Tencent Music Entertainment Group (TME) Q1 2019 Earnings Call Transcript

Motley Fool Transcribing, The Motley Fool
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Tencent Music Entertainment Group (NYSE: TME)
Q1 2019 Earnings Call
May 15, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, good evening, and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group first-quarter 2019 earnings conference call. [Operator instructions] Today, you will hear discussions from the management team of Tencent Music Entertainment Group, followed by a question-and-answer session. Please be advised that this conference is being recorded today.

Now I will turn the conference over to your speaker host today, Ms. Millicent T. Please go ahead, ma'am.

Millicent T. -- Vice General Manager

Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. Tencent Music has announced its quarterly financial results today after the market close. An earnings release is now available on our IR website at ir.tencentmusic.com, as well as on the Newswire services.

Today, you'll hear from Mr. Kar Shun Pang, our CEO, who will start the call with an overview of our recent achievements and our growth strategies. He will be followed by Mr. Tony Yip, our CSO, who will offer more details on our business developments.

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Lastly, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward-looking statements.

All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company's filings with the SEC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law. Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in the company's earnings release and filings with the SEC. You are reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure, and other non-IFRS measures are not uniformly defined by all companies, including those in the same industry.

With that, I'm now very pleased to turn over the call to Mr. Kar Shun Pang, CEO of Tencent Music. Kar Shun?

Kar Shun Pang -- Chief Executive Officer

Thank you, Millicent. Hello, everyone. Thank you all for joining our call today. We started the year of 2019 with solid first-quarter results.

Our revenue grew by 39% year over year, driven by healthy growth on both our online music and social entertainment services. Most notably, paying users for both online music and social entertainment services increased by double-digit percentages year over year during the first quarter of 2019. Paying users for our online music services and paying user retention rate grew steadily as we continued to solidify our content leadership, improve product features and enhance our data technology. To further diversify our content, we forged additional partnerships with industry-leading music labels, engaged in close collaboration with other labels to promote original soundtrack music, continued discovering emerging musicians and added more video and long-form audio formats to our music content offering.

Meanwhile, as the largest online music platform in China, we made further progress in leveraging our all-encompassing distribution capabilities and enhancing our playlist to engage users and improve user stickiness. In addition, we drove user interactions and improved the user loyalty by utilizing data analytics and other proprietary technologies to introduce more personalization features and special audio settings. As wider data network coverages improve and the cost of mobile data usage decreases in China, our users are increasingly consuming music content through streaming services, implying a gradual decline in downloading music content. To capitalize on such changes in our user behavior, we began adopting the pay-for-stream model and educating users in turn.

We are encouraged by early results and confident that our transition toward a pay-for-streaming model will gradually gain traction in the future, such materializations will sustain our long-term growth for years to come and ultimately create exciting opportunities for the industry. In our social entertainment services, MAUs reached 225 million despite quarter-over-quarter fluctuations. Such a scale speaks volumes of our market leadership. While encouraging the user experience of our core users, we will step up our WeChat mini program initiatives and additional light versions of our apps to reach and attract a broader group of users.

By relentlessly sharpening our focus on product innovation and enhancing our user experience, we will further strengthen our ability to engage, grow and maintain our large user base. We also continued to introduce more innovative product features for our social entertainment services. To give you one example, our newly introduced feature titled, Grab the Mic, produced meaningful improvement in operate matrix such as user retention rate in the first quarter of 2019. We are confident that our successful track record, as well as our outstanding capabilities in R&D and innovation will enable us to continue expanding our market share in the music-centric social entertainment industry going forward.

In summary, we achieved a strong financial performance and expanded our user community in the first quarter of 2019. We believe our investment in content, product innovations and technology will continuously enhance user stickiness. Furthermore, they will solidify our platform as an all-in-one music entertainment destination, where users can seamlessly engage with music in a highly social setting. Now I will turn the call over to Tony to discuss the development of our business in more detail.

Tony Yip -- Chief Strategy Officer

Thank you, Kar Shun. During the first quarter of 2019, both our online music and social entertainment services grew chunkily. In online music services, we grew paying users by 27% year on year to 28.4 million. This was accomplished by our continued focus in three areas: content diversity, strengthening promotional capabilities and technology advancements.

First, we continued to implement a multipronged strategy to enrich content. We have further strengthened our collaboration with upstream partners. In January, we established a partnership with SM Entertainment, a premier music label in Asia boasting one of the largest song repository in South Korea. During the first quarter, we also successfully released and promoted songs through Liquid State, a music joint venture label specializing in electronic dance music that we jointly launched with Sony Music in 2018.

