Prepared remarks
Audio gap. The earnings release is available on our website. During today's call, you'll hear from Mr. Cussion Pang, our Executive Chairman; and Mr. Ross Liang, our CEO. They will share an overview of the company's strategies and business updates. We will discuss our financial results before we open the Q&A. Before we continue, I refer you to the safe harbor statement in our earnings release, which applies to this call and includes forward-looking statements. Please note that we discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in our earnings release and filings with the SEC. Please be advised that today's call is being recorded. With that, I'm pleased to turn the call over to Cussion, Executive Chairman. Cussion, please.
Thank you, Millicent. Hello, everyone, and thank you for joining our call today. In the second quarter, we delivered resilient performance while navigating a complex and evolving market. Our second growth engine continued to strengthen. Revenue from marketing and consumption services achieved another quarter of solid growth as we further expanded the value of music IP through live concerts, merchandise and other IP-driven experiences. The addition of Ximalaya marks another important step in our content and platform strategy. By bringing music and audio together, we are enriching our content offering, reaching users across more listening occasions and giving them more ways to discover, enjoy and engage with great content. Our strategy is clear. We are strengthening our content ecosystem by deepening strategic partnerships, developing more proprietary IP and extending premium content across a wider range of experiences. First, premium content remains at the heart of this strategy and the recent momentum we are seeing with classic catalogs is a perfect example. Featured variety shows and concert tours have amplified the reach of this work, making loyal fans more engaged while drawing a new generation of listeners. This has led to continuous growth in their streaming share. Second, we continue to expand our partnerships beyond traditional content licensing. Recently, we deepened our partnerships with Free Music Group. In addition to securing digital-first releases for its top artists, we expanded our collaboration into new areas, including content co-creation, physical offerings and offline experiences. At the same time, we partnered with Huace Film & TV, Linfair Entertainment and Zhejiang Satellite TV to bring original soundtracks and popular music variety shows to our platform, creating a more immersive connection between music and digital entertainment. These deeper partnerships allow us to work more closely with creators and rights holders across the whole music value chain, enabling us to create more value from premium IP. Third, another key focus is developing more high-quality proprietary content, which is becoming an increasingly important differentiator for TME and giving users more reasons to engage with our platform. Examples include Joseen's 'Into Bloom, Shanghai', the F song for the 2026 Jiangsu Football City League, 'Little Light from Ordinary Days' tied to Hugo Music's new brand Anthem, and the insert songs for the hit animated theme 'All Wishes Come True' — all of which recorded strong streaming performance since release. Fourth, Ximalaya further strengthens our content advantage with its premium audiobooks and podcasts. By adding popular categories like online notebooks, history, kids content and education, we can reach users across many more listening occasions, ultimately enhancing user time spent and engagement within our ecosystem. What really stands out is Ximalaya's ability to create its own kids' content. Its original productions have consistently driven strong engagement and pay conversion. In fact, nine of its top ten new online local titles this year were produced in-house, underscoring both the strength and scalability of its original content capabilities. Just as importantly, owning these hits also means better economics. With the strength of our content and platform ecosystem, deep user insights, expansive services and a strong commitment to upholding copyright protection, a growing number of artists are turning to us as we expand talent development and artist management. This is a natural extension of our ecosystem that creates value for artists we are uniquely positioned to deliver. This is exciting as it empowers us to be more entrepreneurial and innovative in bringing more premium content and IP-driven immersive music experiences to music lovers. For instance, as a strategic partner, we have supported certain artists across content promotion, IP development and concert planning, helping them expand into new markets and formats — moving from arena shows to stadium concerts. Following the success of his evolution tour in Asia, we launched 'W', the first Chinese-language web stadium tour in China. More than 30,000 fans attended this opening show in Xi'an. Another good