Tencent Music Entertainment Group Q1 FY2026 earnings call

• Strategic Direction & Ecosystem Positioning

  • Transitioning from a traditional music streaming service to an integrated music ecosystem focused on unlocking full value of premium music IP, with original human creativity and licensed premium IP identified as core long-term differentiators.
  • Leading industry copyright protection efforts against unauthorized AI-generated content that threatens subscription growth, creator rights, and overall ecosystem value, collaborating with creators, rights holders and regulators to establish clear IP frameworks for the AI era.

• Content & IP Expansion

  • Renewed long-term licensing contracts with major labels including JVR Music and Linfair Records, securing continued access to iconic artist catalogs, and deepened strategic partnerships with TF Entertainment to offer exclusive early access to new releases and cross-channel IP collaboration.
  • Grew streaming share of in-house new releases; a high-profile original collaboration with Sony Pictures for the film Project Hail Mary achieved strong chart performance.
  • Leverages AI as a complementary tool for creators, rather than a replacement for human creativity: the Venice AI production platform streamlines the full song creation cycle to reduce cost and speed up time to market, and legitimate AI-generated reinterpretations of classic hits drive renewed interest in original legacy IP, boosting their commercial value.

• User Growth & Platform Development

  • Deepened integration with the WeChat ecosystem, adding one-click transitions from music discovery in WeChat Video Accounts to full-track playback on TME platforms, improving conversion of casual viewers into registered fans.
  • Implemented AI enhancements to user engagement, including improved recommendation algorithms, AI-powered discovery tools, and personalized interactive features, leading to exponential growth in AI-driven usage metrics.
  • Transitioning to a diversified, membership-based business model beyond basic content subscriptions: SVIP membership adoption continues to grow, supported by innovative perks, celebrity brand partnerships, and cross-device high-fidelity audio features (including TME Connect and Doobie SA4 format support).

• IP Monetization Expansion

  • Launched the first artist-centric fan club membership (with Silence Wang) offering exclusive perks such as priority concert ticket access and unique content, expanding into IP-driven niche monetization.
  • Scaled offline IP-driven offerings: served as sole distributor for sold-out artist physical albums and merchandise, and hosted immersive offline fan experiences for global and domestic artists. Hosted multiple flagship concerts this quarter drawing over 10,000 total attendees, and supported emerging and established artists on global tour stops to expand the international reach of Chinese music.

• ESG Progress

  • Published the 2025 ESG report in April 2026, with expanded efforts in creator empowerment, product inclusivity, and value chain sustainability, resulting in ESG rating upgrades and external industry recognition.

Total company revenue achieved 7% year-on-year growth in Q1 2026. 1. Music-related services: Revenue grew 12% year-on-year, accounting for approximately 77.8% of total revenue. Within this segment: - Membership services: Revenue reached 4.6 billion RMB, up 7% year-on-year, making it the largest revenue contributor. - Offline performance-related services: Achieved triple-digit year-on-year revenue growth, driven by multiple flagship domestic and international concerts. - Advertising services: Delivered solid year-on-year revenue growth, supported by an expanded ad-supported user base and increased sponsorship demand. 2. Social entertainment services and others: Revenue was 1.4 billion RMB, down 9% year-on-year, accounting for approximately 22.2% of total revenue. Gross margin for the quarter was 44.9%, up 0.8 percentage points year-on-year, driven by higher contributions from higher-margin membership and advertising services, reduced channel fees, and improved cost efficiency for IP-related services. Operating expenses totaled 1.2 billion RMB, representing 50.3% of total revenue; selling and marketing expenses grew 36% year-on-year to 271 million RMB, while general and administrative expenses remained stable at 940 million RMB year-on-year. Non-IFRS adjusted EBITDA was 2.8 billion RMB, up 10% year-on-year, and non-IFRS net profit attributable to equity holders was 2.3 billion RMB, up 7% year-on-year.

