Cloud Music Inc. Reports First Half 2023 Financial Results

Summary of Key Financial and Operating Metrics
(RMB in thousands, unless otherwise stated)

First Half 2023
Key Financial and Operating Highlights

• Revenue was RMB3.9 billion, compared with RMB4.3 billion for the same period of 2022.
  
  • Online music services:
    - Revenue from online music services was RMB2.0 billion, an increase of 13.3% compared with RMB1.8 billion for the same period of 2022. The increase was primarily due to the significant growth in revenue from the sales of membership subscriptions.
    - Mof online music services climbed to 206.7 million, up 13.7% year-over-year.
    - Monthly paying users of online music services expanded to 41.8 million from 37.6 million for the same period of 2022, primarily
    attributed to the expanding offerings of personalised and diversified music and music-inspired content, and broadening consumption scenarios, as well as the enhanced user experience.
    - Monthly ARPPU (average revenue per paying user) of online music services increased to RMB6.8 from RMB6.5 for the same period of 2022 as a result of optimised promotions.

• 
  
  • Social entertainment services and others:
    - Revenue from social entertainment services and others was RMB1.9 billion, compared with RMB2.5 billion for the same period of 2022.
    - Monthly paying users of social entertainment services expanded to 1.5 million from 1.2 million for the same period of 2022.
    - Monthly ARPPU of social entertainment services was RMB199.3 compared with RMB329.8 for the same period of 2022.
    
• Gross profit
  was RMB965.1 million, a significant increase of 79.7% compared with RMB537.1 million for the same period of 2022, primarily due to improved cost control. Gross margin improved to 24.7% from 12.6% for the same period of 2022, owing to our increased business scale, copyright cost structure optimisation, and an improved revenue sharing ratio.
• profit
  was RMB293.8 million, compared withloss of RMB270.8 million for the same period of 2022.
• Adjustedprofit
  was RMB331.9 million, compared with adjustedloss of RMB217.0 million for the same period of 2022.

Note:
[1] Adjustedprofit/(loss) is defined as profit/(loss) for the period adjusted by adding back equity-settled share-based payments as appropriate.

Business Overview

Starting
in 2023, we enhanced our music-inspired offerings, driving our music-centric monetisation capabilities and meaningful margin expansion. We brought innovative features and expansive content to our users, grew our differentiated community, and elevated our content ecosystem. These helpeddeliver notable growth of subscription-based memberships. Backed by our optimised operating efficiency and cost structure, we recorded positive performance across both operating profit and adjustedprofit for the first time during the first half of 2023.

Despite the industry-wide slowdown, our Mof online music services for the first half of 2023 steadily climbed to 206.7 million, up 13.7% year-over-year. The growth in our Mof online music services was supported by our continued effort to create a better user experience and broader music-listening scenarios, along with our active initiatives to bolster our branding outreach, which aided in better new user attraction. Meanwhile, our DAU/MAU ratio (daily active user/monthly active user ratio) stayed well above 30%, demonstrating our ability to foster continued growth across our leading music-inspired community . During the Reporting Period, we continually enhanced our user experience and community features through product innovation.

We also secured more high-quality content in the first half of 2023, with a foon better cost efficiency. Paired with our stronghold in fostering a leading independent artist ecosystem and enhancements to our in-house music production, we have developed a comprehensive and differentiated content ecosystem that encourages user stickiness and users' willingness to subscribe to our premium offerings. We will further explore cooperations with record labels to round out our content offerings, focusing on our advantagemusic genres; meanwhile, we are exploring potential copyright collaborations with diverse downstream channels for enlarging music content exposure and commercialisation potentials.

We have worked diligently to strengthen our music-centric monetisation capabilities throughout the first half of 2023. Our online music business has continued to show solid growth momentum on a year-over-year basis. Our subscription-based memberships revenue continued its solid upward trend and grew by 16.7% year-over-year, driven by subscriber scale-up and ARPPU improvement. Our ongoing content enhancements and innovative features, along with broadened membership privileges, supported the increase of our subscriber base, which was up 11.0% on a year-over-year basis. ARPPU also continued to improve, aided by our pricing optimisation initiatives.

