Tencent Music Entertainment Group (NYSE: TME) reported better-than-expected second quarter results. The streaming platform added 2.6 million paid users sequentially, which is a record since Q1 2018.

Tencent Music’s stock has been volatile since its IPO last December with the price increasing about 8% this year. The share price dropped above 6% in the after-market trading post the Q2 results announcement.

Headline Numbers

Revenue jumped 31% to $859 million aided by double-digit growth in music services and social entertainment offerings. Thanks to solid growth in subscriptions and album sales, online music services saw its revenues rose 20.2% over last year. On the social entertainment front, live streaming and online karaoke aided in the 35.3% jump in sales.

Earnings per American Depositary Shares (ADS) came in at 8 cents, while adjusted earnings per ADS was 10 cents. The street was anticipating revenues of $843 million and adjusted earnings of 9 cents per share.

Increase in content expenses and revenue sharing fees with users resulted in 46% jump in expenses to $576 million over last year. 

Future Strategies

Commenting on the future plans, Tony Yip, Chief Strategy Officer said, “In order to provide users a consistent and cohesive listening experience, we are forging Internet of Things (IoT) partnerships with leading manufacturers of cars, smart speakers and smart watches, which will provide further channels for user acquisition.”

Yip also added, “As part of our internationalization strategy, we are also looking to expand our social entertainment services outside of China, as we take initial steps to explore overseas opportunities for WeSing in South East Asia.”

Key Metrics Performance

On the online music front, monthly average revenue per paying user (ARPPU) fell 1.1% despite paid users base jumping 33%. Mobile monthly active users rose modestly by 1.2%.

Tencent Online Music Performance

Social entertainment offerings saw good growth across all its metrics. MAUs rose 4.8%, while paid users rose 16.8%. Monthly average revenue per user increased 16.5% over prior year.Tencent Social Entertainment Metrics Trend

Looking Ahead

For the third quarter, analysts are estimating top line of $953.4 million and adjusted EPS of 10 cents. When it comes to fiscal 2019 period, revenue is expected to jump 32% to $3.64 billion and adjusted earnings to remain flat at 38 cents per share.

UMG Stake Purchase

Last week Bloomberg reported that Tencent Music’s parent Tencent Holdings is planning to buy a 10% stake in Universal Music Group (UMG) from Vivendi, resulting in a valuation of $34 billion for UMG. If the deal is closed, Tencent Music would be the biggest beneficiary which also gives it an edge over its rival Spotify, which spends money on royalties.

Sony and Warner Music already own stakes in Tencent Music. It’s worth noting that Tencent Holdings apart from Tencent Music has invested in Spotify, and Gaana based in India.

Looking Back

Tencent Music’s first quarter results surpassed estimates. Revenue rose 39% and EPS surged 17.4% due to solid performance from the online music and social entertainment offerings.

On the key metrics performance, Mobile MAUs rose 4.6% in online music and 0.4% in social entertainment. Paid subscribers grew 27.4% in online music and 12.5% in social entertainment. Monthly ARPPU was down 1.2% in online music offset by an increase of 28.1% in social entertainment.

Spotify Earnings 

Last month, Tencent Music’s rival Spotify Technology (SPOT) reported a narrower loss in the second quarter aided by higher revenues and lower finance costs. Revenue increased 31% to EUR1.67 billion. Premium revenue rose 31% to EUR1.50 billion and Ad-supported revenue increased by 34% to EUR165 million. The streaming company saw most of the geographies surpassing its expectations.

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