The company undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call. As a reminder, this conference will be recorded. In addition, a live and archived web -- webcast of conference call will be available on Kuke investor relations website at ir.kuke.com.

It's now my pleasure to introduce our first speaker, Mr. Yu.

Yu He -- Founder, Chairman, and Chief Executive Officer

OK. Thank you, Claire. Good morning and good evening, everyone. Welcome to our first ever earnings call as a listed company.

First, I would like to thank all our investors for all of your outstanding support you have given to our company. For most companies 2020 was not an easy year. However, since the second half of 2020, China's economy has largely recovered from, COVID-19. By the fourth quarter of 2020, our operations had also largely recovered, especially compared with the first three quarters of the year.

This improvement was mainly driven by two trends. First was the overall rebound of the economic activities in China. Second was the resumption of our customers' business operations. In September for example, as most of China's economy have started, we opened our music education business, entered into a new growth cycle, and we have observed a strong demand for our music education services since then.

As a leading provider of smart music education solutions in China, we expect our kindergarten segment to continue to perform well going forward. We also benefited from the stability and the loyalty of our licensing and a subscription customer base. In the fourth quarter, the majority of all our customers from this segment renewed their service contracts with us, and more and more traditional business are going online and adding to the digital world. These companies will need a music solutions to improve their customer experiences.

Next, I will pass to Patricia Sun, president of Kuke Music, who will introduce our business segment highlights.

Patricia Sun -- President

Thank you, Mr. Yu. Good morning and good evening to everyone. As this is our first earnings call, I would like to take this opportunity to elaborate on some of the key areas for each of our three business segments.

As a leading provider of smart music education services in China, we are backed by a well diversified classical music library and a rich collection of digital music scores. Both of which have been key elements to securing our leading position in the offering of pioneering interactive music classes with performance tracking, a lack of qualified music teachers and high tuition fees for music education, having the main industry pain points in China. Recognizing these concerns, we have developed a system that can independently teach students. Thereby, reducing the role of human teachers to that of maintaining an orderly classroom.

Going forward, we will continue utilizing and upgrading this system to make high quality music education affordable and accessible. There are about 280,000 kindergarten and more than 47 million students in China according to China's Ministry of Education. Since launching our smart music education solution in late 2019, the demand from kindergarten has been quite robust despite the impact of the COVID-19 pandemic. In the fourth quarter of 2020, we once again observed the resilience of our target market.

As of December 31st, 2020, our collaborating kindergarten had a growth of more than 1,600 from 248 a year ago. Our student enrollment had increased to more than 30,000 from 5,600 a year ago, and our geographic coverage had expanded to 172 cities by year end. As mentioned, growth in this segment is also being driven by favorable government policy. At the end of 2020 for example, the Ministry of Education officially announced that it plans to raise the importance of physical education, arts education, and music education, and may include these subjects in both high school entrance examinations and high school academic proficiency tests in most of cities in China as soon as 2022.

Recognizing these favorable signals and the demand for our solutions, we expect our music education business to deliver a strong result in 2021 as we continue to expand at a rapid pace. Overall performance for this segment is generally subject to seasonal recreation and the change in school terms. Now turning to our licensing and subscription service and business. We pride ourselves as the hub to one of the most abundant pools of classical music content in China.

Our extensive catalog of copyrighted content allows us to explore various business opportunities, established unique competitive advantages, and attract clients that are key players in their field, including among others, major digital music service providers, publishing houses, public libraries, movie and TV production companies, airline companies, and high-end equipment manufacturers. By maintaining long-lasting relationships with these players, we are able to maintain stable revenue projections with solid growth potential. In addition, our ability to utilize our capital can also view the development of our music education segment and these two growing segments have become increasing correlated. Our life classical music events business also has strong revenue growth potential.

In February 2020, we acquired BMF, which have been involved in hosting the Beijing Music Festival, one of the most influential classical music events in China for 23 -- for the past 23 years. As a result of the acquisition, our music ecosystem now encompasses music content, smart education solutions, and performing arts. In October 2020, was successfully -- we successfully hosted the 23rd Beijing Music Festival through a combination of online and offline music programs. By addressing the full breadth of people's music needs, we believe that our comprehensive music ecosystem will become an essential part of people's daily lives.

For research and development. We will continue to upgrade our smart music education system and curriculum. We will also introduce more innovative technologies and product lines, such as online masterclasses, virtual workshops, and high resolution music audio collection across the music education market for students in K12 and above. Our goal is to cultivate a music ecosystem through which individuals can progress from their earliest stage of development to the professional level.

