Kuke Music Holding Limited (KUKE) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning and good evening, ladies and gentlemen. Welcome to Kuke Music Holding Limited Third Quarter 2021 Earning Conference Call. At this time, all are in a listen-only mode. We will be hosting a question-and-answer session after management 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.
Jane Zuo: Thank you, Operator. Hello, everyone. Welcome to our third quarter 2021 earnings call. On the call with me today are Mr. He Yu, Founder, Chairman, CEO, Ms. Patricia Sun, President, and Mr. Tony Chan, CFO of Kuke. Mr. He Yu will share our views on the business model and the strategic focus. Ms. Sun will then review our business operations. And then Tony will discuss our financial results. Afterwards, we will take questions from the audience. Before we start, please note that this call may contain forward-looking statements, made pursuant to the Safe Harbor provisions for 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 the actual results, performance, or achievements of the Company to be materially different from the results, performance, or expectations implied by those forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statement, risk factors, and the health of Company's filing with the SEC. The Company undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call. As a reminder, this conference call is being recorded. In addition, a live and archived webcast of the conference call will be available on Kuke Investor Relations website at ir.kuke.com. You can check out our full earnings release on our ir website as well. Is now my pleasure to introduce Mr. He Yu, Founder, Chairman and CEO of Kuke.
He Yu: Thank you, Jane. Good evening and good morning, everyone. Thanks for joining us, and welcome to our third quarter earnings call. I would like to start by sharing our thoughts on the resilience in our business model and our core strength. In addition, I will share how we can leverage our capabilities and a core classical music assets to survive in any macro environment. We founded Kuke in 2007, with the mission to deepen the impact of classic music and to monetize our core music assets, through digital innovation in China. With almost for 15 years in operation, Kuke has become a leading provider of classic music content, licensing subscription and modern musical learning solutions in China, with our ever-growing copyrighted classical music content library added call. We keep exploring and expanding our operations at a music content consuming services, supported by our 3 main business lines in licensing subscription, music learning solutions services, and live music events. We generated licensing revenue by licensing our music copyrights to digital music service providers for digital streaming or download through their online platform. Our subscription revenue is generated by providing customers access to music content databases through websites and on mobile apps as well as from the sale of smart music devices. These 2 services deliver cash flows that perform well even during a downturn in the economy. More importantly, our licensing and subscription revenues contributed to nearly half of our total revenues; 49.6% of total revenues in the third quarter. In terms of our core strengths, our ever-growing copyrighted classic music contents in the library continues to serve as the foundation of our business development. Our classical music content has always being one of our most valued asset. And maintaining and growing this classic music content library is as core of our ability to drive through and innovation. Knowing this, we established a deep rooted cooperation with Naxos since 2006, making it our global strategic business partner, and the founding Naxos China together, the core business of which is to distribute and the promote global classical music in China and through the broader international stage for a new-generation of Chinese musician. Leveraging Naxos's ever-growing classical music content library, Kuke has made a great progress in music content operations, and it keeps improving the value and monetization efficiency of those core objects. 2021 was an eventful year with COVID and the regulatory trends impacting various industries. Based on our views of the potential regulatory impact on our business, we believe the regulatory and guidelines are likely to be positive for art learning as we continued checking the operational situation this quarter. It is safe to say that the guidelines have no significant impact on our business development. In addition to our business partnerships with private kindergartens, we have begun exploring ways to work with public kindergarten, primarily in middle schools to further enlarge our customer base in light of the changing regulatory and macro environment. During the quarter, a portion of our sales team had already been allocated to target public kindergarten. It is worth noting that we have already had experience and effective track record in working with public educational institution such as universities and libraries. We are convinced that these efforts will be helpful to our customer base, which will enhance our ability to probably adapt to potential regular -- regulated for China going forward. As one of the first classical music licensing and subscription service providers in China, we benefit from a significant early mover advantage in terms of our content offerings. Brand and reputation, and the customer loyalty, we remain true to our mission and dedicate ourselves to the development of classical music in China. In early October, we held a very successful 24th Beijing Music Festival with the theme of Masters and Celebrations, which served as a breech bridge for multi-dimensional dialogue between Chinese and Korean composers. Earlier this month, we also sponsored the 16th International Beethoven Piano Competition in Vienna Golden Hall to celebrate Beethoven 's 251st birthday. Additionally, Naxos China, our subsidiary, recently launched the production and global release of the album of Ding Shande's Essential Art Songs in association with Naxos. Leveraging our ever-expanding copyrighted music content libraries through our unmatched access to more than 900 top-tier record companies, including Naxos. We're confident in our ability to continue cultivating interest in classical music and our foster demise -- demand for our overall classical music entertainment and the learning solutions services. Next, I will pass it over to our President of Kuke, Patricia, to share more details in each business segment.
