Kuke Music Holding Limited (KUKE) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning and good evening, ladies and gentlemen. Welcome to Kuke Music Holding Limited First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after managements’ prepared remarks. I will now turn the call over to the first speaker today, Ms. Jane Zuo , Investor Relations Director of Kuke Music Holding Limited. Please go ahead, ma'am.
Unidentified Company Representative: Thank you, operator. Hello, everyone. Welcome to our first quarter 2021 earnings call. On the call with me today, are Mr. He Yu, Founder, Chairman, and CEO; and Mrs. Patricia Sun, President; and Mr. Tony Chen, the CFO of Kuke Music.
He Yu: Okay. Thank you, Jane. Good evening and good morning, everyone. Thanks for joining us and welcome to our first quarter earnings call. In our first quarter, we maintained a strong revenue growth, as we adapted to educational policy changes. Our total revenue grew 85% year-over-year to RMB 11.4 million, by our smart music education business, which increased 7.9 times from the same period last year. This shows our ability to adapt to the market trends, improve our technology, expands our educational content and digital assets, and maintain our deep relationships with good world famous music labels and publishers. So let me tell more about the current industry environment and its impact on our business. 2021 is a year of economic recovery, as more students back-to-school. Our smart music education business continue to benefit from growing demand in this expanding market. At the end of the first quarter, we had over 11,000 Kuke Smart and pianos in the classrooms of over -- 2000 to 500 kindergartens with over 38,000 paying students using our Kuke Systems. In addition to the economic recovery, government’s policy will create more deman3d for music education services. China's Ministry of Education has a new directive for primary school and secondary schools to upgrade their lessons to provide more arts education for students. As a result, music classes will need to provide a better resources to the combined music knowledge with the general introduction of instruments. This gives us an opportunity to provide a better music education services. With our advantage in technology, music licensing and a deep industry partnership, we expect the music education segment to be an important growth forever for our going forward.
Patricia Sun: Thank you He Yu. Good morning and good evening everyone, I would like to take this opportunity to elaborate on some of the – business in first quarter. Licensing and the subscription revenue in the first quarter decreased by 14.5%, year over year, mainly due to such an impact of pandemic during 2020. In order to lay a stronger foundation for our future growth, we are restructuring our customer base and distribution networks. To further bolster overall growth, we continue to invest in research and development and make advanced advancements in our technology. This allows us to not only deliver an improved experience to our customers, but also generate noticeable cost savings. We recently completed improvements on our end system designed for our Kuke kindergarten piano classrooms. This new micro server has simplified installation to the point that our customers no longer require on site installation. It also reduced the necessary hardware and the generated noteworthy classrooms cost savings. Meanwhile, we continued to expand our education curriculum and digital assets to grow our scope of services. During the first quarter, we completed development – our Kuke class curriculum for the second year of kindergarten. We also formed strategic alliances with many local publishers to strengthen our catalog of digital sheet museum resources for our Kuke students. We are also working hard to establish partnerships to help expand our curriculum to cover topics including music literacy, history, theory, culture and more. In our view, our vast music catalog is an incredible resource for us to leverage for our education services growth. We continuously evaluate these existing assets in addition to adding new assets for use in our educational services. Recently, we completed the localization and digitization of my first piano book, one of many books from the globally best selling my first music book series published by our partner, Naxos. Through this digitization, we are able to provide some of the world's leading music education resources to our classrooms all across China. Leveraging our long-standing partnerships with world renowned music labels and publishers provide us with advantages we need to provide world class educational resources and music content. Our partnership with Naxos is one such strategic partnership. In March, five different awards at the 63rd Annual GRAMMY Awards were awarded to winners from the Naxos family, including Best Choral Performance, Best Contemporary Classical Composition, and more. This level of recognition from one of the world's most influential bodies in the music industry signifies the quality and potential of our digital content assets and resources.
Tony Chen: Thank you, Patricia, and hello everyone. Before we start our detailed financial discussions, please note that we will be presenting non-IFRS measures today. Our non-IFRS measures results exclude certain non-cash expenses, which are not part of our core operations. Details of these expenses can be found in the reconciliation tables on our press release. Please note that unless otherwise stated, all financial numbers represent today are for the first quarter of 2021 and are in RMB terms. All comparisons are on the year-on-year basis, unless otherwise stated. Our revenue increased by 85% to RMB 11.4 million from RMB 6.2 million in the same period of 2020. This increase was mainly driven by revenue growth from smart music education services, which saw a significant increase in student enrollment as we accelerated the expansion of our kindergarten education services.
Operator: We will now begin the question-and-answer session. The first question will come from Brian Li with AMTD Group. Please go ahead. Sorry Brian, your line might be muted.
Brian Li: Sorry, thanks management, thank you for taking my question. My question is regarding on the revenue. I noticed that your revenue for the education segment has jumped by about eight times. So, what's the main driver behind this? Thanks.
Tony Chen: Okay, thank you Brian. Yes, revenue increased to the -- for the educational segment for the quarter. We were working with more distributors during the quarter and they brought in more kindergarteners to work with us and we put in more support for the kindergarten students enroll into our music classes. So, that's why the revenue increased significantly for the education segment for this quarter. So, this year, we'll continue to work with more distributors, so as to continue to increase our service coverage in the market and that will push a strong, I think, growth in the number of kindergartens and also the number of students enrolled. We were pretty confident for this year. Thank you.
Brian Li: Thank you. Thank you.
Operator: Our next question will come from Clara Johns with Z Capital. Please go ahead.