• Overall 2026 full-year guidance: Short-term volatility in membership and advertising revenue growth is expected due to ongoing industry competition and AI-related copyright disruption, but management remains optimistic that long-term steady growth will be delivered through the company's holistic IP ecosystem strategy.
• Gross margin guidance: Full-year 2026 gross margin is expected to remain broadly competitive and in line with previous expectations, despite quarter-over-quarter fluctuations from the seasonality of offline IP-related businesses. Rigid cost control (including reduced investment in low-value non-core content) and declining channel fees will offset structural margin pressure from rapidly growing IP-related new businesses, keeping gross margin resilient at industry-leading levels.
• Selling expense guidance: Full-year 2026 selling expenses will see a reasonable increase in line with prior guidance, and the 36% year-on-year growth rate in Q1 2026 is not expected to be sustained for the full year.
• Himalayan (Ximalaya) acquisition guidance: Following recent regulatory approval, the transaction will proceed in compliance with all regulatory requirements and commitments, and long-term opportunities exist to expand into long-form audio subscription verticals including audiobooks and children's audio to complement TME's existing IP ecosystem.

• Intense industry competition, including ongoing price competition and aggressive user acquisition tactics from competitors that have increased user churn risk, particularly for price-sensitive users on the Kugou Music platform.
• Widespread unauthorized AI-generated pirated content that diverts user attention from legitimate streaming services, creates headwinds for subscription growth, and undermines creator rights and the long-term value of the music ecosystem.
• The seasonality of offline IP-related businesses (concerts, merchandise) can cause quarter-over-quarter volatility in gross margin and overall revenue.
• Uncertainty around future revenue growth for traditional streaming music services due to the combination of competitive pressure and AI-related industry disruption.

Q: Management was asked to provide 2026 full-year revenue guidance for membership and non-membership business, outline key growth drivers amid ongoing competition, and share an update on the recently approved Himalayan acquisition. / A: Management confirmed that Q1 performance was stable, with robust non-membership growth and triple-digit year-on-year growth for offline performance businesses. Short-term volatility in membership and advertising growth is expected due to price competition and AI-driven piracy, but long-term steady growth is expected. Key strategic priorities going forward are: 1) strengthen copyright enforcement to crack down on AI-powered infringement, 2) expand top-of-funnel traffic via deeper WeChat ecosystem integration, and 3) deepen competitive advantage via IP expansion and value chain extension for in-house artists. The Himalayan acquisition will proceed in full compliance with all regulatory requirements. (378 characters)

Q: The analyst asked for details on TME's multi-tier subscription structure, user retention across tiers, growth potential for newer offerings like Fan Club and Babel, and initial plans for long-form audio after the Himalayan acquisition. / A: Management declined to disclose specific tiered user retention numbers, noting that the multi-tier system is designed to meet diverse user needs: free/ad-supported tiers serve light users, basic music subscriptions serve highly engaged core users, and newer artist-centric Fan Club and Babel offerings serve super fans with deeper, diversified needs. Management added that IP-based subscription offerings, including future expansion into long-form audio such as audiobooks and children's content, will create new commercial opportunities and improve overall user retention, reinforcing TME's competitive advantage as a one-stop IP-based music platform. (456 characters)

Q: The analyst asked what caused the slight quarter-over-quarter decline in Q1 membership revenue, whether it stemmed from user churn or downshifting from high-value to lower-value plans, and what the expected quarter-over-quarter trend will be going forward. / A: Management clarified the decline was not caused by downshifting or churn of medium-to-high value SVIP users, which continue to grow steadily. The slight decline was driven by competitive pressure: some competitors use unauthorized AI-generated content to poach price-sensitive light users, disproportionately impacting new member growth on the more price-sensitive Kugou Music platform. QQ Music's overall operation remains stable and healthy, and its recent integration with WeChat Video Accounts will further strengthen its competitive position. Management reaffirmed that offline and multi-device experience advantages remain solid supports for future growth. (462 characters)

Q: The analyst asked if the higher-than-expected Q1 gross margin would change full-year gross margin guidance, and whether the 36% year-on-year increase in selling expenses was a one-time event or will persist for the full year. / A: Management explained that the quarter-over-quarter gross margin increase was driven by seasonal factors, as IP-related offline businesses (which have lower margin) contributed less revenue in Q1 than in the prior year Q4. Full-year gross margin is still expected to be broadly in line with prior guidance and remain resilient and industry-leading due to strict cost cutting on low-value content and lower channel fees. The elevated Q1 selling expense growth was driven by increased user acquisition investment amid heightened competition and structured resource allocation for the WeChat Video Account integration. Full-year selling expense growth will be moderate and in line with prior guidance, and will not stay at the 36% Q1 growth rate. (501 characters)