example: 'Once Upon a Moon' tour wrapped up with two consecutive sold-out arena shows in Hangzhou and is now reaching international markets, showcasing the artist's rising profile and growing fan base. We are also helping artists expand into new opportunities. For a renowned artist we supported, we produced his debut arena tour; his opening show in Shenzhen sold out quickly during ticket sales. Second, recently, we invested in the Black Label to deepen our collaboration on a broader range of IP-related initiatives, including artist promotion and merchandise development, helping leading artists build deeper connections with their audience in China. This strategic partnership reflects our commitment to exploring cross-border opportunities and deepening the fan-based economy. By integrating content creation, music streaming, artist development, live experiences, merchandise and fan engagement, we are able to create more value from premium IP — truly bringing the IP to life. We are already seeing encouraging results. IP-related consumption services, particularly live events and artist merchandise, continue to deliver strong double-digit year-over-year growth during the quarter. First, in live entertainment, we hosted three fan meetings in Macau for SM Entertainment's trainee group, SM Rookies. The events attracted tens of thousands of fans and generated strong merchandise sales. TIMA, our proprietary flagship concert IP for international music awards, is becoming a larger and more influential brand in just its second year. Building on last year's success, we scaled up the venue to Kai Tak Sports Park Stadium in Hong Kong, increasing audience capacity by more than threefold, capturing music lovers' growing enthusiasm. Second, artist merchandise also continued to gain momentum. By bringing together our capabilities in IP development, product design, merchandising and distribution, we are creating more meaningful connections between artists and their fans. During the quarter, we produced physical albums in both CD and vinyl formats, complemented by a range of collectible merchandise that generated strong fan demand. Physical album releases also delivered impressive results. Protecting copyright is fundamental to preserving the long-term value of premium IP. During the quarter, we continued to strengthen our copyright protection efforts through proactive screening and takedown, legal action and closer collaboration across the industry. As AI continues to evolve, we are stepping up our engagement with regulators, music labels, artists and other industry partners to strengthen copyright protection in the new era. By working together across the industry, we believe we can foster a healthier environment for creators, reinforce the long-term value of premium IP and support the sustainable development of the music industry. We remain committed to providing a safe and enjoyable music experience for users of all ages. During the second quarter, with comprehensive upgrades to user experience across our core products, we created a dedicated library of age-appropriate music, helping younger users discover and enjoy music in a safer and more trusted environment. To conclude, while challenges remain, we believe we are still in the early innings of unlocking the full potential of premium IP. We are excited about the opportunities ahead and remain confident in our ability to deliver sustainable long-term growth. With that, I will turn the call over to Ross.
Thank you, Cussion. Hello, everyone. While the competitive landscape continues to evolve, our commitment has not changed: delivering the best music and audio experiences for our users. Every user listens differently. That's why we continue to innovate our products, broaden our user reach and enrich our membership offering. In the second quarter, our focus on user experience translated into stronger engagement with average daily time spent continuing to improve, supporting steady growth in membership revenue. Product innovation remains at the heart of everything we do to serve our users. This quarter, we created a more seamless discovery-to-playback journey through improvements in content discovery and audio quality. Enhanced content discovery features such as swipe types and video feeds help users explore more relevant content in a more engaging way. Newly introduced 3D sound in audio also allowed premium users to experience premium sound quality from their very first listen. Thoughtful application of AI also made music discovery more intuitive and personalized. We upgraded our AI agents across QQ Music and Kugou, enabling them to better understand nuanced user intent and personalize recommendations. The AI agents can now instantly create personalized playlists tailored to users' listening needs in the moment. Together, these improvements help users discover more content, boost their time spent on our platform and increase the share of recommendation-driven streams. Delivering great services is the foundation. Reaching