We remain confident that our unique business model, our differentiated advantages, and a favorable macro environment in which we are operating will allow us to maintain our growth in 2021 and beyond. With that, I will pass the call over to our CFO, Tony, who will walk you through our financial details for fourth quarter. Thank you.

Tony Chen -- Chief Financial Officer

OK. Thank you, Patricia, and hello, everyone. This is Tony Chen, CFO of Kuke Music. Before we start our detailed financial discussion, please note that we will be presenting non-IFRS measures along with IFRS measures today.

Our non-IFRS results exclude certain non-cash expenses and we believe such non-IFRS measures can help management better understand the trends in our business development. The details of these expenses can be found in the reconciliation tables included in our press release. Please note that unless otherwise stated, all the financial numbers representing today are for the fourth quarter of 2020 and are in renminbi terms and that percentage changes are in a year-over-year basis. OK.

Going to our numbers. Revenue in the quarter increased by 21.7% to RMB 128 million from RMB 105.2 million a year ago. This increase was mainly driven by the increase in revenue from our smart music education services, which was mainly due to our increasing brand awareness in music education, higher kindergarden subscription growth, and the announcement of new government policies in favor of music education, as was the increase in revenue from our newly acquired life classical music business, that is BMF, that Patricia had just mentioned. Such improvements were partially offset by a decrease in licensing of subscription revenue, which I will put some additional color on in just a moment.

Excluding the impact resulting from the consolidation of BMF revenue, our total revenue in the quarter was RMB 96.5 million, representing a year-over-year decrease of 8.3%. Now turning to our revenue breakdown. In China, the overall music industry was somewhat impacted by the pandemic in 2020 just like other industries. Such unfavourable conditions restricted our ability to secure new customer contracts.

Particularly, in the first half of the year which led to suboptimal results for our [Inaudible] revenue in the fourth quarter. As such, revenue from licensing and subscription in the quarter was RMB 46.4 million, compared to RMB 52 million a year ago. Nevertheless, revenue from our smart music education business in the quarter increased by 2.5% to RMB 54.5 million from RMB 53.2 million in the same period of 2019, but results were lastly driven by the significant growth of our smart music education subscription business, which accounted for 42.6% of our total revenue in the quarter, showcasing our quick recovery from the negative impacts of the pandemic. Finally, due to the gradual resumption of classical music performance across the country, as well as, our success in hosting the 23rd Beijing Music Festival, we generated RMB 27.1 million in revenue from life practical music events.

For the cost of sales in the quarter increased by 36.6% to RMB 26 million. This increase was mainly due to our expansion of smart music subscription partnerships with kindergarten, as well as, the consolidation of the BMF into our financial results. Gross profit in the quarter was RMB 102 million, representing an increase of 18.4%, gross margin was 79.7%, compared to 81.9% in the same period of 2019. Operating expenses were RMB 29.7 million, compared to RMB 16.1 million in the same period of 2019.

Filing and distribution expenses were RMB 818 million, compared to RMB 6.9 million in the same period of 2019, mostly due to the increase in promotional activities for the 23rd Beijing Music Festival, as well as, the increasing overall advertising service fees. Meanwhile, administrative expenses were 23.3%, compared to RMB 8.9 million -- sorry RMB 23.3 million, compared to RMB 8.9 million in the same period of 2019, mainly due to the increase in professional fees related to our IPO which was mainly conducted in the later part of last year. Increase in share-based compensation expenses and the consolidation of the BMF into our financial results. During the fourth quarter, as a result of the pandemic and the corresponding increase in trade receivables levied, our net impairment losses on financial assets were RMB 17.6 million, compared to RMB 0.3 million in the same period of 2019.

Operating profit in the fourth quarter was RMB 55.8 million, compared to RMB 70.1 million in the same period of 2019 while operating margin was RMB 43.6 million, compared to RMB 66.6 -- sorry, operating margin was 43.6%, compared to 66.6% in the same period of 2019. At the same time, our net profit for the period was RMB 44.2 million, compared to a RMB 57.5 million in the same period of 2019, and then IFRS profit was RMB 84.5 million, compared to RMB 59.4 million in the same period of 2019. Basic and diluted earnings per share were RMB 1.80 and RMB 1.79, respectively. Basic and diluted non-IFRS earnings per share were RMB 3.42 to RMB 3.41, respectively.

Moving onto our balance sheet and liquidity. As of December 21st, 2020, we had a total of RMB 25.7 million in cash and cash equivalents. As we mentioned earlier, we have earlier this year, we have completed an IPO exercise on the New York Stock Exchange and we have raised USD 15 million from our IPO. Looking ahead, in order to further improve performances in our collection process for receivables, we plan to strengthen our payment collection terms and maintain close dialogues with our customers regarding the new schedules to outstanding receivables.