In this partnership, we have utilized our industry-leading distribution and promotional capabilities to popularize new songs successfully. For example, the top-selling song in Chinese called [Inaudible] was played several hundred million times in the first quarter. In addition, we continued to broaden unique content in our library. During the first quarter, we successfully obtained the master license to the original music soundtrack of a very popular TV drama titled, The Story of Minglan.

One of the main theme songs was played approximately 1 billion times in the first quarter. Our content diversification strategy has yielded good results. As of March 2019, the total number of songs available on our platform increased to over 35 million. Beyond the number of songs, we also added more music-related videos, top shows and audiobooks to our content offering.

As we increase the number of long-form content on our platform, the average playtime for such content grew substantially. For example, our [Inaudible] series featuring book reading by role model artists and top celebrities recorded a double-digit percentage increase in total playing time for the second season compared to its first season. During the quarter, we introduced the first season of This is Original, an innovative music variety show that discovers new music talents. We also co-invested in this music variety show together with the producer of The Voice of China.

It attracted a large number of contestants to our platform and encouraged them to produce their own versions of the songs featured in the show. We then utilized celebrity endorsements and other social media resources on our platform to help the show become a viral sensation, which has further demonstrated the content development, distribution and promotion capabilities of our platform. We also made further progress in expanding our video content by launching new episodes of our self-produced show called, Kugou Music Show. During the show, well-known celebrities discuss their music creations and real-life inspirations, successfully reducing the emotional distance between artist and their fans.

In addition to viewing their idols, fans could interact with them by competing for viewing seats and sending virtual gifts. As a result, the show's play volume and addition of new users have all doubled in the first quarter of 2019 compared to the fourth quarter of 2018. Second, we continued to strengthen our promotional capability. By leveraging our strength in fan-based economy, we provide the unique platform for artists to showcase their talent and reach hundreds of millions of music lovers online.

We helped several established artists and emerging artists to promote their digital elements and generate impressive sales figures. For example, one newly released digital album by a popular female singer quickly exceeded RMB 5 million in sales within two months. We continued to introduce more proprietary playlists which categorize the songs by genre, time period, themes, mood and other criteria. We further expanded the number of songs on these playlists, which in turn, increase the number of plays and help users discover new music.

Third, we continued to invest in two major technology areas: audio settings and personalization features. To date, we have introduced more than 5,000 special audio settings. For example, our audio setting that mimics virtual surroundings received positive user feedback. We have used personalization features such as smart tagging, deep learning-based playlist recommendations and data analytics to increase user time spent on our platform.

In fact, within just one year, we have developed some of the most comprehensive tagging expertise in the music industry. Today, our smart tagging technology is capable of categorizing a song by thousands of different criteria. This capability has enabled us to improve the accuracy of our recommendations based on user patterns and preferences. I would also like to highlight the progress we achieved in certain new technologies.

In the first quarter, our music and song recognition feature gained increasing popularity among users, enabling us to better assist users in the music discovery journey. Capable of creating a digital fingerprint for any given song, this feature locates a song in our music database to provide the name, artist, lyrics and other song information to our users in a matter of seconds. And lastly, our ring tone feature also continued its rapid ramp-up as the user base increased by high double digits in the percentage in the first quarter sequentially. Now let's turn to our social entertainment business.

Overall, our social entertainment business recorded healthy growth. Paying users increased by 13% year on year to 10.8 million. Mobile MAU remained steady compared to the first quarter of 2018. ARPPU recorded double-digit growth.

Our growth was driven by a combination of three areas: first, product enhancement and innovation; second, use of our platform as an effective promotional channel; and third, data-driven personalization. First, let's look at product enhancement and innovation. During the quarter, we continued to introduce innovative ways to engage users on WeSing, the leading online karaoke platform in China. One new feature called, Grab the Mic, achieved a high user retention rate during the first quarter.

Grab the Mic allows the users to either invite a group of their friends or join a song room with strangers matched with users using our algorithms. Once in a group, users will then hear parts of the same song. They are scored based on time it takes them to identify the song, as well as the accuracy of their lyrics and vocal keys while singing along. This feature helps encourage user interactions and drive user engagement.

In addition, we further optimized our recommendation engine that leverages data analytics to match users singing rooms they are most likely to enjoy. As users perform their favorite songs, they receive virtual gifts from others and increase their scores in our ranking system. This refinement further improves user's song room entry rate. Furthermore, we developed a feature that allows users to record their own poem readings and add background music from our extensive music library.