Patricia Sun: Thank you, Mr. Yu. Good morning and good evening, everyone. Our third quarter results were locked with strong demand recovery, meticulous strategy execution, and continued efficiency improvements in every area of our business. We further grew our licensing and subscription revenues, which increased by 162.8% year-over-year to RMB 41 million in the quarter mainly driven by our improved business synergy with Naxos, ever expanding content library and the growing brand awareness. During the quarter, we continue to drive our process by leveraging improved images with Naxos, award-leading classical music label, as measured by number of new recording it release and breadth of its couple. Founded in 1987, by Carl Siemens , entrepreneur based in Hong Kong. Naxos has since transformed itself from a budget label into global music powerhouse, under the continued viewership of missed payments. Today, Naxos, both a range of downloading and streaming platforms, a significant catalog of multimedia products, above international logistics network, a recording, engineering of our publication divisions, and the licensing departments. As our largest conference provider an important global strategic business partner, not such recorded many impressive achievements this year. For example, in early 2021, Naxos and its partners landed 7 Grammy Awards including best choral performance; best contemporary classical composition; best classical solo vocal album; best engineered album, classical; producer of the year, classical; best chamber music small ensemble performance; and the best classical instrumental solo. In November, our subsidiary Naxos China initiated the production and the global release of album of Ding Shande's Essential Art Songs in association with Naxos. As we further developed and leveraged our global strategic partnership with Naxos, we also made progress in expanding our content library. In third quarter, we added over 80,000 PCs of content, bringing our total amount of content to over 2.8 million, which includes more than 2.38 million music tracks, 427,000 audio book track. In addition, the library also includes 4,000 hours of long-form concert videos, opera, and more, and over 3,000 pieces of digital sheet music. As a result of our expanded music offerings, our brand awareness has been greatly enhanced and the number of our library subscribers increased accordingly. In the third quarter, we garnered interest from libraries and had secured 11 different university and library customers by the end of the third quarter. In terms of our smart music learning solutions business, revenue in the third quarter reached RMB 27.1 million, representing a year-over-year increase of 8.4 times. As of September 30, 2021, we grew the number of our collaborating kindergartens to 5,161 from around 4,100 as of June 30, 2021. During the 12-months added, September 30th, 2021, we added 3,861 collaborated kindergarten to our network, increasing the number of active students over 5 -- both from 5,852, a year-ago, to 32,608. To better facilitate our services and improve our customer experience, we established an operation center in the city of Wuhan, to provide the training services to kindergartens during the quarter. Even as we continue our business expansion in private kindergartens, we are actively exploring new monetization channels in public kindergartens, primary schools, and middle schools to enhance our revenue streams and further diversify our customer base in the light of the changing regulatory and macro environment. Considering the regulatory uncertainties and the global chips shortage, we proactively slowed our pace in launching services for new kindergarten through in the quarter. The strategic shifts may cause the near-term fluctuations in our topline performance. As far as we can see, overall market demand remains strong as we continued to unlock additional demand nationwide. We are confident that we can fulfill the backlog of orders in the quarters to come. For our live music event segment, revenue in the third quarter reached RMB 14.2 million, representing a year-over-year increase of 134 times. During the quarter, we provided planning and execution services for commercial performances to music groups. Thanks to the undeniable value of our classical music assets. The balancing, it's from growing brands are declination and launched at the highly successful 24th, Beijing Music Festival in early October. The revenue from which will be fully recognized in the fourth quarter. The Festival span across 16 days celebrating this year's theme of Masters and Celebrations. We hosted audiences at a festival for 18 sets of performances across main concerts, encompassing a variety of genre, including symphonic music, opera, vocal music, chamber music music, and orchestral film music. Beyond the exciting professional performances, 24th BMF also features children's concerts, music at noon concerts, master classes, lectures, and other public events to appeal to a diverse area of audiences. In addition, we co-sponsored