Tencent Music Entertainment Group (TME) Earnings

Management highlights

- Content Ecosystem Expansion • Added Simalaya to the TME platform, combining music and premium audio (audiobooks, podcasts, online novels, kids content) to reach users across more daily listening occasions, increase overall user engagement and time spent. • Deepened strategic content partnerships: expanded collaboration with Dream Music Group to cover digital first releases, content co-creation, physical products and offline experiences; partnered with multiple film and TV producers to bring original soundtracks and music variety shows to the platform. • Scaled high-quality proprietary original music content, with multiple recent original releases and theme songs posting strong streaming performance. Simalaya has demonstrated strong original content capability, with 9 of its top 10 new online titles this year produced in-house. - IP Monetization and Artist Development • Built an end-to-end ecosystem covering content creation, streaming, artist development, live events, merchandise and fan engagement to unlock full IP value. IP-related consumption services (live events, merchandise) delivered strong double-digit year-on-year growth in Q2. • Scaled successful live events: hosted sold-out stadium and arena shows for multiple partnered artists, held well-attended fan events for SMTR25 in Macau, and expanded the TIMA concert brand to a 3x larger venue in Hong Kong. • Delivered strong artist merchandise results, including high-demand physical albums and collectibles for top artists. Invested in The Black Label to deepen cross-border IP collaboration and fan economy development. - Product Innovation and User Growth • Improved core product experience: upgraded content discovery features, introduced premium 3D audio, and launched upgraded AI personal DJ agents that create instant personalized playlists, increasing recommendation-driven stream share and user retention. • Deepened integration with the Tencent ecosystem: expanded collaboration with WeChat Video Accounts for seamless music discovery-to-streaming journeys, partnered with Weixin AI agent Xiao Wei to reach new users, and leveraged Tencent ecosystem touchpoints for higher traffic efficiency. • Expanded cross-device coverage through deeper partnerships with leading automakers and early integration with Harmony OS to capture new monetization opportunities. • Enhanced the SVIP membership offering by adding Simalaya premium audio, artist-themed benefits (collectibles, NFC cards), gaming IP collaborations, and content from The Black Label, driving healthy growth in SVIP user base, ARPU, retention and engagement. - Copyright and Safety • Continued proactive copyright protection efforts through screening, takedowns, legal action and industry collaboration, and is working with regulators and partners to establish copyright frameworks for AI-generated content. • Launched age-appropriate content features for younger users to deliver a safe listening experience.

Guidance

- Overall revenue is expected to maintain steady growth for the full year 2026, with IP-related services (live events, merchandise) continuing to drive stable growth even with industry headwinds for membership and advertising. - Gross margin is expected to decline slightly year-over-year in the second half of 2026, as faster growing offline performance services hold a higher revenue share; long-term gross margin is expected to remain competitive, with potential for improvement as Simalaya integration drives better SVIP conversion and retention. - Full-year 2026 sales and operating expenses will increase moderately, as the company maintains disciplined, ROI-focused channel spending and targets high-value users; net margin for the full year will decline slightly, while adjusted EBITDA will edge up year-over-year. - The company will complete its existing $1 billion share repurchase program on schedule, and is actively preparing a new round of shareholder return initiatives after completing the current program.

Segment performance

Total Q2 2026 revenues were 8.9 billion RMB, up 6% year-on-year, with 0.4 billion RMB contributed by the consolidation of Simalaya. 1. Music-related services: Revenue grew 11% year-on-year. Membership services revenue was 4.8 billion RMB, up 8% year-on-year, with Simalaya consolidation contributing to this growth. Offline performance-related services delivered robust double-digit year-on-year growth driven by successful concerts for partnered artists, and digital album sales also posted solid results. 2. Advertising: The segment faced industry headwinds in the quarter, though Simalaya consolidation contributed positively to advertising revenue growth. In terms of overall revenue contribution, music-related services are the largest segment, contributing over 50% of total revenue (membership services alone account for ~53.9% of total revenue). Gross margin for the quarter was 44.2%, slightly down from 44.4% in the year-ago quarter, impacted by the faster growth of higher-cost offline performance services. Operating expenses totaled 3.3 billion RMB, accounting for 14.5% of total revenue, up from 13.7% year-on-year due to Simalaya consolidation and related intangible asset amortization. Net profit attributable to equity holders was 2.7 billion RMB, up 4% year-on-year, and adjusted EBITDA was 3.3 billion RMB, up 5% year-on-year.

Risks & headwinds

- Intensified industry competition creates pressure on membership and advertising business growth, particularly for light casual users. - The overall challenging macroeconomic environment creates continued headwinds for the advertising segment, especially for ad-supported business models. - Simalaya consolidation adds near-term operating expenses due to intangible asset amortization from purchase accounting. - Evolving AI technology creates new copyright and intellectual property challenges that require coordinated industry and regulatory action to address.

Analyst Q&A

• Q: What is the growth outlook for IP-related business in H2 2026, and what is the medium-long term financial impact of Simalaya's consolidation?

  A: Management states IP-related business is on track for steady H2 growth, supported by the company's completed end-to-end online-offline IP ecosystem. The business benefits from diversified high-quality IP supply from internal development and external partnerships, end-to-end control from content creation to derivative merchandising, and multi-scenario monetization that also boosts SVIP membership growth. A: Simalaya's consolidation completed TME's transition to a comprehensive music and audio platform, expanding TME's user base, enriching user profiles, and increasing overall platform time spent and loyalty. The combination of Simalaya's strengths and TME's existing ecosystem will unlock long-term growth potential for the entire group. ---

• Q: Excluding Simalaya, subscription revenue growth moderated in Q2. What is the H2 subscription outlook, and how is TME positioned against current competition?

  A: Competition has primarily impacted light casual users, while high-value SVIP users have seen little impact. TME is stabilizing its core SVIP base, and growing the member base by adding expanded benefits including merchandise, live event access, and Simalaya's premium long-form audio to the SVIP package, maintaining healthy differentiation from competitors. A: TME is also tapping user growth potential through lightweight apps like Bodian Music and Kugoo Concept, and deepening traffic-driving collaboration with WeChat Video Accounts. Having completed the transition to a comprehensive music and audio platform with more diverse content and cross-online-offline benefits than peers, TME expects continued steady subscription growth. ---

• Q: What early results have come from Weixin Xiaowei integration and in-platform AI agents, and what is AI's role for revenue and efficiency?

  A: Weixin Xiaowei integration is still in early testing, but already sees frequent user adoption for playlist creation and song sharing. In-platform AI personal DJs have increased user retention, especially for high-value users, and improved recommendation engagement, with the underlying algorithm recognized at a top industry conference. A: AI is primarily an efficiency and engagement tool that drives higher user activity and paid subscription growth. TME has also already deployed consumer-facing AI music generation that has delivered positive commercial returns, and will continue to use AI to tap new direct revenue opportunities. ---

• Q: What are TME's core competitive advantages in music and long-form audio IP?

  A: For long-form audio via Simalaya, TME benefits from Simalaya's existing leading market position in kids content, deep strategic collaboration with China Literature for fast distribution of new internet literature audiobooks, and close integration with Tencent Video to quickly turn hit dramas into audio content with cross-platform traffic synergy. A: For music, TME has multi-year professional deployment covering label partnerships, in-house content production, collaboration across the Tencent ecosystem (games, video) for hit OSTs, and end-to-end artist development from nurturing to live concerts. This integrated model drives proven, sustained IP business growth that also supports SVIP membership expansion.