Going forward, as Kar Shun mentioned earlier, we will continue to explore WeChat mini program initiatives and deploy additional light versions of our app to cater to different user preferences and captivate a broader group of users. We also utilized more singing contest features to improve interactions between users and live streaming performance. Such features attracted numerous live streaming performance, enabling them to attract more followers compared to those who did not use this feature. Importantly, the majority of these performance have relatively low public recognition levels in the past.

By helping these less popular performers to grow, we further diversified our live streaming performer base to foster a more healthy live streaming ecosystem. We also introduced a new multi-performer live streaming model. This model selects a group of popular performers and allocates 15 minutes of performance time to each. Viewers can access a variety of music-related live streaming content without having to switch between different showrooms.

It has been very effective in attracting and converting new users. It has also improved the overall average user time spent significantly. Second, more emerging talents found success on our platform while contributing and providing of music content. This year, WeSing annual carnival recorded more success in terms of discovering talent, as well as performer and user participation rate, which were up 49% and 128% year on year, respectively.

One of this year's top three contestants leveraged our WeSing platform as a launchpad to showcase his singing talent, reaching millions of audience and published multiple digital albums. Musicians like him have added high-quality content to our library and thereby attracted more users to our platform that's forming a virtuous cycle. Our music-centric live streaming platform enables us to discover and nurture emerging artists, too. Another emerging artist, as an example, she was discovered through our live streaming platform and went on to develop her professional singing career.

She continued to engage with her fans and publish even more new songs through our platform. This, in-turn, expanded our music library. Such examples truly demonstrate our unique position as an integrated all-in-one music entertainment platform which allows our users to discover, listen, sing, watch, perform and socialize around music. Third, our personalization content recommendation engine continued to drive better user experience.

Our data-driven personalization engine leverages in-depth analysis to recommend different types of music-centric content to users. Recommended content can include songs, radio, short videos and live streaming. The result of this personalization has improved the average time spent on the WeSing app sequentially. In summary, we continued our healthy growth trajectory across all business lines in the first quarter.

Looking forward, we believe that our vast content library, events data repository and proprietary technology will enable us to attract more users, improve our user experience and increase our monetization capabilities. With that, I would like to turn over to our CFO, Shirley Hu, for a closer review of our financials.

Shirley Hu -- Chief Financial Officer

Thank you, Tony. Hello, everyone. For the first quarter of 2019, our revenues increased by 39% year over year to RMB 5.7 billion. The increase was driven by historical growth in both our online music and the social entertainment business.

Revenues from online music services increased by 28% year over year to RMB 1.6 billion. This growth was mainly due to increase in subscription revenue and the sublicensing revenue to our company, including third-party music platforms and the Tencent Group. Therefore, also higher digital music album sales in the quarter. Sales of subscription packages contributed to RMB 710 million in revenue, up from RMB 565 million year over year.

In Q1, we continued to offer promotional deals for long-term subscribers, including automatic renewal and annual package subscribers. On the other hand, premium membership subscriptions gained more weight in our total subscription base, but there was a slight decrease in our ARPPU from RMB 8.4 in Q1 2018 to RMB 8.3 in Q1 2019. We have also seen a steady improvement in subscriber retention rate over the past five quarters. The improvement of the subscriber retention rate will continue to be our focus in 2019.

Revenues from social entertainment services increased by 44% year over year to RMB 4.1 billion, primarily driven by the revenue growth in our online karaoke and live streaming services. Our ARPPU in social entertainment services increased by 30% to RMB 129 year over year, while paying user retention rate also improved from 4.3% from 4.8%. WeSing annual carnival was not only successful in revenue generation and ARPPU expansion during the quarter, but also increased the user participation and provided a stage for artists to improve their performance base. Cost of revenues increased by 52% year over year to RMB 3.7 billion.

The increase was attributable to higher content and revenue-sharing fees. The increase in content fees was mainly attributable to the increased market price and the amount of music content licensed from music labels and other content partners, as well as increased investments in the production of high-quality original music content. The increase in revenue-sharing fees reflects the growth in our social entertainment services and the higher percentage of revenue contributed from professionally generated content providers. Our gross margin was 35.4% in Q1 2019.

We are in the process of ramping up our in-house production, and many of the shows was viewed in the preparatory stage during Q1. Now let's turn to our operating expenses. Our total operating expenses increased by 28% year over year to RMB 1 billion. Selling and marketing expenses for Q1 2019 were RMB 437 million, representing an increase of 20% year over year.

