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Tencent Music (TME) Q1 Earnings Beat Estimates, Revenues Up

Zacks Equity Research

Tencent Music Entertainment Group TME reported first-quarter 2019 adjusted earnings of 11 cents per American Depositary Shares (ADS) that beat the Zacks Consensus Estimate by a penny.

Net profit attributable to equity holders of the company was RMB987 million ($147 million) compared with RMB841 million in the year-ago quarter. Non-IFRS net profit was RMB1.20 billion ($179 million) compared with RMB1.05 billion in the year-ago quarter.

Revenues jumped 39.4% year over year to RMB5.74 billion ($855 million).

However, shares declined more than 6% to close at $15.01 on May 14, apparently due to an executive shake-up. Tencent Music announced that its co-president and director Guomin Xie has decided to resign, effective Jun 6, due to personal reasons.

Top-Line Details

Revenues from online music services rallied 28% year over year to RMB1.61 billion ($239 million), driven by higher revenues from user subscriptions, sublicensing music content to other companies and sales of digital music albums.


Tencent Music Entertainment Group Sponsored ADR Price, Consensus and EPS Surprise


Tencent Music Entertainment Group Sponsored ADR Price, Consensus and EPS Surprise

Tencent Music Entertainment Group Sponsored ADR price-consensus-eps-surprise-chart | Tencent Music Entertainment Group Sponsored ADR Quote

Revenues from paid music through sales of subscription packages were RMB710 million ($106 million), up from RMB565 million in the year-ago quarter.

Revenues from social entertainment services and others soared 44.3% to RMB4.13 billion ($616 million), primarily driven by higher revenues from both online karaoke and live streaming services.

User Base Expands in Q1

Mobile MAU - online music increased 4.6% year over year to 654 million. Paying users - online music rallied 27.4% to 28.4 million. However, monthly ARPPU - online music declined 1.2% to RMB8.3.

Mobile MAU - social entertainment inched up 0.4% year over year to 225 million. Paying users - social entertainment increased 12.5% to 10.8 million. Moreover, monthly ARPPU - social entertainment rallied 28.1% to RMB127.5.

As of Mar 31, 2019, the company's music library included more than 35 million tracks from domestic and international music labels.

During the quarter, Tencent Music inked partnerships with music labels like SM Entertainment Group that owns one of the largest music repositories in Korea. Moreover, the company collaborated with its music label joint venture partner to release a highly popular song that was streamed several hundred million times.

Moreover, the company acquired the master license to the original music soundtrack of a very popular TV drama, The Story of Minglan. One of the main theme songs was played approximately 1 billion times in the reported quarter.

Tencent Music also took initiatives to diversify content by adding video content, and long and short form audio content, including talk shows, audiobooks, comedy sketches and movie review shows.

Moreover, the company launched the “Grab the Mic” in an attempt to improve user engagement on the WeSing app. Tencent Music also added audio settings features, including the ones that mimic virtual surroundings.

Operating Details

Tencent Music’s first-quarter 2019 cost of revenues surged 52.2% year over year to RMB3.70 billion ($552 million), primarily due to increased content and revenue sharing fees.

Nevertheless, gross profit increased 20.8% to RMB2.03 billion ($303 million) in the reported quarter.

Selling and marketing expenses were RMB437 million ($65 million), up 20.1% year over year due to increased spending to promote the company's brands, products and content offering.

General and administrative expenses were RMB602 million ($90 million), up 35% primarily due to higher employee benefit expenses.

Operating profit rallied 22.9% to RMB1.15 billion ($171 million) in the reported quarter.

Balance Sheet & Cash Flow

As of Mar 31, 2019, Tencent Music’s cash and cash equivalents, and term deposits were RMB18.10 billion ($2.70 billion) compared with RMB17.36 billion as of Dec 31, 2018.

Net cash from operations were RMB926 million ($138 million) compared with RMB74 million in the year-ago quarter.

Zacks Rank & Other Stocks to Consider

Tencent Music has a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the broader computer & technology sector include j2 Global JCOM, Match Group MTCH and The Trade Desk TTD. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for j2 Global, Match Group and The Trade Desk is 8%, 15.15% and 20%, respectively.

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