For our social entertainment arm, revenue has declined 23.8% year-over-year, as we are refining our operating strategy for social entertainment services . We introduced multiple measures in the social entertainment services to enhance the listening experience of more dedicated music fans and improve profitability. These include reducing the in-app exposure of certain live streaming functions and lowering broadcasters' and agencies' revenue sharing ratio. Moreover, we are further reinforcing our internal controls mechanism, such as adopting stricter monitoring over irregular user activities, and recently taking additional measures to optimise live streaming functions.

We improved our profitability considerably in the first half of 2023, mainly attributable to our increased scale and cost optimisation. Gross Margin soared to 24.7% in the first half of 2023, compared with 12.6% in the same period of 2022, owing to our increased business scale, copyright cost structure optimisation, and an improved revenue sharing ratio. As a result, we recorded AdjustedProfit of RMB331.9 million in the first half of 2023, compared with AdjustedLoss of RMB217.0 million in the first half of 2022.

Going forward, we will remain committed to cultivating our community, bringing more high-quality music to our users, further strengthening our operating capabilities, and improving profitability. Our plans call to:

• cultivate our users' willingness to pay for and subscribe to premium offerings by improving user experience, deepening user engagement, and broadening consumption scenarios;
  
• continue the initiatives to safeguard our social entertainment services with reinforced controls, ensuring and promoting our social entertainment services' sound and sustained development, pursuing better integration with our core online music ecosystem;
  
• foster our music-oriented community ecosystem and explore innovation in social networking via enhancements to our comprehensive product offerings, including embedding our products with more interactive features and broadening the communicative ecology;
  
• further diversify and enhance our content offerings with better efficiency. We plan to deepen our collaboration with copyright holders, as well as strengthen our capabilities in independent artist incubation and in-house music production;
  
• improve profitability through continued content cost optimisation, enhanced operating efficiency and disciplined cost control; and
  
• look to IoT layouts and game-inspired initiatives to further expand music listening scenarios and explore commercialisation opportunities.

Comprehensive and differentiated content ecosystem

We continue to incorporate a wider variety of copyrighted content to our library, strengthen our leading original music ecosystem and develop unique in-house music content. These actions further amplify our comprehensive and differentiated content ecosystem to meet our young users' ever-changing needs. By the end of June 2023, we had amassed about 136 million music tracks. Benefiting from the industry-wide trend of optimised content costs, we are driving a meaningful improvement in our gross margin profile, further aided by our adept acquisition and management of copyrighted content.

Enhancing copyrighted content library

• Deepened partnerships with copyright holders, continued amplifying our music genres (including popular, rap, folk and K-POP) and increased our appeal to audiences.
  We have partnered with more top-tier C-pop labels and further extended collaboration with more renowned Korean record labels, expanding our content matrix with more popular music tracks from influential musicians, singers and groups, such as MAYDAY, Sodagreen/Oaeen(鱼丁糸), Jackson Wang, Shinhwa, as well as a library of OST from JTBC. Meanwhile, we continued promoting on our advantagemusic genres and styles. Hit songs, including folk song "Wo Ji De (《我记得》)" by Lei Zhao (赵雷) and hip-hop song "Snow Distance (《雪
  Distance》)"
  by Capper & Yan Luo, have seen a surge in popularity and user interaction on our platform, demonstrating the positive momentum and unique community engagement we have built across these genres.
  
• Recorded impressive album sales performances from top artists . During the Reporting Period, our platform saw impressive sales of several premium digital albums, including the latest mini-album from the South Korean girl group (G)I-DLE. Titled "I FEEL," the mini-album quickly gained over RMB10 million in total sales after its release in May. Our first co-published physical album, C-Pop artist Chenyu Hua's new album "希忘(Xiwang) Hope" recorded approximately RMB20 million in total gross sales.
  
• Expanded copyright partnership with downstream channels and music consumption scenarios and provided more value-added services along the music industry value chain.
  We upgraded our one-stop copyright service platform "Cloud Village Exchange" (云村交易所) to better meet increasing demands in downstream commercial use of copyright music licensing. We also expanded partnerships with more downstream channels to facilitate orderly usage of copyright content, including the additions of Tmall Genie's voice-based interactive system, Hangzhou International Digital Exchange Center and China's largest bar chain network Helen's (海伦司).

Strengthening our leading independent artists ecosystem

We continue to enhance our support system for independent artists, offering comprehensive assistance for their encounters in the limelight and backstage, from the creation process to financial support, and nurturing a new generation of pioneering original force for the Chinese music industry. As of the end of June 2023, our platform was home to more than 646,000 registered independent artists, who had collectively contributed about 2.8 million music tracks to our content library. Also, we are proud to have discovered and nurtured early-stage musicians, such as Runze Zheng (郑润泽), who is being more popular.

