Kuke Music Holding Limited (KUKE) Q1 2022 Earnings Call Transcript

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Kuke Music Holding Limited (KUKE -3.70%)
Q1 2022 Earnings Call
May 26, 2022, 8:00 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's first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. We'll be hosting a question-and-answer session after management's prepared remarks.

I will now turn the call over to the first speaker today, Ms. Jane Zuo, investor relations director of Kuke Music Holdings Limited. Please go ahead, ma'am.

Jane Zuo -- Director of Investor Relations

Thank you, operator. Hello, everyone. Welcome to our first quarter 2022 earnings call. On the call with me today are Mr.

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

Yu will share with you our views on the business model and strategic focus. Ms. Sun will then review our business operations, and then Tony will discuss our financial details. Afterward, we'll take questions from the audience.

Before we start, please note that this call would 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 expressively qualified in their entirety by the cautionary statement and risk factors included in the company's filings with the SEC. The company undertakes no duty to revise or update any forward-looking statements, or 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 a conference call will be available on Kuke investor relation website at ir.kuke.com. You can check out our full earnings release at our website as well. It's now my pleasure to introduce Mr.

He Yu, founder, chairman, and 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 first quarter 2022 earnings call. Before sharing our Q1 financial highlights, I like to talk about the fundamentals of our strategy.

First is our immense focus on classical music service, as demonstrated by Kuke's vision. We aim to expand the influence of classical music in China, and throughout the global community. Our business segments include licensing and subscription services, smart music learning solutions, live music events service, and new initiatives such as NFT technologies. These business segments are built upon the strong foundation of our classical music service.

Second is embracing the growth of China, according to the latest 2022 IFPI reports. The Chinese recorded music market grew by 30.4% in 2021, which you saw above the average global growth of 18.5%. This puts China being one of the fastest-growing markets to number six in terms of total recorded music ad revenues, and a number three in terms of streaming revenues of the global music markets, respectively. As Naxos business partner in China, we believe the Chinese market has great potential for growth due to its larger population base of classical music.

Through the expansion of Kuke's and Naxos's expertize, we will continue to unlock such pretentious and share the charm of classical music with all music lovers in China. Third is expanding our global presence. On one hand, we are working ever more closely with Naxos to enhance our relationship with artists and performers around the world. On the other hand, we have also developed multiple initiatives to grow our global presence.

Fourth is cultivating technology. Kuke is a company that thrives at the intersection of art and technology. We embrace innovations to advance the development of the entire industry. This could be the most treated by our recent investment in KOLO and NFT platform for classical music in the metaverse.

Now, let me turn the call over to our president, Patricia, to share with you more details on each business segment.

Patricia Sun -- President

Thank you, Mr. Yu. Good morning, and good evening, everyone. Now, turning to the performance of our business segments.

With regards to our classical music licensing and the subscription segment, we added nearly 1 thousand pieces of content through the long-term support of our international strategic partner, Naxos. This brings our total number of music tracks to over 2.9 million, which included 2 million tracks of traditional classical music, and a 363 thousand tracks of jazz, world, folk, and other genre of music. These contents, in aggregate, cover approximately 2 thousand different types of musical instruments, played by 97 thousand musicians from 266 countries and regions. In addition, our content library also contains over 1 thousand video titles, 465 thousand spoken content tracks, and over 5 thousand volumes of sheet music.

Naxos, as the largest independent classical music content provider in the world, provides our content library with a wide range of standards and a specialty repertoire of classical, jazz, work, folk, and traditional Chinese music recordings that span from medieval to contemporary. In the first quarter, with Kuke strong and ever-growing classical music content, our institutional subscribers increased it to 809 across China. In addition to larger number of subscribers, to increasing adoption of large-screen displays in various commercial scenarios, and at home has resulted in strong demand for long-form videos, which usually comes along with higher contract value. In addition, people working from home as a result of pandemic also posts the demand for streaming of long-form videos.

