Kuke Music Holding Limited (KUKE) Q3 2021 Earnings Call Transcript

Kuke Music Holding Limited (KUKE -7.86%)
Q3 2021 Earnings Call
Nov 29, 2021, 7:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and good evening, ladies and gentlemen. Welcome to Kuke Music Holding Limited third quarter 2021 earnings conference call [Operator instructions] We will be hosting a question-and-answer session after management prepared remarks. I will now turn the call over to the first speaker today, Ms. Jane Zuo, investor relations director of Kuke Music Holding Limited.

Please go ahead, ma'am.

Jane Zuo -- Director of Investor Relations

Thank you, operator. Hello, everyone. Welcome to our third quarter 2021 earnings call. On the call with me today are Mr.

He Yu, founder, chairman, and CEO; Ms. Patricia Sun, president; and Mr. Tony Chan, CFO of Kuke. Mr.

Yu will share our views on the business matter and strategic focus. Ms. Sun will then review our business operation. And then, Tony will discuss our financial results.

Afterward, we will take questions from the audience. 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. 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 those forward-looking statements. All forward-looking statements are expressly qualified 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 call is being recorded. In addition, a live and archived webcast of the conference call will be available on the Kuke investor relations website at ir.kuke.com. You can check out our full earnings release on our IR website as well.

It's now my pleasure to introduce Mr. He Yu, founder, chairman, and the CEO of Kuke.

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

Thank you, Jane. Good evening and good morning, everyone. Thanks for joining us, and welcome to our third quarter earnings call. I would like to start by sharing our thoughts on the resilience in our business model and our core strength.

In addition, I will share how we can leverage our capabilities and our core classical music assets to survive in any macro environment. We founded Kuke in 2007 with the mission to deepen the impact of classical music and to monetize our core music assets through digital innovation in China. With almost 15 years in operation, Kuke has become a leading provider of classical music content, licensing subscription, and modern music learning solutions in China with our ever-growing copyrighted classical music content library at its core. We keep exploring and expanding our acquisitions and music content consuming services, supported by our three main business lines in licensing and subscription, modern music learning solutions services, and live music events.

We generate licensing revenue by licensing our music copyrights to digital music service providers, both digital streaming or downloads through their online platform. Our subscription revenue is generated by providing customers access to music content databases through websites and on mobile apps, as well as from the sale of smart music devices. These two services deliver cash flows that perform well even during a downturn in the economy. More importantly, our licensing and subscription revenues contributed to nearly half of our total revenues, 49.6% of total revenues in the third quarter.

In terms of our core strength, our ever-growing copyrighted classical music content library continues to serve as the foundation of our business development. Our classical music content has always been one of our most valued assets. And maintaining and growing this classic music content library is at the core of our ability to drive growth and innovation. Knowing this, we established deep-rooted cooperation with Naxos in 2006, making it our global strategic business partner and founding Naxos China together.

The core business of which is to distribute and promote global classical music in China and through the broader international stage for a new generation of Chinese musicians. Leveraging Naxos' ever-growing classical music content library, Kuke has made a great progress in music content operations and keeps improving the value and monetization efficiency of those core assets. 2021 was an eventful year with COVID and regulatory changes impacting various industries. Based on our views of the potential regulatory impact on our business, we believe the regulatory guidelines are likely to be positive for art learning as we continued checking the operational situation this quarter.

It is safe to say that the guidelines have no significant impact on our business development. In addition to all business partnerships with private kindergartens, we have begun exploring ways to work with public kindergartens, primarily in the middle schools, to further enlarge our customer base in light of the changing regulatory and macro environment. During the quarter, a portion of our sales team had already been allocated to target public kindergarten. It is worth noting that we have already had experience and a successful track record in working with public educational institutions, such as universities and libraries.

We are convinced that these efforts will be helpful to our customer base, which will enhance our ability to prompt and properly adapt to potential negative regulatory changes going forward. As one of the first classical music licensing and subscription service providers in China, we benefit from a significant early mover advantage in terms of our content offerings. Brand and reputation and customer loyalty, we remain true to our mission and dedicate ourselves to the development of classical music here in China. In early October, we held a very successful 24th Beijing Music Festival with the theme of Masters and Celebrations, which served as a bridge for multidimensional dialogue between Chinese and foreign composers.