Moreover, we expect that our margin will continue to improve as we further expand our school and kindergarten partnership, promote our smart music education services, and manage the related process procurement costs. As customers demand for quality music solutions, continues to grow, we firmly believe that our ability to keep pace with these demands and deliver a first-rate music products and services, will not only drive our business growth, but also improve our financial performance over the long-term. This concludes our prepared remarks for today. And operator, we are now ready to take questions.

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] And the first question we have will come from Vitus Leung of Deutsche Bank. Please go ahead.

Vitus Leung -- Deutsche Bank -- Analyst

Hi, can you hear me?

Operator

Yes, sir.

Vitus Leung -- Deutsche Bank -- Analyst

OK. You can hear me, thanks. Our thanks to management for taking my call, my question. So I'm just wondering, like, can we get more color in terms of the big growth in the smart education business in 2021? With business and economic recovery in fourth quarter in the education segment, so can management give us more color in terms of the growth prospect in education business in 2021? Thank you.

Tony Chen -- Chief Financial Officer

OK. Operator, this is Tony. I'll take the call. Sorry, I'll take the question.

Operator

Sure.

Tony Chen -- Chief Financial Officer, Kuke Music

Yeah, thank you. Well, the smart music education business segment, we are quite optimistic for 2021. We believe there will be a considerable amount of growth in the number of collaborating kindergarten and the enrlled -- the number of enrollment and the overall revenue for this segment in 2021. It may be too early to say, specifically, just how the growth trend will look like here in the 2020 [Inaudible] release -- results released.

We shall be providing you with more information during our 2021 Q1 first-quarter results release that will be come out soon this year. But here, I would like to take the opportunity to explain to you that our main focus for this segment would be on the kindergarten market and it has a distinctive seasonality pattern. Due to this seasonality pattern, growth would not be even throughout the year. The kindergarten in China usually has two school semesters each year.

The first one from September to December and the other one mainly from March to June. So in the first quarter, there are the winter holiday and Chinese New Year holiday, which is the most important holiday season for Chinese. So throughout the first quarter, things will usually be quite slow, and so business in this quarter is usually relatively flat. In the third quarter, there are usually the long summer holidays.

So again, business would be relatively flat as well. Especially with these, more marketing activities in the second quarter and the first quarter because kindergartners are more productive during these two quarters. And therefore, the business results for this segment, the smart music education segment, for these two quarters namely the second quarter and the first quarter are usually relatively better. But all year round, we do continuously improve on our service and product qualities so as to provide our customers with ever improving learning experience.

So with the trend of our performance will not be homogeneous throughout the full year because of seasonality. Having said that, we were considering working with our collaborating kindergartners to open some classes for kids during summer holidays this year. We hope we can somewhat improve the Q3 performance a bit, as compared to Q3 and Q4. It will be interesting to see how the results will come out this year.

This is one example of our marketing team constantly exploring new ways to deliver our education services and attract more students to enroll into our classes. That's pretty much all that I would like to address.

Operator

OK. Next we have Yuji Fung of SBI China Capital.

Yuji Fung -- SBI China Capital -- Analyst

Hello, can you hear me?

Tony Chen -- Chief Financial Officer

Hello.

Operator

Yes, sir, we can hear you.

Yuji Fung -- SBI China Capital -- Analyst

OK. OK. OK. Thank you for taking my question.

I have two questions. My first question as the [Inaudible] not [Inaudible] business, so we assume that our capital expenditure for this segment will be also increasing, right? Does the company have any action or how does the company manage to control the cost effectively for the [Inaudible] for this segment? That's my first question. And my second question is, I'm also aware that recently the capital market has raised attention on the education companies due to the changes in policy and regulation in China. How we foresee these trends in person? Would that have any impact on our music education business going on? That's it for my questions.

Thank you.

Tony Chen -- Chief Financial Officer

OK. Maybe I'll address this first question and then Patricia can address the second one. Is that OK?

Patricia Sun -- President

Yes, I'll take the second one. Tony will take the first one. Please, Tony.

Tony Chen -- Chief Financial Officer

OK. So let me start with the first question about capex for this year and our control with our supply and cost. It's a very important question that you've raised. In our smart music education segment, capex grew simultaneously with the number of collaborating kindergartens.