more users is equally important. That's why we are continuing to deepen our integration with the Tencent ecosystem to expand our presence across more user touch points. First, we deepened our cooperation with Weixin Video Accounts by bringing leading labels, top artists and independent musicians into its ecosystem. We are creating a more seamless journey from music discovery to full-track streaming on TME. Collaborations with Weixin Pay also helped our lightweight products, such as QQ Music Lite and Kugou Lite, attract users looking for a simple music experience and deepen their engagement. Furthermore, we recently integrated with Weixin's AI agent, Xiaowei. We are pleased that by tapping into Weixin's massive user base, more users can now discover songs, generate playlists, stream music with easy commands and instantly share favorite tracks with friends. Together, these initiatives are expanding our user reach, improving conversion and engagement as well as enhancing content distribution across the Tencent ecosystem. Second, we are also extending our user reach beyond mobile and PC into cross-device listening scenarios. During the quarter, we broadened our smart vehicle coverage through deeper collaborations with leading automakers, including Changan, Li Auto and XPeng, and introduced LLM-powered search to deliver a smarter in-car experience. We are also among the first music platforms to integrate with HarmonyOS, expanding our reach within its fast-growing ecosystem. Such a move has strengthened our presence among HarmonyOS users and positioned us to capture new opportunities for further monetization. We are excited to welcome Ximalaya to the TME family. Music and audio naturally complement each other. They broaden our content offering and create more listening occasions throughout the day. This helps to strengthen our position as a comprehensive music and audio platform. We are still in the early stages of unlocking the full potential of this combination, and we are seeing significant opportunities ahead. By bringing together our complementary strengths, we can deliver compelling content to a much broader audience. We are starting to enrich our SVIP offering with premium audio content to create richer listening experiences. Over time, we also see opportunities to strengthen our advertising business and improve efficiency, leveraging our shared technology and infrastructure. We believe these efforts will create lasting value for our users, creators, partners and shareholders. Finally, we are further elevating the SVIP value proposition by transforming it into a multidimensional experience centered on IP engagement. Premium music remains at its core, now complemented by premium audio and a growing portfolio of IP-driven member benefits. This quarter, digital albums and tailored SVIP packages continued to drive stronger member adoption and user engagement. Packages for several artists featured popular member benefits such as photo cards and NFC cards. We also expanded our Star Life card lineup by adding artists from the Black Label, including Tang, Somi, Mo and A Day Project. Meanwhile, collaborations with popular gaming IPs such as 'Vision of Mina' and 'Light and Night' brought new themed decorations to SVIP users, generating strong user engagement and conversion. Together, these offerings contribute to healthy growth in our SVIP user base, ARPPU, time spent, retention as well as consumption of other premium ancillary experiences. They reinforce our value proposition of one membership, richer experiences. To conclude, our journey reflects how we have evolved from a gateway for content into a strategic platform that actively shapes the music and audio entertainment landscape. Our focus remains steadfast: creating deeper and more meaningful connections between creators, content and audiences. We are uniquely positioned and confident that we can translate these deep connections into long-term sustainable value across music and audio. With that, I would like to turn the call over to Min, our CFO, for a deep dive into our financials.
Thank you, Ross, and greetings, everyone. Let me now turn to our financial results and the evolving competitive industry landscape. We delivered steady financial results in the second quarter of 2026 with 6% year-on-year revenue growth. Total revenues were RMB 8.9 billion, up 6% year-on-year, primarily driven by strong growth in revenues from music-related services. The consolidation of TME's acquisition contributed approximately RMB 0.4 billion to our overall revenues in the second quarter of 2026. Revenues from music-related services grew 11% year-on-year, driven by solid growth in revenues from membership services and offline performance-related services. Revenues from membership services were RMB 4.8 billion, up 8% year-on-year. In the second quarter of 2026, our SVIP membership program continued to expand. Our diversified SVIP privileges such as artist membership sales, Pass and Star Life Pass continued to