Kuke Music Holding Limited (KUKE) Q4 2021 Earnings Call Transcript

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Kuke Music Holding Limited ( KUKE 8.71% )Q4 2021 Earnings CallMar 16, 2022, 8:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning and good evening, ladies and gentlemen. Welcome to Kuke Music Holding Limited's fourth quarter 2021 earnings conference call. [Operator instructions] 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 -- Director of Investor Relations

Thank you, operator. Hello, everyone. Welcome to our fourth quarter and the full year 2021 earnings call. On the call with me today are Mr.

He Yu, founder, chairman, and CEO; Ms. Patricia Sun, president, and Mr. Tony Chen, 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 details. 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 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 the 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. It is now my pleasure to introduce Mr.

He Yu, founder, chairman, and CEO of Kuke.

Yu He -- Founder, Chairman, and Chief Executive Officer

Thank you, Jane. Good evening and good morning, everyone. Thanks for joining us, and welcome to our fourth quarter and full year 2021 earnings call. We finished the year of 2021 with strong financial results.

Our full year revenues reached RMB302 million, representing an increase of 85.4% year over year. Especially our copyrighted classical music licensing revenue reached an all-time high to RMB88.2 million. We continued to make good progress on multiple fronts, including the copyrighted classical music licensing segment, the smart music learning solutions segment, and our investment in NFT platform KOLO. With almost 15 years in operation, Kuke has become a leading classical music consumption and learning platform, leveraging our rich copyrighted classical music content at the core.

We continue to explore and expand our operations. As we have mentioned in the third quarter's earnings call, our music learning solutions segment will place greater focus on working with public kindergartens, primary and the middle schools to further diversify our customer mix in light of the current regulatory environment. Our smart music learning solutions segment continues to grow, contributing to over 50% of total revenue during Q4 and a 40% of total revenue for fiscal year 2021. Looking ahead, we are confident in the growing demand for smart music education from public schools.

Recently, we have expanded our sales and marketing force for smart music learning solutions focusing on primary and secondary schools, which will prepare us to gain greater market share in this growing segment. As a leading classic music consumption and learning platform, we have full confidence in our growth outlook as China's budding classical music industry continues to thrive. As we continue to strengthen our core business, we are also activity pioneering new paths to enhance our monetization capabilities and our position across the value chain in the classic music industry. Recently, we invested in KOLO, which is our leading NFT platform for classical music.

In the future, we will continue to focus on driving innovation in the classic music industry through technology and to create synergy with our ever-expanding classical music content library. Next, I will pass it over to our president of Kuke, Patricia, to share more details in each business segment. Thank you.

Patricia Sun -- President

Thank you, Mr. Yu. Good morning, and good evening, everyone. Our fourth quarter results were marked with effective strategy execution and continued efficiency improvements across our business segments.

With regard to our classic music licensing and subscription segments, we added nearly 1000 pieces of content to the long-term support of our international strategic partner Naxos. This brings our total number of music tracks to over 2.8 million, which includes 2 million tracks of traditional classical music, and 354,801 tracks of jazz, world, folk, and other genres of music. These contents in aggregate covered approximately 2,080 different types of musical instruments played by 95,000 musicians from 266 countries and regions. In addition, our content library also contains over 1000 video titles, 427,000 spoken content tracks, and over 5000 volumes of sheet music.

Naxos as the largest independent classical music content provider in the world provides our content library with a wide range of standard and specialty repertoire of classical jazz, world, folk, and traditional Chinese music recordings that spans from medieval to contemporary. In the fourth quarter with Kuke's strong and ever-growing classical music content, our institutional subscribers increased by 16 to 802 across China. Our licensing revenue in 2021 reached an all-time high of RMB88.2 million, representing a year-over-year growth of 52%. The increase is primarily attributable to increase the customer portfolio and contract amount, which is driven by deeper penetration of classical music in China.