Since we are placing a fixed number of smart pianos into the collaborating kindergartens upfront. Along with the growth in the business side, we are expecting a bigger capex along the way. So this year, yes, the capex we're expecting considerable growth as compared to last year. So currently, we have two major manufacturing partners for our smart pianos and we are already -- one of the major customers for these two, according to our business plan this year, we will be purchasing considerably, both smart pianos to cater for the -- for the vast number of collaborating kindergartens who have signed up for our services.

So we believe we'll be -- we'll be becoming even more important to our manufacturing partners this year. But having said that, we are also evaluating a few other potential manufacturing partners. We might choose one this year, that means we are targeting to have probably three manufacturing partners this year. And we shall allocate our purchase orders to these manufacturing partners according to their production capabilities, qualities, and their expertise in manufacturing.

We would like to specialize them in manufacturing different smart pianos for different market applications for us going forward. We believe we have built a very close and mutually beneficial relationship with our existing partners which will help us in a lot of ways as our business continues to expand in the future. In terms of cost control, this year, we're targeting to further improve the design and specifications of our smart pianos and we shall select the most suitable manufacturing partner to try to further reduce the overall cost of smart pianos in the second half of this year. It will be an important step for us to keep our capex in control this year and beyond.

We are all very excited and eager to see how this new development will come out. Overall, I think our operations will grow bigger and we shall be enjoying it in more economies of scale and our bargaining power with our manufacturing partners will grow even stronger. And at the same time, we are constantly improving our product designs and technologies. So we are trying to -- we're always trying to add more functions while reducing the overall costs in our system.

All these factors will be beneficial to us in terms of the control of our manufacturing partners and costs with our smart music business segment continues to grow in size. So that is all that I would like to address for this question and maybe I'll -- I'll pass the second question to Patricia.

Patricia Sun -- President

OK. Thank you, Tony. In order to refresh the second question, could you please answer -- ask the question again? So we could memorize that question which is the details about the question. Thank you.

Yuji Fung -- SBI China Capital -- Analyst

Hello, can you hear me?

Tony Chen -- Chief Financial Officer

Yes.

Yuji Fung -- SBI China Capital -- Analyst

Hello.

Tony Chen -- Chief Financial Officer

Hi, yes, hi.

Yuji Fung -- SBI China Capital -- Analyst

OK. My question is that -- my question is that recently the capital market has raised the attention on the education companies due to the changes in policy and regulation in China. How we foresee these changes, would that have any impact on our music education business going on?

Patricia Sun -- President

Thank you, very clear. So as we mentioned in our presentation, the Minister of Education recently officially announced that they plan to raise importance of physical education, arts education, and music education, which means that music education may include into the major subjects. Involves high school entrance examinations and high school academic proficient test in most of our cities and maybe in time in 2022. And we think this is a very good signal for the whole music industry and the music education industry in China and the announcements made by MOE urging the [Inaudible] to include music education to be -- maybe to be the mandatory curriculum at schools has definitely given us a confidence boost for our current planning for the future development of our smart piano system and -- which means maybe some companies in the music education industry market, they cannot do the major subjects for students.

But for music education for our company, we could planning and boost our future, the picture and landscape. And if not -- and that that policy, not only meant the future policy might be in favor for our business strategies and likely to pave most way for future -- exactly for future plans, but also indicates that the companies -- the plan and the concept in line with that of the government in the long run. Although we are [Inaudible] with the governments policies at the moment, but it's still going to take some time for policy to be rolled out in full with a solid execution plan from top to bottom. In general, we are optimistic about the future prospects of the announcement and we'll definitely keep a close eye on its developments.

But for the moment, we tend to remain cautious to put forward any drastic action plan, so thank you.

Operator

Thank you, ma'am. [Operator instructions] The next question we have will come from Tony Wang of Tiger Brokers. Please go ahead.

Unknown speaker -- Analyst

Hi, thank you for taking my question. We understand that company experience and excel in doing music licensing and subscription business for many years. We noticed that the company started focus on music education business in recent years. My question is, how does the company apply its common to the music education market and how does it correlated to music education business? Thank you.

Patricia Sun -- President

Thank you. I will take this question. We have been increasing our attention in fourth quarter on acquiring and digging into our existing catalog for content, not suitable for music education purposes. Because in our large and diversified content pool, not only we have audio tracks, long-form video tracks, but also there are so many and lots of educational content, such as music scores and educational e-books and applications.

So I will give some examples for what we have done in the fourth quarter. For example, the first example is, we have my first series and books and educational content, and these series and books have always been a long-term back to selling books for kids in, not only in China market, but also in the global market. And recently, we have digitized and localized my first piano book and we developed into the digital assets and we utilized our platforms and social media channels to [Inaudible] like parents and kids who are learning our Kuke smart piano as their additional education material. And also, we have so many licensed publications [Inaudible] by Naxos UK, which they license that and also, we would like to integrate it in the content of my first series books and educational contents into our Kuke courses and our teaching system.