the 16th International Beethoven Piano Competition with Naxos. The competition is Austria's oldest international piano competition and ranks among the most renowned music competitions today. Founded more than 15 years ago, which is hosted by the University of Music and Performing Arts in Vienna. On November 6th and 7th, we completed the initial screening of the final rounds of the 16th National Beethoven Piano Competition in 5 cities across China and adapted the screening into content for cinemas. This unique classical music content is sure to inspire future generation of Chinese pianists by leveraging our strong position in classical music and our synergies with Naxos. We will continue to pray and deliver innovative viewing and listening experiences through enriched conference for our customers. During the third quarter, we leveraged our core assets in copyrighted classical music contents and our operating capability to drive growth for our 3 main business lines. We also proactively engaged various potential customers to further diversify our revenue to respond at the potential change in the regulatory and the macroeconomic environments. We are convinced that this effort will help us further solidify our market shift going forward. With that, I will pass the call over to our CFO Tony Chan, who will walk you through our financial details for the quarter. Thank you.
Tony Chan: Thank you, Patricia. And hello, everyone. Before we start our detailed financial discussion, please note that we will present non - IFRS measures today. Our non - IFRS results excludes certain non-cash expenses, which are not part of our core operations. Details for these expenses can be found in the reconciliation tables on our press release. Please note that, unless otherwise stated, all financial numbers we present today are for the third quarter of 2021 and are in RMB terms. All comparisons are on a year-over-year basis, unless otherwise stated. During the third quarter of 2021, our revenue increased by 343.6% to RMB 82.7 million from RMB 18.6 million in the prior year period. This increase was driven by revenue growth in all 3 of our business segments. Our licensing and subscription revenue in the third quarter was RMB 41 million compared to RMB 15.6 million in the prior-year period. The increase was mainly due to an increase in licensing agreement secured during the quarter. Revenue from our smart music learning solutions business increased by 8.38 times to RMB 27.5 million from RMB 2.9 million in the prior-year period, mainly due to a robust growth in both the enrollment of kindergarten students and sales of our smart music learning solutions. Revenue from our music event business also increased by a 134 times to RMB 14.2 million, as we began providing performance services to orchestras in China, earlier this year. Total cost of sales increased by 342.6% to RMB 29.6 million, in line with the increase of our revenue. Gross profit was RMB 63.1 million, representing an increase of 344.1%, from 12 million in the same period last year. Gross margin remained stable at 64.2% for both the third quarter and the prior-year period. Operating expenses were RMB 72.4 million compared to RMB 19.9 million in the prior-year period. Selling and distribution expenses were RMB 15.7 million compared to RMB 7.4 million in the prior-year period. Mostly due to an increase in distribution expenses associated with increased sales of our smart music learning solutions. Meanwhile administrative expenses were RMB 32.7 million, compared to RMB 11.8 million in the prior-year period, mainly due to an increase in share-based compensation expenses and research and development expenses. Operating loss in the third quarter was RMB 20.8 million compared to RMB 9.5 million in the prior-year period. Our loss for the period was RMB 24.4 million compared to RMB 12.3 million in the prior-year period. And non - IFRS profit was 20.5 million compared to the non - IFRS loss of RMB 8.9 million in the same period of 2020. Basic and diluted loss per ADS were both 0.83, and basic and diluted non - IFRS profit per ADS were both 0.7. Moving on to our Balance Sheet and liquidity. As of September 30th, 2021, we had a total of RMB 105.3 million in cash and cash equivalents. Full-year 2021 revenue is expected to be between RMB 300 million and RMB 350 million. After analyzing and taking into account the impact of COVID and higher hardware costs due to the global chips shortage, we're taking for proactive actions to slowdown the pace of our new kindergarten deployments, to balance our business growth, decrease risk exposure, and improve cost control. Furthermore, we're also -- we've also begun exploring ways to engage public kindergartens and schools to enhance our revenue streams and further diversify our customer-base in light of the changing regulatory and macroeconomic environment. We're confident that doing so enhances our competitiveness and strengthens our resilience. This concludes our prepared remarks for today. Operator, we are now ready to take questions.