The increase was primarily due to increased spending on branding and the promotion of our content. General and administrative expenses increased by 35% year over year to RMB 602 million in Q1 2019. The increase was mainly due to the higher employee benefit expenses as we continued to invest in our workforce. There has been a greater increase in the size and the pay scale of our personnel in the past quarter.

We have seen improvement in operating leverage on a year-on-year basis. Operating expenses as a percentage of revenue decreased to 18% in Q1 2019 from 20% in Q1 2018. Our effective tax rate was 12.4% in Q1 2019, compared to 9.2% in Q1 2018. The increase was mainly due to the change in the preferential tax rate of certain subsidiaries.

As a result of the foregoing, our net profit attributable to equity holders of the company increased by 17% year over year to RMB 987 million. And our non-IFRS net profit attributable to equity holders of the company increased by 15% year over year to RMB 1.2 billion. Our non-IFRS net profit margin was 20.9% in Q1 2019. As of March 31, 2019, our combined balance of cash and cash equivalents and the term deposits amounted to RMB 18.1 billion, an increase of RMB 748 million, compared to RMB 17.4 billion as of December 31, 2018.

The increase in balance was primarily due to cash flow generated from operations of RMB 926 million. Our cash and cash equivalents balance was also affected by change in the exchange rate of RMB to USD at different balance sheet dates. The exchange rate was 6.7 to one on March 29, 2019, and a 6.9 to one on December 31, 2018. With our strong profitability and cash flow, we will continue to invest in our products and content offerings.

These investments will help to expand our user base and improve user engagement, both of which are crucial to our sustainable revenue growth in the long term. We are confident that such efforts will create long-term shareholder value, as well as increase the return on capital for investors. This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Eddie Leung with Bank of America Merrill Lynch. Please go ahead.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Hi. Good morning, guys. Just two quick questions mainly on the user sign. Just curious, No.

1, as we moved more content under the paywall, for example, recently Jay Chou's songs under the paywall as well. Could you comment on the paying user ratio under the music thesis going forward? As I remember, both Kar Shun and Tony mentioned about encouraging users are paying for streaming. And then the same question is on the MAU of your social entertainment business. Any color on the trend between live broadcasting and WeSing in the first quarter? Because we pay attention to the overall social entertainment MAU.

Your growth are not very strong in the quarter. So wondering how and/or is there any difference between WeSing and channel live broadcasting? Thanks.

Tony Yip -- Chief Strategy Officer

OK. Sure. Hi, Eddie. It's Tony.

Let me address both your questions. With respect to the music paying users, I want to reiterate that 27% year-over-year growth for our music paying user is -- they have a very healthy pace. And with the mobile data cost declining, the paying user conversion, driven by pay-for-download is facing some headwinds. While the paying users that are driven by pay-for-stream is actually enjoying a lot of tailwind as Kar Shun mentioned in his speech.

And however, because the pay-for-stream user base is relatively small, right, because we only started implementing the pay-for-stream model in Q1, it will require some time for that to ramp up. So this is a particular quarter where you see that impact between the netting of the headwinds and the tailwinds playing out the most. Over time into the next quarter and beyond, we expect the paying user growth to improve, right? And now in addition to growing the paying users, we've also made a lot of progress on improving the subscriber retention rate over the last several quarters as Kar Shun mentioned. And that's driven by our continued investment in enriching the content offering, as well as some of our promotional campaigns on auto-renewal program.

So our focus is not only on the quantity of paying users but also on the quality of the paying users. On the pay-for-stream development specifically, we have made -- we started the implementation of pay-for-stream monetization model with a small selection of content in Q1. While the amount of content being put behind the pay-for-stream paywall accounts for only a very small percentage of our total, this is just the beginning, and we'll continue to gradually add more content over time. The current focus is on making sure the user experience remains good despite the transition, and it will take some time for us to promote a broader user adoption.

We are seeing encouraging results so far, which gives us the confidence that this is the right strategy that can generate significant value for the company over the long term. So that's on the music side. And then on the social entertainment side, I also want to stress that while the MAU growth is -- seems slow, the overall social entertainment revenue grew at a very healthy pace at 45% year over year. And we recognize that the MAU growth has slowed.

But I think one also has to recognize that our MAU base is already very sizable. Now historically, our focus was more on the core karaoke users with relatively higher usage frequency. And as a result, we have been very successful in amassing a large group of such core karaoke users. And hence, we are reaching a high level of penetration within that core user group now.