We are now investing and purchasing more long-form videos including opera, live concert, ballet, documentary, master class, and international competition, live streaming to capture the growth opportunities in the market. And we believe, these market trends and dynamics should follow drive to performance of our classical music licensing and subscription segment in the future. Next, I would also like to share with you our business updates associated with Naxos. In April, Kuke and Naxos announced to join to sponsor the 10th Fritz Kreisler International Violin Competition, Austria's most important violin competition.

As it's known to all, classical music is the universal language of mankind. Through sponsoring some of the most renowned music events across the world, Kuke continues to expand the influence of classical music in the global community, and to promote Kuke brand internationally. Going forward, Kuke will sponsor, promote, and monetize increasingly more international competitions. In terms of our smart music learning solutions segment, despite of the handlings in a challenging environment for education business, we have prioritized establishing deep-rooted collaboration with public schools and kindergartens, since the fourth quarter of last year, with an aim to further enhance our revenue streams through providing high-quality smart music learning solutions to the underserved market of art and music learning in China.

For the first quarter, revenues from public school became our main revenue growth contributor in the smart music learning segment. For our live music event segment, revenue in the first quarter reached RMB13.8 million, mainly driven by income from the marketing, planning, and execution services for live music events in China. With that, I will pass the call over to our CFO, Tony, who will walk you through our financial details for the first quarter.

Tony Chen -- Chief Financial Officer

Thank you, Patricia, and hello, everyone. Before we start our details on financial discussion, please note that we'll be presenting non-IFRS measures today. Non-IFRS results exclude certain non-cash expenses, which are not part of our operations. Details for these expenses can be found in the reconciliation tables on our press release.

Please note that unless otherwise stated, all financial numbers we present today, are for the first quarter of 2022 are in R&D terms. All comparisons are on a year-over-year basis unless otherwise stated. During the first quarter of 2022, our revenue increased by 128.8% to 26.1 million, from 11.4 million in the prior year period. Which our licensing revenue increased by 275.8% to RMB 1 million, from RMB 0.3 million in the same period of 2021.

Due to the larger client base, subscription revenue decreased slightly to RMB 3.4 million, from RMB 4.3 million in the same period of 2021, mainly due to the decrease in sales of hardware products. Revenue from smart music learning solutions segment increased by 9.4% to RMB 7.5 million, from RMB 6.8 million in the same period of 2021. Specifically, smart music learning solutions sales revenue increased by 183.1% to RMB 1.2 million, from RMB 0.4 million in the same period of 2021, mainly due to increased sales of smart music learning products to public schools in the first quarter of 2021. Smart music learning solutions subscription revenue from kindergarten students decreased by 1.6% to RMB 6.3 million, from RMB 6.4 million in the same period of 2021, due to the contraction of project kindergarten businesses in 2021.

Most importantly, total life music event segment revenue increased to RMB 13.8 million, driven by the substantial increase in life music events service revenue in the quarter. In addition, the total one-time disposal of obsolete inventory revenue was RMB 0.4 million, as a result of the contraction of private kindergarten business. In the first quarter of 2022, our gross profit rose RMB 0.2 million, compared decreased from RMB 3.2 million in the same period of last year. Gross margin was 0.7% compared to 28.2% in the same period of 2021.

Our segment, the gross margin of classical music licensing as a of revenue with a -10.3% compared to +52.4% in the same period of 2021. Specifically, the gross margin of classical music has been improved to a -192.3%, from -481.2% in the same period of 2021, mainly due to the year-over-year revenue growth in the quarter. The gross margin in classical music subscription decreased to 45.2% from 86% in the same period of 2021, due to the decreased revenue and higher amortization cost of royalty payments. The gross margin of smart music learning solution segment was -3.1% compared to a +23.2% in the same period of 2021.