Operator: Thank you. . We pause for just a moment to allow everyone an opportunity to signal for questions. We take our first question from Mr. Brian Li with AMTD Group. Your line is open. Please go ahead.
Brian Li: Hello, can you hear me?
Jane Zuo: Yes.
Tony Chan: Yes.
Brian Li: Hello, hi. Thanks for taking my question, and I have 2. First is about your strategy. We noted that many peers, including WMG, are looking into new opportunities to engage with innovative technologies such as metaverse and NTFs and many others. Do you have any plans on that front, and how will you maintain your competitiveness with this emerging opportunities? That is the first one. The second one is
Brian Li: regarding your full-year revenue guidance. The full-year revenue guidance was no less than RMB 400 million in the last few quarters. But now in Q3, you have just adjusted the guidance to below -- between RMB 300 and RMB 400 million. So what are the factors or trend to driving the guidance down? So -- and could you give us more details about which business not -- are you projecting less growth in this quarter than previous quarters? Thanks.
Patricia Sun: Thank you. This is Patricia, I will take your first question and answer your close questions. The core focus business is music copyright, and we also empower our business with technology. And we are constantly watching for trends and new developments in tax for music industry. Actually, in October of 2019, Beijing Music Festival is our one more power life performance segment had already launched an experiment, virtual reality, opera. It is called 8. It is a one-person opera, but with the experimental virtual reality technology, which -- applied via technology to live music event. We are also exploring how to deliver the next generation experience for live music event, which may allow remote audiences to participates in rehearsals through VR technology and immersively enjoy orchestra performances delivering unforgettable and engaging live performance experience to our remote audience. And we also believe that throughout these new developments, copyrights will be always our Company's competitive edge and also our advantage. In the metaverse or for NFT now digital assets is domains. We believe that audio and visual content will be seamlessly integrated first, so we are anticipating these new technologies to bring about revolutionary developments and opportunities in the music industry. And we are actively exploring these new developments and she'll disclose our respective business strategies and action plans at the appropriate time in the future. Thank you.
Tony Chan: So I will take the -- yes, I'll take the 2nd question regarding the revenue guidance. Yes, our previous revenue guidance was no less than RMB 500 million, and in this quarter, we have revised our guidance to between RMB 300 million to RMB 350 million. This is in light of the rising hardware costs, due to the global chip shortage. So we're taking adventive action to decrease risks exposure, and also balance our business growth. And also this is an act to improve cost control by slowing down the pace of our new kindergarten deployment for our smart music learning business. So with this new strategy, the deployment of smart music learning businesses will not be as fast as we expected at the beginning of the year. Therefore, we have adjusted our full year guidance accordingly.
Brian Li: Okay. Thank you. Very clear.
Tony Chan: At the end of month. Okay. Thank you, Brian.
Brian Li: Okay. Thank you. Thank you. Thank you. Very clear. Thanks for the management.
Operator: Thank you. We take our next question from Don Dong with RiverCircle Investments. Your line is open, please go ahead. I'm so sorry, Mr. Don Dong already removed himself from the queue. We move to Ms. Lex Zhang, with Koi Investment your line is open, please go ahead.