But we already have a well-defined plan to address this and to propel the user growth going forward. We will execute a number of initiatives focused on expanding the user coverage beyond the traditional user group. Some of the examples I've already mentioned earlier on the call. For example, we will continue to leverage the WeChat mini program that offer a more simplified singing feature to capture more users within a large social network within WeChat.

We'll continue to expand our target users through light versions of our app with more simplified product experience tackling fewer singing features. We will lower the youth karaoke usage barrier by allowing user to sing only part of the song such as the chorus instead of the full song and combine that with the one-click sound correction feature that we mentioned in the last quarter. It will both help reduce the usage barrier. And finally, we'll continue to invest in innovative product features to continue to deliver a fun and engaging user experience such as the multi-mic singing room we mentioned in the last quarter that is starting to bear fruit and also the Grab the Mic new feature that we launched this quarter.

So combining all of that means that we are very confident our user growth plan will start to drive better user growth in Q2.

Kar Shun Pang -- Chief Executive Officer

Eddie, this is Kar Shun. And I would like to add one more point regarding the online music part. As I mentioned before, I think that the focus on -- at least besides driving the paying ratio, I think is more it's very important for us to improve a good number of users -- paying users rather than driving the higher ARPPU at this moment. So since as everyone of us may know that pay-for-streaming is more expensive than pay-for-download, since the download is just like a one-off charge, streaming is more like a monthly burn charge.

So what we are doing is we will be prudent in handling this education process and make sure that we are going to have the best content and adding more privileges to our service as well to make sure that our users will be adapting to the new business model in a greater manner. So as we smoothly execute the transition over from time to time, while we expected that we are not driving just a number of user base but the ARPPU will also grow as well, so I think that is going to create a very healthy future for us in our business model on the online music part.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Our next question comes from Wendy Chen with Goldman Sachs. Please go ahead.

Wang Chen -- Goldman Sachs -- Analyst

Thanks, management, for taking my question. So one quick question is about our cost of revenue and the margin trend. So we mentioned that we are moving some from behind the paywall and we have seen a very healthy trend on the paying ratio side. So I'm just wondering whether this such move will kind of like change our cost structure as well in terms of our agreement with the label company.

Thanks very much.

Shirley Hu -- Chief Financial Officer

About the music content part. This quarter, our music content cost has increased compared to the net of Q1 in 2018. And it comes from market price increase and we signed more contracts with the labels and the content provider partners. And we also continued in our self-made content such as music-centric shows and self-made songs.

We can see we get some achievements in this area. This quarter, we had self-made songs named, Please Say Hello First, sang by popular pop artist, He Yihang and ranked in top 20 -- among top 20 in our most played song chart. So recently, we can get more from our self-made content. And in 2019, we expect our music online -- our online music revenues will continue to increase and it will align our expectation before.

Just like Kar Shun mentioned, we will focus on our subscriber increase and use the initiatives to encourage paying user retention rate and put more pay streaming content in paying more so our subscribers will increase where we [Inaudible], but ARPPU is large now for our important forecast. So we estimate that ARPPU will be steady compared to the last year. And the other very important point, generally speaking, our license revenue will be not difficult to forecast because it can -- it's not only by our offer and it is determined by the third-party music platform, their purchase strategy and their financial resources. From the market information now, maybe some -- the third-party platform will give up some content, so our sublicense revenue will be decreased in Q2.

Millicent T. -- Vice General Manager

OK.

Shirley Hu -- Chief Financial Officer

OK.

Millicent T. -- Vice General Manager

So thank you, Shirley. So next question, please.

Operator

Our next question is from Alex Yao with J.P. Morgan. Please go ahead.

Alex Yao -- J.P. Morgan -- Analyst

Hi. Good morning, management, and thank you for taking my call. I would like to follow up with the previous question regarding the paying ratio for music streaming business. Can you elaborate a little bit more on what exactly is the content strategy that you introduced recently, which makes the subscription relatively more attractive or more appealing to the streaming user and relatively less attractive to the download users? Also, can you give us a rough breakdown in terms of the split within your paying user between users that are driven by download behavior and the users that are driven by streaming behavior? And lastly, given the current dynamic content strategy, etc., etc., how should we think about the paying ratio increased pace over the coming quarters? Thank you.

Tony Yip -- Chief Strategy Officer

Yeah. Thank you for your question. So in terms of the music paying user, I want to clarify one point. The subscription package is one subscription package.

There -- it doesn't differentiate between download or streaming. However, within that one subscription package, the reason that drive user to convert to be from a free user to a subscriber, there are different reasons. Some users are driven by the need to download the song, while other users may be driven by the need to stream the song even without the download. What drives that depends on what content they encounter.

