Source: The Motley Fool transcript (verbatim, lightly formatted). Non-IFRS / RMB measures unless noted.
---
Millicent T. ([IR]):
[Audio Gap] The earnings release is available on our website. During today's call, you'll hear from Mr. Cussion Pang, our Executive Chairman; and Mr. Ross Liang, our CEO. He will share an overview of the company's strategies and business updates. will discuss our financial results before we open the quest. Before we continue, I refer you to the safe harbor statement in our earnings release, which applies to this call to include forward-looking statements. Please note that we discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in our earnings release and filings with the SEC. please be advised that today's call is being recorded.
With that, I'm pleased to turn the call over to Cussion, Executive Chairman of Tencent. Cussion, please.
Thank you, Millicent. Hello, everyone, and thank you for joining our call today. In the second quarter, we delivered resilient performance while navigating a complex and evolving market. Our second growth engine continued to strengthen. Revenue from marketing and consumption service achieved another quarter of solid growth as we further expanded the value of music IP through live concerts, merchandise and other IP-driven experiences. The addition of Simaaya marks another important step in our content and platform strategy. By bringing music and audio together, we are enriching our content offering, reaching users across more listening occasions and giving them more ways to discover, enjoy and engage with great content. Our strategy is clear.
We are strengthening our content ecosystem by deepening strategic partnerships, developing more proprietary IP and extending premium content across a wider range of experiences. First, premium content remains at the heart of this strategy and the recent momentum we are seeing with classic catalogs is a perfect example. Second, we continue to expand our partnerships beyond traditional content licensing.
These deeper partnerships allow us to work more closely with creators and rights holders across the whole music value chain, enabling us to create more value from premium IP.
Third, another key focus is developing more high-quality proprietary content, which is becoming an increasingly important differentiator for TME and giving users more reasons to engage with our platform.
Its original productions have consistently driven strong engagement and pay conversion. Just as importantly, owning this hit also means better economics.
With the strength of our content and platform ecosystem, deep user insights, expansive services and a strong commitment to upholding copyright protection, a growing number of artists are turning to us as we expand talent development and artist management. This is a natural extension of our ecosystem that creates value for artists we are uniquely positioned to deliver. This is exciting as it empowers us to be more entrepreneurial and innovative in bringing more premium content and IP-driven immersive music experiences to music lovers. First, T wrapper Guy, for instance.
For renowned art and Sing [indiscernible], we produced his debut Arena tool, Liu Jenny, and his opening show in Shenzhen sold out quickly during his sales. This strategic partnership reflects our commitment to exploring cross-border opportunities and deepening the fan-based economy. By integrating content creation, music streaming, artist development, live experiences, merchandise and fans engagement, we are able to create more value from premium IP truly bringing the IP to life. We are already seeing encouraging results.
IP-related consumption services, particularly live events and artist merchandise, continue to deliver strong double-digit year-over-year growth during the quarter. The event attracted tens of thousands of fans and generated strong merchandise sales. TIMA, our proprietary flagship concert IP for International Music Awards, is becoming a larger and more influential brand in just a second year. Second, artist merchandise also continued to gain momentum.
By bringing together our capabilities in IP development, product design, merchandising and distribution, we are creating more meaningful connections between artists and their fans. During the quarter, we produced [indiscernible] physical albums in both CV and renal formats, complemented by a range of collectibles merchandise that generated strong fan demand. Physical album releases from, and also delivered impressive results. Protecting copyright is fundamental to preserving the long-term value of premium IP. During the quarter, we continued to strengthen our copyright protection efforts through proactive screening and takedown, legal action and closer collaboration across the industry.
As AI continues to evolve, we are stepping up our engagement with regulators, music labels, artists and other industry partners to strengthen copyright protection in the new era. By working together across the industry, we believe we can foster a healthier environment for creators, reinforce the long-term value of premium IP and support the sustainable development of the music industry. We remain committed to providing a safe and enjoyable music experience for users of all ages. During the second quarter, with comprehensive upgrades to use across our core products, we created a dedicated library of age-appropriate music, helping younger users discover and enjoy music in a safer and more trusted environment.
