Tencent Music’s first earnings report exposes soaring licence and production costs

Chinese streaming firm Tencent Music Entertainment delivered its first earnings report as a public company, meeting market expectations but exposing soaring licence and content production costs which pulled its shares down 6 percent.

The U.S.-listed company’s shares have gained about 43 percent since debuting in December, but its results published on Tuesday highlight the need for more time until Chinese users fully adapt to the relatively new pay-to-listen approach.

Unlike Western peers such as Spotify Technology, Tencent Music generates only a fraction of revenue from music subscription packages, and instead relies heavily on services popular in China such as online karaoke and live streaming.

Tencent Music has been profitable at an operating level for the last two years, whereas Spotify only posted its first-ever quarterly operating profit in the fourth quarter.

“To fuel our growth for the years to come, we are firmly committed to continue investing in premium content offering, innovative products and proprietary technology,” Chief Executive Cussion Kar Shun Pang said on an earnings call on Wednesday.

Tencent Music, controlled by Chinese technology giant Tencent Holdings and backed by Spotify, said quarterly revenue jumped 50.5 percent to 5.4 billion yuan ($805 million), versus analysts’ average estimate of 5.3 billion yuan.

But fees for content and revenue sharing as well as in-house production costs jumped 63 percent, crimping its gross margin to 34 percent from 38.9 percent a year earlier.

“It’s a long-term revolution rather than a short-term switch,” Chief Strategy Officer Cheuk Tung Yip said on the earnings call.

There is a lot of growth potential given the paying ratio is still very low in comparison with international peers, he said.

Paying users of its online music service reached 27 million in the fourth quarter, an increase of 39.2 percent over the same quarter of 2017, the company said.

Tencent Music, which owns the copyright for over 90 percent of copyrighted music in China, reported a net loss of 875 million yuan for the fourth quarter due to a one-off share-based accounting charge.

Excluding one-off items, it earned 0.57 yuan per American depositary share in the quarter, in line with analysts’ average estimate, according to IBES data from Refinitiv.

Full-year net profit reached 1.83 billion yuan.

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