So for example, if they're listening to -- if they want to listen to a song that is sitting behind the pay-for-streaming paywall where you could only listen to it after being a subscriber, we consider that conversion to be driven by pay-for-streaming. Whereas if a user wanting to download a song that is only available behind the pay-for-download paywall and that user is driven from free to be a subscriber, we consider that conversion to be driven by pay-for-download. So what we were trying to explain is because of the mobile data cost coming down gradually over time, the convert -- the number of conversions that are driven by downloads are slowing whereas on the flip side, the number of conversion that are driven by streaming is actually increasing, right, quite quickly. But because of the sheer volume of the number of users that are driven by streaming are still relatively small compared to the pay-for-download-driven users, you're not yet really seeing -- the positive benefit of that is not yet so obvious in the paying user growth.

And so we expect as that scale of pay-for-stream user base to increase, we expect the music paying user growth to show more meaningful and more obvious benefits starting in Q2 and beyond, right? Now we don't -- obviously, we don't provide specific breakdowns into numbers, but I think with the directional comment that we're providing, one should have a reasonable understanding that this is -- in -- with respect to our music paying users, Q1 is a particular quarter. Starting Q2 and beyond, we expect the growth rate to improve.

Millicent T. -- Vice General Manager

OK. Next question, please, operator.

Operator

Absolutely. Our next question is from John Egbert with Stifel. Please go ahead.

John Egbert -- Stifel Financial Corp. -- Analyst

Great. Thanks for taking my question. In March, we saw that iQiyi started sharing VIP membership benefits with Kugou users, and the deal reminded us of Spotify's partnership with Hulu in the U.S. that's been widely viewed as a win-win deal.

So I'm wondering if you can share any additional information about the partnership in terms of how the economics might work, how it might show up in your reported metrics, if at all, and what you're hoping to achieve with it? And is this maybe the start of many different partnerships to try to increase your paid conversion rate? Thanks.

Tony Yip -- Chief Strategy Officer

Yeah. Yeah. I think we mentioned maybe in the last quarter as well is that the bundling campaign is something that is ordinary course of business for us. We do bundle with other online video platforms.

We also bundle with mobile data cards. We bundle with a number of different other subscription services. I think from our perspective, it is a marketing campaign that helps us cross-sell our subscription plan into new user base of other platforms. And so it's a win-win for both.

When that happens, we do count the subscribers onto our numbers as well. But I want to bear in mind that this is more a marketing campaign that we implement from time to time. It is not a forever joint-bundling initiative. So this quarter, you may see us partnering with one particular platform.

And next quarter, you may see us partnering with others. And that's part of our strategy to make sure that we optimize which partner that we partner with. So far, we're seeing good results from such bundling, and it's ordinary course of business.

John Egbert -- Stifel Financial Corp. -- Analyst

That's helpful. Thank you.

Millicent T. -- Vice General Manager

OK. Next question, please.

Operator

Yes. Our next question is from Han Joon Kim with Deutsche Bank. Please go ahead.

Han Joon Kim -- Deutsche Bank -- Analyst

Great. Thank you for the time to ask a question. I want to follow up on the user shifting from pay-for-download to pay-for-streaming. Do see any peripheral kind of difference in the user behavior, perhaps in relation to the digital album sales or the amount of songs being streamed or whatnot that leads to enhanced kind of lifetime value of the user for pay-to-stream versus pay-to-download? Thank you.

Tony Yip -- Chief Strategy Officer

Han Joon, do you mind repeating the question? We have trouble hearing you just now.

Han Joon Kim -- Deutsche Bank -- Analyst

Sure. I'm trying to understand whether -- as you observed the pay-to-stream user versus the pay-to-download user, whether you see any other kind of behavioral changes to the pay-to-stream user in the sense that maybe they consume digital albums more or they happen to listen to songs more. Anything that would allude to that the lifetime value of a pay-to-stream user is higher than the pay-to-download users.

Tony Yip -- Chief Strategy Officer

Sure. Well I think one very helpful fact that we are serving is that the pay-for-stream user tend to consume more content through our recommendation. Because they're streaming more, they are listening less to songs that they've downloaded in their personal asset list or their personal folder, right? So as a result, it actually gives our platform more opportunity to help them discover new music. And with more opportunity for us to help them discover new music, it actually strengthen our ability to promote new songs and increases the chance of us to promote other songs that may be sitting behind the pay-for-streaming paywall.

And so I think that's a clear differentiation between users that typically listen to the downloaded song in their personal folder versus users who stream more.