Specifically, the gross margin of smart music learning solutions sales rose to 35.8% from 28.8% in the same period of 2021, due to increased revenue from the business. The gross margin of smart music learning solutions subscription from private kindergarten students was a -10.1% compared to a +22.9% in the same period of 2021, due to the higher depreciation cost, as a result of the strategic contraction of the private kindergarten subscription business. The gross margin of life music event segment was 12%. Mainly due to the increased revenue from the licensing music service in the quarter.

Moving on to the operating expenses, the total operating expenses in the first quarter of 2022 decreased by 18.9% to RMB 40 million, from RMB 49.3 million in the same period of 2021 [inaudible]. Selling and distribution expenses in the first quarter of 2022 increased by 4% to RMB 8.3 million from, RMB 17.3 million in the same period of 2021. The increase was mainly due to the increases in the number of employees, and therefore the salaries and wages. Administrative expenses in the first quarter of 2022 decreased by 38.9% to RMB 24.7 million, from RMB 40.4 million in the same period of 2021, due to the one-time listing expenses and higher stock-based compensation costs that incurred in the first quarter of 2021.

Impairment losses on financial assets in the first quarter of 2022 increased to RMB 6.6 million, from RMB 1.6 million in the same period of 2021. This was mainly due to the increased impairment losses on accounts receivable. Operating loss in the first quarter of 2021 was RMB 36.6 million, compared to an operating loss of RMB 37.1 million in the same period of 2021. Our net loss was RMB 35 million, compared to RMB 37 million in the same period of 2021.

And non-IFRS net loss was RMB 17.1 million, compared to non-IFRS loss of RMB 15.6 million in the same period of 2021. In the first quarter of 2022, our basic and diluted loss per ADS were both RMB 1.18 basic, and [inaudible] loss for ADS were both RMB 0.58. Moving on to our balance sheet and liquidity. As of March 31st, 2022, we had a total of RMB 41.7 million in cash and cash equivalents.

With solid cash position and improvement in financial results, we remain confident that we're on the right path by accelerating the growth. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instruction] Our first question comes from Brian Li from AMTD Group. Please go ahead.

Brian Li -- AMTD Group -- Analyst

Hey, hello. Hi. Thank you for taking my question. I have two questions here.

The first one is we noted that gross margin declined in first quarter. So could you please give us some more color on this, and what's our guidance for the gross margin up this year? And then the second one is if there's a rapid growth in revenue from sales of smart music and learning solutions segment on your young base. So can we expect that growth to be sustainable in following orders? And the revenue from their licensing also rose significantly, and what's a key driver behind. Thanks.

Tony Chen -- Chief Financial Officer

OK. Thank you, Brian. I'll take these two questions. So for the first question, gross margin in the first quarter of 2022 decreased to RMB 0.2 million from RMB 3.2 million in the same period of 2021.

The decline was attributable to the one-time disposal of the inventory, and the increased taxation of royalty payments. We expect the gross margin to be normalized for the full year. So for the second question about the rapid growth, the revenue from smart music learning solutions sales increased by 183% to RMB 1.2 million from RMB 0.4 million in the same period of 2021. This is mainly due to the increased health of smart music learning products to public schools in the first quarter of 2022.

We believe the growth will be sustainable, as we see stable demand from public schools. Revenue from licensing increased by 275.8% to RMB 1 million from RMB 0.3 million in the same period of 2021. This is spread by a larger client base, as a result of growing demand for classical music in China and new use cases. For example, the increasing adoption of large-screen displays in various commercial scenarios and at home, has resulted in strong demand for long-term love on videos, and people working from home as a result of pandemic.

Although both the demand for streaming of long-form video. We're not investing opposed to seeing more long-form videos including opera, live concert, ballet, documentary, master class, international competition, live streaming, etc. to capture this growth opportunities in the market. So, that is my reply to these two questions.

Brian Li -- AMTD Group -- Analyst

Thank you. Thank you. Very clear. Thanks. 

Tony Chen -- Chief Financial Officer

Thank you, Brian.