To conclude, while challenges remain, we believe we are still in the early innings of unlocking the full potential of premium IP. We are excited about the opportunities ahead and remain confident in our ability to deliver sustainable long-term growth. With that, I will turn the call over to Ross.
Thank you, Cussion. Hello, everyone. While the competitive landscape continues to evolve, our commitment has not changed, delivering the best music and audio experiences for our users. That's why we continue to innovate our products, broaden our user reach and enrich our membership offering. In the second quarter, our focus on user experience translated into stronger engagement with average daily time spent continue to improve, supporting standing growth in membership revenue. Product innovation remains at the heart of everything we do to serve our users.
We are delivering great services is a foundation. That's why we are continuing to deepen our integration with the Tencent ecosystem to expand our presence across more user touch points. We are creating a more seamless journey from music discovery to full track listing on TME. Collaborations with Weixin Pay also helped our lightweight products such as body Music and Kugou concept, attract users looking for a simple music experience and deepen their engagement.
During the quarter, we broadened our smart vehicle coverage through deeper collaborations with leading automakers, including Changan, Li Auto and Xiaopeng and introduced LM-powered search to deliver a smarter in-car experience.
We are excited to welcome Ximalaya to the TME family. This helps to strengthen our position as a comprehensive music and audio platform. We are still in the early stages of unlocking the full potential of this combination, and we are seeing significant opportunities ahead. By bringing together our complementary strengths, we can deliver compelling content to a much broader audience.
Over time, we also see opportunities to strengthen our advertising business and improve efficiency, leveraging our shared technology and infrastructure. We believe these efforts will create lasting value for our users, creators, partners and shareholders. Finally, we are further elevating the SVIP value position by transforming it into multidimensional experience centered on IP engagement. This quarter, digital albums and tailored SVIP package continue to drive stronger member adoption and user engagement.
They reinforce our value position of one membership richer experiences.
With that, I would like to turn the call over to Shirley, our CFO, for a deep dive into our financials.
Thank you, Ross, and greetings, everyone. Let me now turn to our financial results and an evolving competitive industry landscape. We delivered steady financial results in the second quarter of 2026 with 6% year-on-year revenue growth. Total revenues were RMB 8.9 billion, up by 6% year-on-year, primarily driven by strong growth in revenues from music-related services. The consolidation of TME contributed approximately RMB 0.4 billion to our overall revenues in the second quarter of 2026. Revenues from music-related services grew 11% year-on-year, driven by solid growth in revenues from membership services and off-line performance-related services. Revenues from membership services were RMB 4.8 billion, up by 8% year-on-year. In the second quarter of 2026, our SVIP membership program continues to expand.
Our diversified SVIP privileges such as artist membership sales, Pass and Star Life Pass continued to drive SVIP user adoption and revenue growth. This quarter, we collaborated with our SVIP ambassadors to offer spatial packages and improve our SVIP adoption. The consolidation of Ximalaya also contributed to revenue growth in membership services. Within marketing and consumption services, offline performance-related service delivered robust results as we successfully staged several concepts for our strategically collaborated artists, including Science and [indiscernible].
We continue to prioritize our IP-related offerings and build deeper collaborations with strategic artists across music promotions, offline performances, artist merchandise and digital albums. In a challenging macro environment and the competitive market, our advertising business, especially the ad-supported model experienced some headwinds. The consolidation of Ximalaya contributed to revenue growth in advertising positively, and we see growth potential in this area through leveraging our expanded content and shared resources and technologies.
Our gross margin in Q2 2026 was 44.2% compared with 44.4% in the same period of last year. Revenue mix impacts our gross margin. Offline performance-related services continue to grow. We are happy to see continued cost efficiency improvement for offline performance-related services. The consolidation of Ximalaya after considering the amortization of intangible assets recorded under purchase accounting had a favorable impact on overall gross margin this quarter. We are confident that our gross margin will remain competitive in the industry over time. They amounted to RMB 1.3 billion, representing 14.5% of our total revenue in 2026 compared with 13.7% in the same period of last year.
This quarter, we adjusted our channel spending strategies by reducing channel spending and deeping collaborations with the Tencent ecosystem. For example, we strengthened our cooperation with Weixin Video Account for content distribution and user composition and collaborated with Weixin Xia to drive traffic to our lightweight IP. The consolidation of including the amortization of intangible assets recorded under purchase accounting drive the increase in operating expenses. Our net profit attributable to equity holders was RMB 2.5 billion compared with RMB 2.4 billion in the same period of 2025.
