Public

Tencent Music Files For U.S. IPO With Strong Financials

Tencent Music, the music streaming subsidiary of Chinese internet giant Tencent, has filed for a U.S. IPO. In July, Tencent, which is listed in Hong Kong, announced that it intended to spin the music streaming business off as an independent entity.

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The company’s F-1 includes a $1 billion potential IPO raise. That figure is a popular placeholder figure used to indicate that the IPO intends to raise far more than the $100 and $500 million figures that smaller companies command.

Tencent Music’s F-1 seems to indicate that the firm has yet to choose between the New York Stock Exchange or the Nasdaq. Regardless of which exchange it selects, the firm expects to use the ticker symbol “TME” when it does publicly trade.

Financial Results

Tencent Music has a history of quick growth and profitability. The combination is rare in today’s IPO market.

The firm more than doubled its revenue from 2016 to 2017, for example, while generating a profit that more than doubled during the period. Managing profitability during that pace of growth can be difficult; managing to grow profitability at the same time is impressive.

More recently, the firm grew its revenue 92.2 percent to $1.30 billion from the first half of 2017 to the first half of 2018. Tencent Music’s gross profit expanded 151.7 percent during the same interval, helping the company grow its profit during the two-quarter period to $263 million.

To frame Tencent Music’s growth, the company generated revenue of $1.66 billion in revenue during all of 2017, compared to its $1.30 billion in top line generated during the first two quarters of 2018. That’s quick.

Tencent Music isn’t going public because it needs capital. Profits aside, the firm wrapped the June 30, 2018 quarter with $1.44 billion in cash and equivalents. That’s quite a war chest for a private company. And Tencent Music generates cash, including $431 million from a combination of operating, investing, and financing cash flows during the first half of this year.

The company is also growing its monthly active user (MAU) count at a good clip. In Q2 2018 (the last quarter to have reported numbers), Tencent Music had a total of 872 monthly active users, an over 8 percent jump in MAUs compared to the same quarter last year.

On top of this MAU growth, Tencent was able to expand how many of those users paid for the service. Comparing Q2 2018 to Q2 2017, revenues from paying users grew by 38 percent.

Per its filing, Tencent has two sources of revenue, namely online music services and “social entertainment services and others,” which accounted for 29.6 and 70.4 percent of its total revenue in H1 2018. That second bit, according to the company, includes live streaming, online karaoke, sales of music-related merchandise (headphones and karaoke microphones), and other services (in-car audio and event ticketing).

Who Owns What

Further confirming what has already been reported by TechCrunch and others, Tencent Music competitor Spotify owns 9.1 percent of the company’s shares. The two companies swapped shares in a transaction in December 2017.

The F-1 also documents that Zhenyu Xie, formerly the founder and CEO of digital music service KuGou, has a 4.2 percent stake in Tencent Music. KuGuo was acquired by China Music Corp (CMC) and made a subsidiary. Eventually, Tencent acquired CMC and merged the entity with its QQ music service to create Tencent Music. Guomin Xie, the founder of CMC, now holds 4 percent of the final company’s shares.

Just how much those shares are worth can’t be determined until Tencent Music offers up a per share price range.

In general, however, Tencent Music will likely do well in the public markets. The IPO window is wide open, and with profitability and growth in the satchel, the streaming company has a leg up over most companies going public so far this year.