Kar Shun Pang -- Chief Executive Officer

Yeah. Exactly. And all of these streaming users is more active. And in terms of the time spent on our platform is also higher than compared to the others or the general users who is listening to the downloaded songs.

So I actually agree that once we are going to try and have this transition done, more and more user is going to be listening to streaming music through our platform, they will be more active and also, they will have a more open mind and willing to accept more new songs that was recommended by us according to their preferences.

Millicent T. -- Vice General Manager

Thank you, Kar Shun. Next question please.

Operator

Certainly. Our next question comes from Wendy Huang with Macquarie. Please go ahead.

Wendy Huang -- Macquarie Research -- Analyst

Just a few housekeeping questions. First, can you maybe share the paying user breakdown between the WeSing and also live streaming, Kugou live? And secondly, just wonder for that pay-for-streaming business model. So do you expect that to commercialize your paying subscriptions in the near term? If so, for how long would that probably be like expectation? Thank you.

Tony Yip -- Chief Strategy Officer

Wendy, do you mind repeating the first part of your question?

Wendy Huang -- Macquarie Research -- Analyst

Yeah. The first question I just want to get some breakdown of the paying user between the karaoke app, WeSing, and also the live streaming app, the Kugou live.

Tony Yip -- Chief Strategy Officer

OK. So we don't provide specific breakdowns. But I think it's fair to say that the paying user growth for both live streaming and karaoke are growing. And in terms of your second question, whether there's any cannibalization between pay-for-stream and pay-for-download, certainly no, because it is addition for us.

As we mentioned, the paying users that are driven by pay-for-stream is actually enjoying a lot of tailwind, right? With the major trend, mobile data cost coming down, a lot more users are consuming music through online streaming. And as a result, we're actually enjoying the benefit of increasing conversion from a free user to a paid user by catching them with content that is only available to stream behind the paywall. So we're actually seeing that as a positive for us that helps us grow our music paying users over time.

Millicent T. -- Vice General Manager

OK. Next question please.

Operator

Absolutely. Our next question is from Binnie Wong with HSBC. Please go ahead.

Binnie Wong -- HSBC -- Analyst

Hi. Good morning, management. Thank you for taking my questions. The question is actually two questions here.

One is on the margin trend. Recall earlier in the year, we talked about like the investments into content and also, of course, into the pay-for-streaming, and we also see the cooperations our company has been having with other platforms. So can you remind us in terms of basically -- and following in the rest of the year, because if you look at the Q1 2019, you see that gross margin is still relatively holding to relatively the higher end of the range we talked about earlier in the year. So can you remind us in terms of our content investment how that should be impacting our margin trend? And then second is that a follow-up question basically on the online music paying user growth rate? We have mentioned about that in March 2019, QQ and Kugou music pressing users to pay-for-streaming, pay for like Jay Chou's music.

So how do you see that this strategy will be impacting us going forward? And what is the results you have been seeing? Because I think that that has been launched in March, right? So by now, about a, like, two months already. How have you been seeing the paid user growth affecting like positive impact to the user growth? And how does that impact our gross margin basically as well? Thank you.

Tony Yip -- Chief Strategy Officer

Sure. Let me tackle the first -- the second part of your question about adding more content behind the pay-for-streaming paywall, and I'll let Shirley answer your question about the margin. As I mentioned, we have implemented the pay-for-streaming monetization model in Q1 by selectively putting some of the content behind the pay-for-streaming paywall. We're actually seeing very encouraging results so far in terms of driving more and more conversion from free to paid.

But I want to keep stressing, this is early stage. We've just begun that transition in Q1. But the early results give us a lot of confidence that this is the right strategy that we would continue to implement and would generate a lot of value for the company over the long run. And that's the reason why we think starting in Q2 and onwards, the music paying user growth should be better than Q1 is precisely because of the encouraging results that we see.

Shirley Hu -- Chief Financial Officer

About the margin. This quarter, our margin is -- it now meets our expectations. And in the future coming quarters, we expect the sublicenses revenue will be decreased. And I have just to say that some -- the third-party music platform will -- we see -- sell them content from our platform.

So that will be some -- largely impact our gross margin in whole year. And for the -- especially for the Q2, the sublicense revenue will be decreased from this quarter, and our revenue expectation will be lower -- from this quarter will be lower of the whole year expectation. So this will be -- impact the gross margin in Q2. But in our underlying growth rate will be greatly accelerated in the second half of the year.

So we think our gross margin will recover and go to our estimate of the whole year so -- like for the gross margin.