Operator

The next question comes from [inaudible] from [inaudible] asset management. Please go ahead.

Unknown speaker

Hi, hello. Thank you for taking my question. I have two questions today. With the first one being, with you please elaborate on the strategies of working with public kindergartens and schools, and what's the latest development on collaboration with private kindergartens? That's the first question.

And my second question is, could you please elaborate on your strategy of expanding your business in a global market? Yes, that's my two question. Thank you.

Patricia Sun -- President

This is Patricia. I will take the two questions. The first one is about strategic about working with public in kindergartens at school. So since the beginning of this year, considering the headwinds in the challenge of our environment for private, [inaudible] and business, we have focused more on providing smart music learning solutions to public schools, which is in line with the policy that encourages art education in China.

Therefore, for the first quarter, we have been gradually scaling down the private kindergarten in business, while the revenue from public school became the main revenue growth contributor in this smart music learning segment. So regarding the second question about our strategy of expanding business in the global market, I would say firstly, Kuke has been working closely with our strategic global partners to enhance our relationship with artists and performers around the globe, and to expand the reach of classical music. As Naxos business partner in China, we believe the Chinese market has great potential for growth, due to its large population base, and a currently lower penetration rate of classical music. The company will continue to unlock such distinctions and share the charm of classic music with all music lovers in China.

Regarding the content strategy, on one hand, we continue to invest in classical music copyright term by expanding collaboration with international music labels. During the first quarter, we have added four category, long-form videos, content including opera, live concerts, ballet, documentaries, master classes, international competitions, and doing live streaming to further enrich our classical music library. and also capture the growth opportunity across the China market. On the other hand, we expanded online distribution and was leading streaming platform for our self-production content of renowned Chinese parties and their new work.

For example, our self-production, The Sound of Nature, having successfully distributed to overseas markets through ARC label, and Naxos global network. As such, we expect to gradually increase our global revenue from business. At the same time, we will be committed to growing Kuke's global presence. As mentioned before, in script we in April, Kuke's and Naxos announced to jointly sponsor the 10th Fritz Kreisler International Violin Competition, which will be held in September this year, which is also held in Austria, most important to violin competition.

Classical music is known as a universal language for mankind. And is sponsoring the most renowned music events across the world will help us to expand the influence of classical music in the global community, and also promote Kuke its brand internationally. And going forward, the company will sponsor, and promote, and also monetize increasingly more international competitions. Meanwhile, we will also continue to explore new initiatives and the global business opportunities.

Recently, we started our investment in Kolo and NFT platform for classical music in the metaverse. We also embrace innovations to advance the development of the imply industry. And we firmly believe that the company, Kuke, is a company that will thrive at the intersection of art and technology. Thank you.

Unknown speaker

Thank you. Very clear.

Operator

The next question comes from Tong Wang from Tiger Brokers. Please go ahead.

Tong Wang -- Tiger Brokers -- Analyst

Oh, hi. Thank you. And I have two questions. And the first one is, how is your latest cash position? And do you have any financing plans recently? And my second question is, we noticed in the last [inaudible] 6.6 million.

And could you please expand this in detail? Thanks.

Tony Chen -- Chief Financial Officer

Thank you, Tong. This is Tony Chen, I'll take these two questions. For the cash position as of March 31st, 2022, our cash and cash equivalents were I can be RMB 41.7 million. We believe there are plenty of global M&A opportunities in the classic classical music industry, and when we see a desirable acquisition target, we might be thinking of obtaining finance accordingly.

So it really depends on the situation, but currently for the cash position, I think we're pretty efficient right now. So for the second question on the impairment loss, the impairment loss were all related to accounts receivable in relation to the smart music learning solutions business. So that is my reply for this question. Thank you.

Tong Wang -- Tiger Brokers -- Analyst

Thanks.

Operator

[Operator signoff]

Duration: 28 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

Unknown speaker

Tong Wang -- Tiger Brokers -- Analyst

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