Tencent Music Entertainment's (TME 1.87%) stock recently popped after the Chinese music streaming giant posted its third-quarter numbers. Its revenue rose 31% annually to 6.51 billion yuan ($910 million), which missed expectations by $3.5 million.
However, its net income rose 6% to 1.03 billion yuan ($144 million), while its non-GAAP net income grew 8% to 1.24 billion ($173 million), or $0.11 per ADS, which beat expectations by two cents. Those results were mixed, but a deeper dive reveals a few key numbers which brought back the bulls.
Image source: Getty Images.
Its online music business is growing
TME generated 28% of its revenue from its online music business, which includes its music streaming apps (QQ Music, Kugou, and Kuwou) and digital downloads. The unit's annual growth in paid users, subscription revenue, ARPPU (average revenue per paid user), and total revenue all accelerated from the previous quarter.
|
Online music |
Total |
QOQ growth |
YOY growth |
|---|---|---|---|
|
Mobile MAUs |
661 million |
1% |
1% |
|
Paid users |
35.4 million |
14% |
42% |
|
Subscription revenue |
942 million |
18% |
48% |
|
ARPPU |
8.9 RMB ($1.27) |
3% |
5% |
|
Revenue |
1.85 billion RMB ($260 million) |
16% |
26% |
QOQ = Quarter-over-quarter. YOY = Year-over-year. Source: TME Q3 report.
Its growth in mobile MAUs (monthly active users) might look anemic, but it marks a significant improvement from its flat quarter-over-quarter growth last quarter. This indicates that TME isn't losing users to rival platforms like NetEase's (NTES 1.01%) Cloud Music.
A slight slowdown in the social entertainment unit
The remaining 72% of TME's revenue came from its social entertainment unit. That business generates most of its revenue from the WeSing karaoke platform, which lets users buy virtual gifts for their favorite performers.
Image source: Getty Images.
This business is TME's core growth engine, since the average social entertainment user generated roughly 14 times as much revenue as the average online music user. The unit's annual growth in mobile MAUs and paid users accelerated during the quarter, but its growth in ARPPU and total revenue decelerated slightly.
|
Social entertainment |
Total |
QOQ growth |
YOY growth |
|---|---|---|---|
|
Mobile MAUs |
242 million |
1% |
8% |
|
Paid users |
12.2 million |
10% |
23% |
|
ARPPU |
127.3 RMB ($18.18) |
(2%) |
7% |
|
Revenue |
4.66 billion RMB ($670 million) |
8% |
33% |
QOQ = Quarter-over-quarter. YOY = Year-over-year. Source: TME Q3 report.
The platform's growth in paid users and its sequential dip in ARPPU strongly suggests that WeSing is attracting more viewers, but the average viewer is spending less money on virtual gifts. This might just be a short-term blip, but it could also indicate that the platform's growth is peaking.
Stabilizing margins with steady profit growth
Unlike Spotify (SPOT -6.41%), which remains unprofitable due to high content licensing costs, TME is consistently profitable thanks to the growth of its higher-margin social entertainment unit and favorable licensing deals with top record labels.
However, the online music's sublicensing business, which licenses its tracks to other streaming platforms, was recently probed by Chinese antitrust regulators over allegations that it intentionally overcharged its domestic rivals.
The reduction of that higher-margin licensing revenue, along with higher licensing payments to record labels, caused its gross margin to drop 540 basis points annually to 34%. However, that still marked a 110 basis point improvement from the previous quarter.
Higher operating expenses -- led by higher marketing and R&D costs for new services -- caused TME's operating margin to fall 300 basis points annually and 20 basis points sequentially to 18.3%. Nonetheless, TME's robust revenue growth still boosted its total operating profit 12% for the quarter -- indicating that investors shouldn't fret too much over its margins.
Still a better all-around investment than Spotify
Tencent Music doesn't offer any forward guidance, but analysts expect its revenue and earnings to rise 32% and 34%, respectively, next year -- which are stellar growth rates for a stock that trades at less than 30 times forward earnings.
By comparison, Spotify is expected to post 24% revenue growth next year as its bottom line remains in the red. Therefore, it's safe to say that TME is a better all-around play on the streaming market than Spotify (which notably owns a major stake in TME).
Tencent Music didn't deliver a perfect quarter, but its strengths clearly outweigh its weaknesses. It remains the 800-pound gorilla of China's streaming music market, and it generates robust revenue growth and stable profits as its industry peers struggle to stay in the black.