For example, with increasing adoption of large-screen displays, various commercial scenarios, and at home, the demands for classical music, and in particular long-form videos are getting stronger. In addition to our core business development, we also want to share the development of Naxos China and Naxos. By the end of 2021, Naxos China, a subsidiary of Kuke, has produced a double-digit number of local productions, featuring some of the best Chinese composers and inspirational performance in the world, such as Stradivari quartets live recording from Shanghai Symphony Concert Hall, and Chinese contemporary chamber music by Beijing temporary solos. The release of these recordings exemplifies the wide impact of the light show communications of the classical music work from east to west.

In January 2022, Naxos and its affiliated labels was listed in a total of five award categories presented by the 2022 International Classical Music Awards, one of the most influential classical music awards worldwide. The award success one included solo instruments, chamber music, symphonic music, contemporary, and assorted programs. In terms of our smart music learning solutions segments, the number of active students in private kindergarten totaled 32,424 during the fourth quarter, representing a year-over-year increase of 39.4%. Revenues for this segment in the fourth quarter reached RMB63.2 million representing a year-over-year increase of 15.8%.

In the fourth quarter, given the current regulatory environment, we slowed down the pace of private kindergarten partnership expansion and will prioritize establishing deep-rooted collaborations with high-quality kindergarten that maintain great operational efficiency. We are also allocating more resources to establish collaboration with private kindergartens, primary and secondary schools. Earlier this year, the company entered into an equity transfer agreement to acquire a team of marketing and sales personnel experienced in promoting smart music learning solutions to primary and secondary schools aiming to meet the growing demand from public schools for smart music devices, teaching systems, and copyrighted music content. With a more diversified customer base, we are confident in growing our top-line performance as the overall market demand continues to play.

While our live music events segment, the revenue of music events segment in the fourth quarter reached RMB39.3 million representing a year-over-year increase of 45.1%, mainly driven by revenues from the marketing, planning, and execution services for live music event in China, and newly launched smart music learning hardware product. In Q4 we have also successfully completed the 24th Beijing Music Festival in October, the revenue of which has been fully recognized in the quarter. With that, I will pass the call over to our CFO, Tony who will walk you through our financial details for the quarter. Thank you.

Tony Chen -- Chief Financial Officer

OK. Thank you, Patricia. Hello everyone. Before we start our detailed financial discussions, please note that we will present non-IFRS measures today and non-IFRS results exclude 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 for the fourth quarter and full year of 2021 are in RMB terms. All comparisons on a year-over-year basis unless otherwise stated. During the fourth quarter of 2021, our revenue decreased by 3.2% to RMB123.8 million from RMB128 million in the previous year period.

Our licensing and subscription revenue in the fourth quarter was RMB21.3 million, compared to RMB46.4 million in the prior-year period. Because certain contracts that were supposed to be renewed in the fourth quarter were renewed in the third quarter instead. Revenue from our smart music learning solutions business increased by 15.8% to RMB63.2 million from RMB54.5 million in the prior-year period, mainly due to the increase in number of partnered kindergartens and subscribing students. Revenue from our music events business also increased by 45.1% to RMB39.3 million, driven by revenues from marketing, planning, and execution services for live music events in China, and newly launched smart music learning hardware product.

Gross profit was RMB66.8 million decreased from RMB102 million in the previous year period. Gross margin was 53.9%, compared to 79.7% in the same period of 2020. By segment, the gross margin of smart music learning solutions was 67.6%, compared to 76.5% in the same period of 2020, mainly due to the increased sales of lower gross margin of smart music learning hardware product. The gross margin of classical music licensing and subscription was 52.7%, compared to 108.5% in the same period of 2020, mainly due to change of profit-sharing policy with music content provider.

The gross margin of live music events decreased to 32.8% from 36.8% in the same period of 2020, mainly due to the increased expenses in the performance and marketing services provided to music groups in China. Operating expenses were RMB47.1 million, compared to RMB49.7 million in the prior-year period. Selling and distribution expenses were RMB37.6 million, compared to RMB8.8 million in the prior-year period. The increase was primarily attributable to increased spending to promote our brands and products.

Meanwhile, administrative expenses were RMB21.6 million, compared to RMB23.3 million in the prior-year period. Impairment losses on financial assets in the fourth quarter of 2021 decreased to a minus RMB13.9 million from RMB17.6 million in the same period of 2020, mainly due to the settlement of overdue accounts receivable. Operating profit in the fourth quarter was RMB18.5 million, compared to RMB55.8 million in the prior-year period. Our profit for the period.

