To The Moon

After its earnings report release, Tencent Music Entertainment (TME) shares plunged more than 12%. On the surface, the company’s second-quarter revenue and profit continued to grow. However, a closer look at the financials suggests that the underlying momentum of TME’s core businesses remains underwhelming. $Tencent Music(TME)$

In terms of revenue, TME reported total revenue of RMB 8.933 billion (approximately US$1.32 billion) in the second quarter, up 5.8% year over year. Compared with Q2 2025, revenue increased by RMB 491 million, of which approximately RMB 407 million came from the consolidation of Ximalaya. In other words, excluding the consolidation, total revenue from the company's remaining businesses grew by just RMB 84 million. Moreover, with the contribution from the acquisition, the company’s year-over-year revenue growth rate has slowed for three consecutive quarters, raising concerns about the momentum of its core businesses.

Looking at the revenue structure, TME's top line consists of three main segments.

Second-quarter music-related services revenue reached RMB 7.61 billion, up 11% year over year, accounting for more than 90% of total revenue. This remains the company’s core revenue source and primary growth engine. Marketing, consumption services, and membership services were the primary growth drivers. Membership services revenue alone was RMB 4.79 billion, up 8.1% year over year. However, on the earnings call, CFO Shirley candidly acknowledged that, amid intense competition, the advertising business — particularly the ad-supported model — is under pressure, which may add to market concerns.

The social entertainment services and other revenue segments, on the other hand, totaled RMB 1.33 billion, down 16.4% year over year, representing a decline of approximately RMB 260 million. This offset most of the revenue increase generated by membership services. The contribution of this segment to total revenue has also fallen sharply, from approximately 67% in Q4 2020 to just 14.9% today, highlighting its prolonged decline.

One possible explanation is that users are increasingly shifting their time to short-form video platforms, weighing on its businesses such as online karaoke and contributing to the continued contraction of the social entertainment services segment.

In terms of profitability, TME’s gross margin was 44.2% in Q2, down 0.2 percentage points from the same period last year. Excluding the positive contribution of the Ximalaya consolidation to gross margin, the decline in the gross margin of the existing business may have been even more pronounced.

Cost of revenue increased 6.2% year over year, mainly due to higher costs related to offline performances and the expansion of the company’s audio content library.

It is worth noting that the growth in cost of revenue slightly outpaced revenue growth in Q2. This could indicate potential deterioration in TME’s operating leverage, although it remains to be seen whether this is a temporary issue or a more structural trend.

As for operating expense, it increased 12% year over year in Q2, mainly due to the consolidation of Ximalaya, including amortization expenses related to intangible assets. Whether the increase in intangible assets following the acquisition could lead to higher amortization expenses and potential impairment risks, which could put further pressure on earnings, needs to be seen.

Another issue is the company’s disclosure of key operating metrics. Starting from Q1 2026, TME stopped reporting key quarterly operating metrics such as online music MAUs, paying users, and ARPPU. The market may interpret this as reduced transparency, which could further undermine market confidence.

Based on the second-quarter disclosures, several key areas still should be continued to monitor going forward: the organic growth after the Ximalaya consolidation; the sustainability of growth in marketing, consumption services, and membership services revenue; the trajectory of gross margin; and whether the decline in social entertainment revenue begins to moderate.

Overall, both core business momentum and information transparency are coming under pressure, which may help explain the sharp decline in TME’s share price following the earnings report release.