Lex Zhang: Thanks, Operator. Thanks for the presentation, management. Actually, I have 2 questions. The first one is regarding the margins essentially. There has been a global supply chain disruption effect given the COVID situation, which affected many consumer companies, especially this quarter. And you've also mentioned the global chip shortage situation. So how these effects from the supply chain disruption, especially the chips shortage affects your margins of the business, especially your learning solution business? The second question is regarding the number. So the numbers are solid, but I noticed that there is a increase in selling and distribution expenses in Q3, while there is a slight decrease in revenue, if you compare that to Q2. And do you have more colors on that situation? And also, I guess, more importantly, how do you actually monitor your selling and distribution expenses? Thank you.
Tony Chan: Okay. Thank you, Lex. Let me take your questions. The 1st questions about the supply chain disruption that is going to affect our margins. Well, actually, in Q3 we have adjusted our development pace, as we have explained just now. So from this act, actually we were able to maintain a gross margin level very similar to that of Q2. So that shows our ability to control costs and maintain margins, so you can be assured that we have a tight monitoring system on our margins. We will -- we -- it's very effective basically. So this is my answer to the 1st question. For the 2nd question on the selling and distribution expenses. Selling and distribution expenses increased in Q3 and mainly due to the increase in revenues from the licensing and subscription business, and the smart music education business, as compared to Q2. The overall slight decrease in the revenue in Q3 as compared to Q2, was mainly due to the decrease in revenue from live performances business and this business usually does not incur a lot of selling and distribution expenses. That's why Q4 you see this increase in selling and distribution expenses despite the revenue being slightly decreased from Q2. So, does that answer your question?
Lex Zhang: Yes, indeed. Thank you.
Tony Chan: Thank you, Lex.
Operator: Thank you. We'll take our next question from RiverCircle Investments. Your line is open. Please go ahead.
Don Dong: Hi, management. Sorry for the tech issue. I've got 2 questions. The 1st one, you have mentioned that you have slowed down the deployment of the private kindergarten in this quarter. So you know that we are approaching the year-end now. I'm wondering how the market looks like right now, and how is the progress of your engagement of public school so far? That is 1st question and the 2nd question, how is your relationship with Naxos right now? And going forward from this relationship, what kind of benefit do you think would be brought to the business of Kuke? Thanks.
Patricia Sun: Thank you. I will take these two questions. The first one that demand from private kindergartens remained -- still strong, but as we discussed in earnings call, even though government policies is not affected us in music education sector, but we are taking preemptive action to decrease our risk exposure, balance our business growth, and improve cost control by slowing the pace of our new kindergarten development for our smart musical learning business, in light of rising hardware costs due to the global chip shortage. So our current strategy is to slow down the development of new private kindergartens while actively monetize on our existing private kindergarten's networks, and also actively cultivate cooperative relationships with public kindergartens, primary schools, and secondary schools. And as of the end of Q3, we were providing music subscription services to more than 700 institutional organizations including high schools and public libraries, and we are highly experienced in working with public sector of This wealth of experience will strengthen our business developments in the public school sector. This is the end of answer for the 1st question. Regarding the 2nd question, talking about the relationship between Kuke and Naxos, that we have a long-term strategic partnership with Naxos and Naxos is our global strategic business partner. And Kuke is Naxos business partner in China. This is a very close business relationship and we believe with this relationship can stabilize and maintain the current business while cultivating numerous new business together in future. Actually, in early November, Naxos and Kuke jointly sponsored the 16th International Beethoven Piano Competition, for which Kuke launched a cinematic screening in 5 cities across China of the competition for the first time. And Naxos and Kuke, we're also joint planning to sponsor the International Fritz Kreisler Violin Competition in 2022 the next year. And going forward, we believe there will be many more global business opportunities for collaboration with Naxos, and more business opportunities in future between Naxos and Kuke. Thank you.
Don Dong: Thank you.
Operator: Thank you. As there is no further question, I will now hand the call over to the management for any closing remarks.
Jane Zuo: Thank you again for joining our call. If you have further questions, please feel free to contact us. We're impressed through our IR website. We look forward to speaking with everyone in our next Q4 call. Have a good day. And bye.
Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