drive SVIP user adoption and revenue growth. This quarter, we collaborated with our SVIP ambassadors to offer spatial packages and improve our SVIP adoption. The consolidation of Ximalaya also contributed to revenue growth in membership services. Within marketing and consumption services, offline performance-related services delivered robust results as we successfully staged several concerts for our strategic collaborator artists, including SM artists. Sales of digital albums also achieved solid performance, primarily driven by the launch of album 'Ching of the Sound.' We continue to prioritize our IP-related offerings and build deeper collaborations with strategic artists across music promotions, offline performances, artist merchandise and digital albums. In a challenging macro environment and competitive market, our advertising business, especially the ad-supported model, experienced some headwinds. We continue to take actions to improve ad exposure, enhance reach and experience and offer more engaging interactive products for users. We are also deepening collaboration with the Tencent ecosystem to reach more users. The consolidation of Ximalaya contributed to revenue growth in advertising positively, and we see growth potential in this area through leveraging our expanded content and shared resources and technologies. Our gross margin in Q2 2026 was 44.2% compared with 44.4% in the same period last year. Revenue mix impacts our gross margin. Offline performance-related services continue to grow. We are happy to see continued cost efficiency improvement for offline performance-related services. The consolidation of Ximalaya, after considering the amortization of intangible assets recorded under purchase accounting, had a favorable impact on overall gross margin this quarter. We are confident that our gross margin will remain competitive in the industry over time. Moving on to operating expenses. They amounted to RMB 1.3 billion, representing 14.5% of our total revenue in 2026 compared with 13.7% in the same period last year. This quarter, we adjusted our channel spending strategies by reducing channel spending and deepening collaborations with the Tencent ecosystem. For example, we strengthened our cooperation with Weixin Video Accounts for content distribution and user acquisition and collaborated with Weixin Xiaowei to drive traffic to our lightweight IP. The consolidation of Ximalaya, including the amortization of intangible assets recorded under purchase accounting, drove the increase in operating expenses. Going forward, we expect to dynamically adjust our channel spending strategy for all our business according to market conditions and our requirements. Our net profit attributable to equity holders was RMB 2.5 billion compared with RMB 2.4 billion in the same period of 2025. Diluted earnings per ADS were RMB 1.7. In 2026, our adjusted EBITDA was RMB 3.3 billion, up 5% year-on-year. IFRS net profit attributable to equity holders of the company was RMB 2.7 billion, up 4% year-on-year. As of June 30, 2026, our combined balance of cash, cash equivalents, term deposits and short-term investments was RMB 44.2 billion as compared to RMB 41 billion as of March 31, 2026. This combined balance was affected by changes in the exchange rate of RMB to USD at different balance sheet dates. In addition to our strong operating cash flow, we maintained diversified financing options to meet our expenditure requirements. Under the share repurchase program announced in March 2025, we repurchased 43.5 million ADSs from the open market for a total cash consideration of USD 400 million in the second quarter of 2026. As part of our long-term commitment to shareholder returns, we remain on track to complete the 2025 stock repurchase program on time. Looking ahead, we continue to focus on the development of SVIP membership, creating more innovative products and providing more diversified benefits and privileges to our users. We also keep investing in quality content and IP development to build a comprehensive content ecosystem. Additionally, we continue to deepen collaboration with the Tencent ecosystem. The combination brings exciting opportunities for us as a music and audio platform. All these factors pave the way for long-term healthy growth of our business. This concludes our prepared remarks. We are now ready to open the call for questions.
Questions and answers
And the first question comes from an analyst.
So my question is — there are two questions. So the first question is on IP-related business. IP has been a key driver for our revenue in the first half of 2026. I was wondering how the IP-related business will drive revenue growth for the rest of this year? How does the momentum outlook look there? And the second question is really on Ximalaya consolidation. Now that Ximalaya is already part of the TME Group, how should we think about the financial outlook after Ximalaya consolidation and its impact on TME financials in the second half of this year?