• Supporting music creation efficiency. We are dedicated to leveraging cutting-edge technologies, providing musicians with efficient tools covering the entire composition process to maximize their productivity. Among them, our music creation auxiliary tool, provides reliable assistance to musicians in their content creation endeavours; X Studio, our intelligent voice synthesis software in partnership with Xiaoice, provides 12 natural singing voices (covering styles such as pop and folk) for musicians to automatically select the appropriate voice; and BeatSoul, our one-stop Beat transaction platform also effectively makes music co-creation more accessible.
  
• Exploring and improving musician exposure .
  We continued to discover and nurture musical talent through a range of approaches, including special events, targeted operations and location-based initiatives. For instance, we launched multiple initiatives, such as the New Voice Power Project (新声势力计划), "Take in and Rap out" (街头招式) and the "City Tour Guide" (城市云游指南) special planning series, to provide comprehensive training and development opportunities both online and offline for emerging rappers and producers, as well as regionally representative talent from the industry. As the offline entertainment industry is gradually recovering, we are actively leveraging the momentum of the music community on our platform, as well as utilising our extensive promotion channels such as music festivals, offline tours and variety shows, to help emerging musicians (such as Runze Zheng 郑润泽) kickstart their music journey and gain widespread recognition.
  
• Helping musicians improve their commercial value .
  We upgraded our renowned musicians' support project and launched "Project Cloud Ladder 2023" (云梯计划2023第一期). This update offers independent musicians better financial incentives that support independent musicians and high-quality original content. These efforts have in turn helpedpromote original music ecosystem. In addition, the update also provides musicians with access to more services, such as worldwide distribution of their music and automated copyright protection.

Developing differentiated in-house music

We continue to invest in expanding our in-house music production teams and strengthening music creation capabilities. Our multiple in-house studios are continuing to foon creating unique music content and are further driving commercial value through deeper collaboration with NetEase portfolio and external commercial brands.

• Crafting high-quality music content tailored to a variety of needs .
  Our in-house studios have successfully popularised multiple hit songs, including "Xiang Yun Duan" (《向云端》) and "Jing Wei" (《精卫》). In particular, our co-produced song "Xiang Yun Duan" (《向云端》) quickly demonstrated remarkable popularity across multiple platforms after its release in May.
  In addition, our in-house music works have been featured on many prominent galas in China and have served large-scale sports events and influential public events. This has further demonstrated our capacity to create and customize top-notch music.
  
• Deepening collaboration with NetEase and commercial brands .
  By leveraging our in-house music capabilities, we have deepened our collaboration with NetEase's portfolio such as rolling out customised songs for their blockbuster game IPs such as Fantasy Westward Journey (梦幻西游), Onmyoji (阴阳师)
  and Eggy Party (蛋仔派对).
  We also collaborated with mainstream commercial brands, such as SAIC Volkswagen and Yili, which further enhances our value to the industry. In particular, one of the customised game promotion songs "Look, it's Eggy" (《注意看,是蛋仔》) for Eggy Party (蛋仔派对)
  has been widely praised by game players.

Community ecosystem and product innovation

In the first half of 2023, we further promoted product innovation and the build-up of a music community that brings excitement to users. We actively incorporated new interactive features, enhanced user listening experiences and broadened music consumption and communication scenarios, to continually reinforce our differentiated community ecology and user stickiness.

• Adding interactive functions and cultivating community resonance.
  On top of our iconic comments section, we rolled out new scenario " Comment Square " (乐评广场), allowing users, musicians and content creators to use music as a medium to express their emotions and interact with each other. Comment Square is a hub where users can browse and explore song comments, share their thoughts on music and respond to the sentiments of other users. We are confident that this will help sharpen their perception on comments and create a more robust community atmosphere.
  
• Expanding music consumption and communicative scenarios.
  We continue looking to IoT layouts and game-inspired initiatives to expand music consumption to more aspects of gaming and everyday living.