Earlier this month, we also sponsored the 16th International Beethoven Piano Competition in Vienna Golden Hall to celebrate Beethoven's 251st birthday. Additionally, Naxos China, our subsidiary, recently launched the production and the global release of the album of Ding Shande, Essential Art Songs in association with Naxos. Leveraging our ever-expanding copyrighted music content library through our unmatched access to more than 900 top-tier record companies, including Naxos, we are confident in our ability to continue cultivating interest in classical music and a fostered demand for our overall classical music entertainment and learning solutions services. So, next, I will pass it over to our president of Kuke, Patricia, to share more details in each business segment.

Patricia Sun -- President

Thank you, Mr. Yu. Good morning and good evening, everyone. Our third quarter results were marked with strong demand recovery, particular strategies and execution, and continued efficiency improvements in every area of our business.

We further grew our licensing and subscription revenue, which increased by 162.8% year over year to RMB 41 million in the quarter, mainly driven by our improved business synergy with Naxos, ever-expanding content library, and the growing brand awareness. During the quarter, we continued to drive our process by leveraging improved synergies with Naxos, an award-leading classical music label as measured by number of new recordings it releases and breadth of its catalog. Founded in 1987 by Klaus Heymann, a German-born entrepreneur based in Hong Kong, Naxos has since transformed itself from a budget label into a global music powerhouse under the continued stewardship of [Inaudible]. Today, Naxos boasts a range of downloading and streaming platforms, a significant catalog of multimedia products, a vast international logistics network, a recording engineering arm, a publications division, and a licensing department.

As our largest content provider and important global strategic partner, Naxos recorded many impressive achievements this year. For example, in early 2021, Naxos and its partners landed seven Grammy Awards, including Best Choral Performance; Best Contemporary Classical Composition; Best Classical Solo Vocal Album; Best Engineered Album, Classical; Producer of the Year, Classical; Best Chamber Music/Small Ensemble Performance; and Best Classical Instrumental Solo. In November, our subsidiary, Naxos China, initiated the production and the global release of Ding Shande, Essential Art Songs, in association with Naxos. As we further developed and leveraged our global strategic partnership with Naxos, we also made progress in extending our content library.

In the third quarter, we added over 80,000 pieces of content, bringing our total amount of content of over 2.8 million, which includes more than 2.38 million music tracks, 427,000 audiobook tracks. In addition, the library also includes 4,000 hours of long-form concert videos, opera, and more, and over 3,000 of digital sheet music. As a result of our expanded music offerings, our brand awareness has been richly enhanced, and the number of our library subscribers increased accordingly. In the third quarter, we've garnered interest from five new public libraries and had secured 11 different university and library customers by end of the third quarter.

In terms of our smart music learning solutions business, revenue in the quarter reached RMB 27.1 million, representing year-over-year increase of 8.4 times. As of September 30, 2021, we grew the number of our collaborating kindergartens to 5,161 from 4,500 as of June 30, 2021. During the twelve months ended September 30, 2021, we added 3,861 collaborating kindergartens to our network, increasing the number of active students over five-fold from 5,852 a year ago to 32,608. To better facilitate our services and improve our customer experience, we established an operations center in the city of Wuhan to provide streaming services to kindergartens during the quarter.

Even as we continue our business expansion in private kindergarten, we are actively exploring new monetization channels in public kindergartens, primary schools, and middle schools to enhance our revenue streams and to further diversify our customer base in the light of the changing regulatory and macro environment. Considering the regulatory uncertainties and the global chip shortage, we proactively slowed our pace in launching services for new kindergartens during the quarter. The strategic shift may cause some near-term fluctuations in our topline performance. As far as we can see, overall market demand remains strong as we continue to unlock additional demands nationwide.

We are confident that we can fulfill the backlog of orders in the quarters to come. For our live music events segment, revenue in the third quarter reached RMB 14.2 million, representing a year-over-year increase of 134 times. During the quarter, we've provided planning and execution services for commercial performances to music groups. Thanks to the undeniable value of our classic music assets, we've benefited from growing brand recognition and launched the highly successful 24th Beijing Music Festival in early October.

