Tencent Music (Minutes): Its Core Strategy for the Current Competitive Landscape Is to Hold the Line on Its SVIP Base.

Compiled by Dolphin Research: $ Tencent Music.US FY26Q2 earnings call transcript.

I. Key Takeaways

1. Shareholder returns: The $1bn capital return plan remains in place. TME repurchased 43.5 mn ADS in Q2 from the open market for approx. $400 mn.Management is preparing a new buyback while completing the current one and will enhance shareholder returns through multiple channels.

2. 2H and full-year guidance

a. GPM: Based on 2H revenue outlook, GPM is expected to decline slightly YoY.

b. Opex: Full-year selling and operating expenses to edge up. Channel spend will pivot to higher-ROI projects; following Ximalaya consolidation, ad spend was largely paused in Jun and resumed in Jul under the same ROI discipline.

c. Margin: Net margin to tick down for the year, while EBITDA to edge higher.

3. Q2 headline metrics

a. Total: Revenue of RMB 8.9 bn (+6% YoY), driven mainly by music-related services; Ximalaya contributed ~RMB 0.4 bn. GPM was 44.2% vs. 44.4% a year ago.

b. Segments: Music-related services rose 11% YoY, supported by member services and offline performance-related services. Member services revenue reached RMB 4.8 bn, up 8% YoY.

c. Expenses and profit: Operating expenses were RMB 1.3 bn, 14.5% of revenue vs. 13.7% a year ago. Net profit attributable to shareholders was RMB 2.5 bn vs. RMB 2.4 bn; Adj. net profit RMB 2.7 bn (+4% YoY); Adj. EBITDA RMB 3.3 bn (+5% YoY); diluted EPS per ADS RMB 1.57.

4. Balance sheet and cash: As of Jun 30, 2026, cash, cash equivalents, deposits and short-term investments totaled RMB 44.2 bn, up from RMB 41.0 bn on Mar 31, partly affected by RMB/USD FX moves.Beyond strong operating cash flow, the company maintains diversified financing channels to support strategic spending.

II. Earnings Call Detail

2.1 Management highlights

1. Content supply and licensing

a. Recent performance of classic catalog validates the premium-content strategy. Variety shows and concert tools amplified reach, increasing stickiness among legacy fans while attracting younger listeners, and the share of plays kept rising.

b. Deepened partnership with Dream Music Group, expanding beyond digital first-launches of top artists to co-creation, physical products and offline experiences.

c. Collaborations with Huace Film, RUYI FILM and Zhejiang TV brought OSTs and hit music variety shows, integrating music with visual entertainment.

d. In-house content is a key differentiator: Zhou Shen's 'Blaze into Bloom', Liu Yuning's Shanghai set, the 2026 Jiangsu Football City League theme song, Liu Yuning's 'Borrow a Little Light from Ordinary Days', new works under KuGou's label, and the theme and inserts for the popular animation 'All Wishes Come True' all posted strong streams post release.

2. Ximalaya consolidation and long-form audio

a. Ximalaya adds quality audiobooks and podcasts, filling categories such as web lit, history, kids and education, broadening listening scenarios and boosting time spent and in-ecosystem interaction.

b. Strong in-house production: 9 of this year's Top 10 new web-lit titles are self-produced, and scaled original output also improves unit economics.

c. The integration of 'music + audio' is still early. TME is enriching SVIP with premium audio content and will seek efficiency gains in ads and shared tech infrastructure.

3. Artist management and IP derivatives

a. More artists are choosing TME, and artist development and management are becoming a natural extension of the ecosystem.

b. For GAI Zhouyan, TME provided end-to-end support across content promotion, IP development and concert planning. After the Asia EVOLUTION tour, he launched the first Chinese-language stadium tour REAL G, drawing over 30,000 attendees at the Xi'an opener.

c. Tia Ray's Once Upon a Moon tour wrapped with two sold-out arena shows in Hangzhou and has started to enter international markets.

d. For singer Zhang Xincheng, TME produced his first arena tour New Journey, and the opening show sold out at onsale.

e. Investment in Korea's THE BLACK LABEL enables broader IP cooperation around artist promotion and merchandise, advancing cross-border reach and the fan economy.

4. Offline shows and physical merchandise

a. IP-related consumer services, especially offline performances and merchandise, continued to deliver strong double-digit YoY growth this quarter.

b. TME hosted three fan meetings in Macao for SM Entertainment trainee group SMTR25, attracting tens of thousands of fans and driving merch sales.

c. The flagship performance IP TIMA (International Music Awards) expanded in its second year, upgrading the venue to Hong Kong Kai Tak Sports Park, with audience capacity more than tripled.

d. Merchandise ramped in tandem with physical albums: TME produced Jay Chou's physical album (multiple versions) with bundled merch, and physical albums from Kwan Shi Quan and ESG also performed well.