– Partnership with
NetEase Games. We have created an immersive gaming experience by connecting users with varilistening options, such as popular casual game Eggy Party (蛋仔派对)
and Sky (光遇)
. In partnership with Eggy Party (蛋仔派对)
, we have embedded our player within the core gaming scenes, expanding the high-quality music consumption experience to more gaming scenarios. Recently, we launched a cooperative gift package, including customised in-game skins that integrate NetEase Cloud Music IP attributes, as well as a bundled vinyl VIP membership. This collaborative project has gained notable popularity among the gaming community, resulting in effective user reactivation and users' increased willingness to pay. As part of the package, users are also entitled with an Eggy Party-themed player interface within our NetEase Cloud Music app, boosting user engagement and stickiness for enthusiasts of both game and music.

– IoT layouts. We expanded our coverage and content pool to the IoT market, encompassing smart devices that touch on variaspects of people's lives. Recently, we expanded our coverage to more automakers and their in-car systems, including Geely, SAIC Audi.

• Optimising users' listening experience.
  We are dedicated to providing users with the best listening experience possible and better fulfilling personalised user demands by continuously leveraging sound enhancement technology and optimising listening features.

– Sound enhancement technology. We rolled out new premium offerings such as "ultra-clear master tape" (超清母带) and "surround sound" (沉浸环绕声). The former is designed to restore the original sound of the mastering and recording, while the latter creates an immersive listening experience.

– Upgraded vinyl player interface. We have unveiled a major upgrade to our iconic vinyl player interface. Making breakthroughs in classic style, we are further upgrading the experience with and providing users with up to nine new player styles.

Conference Call

The Company's management will host an earnings conference call at 7:00 p.m. Beijing/Hong Kong Time on Thursday, August 24, 2023
(7:00 a.m. U.S. Eastern Time on the same day). Details for the conference call are as follows:

Event Title: Cloud Music Inc. First Half 2023 Earnings Conference Call
Registration Link:

All participants must use the link provided above to complete the online registration process in advance of the conference call. Upon registering, each participant will receive a set of dial-in numbers, an event passcode, and a personal access PIN, which will be used to join the conference call.

A replay of the call will be accessible by phone at the following numbers and entering PIN: 10032403. The replay will be available through August 31, 2023.

Additionally, a live and archived webcast of the conference call will be available on the Company's investor relations website at
.

About Cloud Music Inc.

Launched in 2013 by NetEase, Inc. (NASDAQ: ntes ; HKEX: 9999), Cloud Music Inc. (HKEX: 9899) is a well-known online music platform featuring a vibrant content community. Dedicated to providing an elevated user experience, Cloud Music Inc. provides precise, personalised recommendations, promotes user interaction and creates a strong social community. Its foon discovering and promoting emerging musicians has made Cloud Music Inc. a destination of choice for exploring new and independent music among music enthusiasts in China. The platform has been recognised as the most popular entertainment app among China's vibrant Generation Z community.

Please see
for more information.

Forward Looking Statements

This press release contains forward-looking statements relating to the business outlook, estimates of financial performance, forecast business plans and growth strategies of the Company. These forward-looking statements are based on information currently available to the Company and are stated herein on the basis of the outlook at the time of this press release. They are based on certain expectations, assumptions and premises, some of which are subjective or beyond our control. These forward-looking statements may prove to be incorrect and may not be realised in the future. Underlying these forward-looking statements are a lot of risks and uncertainties. In light of the risks and uncertainties, the inclusion of forward-looking statements in this press release should not be regarded as representations by the Board or the Company that the plans and objectives will be achieved, and investors should not place undue reliance on such
statements.

Non-IFRS Measure

To supplement our consolidated results, which are prepared and presented in accordance with International Financial Reporting Standards ("IFRSs"), the Company uses adjustedloss as an additional financial measure, which is not required by, or presented in accordance with, IFRSs. We believe that this measure facilitates comparisons of operating performance from period to period and company to company by eliminating the potential impact of items that our management does not consider to be indicative of our group's operating performance, such as certain non-cash items. The use of this non-IFRS measure has limitations as an analytical tool, and shareholders and potential investors of our company should not consider them in isolation from, as a substitute for, analysis of, or superior to, our group's results of operations or financial condition as reported under IFRSs. In addition, this non-IFRS financial measure may be defined differently from similar terms used by other companies, and may not be comparable to other similarly titled measures used by other companies. The presentation of this non-IFRS measure should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items.

Investor Enquiries:

Angela Xu
Cloud Music Inc.
[email protected]

Media Enquiries:

Li Ruohan
NetEase, Inc.
[email protected]

SOURCE NetEase Cloud Music

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