The revenue from which will be fully recognized in the fourth quarter. The festival spanned across 16 days, celebrating this year's theme of Masters and Celebrations. We hosted audiences at the festival for 18 sets of performances across 20 main concerts, encompassing a variety of genres, including symphonic music, opera, vocal music, chamber music, percussion music, and orchestral film music. Beyond that exciting professional performances, 24th BMF also featured children's concerts, Music at Noon concerts, smart classes, lectures, and other public events to appeal to a diverse array of audiences.

In addition, we co-sponsored the 16th International Beethoven Piano Competition with Naxos. The competition is Austria's oldest international piano competition and ranks among the most renowned music competitions today. Founded more than 15 years ago, it is hosted by the University of Music and Performing Arts in Vienna. On November 6th and 7th, we completed the initial screening of the final round of the 16th International Beethoven Piano Competition in five cities across China and adapted the screening into content for cinemas.

Its unique classic music content is sure to inspire future generations of Chinese pianists. By leveraging our strong position in classic music and our synergies with Naxos, we will continue to create and deliver innovative viewing and listening experiences through innovative content for our customers. During the third quarter, we leveraged our core assets and copyrighted classical music content and our operating capabilities to drive growth for our three main business lines. We also proactively engaged various potential customers to further diversify our revenue to respond to the potential change in the regulatory and the macroeconomic environment.

We are convinced that these efforts will help us further solidify our market viewership going forward. With that, I will pass the call over to our CFO, Tony Chan, who will walk you through our financial details for the quarter. Thank you.

Tony Chen -- Chief Financial Officer

Thank you, Patricia, and hello, everyone. Before we start our detailed financial discussion, please note that we will present non-IFRS measures today. Our non-IFRS results exclude certain noncash expenses, which are not part of our core operations. Details for these expenses can be found in the reconciliation table on our press release.

Please note that, unless otherwise stated, all financial numbers we present today are for the third quarter of 2021 and in RMB terms. All comparisons are on a year-over-year basis unless otherwise stated. During the third quarter of 2021, our revenue increased by 343.6% to 82.7 million from 18.6 million in the prior-year period. This increase was driven by revenue growth in all three of our business segments.

Our licensing and subscription revenue in the third quarter was 41 million compared to 15.6 million in the prior-year period. The increase was mainly due to an increase in licensing agreements secured during the quarter. Revenue from our smart music learning solutions business increased by 8.38 times to 27.5 million from 2.9 million in the prior-year period, mainly due to a robust growth in both the enrollment of kindergarten students and sales of our smart music learning solutions. Revenue from our music events business also increased by 134 times to 14.2 million, as we began providing performance services to orchestras in China earlier this year.

Total cost of sales increased by 342.6% to 29.6 million, in line with the increase of our revenue. Gross profit was 53.1 million, representing an increase of 344.1% from 12 million in the same period last year. Gross margin remained stable at 64.2% for both the fourth quarter and the prior-year period. Operating expenses were 72.4 million compared to 19.9 million in the prior-year period.

Selling and distribution expenses were 15.7 million compared to 7.4 million in the prior-year period, mostly due to an increase in distribution expenses associated with increased sales of our smart music learning solutions. Meanwhile, administrative expenses was 32.7 million, compared to 11.8 million in the prior-year period, mainly due to an increase in share-based compensation expenses, and research and development expenses. Operating loss in the third quarter was 20.8 million compared to 9.5 million in the prior-year period. Our loss for the period was 24.4 million compared to 12.3 million in the prior-year period.

And non-IFRS profit was 20.5 million compared to the non-IFRS loss of 8.9 million in the same period of 2020. Basic and diluted loss per ADS were both 0.83, and basic and diluted non-IFRS profit per ADS were both 0.7. Moving on to our balance sheet and liquidity. As of September 30, 2021, we had a total of 105.3 million in cash and cash equivalents.

Full year 2021 revenue is expected to be between 300 million and 350 million. After analyzing and taking into account the impact of COVID and higher hardware costs due to the global chip shortage, we're taking pre-emptive actions to slow down the pace of our new kindergarten deployments to balance our business growth, decrease risk exposure, and improve cost control. Furthermore, we're also -- we've also begun exploring ways to engage public kindergartens and schools to enhance our revenue streams and further diversify our customer base in light of the changing regulatory and macroeconomic environment. We're confident that doing so enhances our competitiveness and strengthens our resilience.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Questions & Answers:

Operator

[Operator instructions] We take our first question from Mr. Brian Li with AMTD Group. Your line is open. Please go ahead.