5. Product experience and AI

a. Avg. daily time spent improved further in Q2, supporting member revenue growth. Playback experience was enhanced via content discovery and audio quality, with new discovery features like 'Swipe to find' and video feeds, plus 3D effects so users experience high fidelity from the first track.

b. Upgraded AI agents in QQ Music and KuGou to better understand user intent and act as personalized DJs, instantly generating context-aware playlists to lift time spent and the share of recommendations-driven plays.

c. Coupled with Tencent's Hunyuan HY3, retention improved, especially among high-value users. The latest generative recommendation model increased recommendation engagement, and related work was accepted by a top academic conference.

6. User reach and Tencent ecosystem synergy

a. Deeper cooperation with WeChat Channels brings in top labels, leading artists and indie musicians, creating a seamless path from discovery on Channels to full-track listening on TME.

b. TME collaborated with WeChat to funnel users to lightweight apps like BoDian Music and KuGou Concept, catering to simple music experiences. Integration with WeChat's AI assistant 'Xiaowei' allows users to find songs, generate playlists, play and share via commands.

c. Cross-device expansion: extended partnerships with automakers Changan, Li Auto and XPeng to broaden smart-car coverage and added search capabilities. TME is also among the first music platforms integrated into the HarmonyOS ecosystem.

7. SVIP and copyright protection

a. SVIP is shifting from pure music benefits to a multi-dimensional, IP-centric experience, augmented by premium audio content and expanding IP member perks.

b. Digital albums and customized SVIP bundles continue to drive conversion: launched bundles for RENJUN, Lay Zhang, aespa and RIIZE with perks like photocards and NFC cards, and added card designs for artists under THE BLACK LABEL.

c. Themed skins were rolled out in collaboration with hit game IPs such as 'Wuthering Waves' and 'Light and Night', lifting SVIP users, ARPPU, time spent and retention, as well as other paid derivative consumption.

d. Copyright enforcement was strengthened via proactive takedowns, legal action and industry collaboration. For the AI era, TME is deepening dialogue with regulators, labels, artists and partners. Core products were comprehensively upgraded this quarter, including establishing an age-appropriate music zone.

2.2 Q&A

Q: IP-related businesses were a major driver of 1H revenue. What are the growth drivers and outlook for 2H?

A: Q2 delivered steady growth, largely reflecting TME's forward-looking strategic layout over the years. We have built a differentiated 'content + platform' system that connects online and offline services and products, and blends virtual and physical formats to form a complete music ecosystem.This lets us fully leverage diversified IPs, with marketing and consumer services making a notable contribution this quarter.

This year we indeed face headwinds in membership and ads due to competition, but IP-related services, including concerts and shows, are growing steadily for three reasons. First, IP supply: beyond in-house IP, we collaborate deeply with external suppliers to build a full-range, high-quality IP portfolio. Second, content cooperation: we are well positioned not only in promotion and distribution but also in derivatives and merchandise. Third, monetization diversification: the platform delivers performances, concerts and merchandise, and can also reinforce SVIP growth through member benefits.Together these build a strong competitive moat.

Q: How will Ximalaya affect TME's financials in 2H now that consolidation is complete?

A: With Ximalaya onboard, we have a one-stop 'music + audio' platform that enlarges the user base, enriches user profiles and increases time spent. Over the medium to long term, integrating Ximalaya will unlock more growth potential and lay a solid foundation for future expansion.

Q: Subscription revenue growth slowed in Q2 ex-Ximalaya. How does 2H look, and what are the trends for SVIP and ARPPU?

A: In the current competitive backdrop, growth in music-related businesses is indeed slowing, with the main impact on traffic. However, from a revenue mix perspective, high-value users, namely SVIP, are less affected, while broader and light users see the largest impact.

Our response is to stabilize the SVIP base and add more perks into SVIP bundles to enhance value, including merchandise, shows and concerts, plus high-value long-form audio content following Ximalaya consolidation. Versus peers, core music remains on a steady, healthy growth trajectory.

For acquiring light users, lightweight apps such as BoDian Music, KuGou Concept and the new KuGou Free Edition still have room to grow. TME also took over the music ops for WeChat Channels, and connectivity between Channels and the QQ Music app is already smooth.Through deeper cooperation with Channels to fortify the core and tap high-value users, we believe we can maintain a solid position amid competition.

Q: What's the latest on competition against rivals like Qishui Music?

A: TME has never been out of a competitive environment, and the key is to execute well. With Ximalaya consolidated, we have completed the transition from a music platform to a comprehensive 'music + audio' service platform.Looking ahead, we will offer richer content, more channels and broader benefits spanning online and offline. Regardless of how competition evolves, we will stick to our pace, and the business will continue to grow steadily and resiliently.

