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Tencent Music (TME) Q3 Earnings In Line, Revenues Up Y/Y

Zacks Equity Research

Tencent Music Entertainment Group TME reported third-quarter 2019 adjusted earnings of 10 cents per American Depositary Shares (ADS), in line with the Zacks Consensus Estimate.

In domestic currency, the company reported adjusted earnings of RMB0.62 per ADS.

Revenues jumped 31% year over year to RMB6.51 billion ($910 million).

Top-Line Details

Revenues from online music services increased 26.2% year over year to RMB1.85 billion ($258 million), driven by higher revenues from user subscriptions and sales of digital music albums.

Revenues from paid music through sales of subscription packages were RMB942 million ($132 million), up 48.3% year over year due to improved paid user retention rate and increased number of paying users.

Revenues from social entertainment services and others soared 32.9% to RMB4.66 billion ($652 million), primarily driven by higher revenues from both online karaoke and live streaming services.

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

User Base Expands in Q3

Mobile MAU - online music increased 0.9% year over year to 661 million. Paying users - online music jumped 42.2% to 35.4 million. Moreover, monthly ARPPU - online music increased 4.7% to RMB8.9.

Mobile MAU - social entertainment increased 7.6% year over year to 242 million. Paying users - social entertainment improved 23.2% to 12.2 million. Moreover, monthly ARPPU - social entertainment rose 7.4% to RMB127.3.

During the reported quarter, Tencent Music launched target programs for students including subscription plans, promotional events during summer holiday, and a streaming program called summer fan appreciation.

Summer fan appreciation is a special edition of self-produced new song releasing events, which live streams the artists’ release events. It boosted the number of video playbacks of new song releasing events to 280 million in the third quarter, higher than that of the first two quarters combined.

Moreover, the company made investments targeting the younger generation by strengthening genres, including Urban, EDM, ACG and Chinese ancient style. Notably, Tencent Music recently signed a strategic agreement with Neman Cultural Media, the largest Chinese ancient style music label in China.

Tencent Music also took initiatives to diversify by adding video content, and long and short-form audio content, including podcasts and audiobooks.

Further, the company continued to add long-form audio, such as audio books and podcasts, including categories such as audios novels, talk shows and a diverse set of topics on children, education, history, and humanities to increase user engagement during the quarter.

Operating Details

Tencent Music’s third-quarter 2019 cost of revenues increased 42.9% year over year to RMB4.3 billion ($601 million), primarily due to increased content and revenue sharing fees.

Nevertheless, gross profit improved 12.6% to RMB2.21 billion ($309 million) in the reported quarter.

Selling and marketing expenses were RMB517 million ($72 million), up 19.1% year over year due to increased spending to promote the company's brands, and content offerings.

General and administrative expenses were RMB720 million ($101 million), up 32.6% on higher research and development expenses.

Operating profit rose 11.9% to RMB1.19 billion ($166 million) in the reported quarter.

Balance Sheet & Cash Flow

As of Sep 30, 2019, Tencent Music’s cash and cash equivalents and term deposits were RMB21.14 billion ($2.96 billion) compared with RMB19.90 billion as of Jun 30, 2019.

Net cash from operations was RMB1.35 billion ($189 million), compared with RMB1.64 billion in the year-ago quarter.

Zacks Rank & Stocks to Consider

Tencent Music currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader computer & technology sector include Alteryx AYX, NetEase NTES and Fortinet FTNT. All 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 Alteryx, NetEase and Fortinet is 39.9%, 31.9% and 14%, respectively.

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