Tony Yip -- Chief Strategy Officer

Yeah. Let me just add that we do not provide specific guidance in terms of the numbers because we want to stay very focused on growing the company over the long term rather than be distracted by short-term fluctuations. However, I think directionally, as Shirley mentioned, we expect the Q2 to show better growth in terms of operating data, especially respect -- with respect to social entertainment and MAU driven by the execution of our user growth plan that I've outlined. In terms of total revenue, we expect Q2 to be -- we expect Q2 growth rate to be slightly softer than Q1 growth rate before the growth rate reaccelerates again in the -- in Q3 and beyond.

And that's mainly driven by -- like what Shirley mentioned, some of the third-party music platforms may reduce the amount of content they sublicense from us. And so while this put pressure on the sublicensing revenue in the short term, in Q2 specifically, it actually is very positive for our platform in the long term because our content leadership becomes even more obvious.

Kar Shun Pang -- Chief Executive Officer

Yeah. I think it's very important for us to emphasize the point that in order to ensure the long-term success of TME, we have to keep investing in the content enhancement, even though we have the largest content library available in the market right now. And additionally, we also need to put more resources investing in our product innovation as well so it will give us more competitive advantage in the future. So we are not just focusing on the quarter-to-quarter performance, but instead we are focusing on more long-term value generations for the company.

Millicent T. -- Vice General Manager

OK. In the interest of time, we'll take our last question, operator.

Operator

Yes. Our last question is from Hans Chung with KeyBanc Capital Markets. Please go ahead.

Hans Chung -- Keybanc Capital Markets -- Analyst

Good morning, management team. Thank you for taking my question. So I have two quick questions. One, just following on the paying ratio question.

So given that initial results, so what's our observation about the churn rate for the online music, the paying subscribers? And then second question is it seems like we may have the sound growth acceleration in social entertainment MAU and then -- but given that we -- given the high base and since like we have seen a slowdown in the overall user base, so just beyond, like even beyond second quarter, how should we think about the user growth in social entertainment? I mean, in at least in the coming 12 or six months? Thank you.

Kar Shun Pang -- Chief Executive Officer

Yeah. OK. Thanks for the questions. And I'll take the first part of the questions, which is regarding the online music side, and I will let Tony to talk about the social networking -- the social entertainment.

First of all, I think we are confident and keen to drive and achieve a healthy music subscriber count by providing the best content outstanding product experience to our users. As I've mentioned before, through the ongoing efforts and the hard work of our team, we have already achieved a very good result, and there has been significantly steady improvement on our subscription retention rate over the last five quarters, actually. The actual [Inaudible] is around 60% of retention rate in the quarter 4 of 2017. And right now, we are around 70% in Q1 2019.

So I think that we are doing a really good job in terms of the user retentions and especially for the online music services. And Tony, maybe you can talk about the social entertainment side.

Tony Yip -- Chief Strategy Officer

Sure. Yeah. I think as I briefly outlined, in the past, our focus with social entertainment has more been on the core karaoke users with high usage frequency. And obviously, that puts a limit on how high the penetration rate could go because there's only so many people who needs to sing karaoke a lot every day.

But we are -- we already have a well-defined plan to address this, and we've already started executing on some of the steps, and we expect to see some of the positive results floating through starting in next quarter. I won't repeat those initiatives again. But I think those initiatives would be more than sufficient to help drive the user growth going forward not just a single quarter. I think overall, the theme is that we want to broaden our user coverage beyond the high-frequency users into the less traditional users, perhaps even to the casual users through a series of measure that lower the usage barrier, that enables them to find it more convenient to sing, to enjoy content, to improve content, as well as share with friends.

Millicent T. -- Vice General Manager

OK. Thank you, everyone, for joining us today. If you have any questions, please feel free to reach to us through our IR website at ir.tencentmusic.com. This concludes the call, and we look forward to speaking with you again next quarter.

Thank you, and goodbye.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Millicent T. -- Vice General Manager

Kar Shun Pang -- Chief Executive Officer

Tony Yip -- Chief Strategy Officer

Shirley Hu -- Chief Financial Officer

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Wang Chen -- Goldman Sachs -- Analyst

Alex Yao -- J.P. Morgan -- Analyst

John Egbert -- Stifel Financial Corp. -- Analyst

Han Joon Kim -- Deutsche Bank -- Analyst

Wendy Huang -- Macquarie Research -- Analyst

Binnie Wong -- HSBC -- Analyst

Hans Chung -- Keybanc Capital Markets -- Analyst

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