Unidentified Analyst: Hi thanks for taking my question. This is Clara. So, we observed that currently the live performances segment is very focused on Beijing music festival that is held in October each year. Revenue and business seems to be very concentrated, they haven't for the segment going forward to diversify?
Patricia Sun: Sorry, could you please repeat it again, plus your voice is very low. Thank you.
Unidentified Analyst: Hi, can you hear me?
Patricia Sun: Yes, please.
Unidentified Analyst: Hello? Okay.
Patricia Sun: Yes, please.
Unidentified Analyst: So, we have observed that currently the live performance business is very focused on the Beijing Music Festival that is held in October each year. Revenue and business seems to be very concentrated. Do you have any plans for this segment going forward to diversify? Thank you. A - Patricia Sun Okay. During the 2019 Beijing Music Festival, a series of Lunchtime Concerts have been held in collaboration with local radio stations for live broadcasting. Since 2021, this concert series has transformed into an all year program, featuring different artists at different venues every month, maybe twice every month, or we will add more times in each month in the near future.
Unidentified Analyst: Thank you, management team. I also have one more question. The company has issued an revenue target of total of RMB400 million this year. How was this target to be achieved this year? Thank you.
Tony Chen: Okay. Yes, we're targeting not less than RMB400 million in revenues this year. It represents more than 100% growth from last year. The growth will mainly come from the music education business segment. As we have mentioned earlier, this year we are speeding up on the surface coverage of smart music education services by working with more distributors and kindergartens. We're expecting more student enrollment as a result, and it will push up our revenue significantly this year. As for the licensing and subscription segment and live performances segments, there'll be relatively more stable this year. We'll try new forms of product or services for this segment to look for new growth engines. That's my -- our response for the question. Thank you.
Unidentified Analyst: Okay. Thank you. Thank you very much.
Operator: Our next question will come from Yuji Fung with RiverCircle Investments. Please go ahead.
Yuji Fung: Hello. Thanks for picking up my question. My question is currently, the regulatory environment in China is changing in the direction that not very stable to education companies. As the Education Department of China is limiting the provision of extra curricular classes that are widely available after school in order to promote and improve the mental health of students. So it seems a lot of education companies that were mainly focusing on traditional academic core subjects are now moving in the space of other subjects following the state policy. So how is Kuke coping with the change in the regulatory environment and increased compensation? Thank you.
He Yu: Okay. Wow, this is a very thoughtful question. They have several aspects to this question. For the regulatory change, it's mainly related to classes that are provided outside of schools, and are mainly focused on traditional core academic subjects such as languages, mathematics, and science subjects, etcetera. While at the same time, the Ministry of Education or the Education Department is encouraging art education in order to provide a more holistic and balanced education to students in China. So this change in regulatory environment, we believe do not have a material impact on us, because all our classes are provided inside the kindergartens as compared to the other classes that are provided outside. So, our classes are not the direction of these new regulatory changes. And we focus on music education. So, this is, again, an area that is being encouraged by the state. So overall, we don't see much impact on this area. As for the increased competition, we do see a lot of other education companies announcing or trying to get into this art education area. While but this is not easy, as most of them don't have the kind of copyrights like the leading music library, huge collection of classic music, or large number of course materials to start with. And these are our core competitive advantages. So, they also don't have the kind of ecosystem like the copyrights business or live performance business to form an ecosystem like we do. But anyway, we welcome. We were happy to see that more operators are getting into this space, so that together, hopefully, we can build a better market with more choices for the students and parents. But in fact, we have been approached by some music -- some education companies for potential cooperation discussions already. And we're open to all kinds of options. We were happy to discuss any kind of cooperation that will be mutually beneficial. As long as it will benefit the industry and also benefit our businesses as a whole. That concludes my -- our response for the question.
Yuji Fung: Thank you.
Operator: Our next question will come from Kerina Wang with Tiger Brokers. Please go ahead.
Unidentified Analyst: Hi. Thank you for taking my question. And my question is, the company has very mature at high tech products and services, how would you plan your future technology development, and the kind of resources that you will put into this area? Thanks.
He Yu: Okay. We have a series of developments underway. For example, we are developing an AI system to provide adaptive music classes, wherein the student, we will pick a main theme to start with. And then the system will compose a whole new musical piece, according to this main theme. And according to this main theme and the student's skill level, as a student plays along with -- on this new musical piece, the system initiates tracking and practice functions to enhance the students learning experience and regenerate and play accompaniment at the background and reach the fun of learning this new musical piece. So it's totally AI facilitated learning process and every time it's a new experience for the students. So we hope that this system will increase the student's enjoyment of the learning -- the whole learning process. Yeah. So this is one. And a few other AI systems that are developing. For example, one is about the spoken materials, audio books that we will -- the system will display scripts, alongside along with the spoken materials for our audiobooks, so that students can -- easier for students to learn foreign languages. That's one. Another one is, we'll be using a combination -- and the second one is about the EV entertainment system. There we'll be using a combination of speed, location, time and weather conditions to automatically generate a playlist that fits these four dimensions for the driver or the passengers to enjoy music while on the journey. So, another system that we're developing is a graphics detection technology that the system will monitor the posture and finger position of students, while they're playing smart piano and issue corrective notifications accordingly. So this is another level of our AI system that on top of tracking the student's performance on the keyboard. We're also tracking their posture and correcting their finger position. So, we're enhancing the function of our smart music education system every day. That concludes our answer for this question.
Unidentified Analyst: Thank you.
He Yu: Thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Patricia Sun: Thank you again for joining us today. If you have any further questions, please feel free to contact us or request us through our IR website. Thank you everyone. Have a good day. Thank you.
He Yu: Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