Brian Li -- AMTD Group -- Analyst

Hello. Hello, can you hear me?

Patricia Sun -- President

Yes.

Tony Chen -- Chief Financial Officer

Yes.

Brian Li -- AMTD Group -- Analyst

Hello, hi. Thanks for taking my question, and I have two. First is about your strategy. We noticed that many peers, including WMG, are looking into new opportunities to engage with innovative technologies, such as metaverse, and NTFs, and many others.

Do you have any plans on that front? And how will you maintain your competitiveness with these emerging opportunities? That is the first one. The second one is regarding your full year revenue guidance. The full year revenue guidance was no less than RMB 400 million in the last few quarters. But now, in Q3, you have just adjusted the guidance to below -- between 300 million and 400 million.

So, what are the factors or trends driving the guidance down? So -- and could you give us more details about which business is not -- you're projecting less growth in this quarter than previous quarters? Thanks.

Patricia Sun -- President

Thank you. This is Patricia, I will take your first question and answer your first question. The core focus business is music copyright, and we also empower our business with technology. And we are constantly watching for trends and new developments in tech for the music industry.

Actually, in October of 2019, Beijing Music Festival is our -- one of our live performance segments had already launched an experiment virtual reality opera, which is called 8. This is a one-person opera but with the experimental virtual reality technology, which -- applied via technology to live musical event. We are also exploring how to deliver the next generation experience for live music events, which may allow remote audiences to participate in rehearsals through VR technology and immersively enjoy orchestra performances, delivering unforgettable and engaging live performance experience to our remote audience. And we also believe that throughout these new developments, copyright will be always our company's competitive edge and also our advantage.

In the metaverse or for NFT now digital assets is domains. We believe that audio and visual content will be seamlessly integrated first. So, we are anticipating these new technologies to bring about revolutionary developments and opportunities in the music industry. And we are actively exploring these new developments and should disclose our respective business strategies and action plans at the appropriate time in the future.

Thank you.

Tony Chen -- Chief Financial Officer

OK. So, I will take the --

Patricia Sun -- President

So, [Inaudible] --

Tony Chen -- Chief Financial Officer

Yes, I'll take the second question regarding the revenue guidance. Yes, our previous revenue guidance was no less than RMB 400 million. And in this quarter, we have revised our guidance to be between RMB 300 million to RMB 350 million. This is in light of the rising hardware costs due to the global chip shortage.

So, we're taking pre-emptive action to decrease risks exposure and also balance our business growth. And also, this is an act to improve cost control by slowing down the pace of our new kindergarten deployment for our smart music learning business. So, with this new strategy, the deployment of smart music learning businesses will not be as fast as we expected at the beginning of the year. Therefore, we have adjusted our full year guidance accordingly.

OK. So, that's the end of my --

Brian Li -- AMTD Group -- Analyst

OK. Thank you. Very clear.

Tony Chen -- Chief Financial Officer

OK. Thank you, Brian.

Brian Li -- AMTD Group -- Analyst

OK. Thank you. Thank you. Thank you.

Very clear. Thanks for the management.

Operator

[Operator instructions] We take our next question from Don Dong with RiverCircle Investments. Your line is open, please go ahead. I'm so sorry, Mr. Don Dong already removed himself from the queue.

We move to Ms. Lex Zhang with [Inaudible] Investment. Your line is open, please go ahead.

Lex Zhang -- Atlantis Investment Management -- Analyst

Thanks, operator. Thanks for the presentation, management. Actually, I have two questions. The first one is regarding the margins essentially.

There has been a global supply chain disruption effect given the COVID situation, which affected many consumer companies, especially this quarter. And you've also mentioned the global chip shortage situation. So, how these effects from -- you know, supply chain disruption, especially the chips shortage affects your margins of the business, especially your learning solution business. The second question is regarding the number.