Profit for the period was RMB16.8 million, compared to RMB44.2 million in the prior-year period. And non-IFRS profit was RMB14.3 million, compared to non-IFRS profit of RMB84.5 million in the same period of 2020. In the fourth quarter of 2021, basic and diluted loss per ADS were both RMB0.54. Basic and diluted non-IFRS profits ADS were both RMB0.49.

Moving on to our balance sheet and liquidity. As of December 31st, 2021, we had a total of RMB59 million in cash and cash equivalents. With solid cash position and improvement in financial results, we remain confident that we're on the right path for accelerating the growth. For the full year 2021, revenue increased by 85.4% to RMB302 million from RMB162.9 million in 2020, which our licensing and subscription revenue increased by 39.1% to RMB106.5 million from RMB76.6 million in 2020.

Smart music learning solutions revenue increased by 108.8% to RMB218.1 million from RMB58.1 million in 2020. live music events revenue increased by 181.2% to RMB77.4 million. Total cost of sales increased by 191.7% to RMB129.1 million. Gross profit in 2021 was RMB172.8 million, compared to RMB118.6 million in 2020.

Gross margin in 2021 was 57.2%, compared to 72.8% in 2020. Total operating expenses in 2021 were RMB228.4 million, compared to RMB126.1 million in 2020. Selling and distribution expenses were RMB73.6 million, compared to RMB25.8 million in 2020. Administrative expenses were RMB132.2 million, compared to RMB65 million in 2020.

Operating loss in 2021 was RMB47.9 million, compared to RMB3.1 million in 2020. Our net loss in 2021 was RMB56.1 million, compared to RMB15.2 million in 2020. And non-IFRS profit was RMB37.5 million, compared to RMB49.5 million in 2020. In 2021 basic and diluted loss per share were minus $1.96 and $1.94.

Basic and diluted non-IFRS profit per ADS were $1.28 and $1.27. This concludes our prepared remarks for today. Operator, we're now ready to take questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Tuohua Wang from Tiger Brokers. Please go ahead.

Unknown speaker

Hi. Thank you for taking the questions. This is Karina from Tiger Brokers. I have two questions and the first one is the gross profit margin in first quarter dropped from last year and the licensing and subscription business gross profit down to 59.3% from 181.5%.

And the total business gross profit from 76.5% to 67.1%. Could you give us more color on the gross profit margin outlook? Thanks.

Jane Zuo -- Director of Investor Relations

Hi, Tony. This question is for you.

Tony Chen -- Chief Financial Officer

Yes. Yes. I'll take this question. In Q4 for our smart music learning solutions business, the gross margin decrease was mainly due to our strategy readjusting, to focus more on working with public schools and newly developed AI speaker product.

The gross margin of classical music subscription decreased to 14.5% from 271% in the same period 2020 due to the change of profit sharing policy with major content provider. However, we're maintaining confident view on gross margins going forward, because we're expecting steady growth in our licensing and subscription business, as well as the number of paying students for our kindergarten investments. As we solidify our collaboration and partnerships, more public schools and education institutions in China with our leading position. See if you have more questions.

Unknown speaker

Yes. I have another question, thanks. Kuke recorded a net profit from RMB17.7 million in the fourth quarter, while the full year net loss was RMB55.1 million. How should we see Kuke's overall profitability in the future? And is there any guidance that we can -- you can share?

Tony Chen -- Chief Financial Officer

OK. We are optimistic in our overall profitability as we have seen our core business steadily growing. In particular, our licensing revenues show the promising upside recording over 50% year-over-year growth in financial year 2021, and our smart music learning solutions business has also recorded over 100% growth. So we expect that the development of smart music learning business to be fulfilled as we establish more in-depth collaborations with public schools.

As a leading classical music consumption learning platform, we have full confidence in our steady growth outlook as China's budding classical music industry continues to thrive. So in the meantime, as we are leveraging our advantage in rich classical music content base to explore and invest more in technology-based business, including our incubation of KOLO platform, and newly launched blockchain business. We are expecting these businesses to further enhance our revenue stream in the future. So that's our reply to your question.