Secondly, another fascinating product is Music Box. Initially designed as an interactive music education platform for students from K12 and above, as well as, this Music Box is also for the guardians and teachers, etc. In the fourth quarter, in addition to translator, the platform and Music Box companies in Chinese for the market, we have reduced audio programs which the content from this music -- Music Box platforms and contents and also based on contents of Music Box and we are now -- these contents are now available to users through our distribution with local digital service partners. And the third one is, in the fourth quarter, we are focusing on acquire some educational contents with our partners, like a masterclass module.

For example, we acquired from two of the most influential masterclass content providers. One is the [Inaudible] which is based in Spain and they have very good relationships with the world-famous conservatories and they have so many professional teachers, professors, and soloists and artists, and also another one is Classical Academy. We just signed a contract with them about a month's class of content supply and which they provide students with courses from what class soloists can get and they have violin classes, masterclasses, cello, piano, and also conducting and all the effects from the professional classical music areas and and also all cross-instruments segments. While pandemic has temporary fluctuations, international travel on us currently, we think that our masterclass areas we've acquired recently will allow the students to be able to learn from the best without leaving their -- leaving their spots.

And now, the masterclass we acquire from these two famous providers are available on our platform. If you go to the google.com, you could see that we have some masterclass videos on the platform and that will, not only help the Kuke students to attract good Kuke students to know the backup of our famous and rich masterclass content, but also that would be an advantage for our future developers of our courses for K12 students and above. And we have -- we could see that we have formed a strategic alliance with local publishing houses recently to strengthen and further secure sufficient resources in sheet music for Kuke students because the score sheets in the Kuke system and teaching system is very important and very important content resources for the students who are learning our courses. And we have started and we have been starting and collaborating ways, not only with local publishing houses, but also with the international publishing houses to enrich our score sheet content pool.

Thank you. That is my answer.

Operator

[Operator instructions] The next question we have will come from Brian Lee of AMTV Please go ahead.

Unknown speaker -- Analyst

Hello. Thank you for taking my question. I have one question regarding your smart music education business. So we want to know what strategy will the company take to develop the market to grow the business? And will there be any other collaboration on the smart education business besides collaborating with the kindergarteners? Thanks.

Tony Chen -- Chief Financial Officer

OK, operator. Maybe I'll take this question.

Operator

Yes, sir. Please go ahead.

Tony Chen -- Chief Financial Officer

OK. About the marketing plan and if there are other forms of business collaboration, but this year our main focus for the smart music education business segment. This will be the kindergarteners market because we believe the market potential is huge there. There are currently over 280,000 kindergarteners in China.

There are also 47 million students, so this is no doubt a hugely important market for us to tap into and keep developing. Our goal is to occupy a significant market share in music education, in this market in a few years time. Within -- I mean within a few years time, it will be a gradual process. So to achieve our target growth rate, we are expanding our marketing team and distribution -- our distributors network.

We're increasing the number of distributors significantly this year. At the same time, we're adding more high quality processing to our systems to set and enrich our content offerings. So with these measures, we believe the number of collaborating kindergartens and number of enrolling students will grow significantly this year. In terms of the geographical coverage, we will continue to target densely populated cities with lots of kindergartens as our primary service coverage area.

It will be more efficient delivering our services in such areas. So we do need a lot of resources to achieve these ambitious targets. A major part of the company's resources will be applied in the development of this market segment. And with kindergarteners as our main focus, we are also trying out new forms of business collaboration, such as community stores that will be providing our piano classes to people in different communities.

We still experiments phase and collecting useful data to evaluate the feasibility of such kind of business model. But again, if we'd like to make it very clear that our main focus will be the Kindergarteners market going forward. That's pretty much what I would like to address for this question.

Unknown speaker -- Analyst

Very clear. Thank you.

Tony Chen -- Chief Financial Officer

Thank you.

Operator

At this time, we're showing no further questions. We'll go ahead and conclude today's question and answer session. I would like to turn the conference call back over to the management team for any closing remarks. Ladies and gentlemen --

Duration: 48 minutes

Call participants:

Claire Choi -- Press Release Director and Investor Relations

Yu He -- Founder, Chairman, and Chief Executive Officer

Patricia Sun -- President

Tony Chen -- Chief Financial Officer

Vitus Leung -- Deutsche Bank -- Analyst

Yuji Fung -- SBI China Capital -- Analyst

Unknown speaker -- Analyst

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