Diluted earnings per ADS were RMB 1.7 2026, our adjusted EBITDA was RMB 3.3 billion, up by 5% year-on-year. IFRS net profit attributable to equity holders of the company was RMB 2.7 billion, up by 4% year-on-year. As of June 30, 2026, our combined balance of cash, cash equivalents, term deposits and short-term investments was RMB 44.2 billion as compared to RMB 41 billion as of March 31, 2026. This combined balance was affected by changes in exchange rate of RMB to USD at different balance sheet dates.
Under the share repurchase program announced in March 2025, we have repurchased 43.5 million from the open market for a total cash consideration of USD 400 million in the second quarter of 2026. As part of our long-term commitment to shareholder returns, we remain on track to complete the 2025 stock repurchase program on time. We also keep investing in quality content and IP development to build a comprehensive content ecosystem. The combination of brings exciting opportunities for us as our company and audio platform.
All these factors pave the way for long-term health growth of our business. This concludes our prepared remarks. We are now ready to open the call for questions.
Millicent T.:
And the first question comes from [indiscernible]
Unknown Analyst:
So my question is -- there are two questions. So IP has been a key driver for our revenue in the first half of 2026. And I was wondering how will the IP-related business drive the revenue growth for the rest of this year?
Liang Zhu:
[Interpreted] Well, about your first question is about IP-related business. As you can see that we have achieved a solid growth in our Q2 results, that is mainly due to our many years of deployment of our forward-looking strategies. And all of this have calculated a lot to this quarter's results.
Number one is our IDP supply. Second, you can also see that in terms of content collaboration, Apart from that, the promotion, distribution and merchandise is derivative products will also in a very good position.
It would not only provide performance concerts are merchandised and through our member benefits, it could also contribute more to the increase of our SVIP numbers. And all of this have helped us build a very solid competitive moat. About your second question on Ximalaya, we are very pleased to have Ximalaya to be part of TME family.
So overall, in the medium to long run, we can see that Ximalaya is joining to TME family will also unlock more potential of future growth, and this has also set a solid base for future growth.
Millicent T.:
And the next question comes from Lincoln Kong from Goldman Sachs.
Lincoln Kong (Goldman Sachs):
So basically, in the first half or second quarter, if we're excluding Ximalaya, we do see some moderation in revenue growth. So how should we think about the prospects into the second half of the year? What's sort of the growth trend for SVIP or the overall ARPU to contribute to the overall growth?
Liang Zhu:
[Interpreted] Well, with the competition in hand, we can see that the growth in music business is long neck. We're also very pleased to see that TME is already taking charge of the music business operation under WeSing Video Account. Well, if you look at revenue-wise, our high-value users or SVIP has not been by affected.
So if you look at our subscribers, we got to stabilize our SVIP base and try to put more benefits into the SVIP package to increase its total number of things. Compared with our peers, our core music business is still having a solid housing growth.
I believe we can stay in a very good position against the competition. In terms of competition, TME has never been upset from competition over the years. So the most important thing for us is to do our own job well.
No matter what happens then competition will stay firm on our own track of development. We also believe that our business will continue to have stable and steady development.
Millicent T.:
And the next comes from Alex C. Yao.
Alex Yao:
My question is about the integration and synergy with Weixin Shaw, the Weixin agent services.
Liang Zhu:
[Interpreted] Well, though is still at an early testing stage, we're very happy to see that users are using it to send their own song list, share songs, and they're using it very [indiscernible] Well, with our app internal operating, especially with the integration of HYI 3and plus our music AI agent, and we can tell that it does increase the retention especially for the high-value business.
What about the monetization of AI agent, I think the business model is very clear. and we will use that to increase engagement and activity of our users, so they will use it more often to share and lessen to sons, especially for those paid users that will further drive the growth of subscription. About AI technology in general, we talked about this topic in the previous quarter's call as well. Well, AI itself compared with others in nature is also to improve efficiency and cut costs.
We hope that we can use AI technologies to tap more commercial opportunities and increase our revenue.