Q: What quantifiable changes have the WeChat Xiaowei integration and upgraded AI agents on QQ Music and KuGou brought in discovery, time spent, retention or conversion? What is the monetization path?

A: Cooperation with WeChat's Xiaowei is still in testing, and we view it as a critical capability. We already see users generating personal playlists and sharing songs through it, with high usage frequency.

On-app upgrades, combining Hunyuan HY3 with music AI agents improved retention, especially among high-value users. We recently launched two new mobile features: 'Swipe to listen' and AI DJ, which can act as a companion-style DJ radio.With the latest generative recommendation model, recommendation-driven engagement also improved, and related work was accepted by a top academic conference.

The business model is clear: use AI to raise activity and interaction so users share and listen more often, especially paid users, thereby further driving subscription growth.

Q: Do you view AI mainly as an efficiency and cost tool, or can it be a direct revenue contributor?

A: We discussed AI on last quarter's call as well. Fundamentally, AI, like other technologies, is an efficiency tool that reduces costs. But TME is distinct on the consumer side, as AI, especially LLMs, can generate music.Over the past two years, we have used AI to generate songs within KuGou AI (AIK) and QQ Music, and these have produced solid commercial returns. We aim to leverage AI to unearth more business opportunities and incremental revenue.

Q: What are TME's competitive advantages and moat in music IP and long-form audio IP? What is the overall IP strategy?

A: On exclusivity: per the State Administration for Market Regulation, we cannot use exclusive copyrights, so a moat is not about exclusives. Versus peers, our advantages are clear: first, user accumulation, with strong coverage of white-collar and female users concentrated in Tier-1/2 cities. Second, kids content holds meaningful market share, with the story category complementing our broader business. Third, audiobook-izing online literature, where we will deepen cooperation with Yuewen Group so new works become audiobooks and are efficiently distributed on the platform; we are also collaborating on comics and audio dramas, which complement audio formats.

We also have deep collaboration with Tencent Video on long-form video and hit dramas: when a video-side blockbuster emerges, it swiftly becomes an audiobook and goes live, supported by traffic from Tencent Video. Audio resources on our platform are reciprocally licensed to Tencent Video for users to listen.Overall, long-form audio is an IP-centric business. We will focus on classic kids stories, Yuewen's online literature and S-tier dramas from Tencent Video, with solid commercial prospects.

On music creation, we have invested for years: beyond working with domestic and intl labels, we co-produce extensively, set up JVs, and invest heavily in our studios and music production. We also deepen cooperation within Tencent's ecosystem (games, Tencent Video), producing many hit songs over the years.From creation, we extend into artist development and management, including cooperation with Korean entertainment agencies to better cultivate promising talent. With song creation and artist development, we can produce their concerts and organize IP activities, further contributing to growth. Leveraging a one-stop platform, we will incubate more high-quality IPs. The rapid growth of this business in recent years demonstrates its potential, and these benefits will ultimately reinforce subscription and SVIP growth.

Q: Selling and marketing expense growth in Q2 was modest YoY (even factoring in Ximalaya's higher expense ratio). What drove this, and how do you view GPM and net margin for Q3–Q4 with a full quarter of Ximalaya consolidation?

A: The slight GPM decline stems from several factors. Offline businesses grew very fast and took a larger revenue share, and offline artist management also grew rapidly with higher mix; concerts and live performances actually contribute positively to GPM, so the overall decline was only slight.Sequentially, the small GPM dip mainly reflects seasonality in offline shows, as Q2 scale was notably larger than Q1. Longer term, with Ximalaya consolidated, we will continue building a richer 'music + audio' platform with more differentiated experiences, lifting retention and conversion. Based on the 2H revenue outlook, GPM is expected to be slightly lower YoY.

On selling expenses, we tightened control in Q2 and shifted channel strategy toward higher-ROI projects. We also intensified synergy within Tencent's ecosystem, including Tencent Video, Tencent Pay and Tencent Games, with the Tencent Video partnership already boosting traffic and conversion.After Ximalaya consolidation, ad spend was largely paused in Jun, and resumed in Jul under the same ROI framework as tech and platform integration progressed. We will avoid blanket marketing and focus on precision and value extraction within the ecosystem. For the full year, selling expenses will rise slightly and operating expenses will edge up; overall, net margin will dip slightly while EBITDA will rise slightly.

Q: Cash and short-/long-term deposits totaled RMB 44.0 bn at end-Q2, ~40% of current market cap. Any updates on boosting shareholder returns?

A: We are still executing the $1bn shareholder return plan, with $400 mn of buybacks completed in Q2 alone. While completing the prior program, we are preparing a new buyback and will use different approaches to further enhance shareholder returns.

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