About your first question on the IP-related business: as you can see, we achieved solid growth in our Q2 results, which is mainly due to our many years of deployment of forward-looking strategies. We have already built a differentiated platform that fuses content and product capabilities, combining both online services and offline products, as well as virtual and non-virtual offerings. This is a complete music ecosystem, and it fully leverages diversified IPs, which you can see contributed a lot to this quarter's results through marketing and consumption-related services. For the rest of this year, we do see some competitive headwinds in areas such as membership and ads. But our IP-related services like concerts and performances are experiencing steady demand, mainly because of the following reasons. Number one is our IP supply. Apart from our in-house development, we're also carrying out deep collaborations with external partners, which help us build high-quality IPs across the board. Second, in terms of content collaboration, promotion, distribution and merchandise derivative products are all in a very good position. Third is diversified monetization for our platform. It is not only concerts and merchandise: through our member benefits, IP can also contribute to increasing SVIP numbers. All of this has helped us build a solid competitive moat. About your second question on Ximalaya: we are very pleased to have Ximalaya as part of the TME family. With Ximalaya on board, we have already built a one-stop music-plus-audio platform, which helps us amplify the user base, enrich user profiles and increase time spent on our platform. Overall, in the medium to long run, Ximalaya joining the TME family will unlock more potential for future growth and has set a solid base for future expansion.
And the next question comes from Lincoln Kong from Goldman Sachs.
My question is about the subscription business. In Q2, if we're excluding Ximalaya, we do see some moderation in revenue growth. How should we think about the prospects into the second half of the year? What's the growth trend for SVIP and overall ARPU to contribute to overall growth? Can management also elaborate a bit more on the latest status in terms of competition, especially against certain peers?
With the competition we face, we can see that growth in the music business is longer-tailed and there are impacts on traffic. The most important thing is our collaboration with Weixin Video Accounts. We're pleased to see that TME is taking charge of music business operations within Weixin Video Accounts. The connection between Weixin Video Accounts and the Weixin app has improved. From a revenue perspective, our high-value users, the SVIP base, has not been significantly affected. What has been most affected is casual, light users. If you look at our subscribers, we've stabilized our SVIP base and are putting more benefits into the SVIP package to increase its overall value. This includes merchandise, performances, concerts and, with Ximalaya, more high-value long-form audio. Compared with peers, our core music business is still showing solid underlying growth. To acquire more light users, we also see potential from lightweight apps, especially free versions and lite apps such as Kugou Free, which we refreshed this quarter. We believe through deeper collaboration with Weixin Video Accounts, stabilizing our core business and tapping potential high-value users, we can maintain a strong position against competition. Over the years, TME has not been deterred by competition. The most important thing for us is to execute well. With the consolidation of Ximalaya, we have shifted from a pure music platform to a music-plus-audio comprehensive service platform. We can provide richer content, more channels and more benefits that cover both online and offline. We will stay focused on our track of development and believe our business will continue to have stable and steady development.
And the next question comes from Alex C. Yao.
My question is about the integration and synergy with Weixin — the Weixin AI agent services. You highlighted the Weixin integration and upgraded AI agents acting as personal DJs in QQ Music and Kugou. What measurable changes have these products produced in discovery, listening time, retention or conversion? And what is the intended monetization path? Does management primarily view AI as an engagement and cost-efficiency lever — or can AI become a direct revenue generator?
Though these capabilities are still at an early testing stage, we're very happy to see users using them to create and share their own playlists and to interact more with content. With our internal operations, especially with the integration of LLMs and our music AI agent, we can see increased retention, especially among high-value users. Recently, we also launched two new features in our lite version: one is swipe-to-listen and the other is an AI DJ that can act like a companion station. With our latest algorithm and GPT-style models, we have seen improved engagement driven by recommendations, and our recognition has been adopted by one of the top-tier conferences. On monetization of the AI agent, the business model is clear: we will use AI to increase engagement and activity of our users so they will use the product more often, share more and listen more, especially paid users, which will further drive subscription growth. Regarding AI technology in general, AI can improve efficiency and lower costs. On the consumer side, AI — especially large generation models — can also generate music. Over the past couple of years, we've used generative AI in features such as music AI creation and QQ Music AI to generate tracks, and these have generated commercial returns. We hope to use AI technologies to tap more commercial opportunities and increase revenue.
And the next question comes from Citigroup, Alicia Yap.