Millicent T.:
And the next question comes from Citigroup, Alicia Yap.
Alicia Yap (Citigroup):
[Interpreted] I wonder if management can share your insight. What is the competitive advantage and competitive moat of TME on the music and also the long-form audio IP and also the overall IP strategy.
Liang Zhu:
[Interpreted] Well, first of all, about the [indiscernible], we are not in a position to talk about [indiscernible] because according to SAMR use, we cannot use those exclusively on content. However, compared with our peers, our competitive advantage is there. As you probably can see, our kids business on Ximalaya is still taking considerable market share and especially the story part has also complement with our own business.
So with the Tencent video for those hit shows, we can turn those -- we have generated many hit songs.
From music creation, we're also entering into deeper into hardest or generation or nurturing and artist management, for example, we partnered with SM entertainment from Korea, so that you could help us better nurture more talented artists. So with song creation and [indiscernible], we can also help a lot of singers to make their own concerts, and we can also organize a lot of the IP-based events. And all of this will contribute to the business growth. So with our integrated or one-stop platform, we will further nurture more high-quality. And if you look at our business performance over the past several years, such rapid growth is only proven record of a huge potential of this business.
Ultimately, it was more benefits. It will further contribute to the growth of our subscription for SVIP growth.
Millicent T.:
The next question comes from Maggie.
Yifan Ye:
My first question is related to margin. In the second quarter, sales marketing increase appeared to be quite more this year-over-year even taking into consideration of Ximalaya, which was delayed to entail higher sales and marketing cost ratio. So could management help us understand the driver behind that. And what's the overall gross margin and net margin outlook in the third quarter and fourth quarter on a full quarter consolidation of Ximalaya? So our total cash, short-term long-term deposit reached RMB 44 billion at end by the end of second quarter, and it's almost 40% of our current market cap.
Could management share with us your related thoughts on enhancing shareholder return going forward.
Liang Zhu:
[Interpreted] Well, first question about the slight decline of our PP margin is mainly due to the following reasons. Number one is our off-line business is growing very rapidly, which means that it takes a bigger share of our total revenue. And plus our off-line artists brokerage business is also growing directly and also taking a bigger share of our overall revenue and plus concert and live performance, which also contributed positively to our GP margin. And these are why our GP margin is just declining slightly.
Min Hu:
[Interpreted] Well, it looks like quarter-over-quarter, the slight decline of JPMorgan is mostly the seasonal changes of the Offline Performance business because the Offline Performance business in Q2 is greatly higher in Q1. Considering the amortization of the tangible assets of Ximalaya, it has some positive impact over our GP market. And with that, we believe we can increase the retention conversion rate. Our projection into the second half of our revenue expectation, we project that our GP margin will be decreasing slightly year-over-year.
About sales expenses, I would say in Q2, we have controlled the sales expenses because in general, we have changed our channel expenses strategy, which means that we will seek more products with higher ROI. And as you can see in our collaboration with Tencent Video has already helped us to increase the traffic and conversion.
We will not just spend broadly in marketing, and we'll fine-tune our strategy in marketing and to do more targeted and stay focused on our ecosystem and to value -- to try to tap more value from our users. So for the whole year, our sales expenses will go up a little bit and operating expenses will slightly go up. But considering the loans, our net margin for the whole year will go down slightly and EBITDA will go up -- will edge up a little bit. About shareholder return, currently, we're still under that 1 billion shareholder return program. In Q2 alone, we already completed USD 400 million share buyback.
The management is very confident in the long-term future of the company. So apart from finishing the rest of the previous share buyback program, we're also preparing for another round of share buyback. We will try to use different approach to increase shareholders.
Millicent T.:
In the interest of time, I would like to wrap up today's call. Thank you again for joining us today. If you have any further questions, please feel free to IR team. This concludes today's call. We look forward to speaking with you next quarter. Thank you, and bye.
Liang Zhu:
Thank you. Bye.
TME (Tencent Music) — Q2 2026 (Aug 12, 2026). Shares ~$8.8 (mid-Aug) — stock fell ~9% the week after the print despite a narrow sales/EPS beat, as ex-Ximalaya revenue deceleration and ad softness overshadowed results.