Operator

Our next question comes from Brian Li from AMTD. Please go ahead.

Brian Li -- AMTD Group -- Analyst

Thank you. Thank you for taking my question. So I have two questions, the first one is regarding your classic music licensing business. We thought the revenue has been continuously increasing.

So could you give more color on it? Thanks.

Patricia Sun -- President

OK. I will take this question. Our licensing revenue in 2021 reached an all-time high of RMB88.2 million representing a year-over-year growth of 52%. The increase in primary attributed to on one hand the deeper markets and attrition of classical music industry in China on the other hand, Kuke's increasing high brand awareness in the markets.

As of December 31st, 2021, the total content in Kuke's classical music library increased to more than 2.8 million in video content, such as concert videos, opera, ballet increased to about 4000 hours. In the future we believe that with the increasing adoption of large screen displaying various commercial scenarios, and at home, the demand for classical music and especially long-form videos are getting stronger that Kuke will continue to leverage its strong content base and to provide high quality immersive digital enjoyments in classical music for our users. Thank you.

Brian Li -- AMTD Group -- Analyst

Thank you. I have a follow-up question. We noticed that compared to the previous financial year of 2023, the revenue of your three business segments being all recorded significant growth in 2021. So could you help us understand the main reasons behind and how will the revenue contribution from these segments looks like this year? Thank you.

Tony Chen -- Chief Financial Officer

OK. So I'll take this question. So first of all, let's -- let us do some recaps on the financial numbers that we just reported. For full year 2021 revenue increased by 85.4% to RMB302 million from RMB162.9 million in 2020 among which smart music learning solutions revenue increased by 108.4% to RMB122.5 million from RMB58.8 million in 2020.

Specifically, smart music learning solutions subscription and revenue from kindergarten students increased by 516.9%, more than five times to RMB30.7 million from RMB5 million in 2020 due to the increases in the number of collaborating kindergartens, and subscribing students. So now smart music learning solutions sales revenue increased by 70.6% to RMB91.8 million, compared to RMB53.8 million in 2020, as a result of increased sales of smart music learning products. As for the licensing and subscription revenue, increase by 39.1% to RMB106.5 million from RMB76.6 million in 2020. So this increase, the licensing revenue increased to RMB88.2 million from RMB58 million in the full year of 2020.

So the increase was mainly due to the increased customer portfolio and contract amounts. Subscription revenue decreased slightly to RMB18.3 million from RMB18.6 million in 2020. The slight decrease was mainly due to the COVID disruption in 2020. So live music events revenue increased by 165.1% to RMB73 million driven by revenues from the marketing and performance businesses and from musical groups in China.

So looking ahead, our business will continue to flourish as Kuke has successfully leveraged its core assets of the expanding copyrights content. For the licensing and subscription segment this year, we expect to see steady growth. And we have sourced more long-form video content internationally and support more international competitions. For the smart music learning solutions segment, we expect a year of steady growth and we shall develop more collaborations with public schools to expand our customer base.

For the live music events segment, we are going to organize more live events this year and are working with Shanghai Music Publishing House to market our new smart speaker box. So overall we expect steady growth in our business segment this year. So that concludes my answer to this question.

Brian Li -- AMTD Group -- Analyst

Thank you. Thank you, very clear. Thank you.

Tony Chen -- Chief Financial Officer

Thank you.

Operator

As there are no further questions at this time, I'd like to hand the conference back over to Jane Zuo for closing remarks.

Jane Zuo -- Director of Investor Relations

Thank you, operator. In closing, on behalf of the entire management team of Kuke, we'd like to thank you again for joining this conference call tonight. If you have any further inquiries in the future, please feel free to contact us @ir.kuke.com. Thank you, everyone.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Jane Zuo -- Director of Investor Relations

Yu He -- Founder, Chairman, and Chief Executive Officer

Patricia Sun -- President

Tony Chen -- Chief Financial Officer

Unknown speaker

Brian Li -- AMTD Group -- Analyst

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