I wonder if management can share your insight: what is the competitive advantage and moat of TME in music and long-form audio IP and the overall IP strategy?
First of all, on exclusivity: we are not in a position to discuss exclusive licensing issues publicly because of regulatory rules. However, compared with peers, our competitive advantages are clear. Ximalaya brings a large legacy user base that complements our existing users in Tier 1 and Tier 2 cities. Our kids' business on Ximalaya retains considerable market share, and the story content also complements our own offerings. Another advantage is internet literature: many popular novels can be turned into audiobooks and will be efficiently distributed on our platform. We also have deep collaboration with Tencent Video for long-form videos and hit shows. When Tencent Video produces hit shows and plays, we often spot strong consumption scenarios on Ximalaya, and we can convert those into audio IP and music. On music creation, we're entering deeper into creation, artist generation and nurturing artist management. For example, we partnered with SM Entertainment from Korea to help nurture talented artists. With song creation, artist development and event organization, we can help artists produce concerts and IP-based events, which all contribute to business growth. With our integrated, one-stop platform, we will further nurture high-quality IP. If you look at our performance over the past several years, consistent growth demonstrates the potential of this business. Ultimately, these efforts will further drive SVIP subscription growth and other monetization.
The next question comes from Maggie (Yifan Ye).
My first question is related to margin. In the second quarter, sales and marketing increase appeared to be quite more year-over-year even after considering Ximalaya, which would entail higher sales and marketing cost ratio. Could management help us understand the drivers behind that? What's the overall gross margin and net margin outlook in Q3 and Q4 on a full-quarter consolidation of Ximalaya? My second question is related to shareholder return. Our combined cash, short-term and long-term deposits reached RMB 44 billion at the end of Q2, which is almost 40% of market cap. Could management share your thoughts on enhancing shareholder return going forward?
The slight decline in our gross profit margin is mainly due to the following reasons. First, our offline business is growing rapidly, which means it takes a bigger share of total revenue. Our offline artists brokerage business is also growing and is taking a bigger share of overall revenue; concerts and live performance-related revenue have different margin profiles and this affects overall gross margin. These factors explain why gross margin declined slightly.
Quarter-over-quarter, the slight decline of gross profit margin is mostly seasonal due to offline performance business: offline performance is generally higher in Q2 than in Q1. Considering the amortization of intangible assets of Ximalaya, it had some positive impact on our gross margin. In the long run, with the consolidation of Ximalaya, we will continue to build our music-plus-audio platform and enrich our ecosystem to provide a differentiated user experience. With that, we believe we can increase retention and conversion rates. For the second half of the year, we project that our gross margin will decrease slightly year-over-year. About sales expenses: in Q2, we controlled sales expenses by changing our channel expense strategy, seeking products with higher ROI. We are strengthening collaboration within the Tencent ecosystem — with Tencent Video, Tencent Pay and Tencent Gaming. As you can see, cooperation with Tencent Video has helped increase traffic and conversion. The consolidation of Ximalaya: the initial input in June was paused briefly, but with technology and platform convergence we resumed expansion for Ximalaya from July with the same ROI standards. We will not spend broadly on marketing; we'll fine-tune our marketing strategy to be more targeted and focused on our ecosystem to extract more value from users. For the whole year, our sales expenses will rise a little and operating expenses will slightly increase. Considering the scale effects, our net margin for the year will decline slightly while adjusted EBITDA will edge up a little. About shareholder return: we are still executing the USD 1 billion shareholder return program. In Q2 alone, we completed USD 400 million of share buybacks. Management is very confident in the company's long-term prospects. Apart from finishing the rest of the previous buyback program, we are preparing for another round of share buybacks and will consider different approaches to enhance shareholder returns.
In the interest of time, I would like to wrap up today's call. Thank you again for joining us today. If you have any further questions, please feel free to contact the IR team. This concludes today's call. We look forward to speaking with you next quarter. Thank you, and goodbye.
Thank you. Goodbye.