So, the numbers are solid, but I noticed that there is an increase in selling and distribution expenses in Q3, while there is a slight decrease in revenue, if you compare that to Q2. And do you have more colors on that situation? And also, I guess, more importantly, how do you actually monitor your selling and distribution expenses? Thank you.

Tony Chen -- Chief Financial Officer

OK. Thank you, Lex. Let me take your questions. The first question about the supply chain disruption that is going to affect our margins.

Well, actually, in Q3, we have adjusted our development pace as we have explained just now. So, from this act, actually, we were able to maintain a gross margin level very similar to that of Q2. So, that shows our ability to control costs and maintain margins. So, you can be assured that we are -- we have a tight monitoring system on our margins.

We will -- we -- it's very effective basically. So, this is my answer to the first question. For the second question on the selling and distribution expenses, selling and distribution expenses increased in Q3 and mainly due to the increase in revenues from the licensing and subscription business and the smart music education business, as compared to Q2. The overall slight decrease in the revenue in Q3 as compared to Q2 was mainly due to the decrease in revenue from live performances business.

And this business usually does not incur a lot of selling and distribution expenses. That's why, Q4, you see this increase in selling and distribution expenses despite the revenue being slightly decreased from Q2. So, does that answer your question?

Lex Zhang -- Atlantis Investment Management -- Analyst

Yes, indeed. Thank you.

Tony Chen -- Chief Financial Officer

Thank you, Lex.

Operator

Thank you. We'll take our next question from Don Dong, RiverCircle Investments. Your line is open. Please go ahead.

Don Dong -- RiverCircle Investments -- Analyst

Hi, management. Sorry for the tech issue. I've got two questions. The first one, you have mentioned that you have slowed down the deployment of the private kindergarten in this quarter.

So, you know that we are approaching the yearend now. I'm wondering how the marketing looks like right now, and how is the progress of your engagement of public school so far? That is first question. And the second question, how is your relationship with Naxos right now? And going forward from this relationship, what kind of benefit do you think would be brought to the business of Kuke? Thanks.

Patricia Sun -- President

Thank you. I will take these two questions. The first one that demand from private kindergartens remained -- still strong. But as we discussed in earnings call, even though government policies did not affect us in music education sector, we are taking pre-emptive action to decrease our risk exposure, balance our business growth, and improve cost control by slowing the pace of our new kindergarten development for our smart musical learning business in light of rising hardware costs due to the global chip shortage.

So, our current strategy is to slow down the development of new private kindergartens while actively monetize on our existing private kindergartens network and also actively cultivate cooperative relationships with public kindergartens, primary schools, and secondary schools. And as of the end of Q3, we were providing music subscription services to more than 700 institutional organizations, including high schools and public libraries. And we are highly experienced in working with public sector organizations. So, this wealth of experience will strengthen our business developments in the public school sector.

This is the end of answer for the first question. Regarding the second question, talking about the relationship between Kuke and Naxos, so we have a long-term strategic partnership with Naxos. And Naxos is our global strategic business partner. And Kuke is Naxos' business partner in China.

This is a very close business relationship. And we believe with this relationship can stabilize and maintain the current business while cultivating numerous new business together in future. Actually, in early November, Naxos and Kuke jointly sponsored the 16th International Beethoven Piano Competition, for which Kuke launched a cinematic screening in five cities across China of the competition for the first time. And Naxos and Kuke, we're also joint planning to sponsor the International Fritz Kreisler Violin Competition in 2022, the next year.

And going forward, we believe there will be many more global business opportunities for collaboration with Naxos and more business opportunities in future between Naxos and Kuke. Thank you.

Don Dong -- RiverCircle Investments -- Analyst

Thank you.

Operator

Thank you. As there is no further question, I will now hand the call over to the management for any closing remarks.

Jane Zuo -- Director of Investor Relations

Thank you again for joining our call. If you have further questions, please feel free to contact us or request through our IR website. We look forward to speaking with everyone in our next Q4 call. Have a good day.

Bye-bye.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Jane Zuo -- Director of Investor Relations

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

Patricia Sun -- President

Tony Chen -- Chief Financial Officer

Brian Li -- AMTD Group -- Analyst

Tony Chan -- Chief Financial Officer

Lex Zhang -- Atlantis Investment Management -- Analyst

Don Dong -- RiverCircle Investments -- Analyst

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