Cloud Village Inc. Reports Fiscal Year 2021 Financial Results

HANGZHOU, China, March 24, 2022 /PRNewswire/ -- Cloud Village Inc. (HKEX: 9899, "NetEase Cloud Music" or the "Company"), a leading interactive music streaming service provider in China, today announced its financial results for the fiscal year ended December 31, 2021.

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

Fiscal Year 2021 Key Financial and Operating Highlights

• Revenue was RMB6,997.6 million, an increase of 42.9% compared with RMB4,895.7 million for the same period of 2020.
• Online music services:
  -Revenue from online music services was RMB3.3 billion, an increase of 25.4% compared with RMB2.6 billion for the same period of 2020. The increase was primarily due to the significant growth in revenues from sales of membership subscriptions.
  -MAUs of online music services grew to 182.6 million from 180.5 million for the same period of 2020.
  -Monthly paying users of online music services expanded to 28.9 million from 16.0 million for the same period of 2020.
  -Monthly ARPPU (average revenue per paying user) of online music services was RMB6.7 compared with RMB8.4 for the same period of 2020. The decrease was primarily due to the increased use of joint membership packages in cooperation with other platforms from 2020 to 2021, in which the Company's membership subscriptions were sold at a discount to promote our subscriptions and broaden the reach of the Company's services.
• Social entertainment services and others:
  -Revenue from social entertainment services and others was RMB3.7 billion, an increase of 63.1% from RMB2.3 billion for the same period of 2020, driven by the rapid growth of social entertainment services revenue, substantially all of which was derived from live streaming services.
  -Monthly paying users of social entertainment services increased to 683.3 thousand from 327.1 thousand for the same period of 2020.
  -Monthly ARPPU of social entertainment services was RMB448.1 compared with RMB573.8 for the same period of 2020.
• Gross profit was RMB142.7 million, compared with a gross loss of RMB595.3 million for the same period of 2020. Gross margin improved to 2.0% from negative 12.2% for the same period of 2020, as a result of the significant revenue increase and control over content licensing fees.
• Net loss was RMB2.1 billion, narrowed by 30.3% compared with RMB3.0 billion for the same period of 2020.
• Adjusted net loss was RMB1.0 billion, narrowed by 33.4% compared with RMB1.6 billion for the same period of 2020, mainly due to the increased revenue as well as improved cost control.

Note:
(1) Adjusted net loss is defined as loss for the year adjusted by adding back equity-settled share-based payments and changes in fair value of convertible redeemable preferred shares.

Business Overview

We operate a leading online music platform featuring a highly interactive content community for music enthusiasts in terms of user scale and engagement. We have built a large-scale, robust and rapidly growing business to provide community-centric online music services and social entertainment services to our users. Our brand appeals to and resonates with the spirit of young, highly engaged music enthusiasts. Through our online music platform, NetEase Cloud Music, and ancillary social entertainment products, such as LOOK Live Streaming, Sheng Bo and Yin Jie, we empower music enthusiasts with a wide variety of technology-driven tools to discover, enjoy, share and create diverse music and music-inspired content and to interact with each other. Our revenue streams primarily consist of two key components, online music services and music-inspired social entertainment services. Our online music services comprise membership services to our paying users, advertising services to advertising customers in various formats including brand advertising and performance-based advertising, sales of digital albums and singles to purchasers, and copyright sublicensing. Our music-inspired social entertainment services include hosting live streaming services through which we generate revenue from virtual item purchases by our community and consumed on our platform.

We kicked off 2021 with a firm step forward in our evolution into an all-in-one online music and audio entertainment platform, home to music enthusiasts in China. Throughout the year, we successfully enriched our content ecosystem with growing our independent artist numbers and enlarging our music labels library, elevated our differentiated community ecosystem and improved user engagement across our large and stable user scale. Meanwhile, we meaningfully improved our profitability, mainly attributable to strengthened commercialisation capability and optimised content cost structure. We are now better positioned to shift our superior offerings into full play amid a healthier industry environment.

Our MAUs of online music services increased from 180.5 million in 2020 to 182.6 million in 2021. Our users are highly engaged, with DAU/MAU ratio staying well above 30% in 2021, and driven by enhancements to our comprehensive and unique product and content offerings, including music tracks from both big labels and independent musicians, as well as our music-inspired user generated content ("UGC"). Each daily active user spent approximately 78.2 minutes per day on average listening to music on our platform in 2021. Meanwhile, nearly half of users browsed the "comments section" while listening to music. At the end of 2021, 27% of our users generated content on the platform, and 32% of music streams were attributable to platform recommendations, up from 25% and 28%, respectively, as of the end of 2020.

These improvements, along with our continued monetisation efforts, are already showing meaningful gains in our operating leverage, and for the full year of 2021, our total revenues grew by 42.9% year-over-year to RMB6,997.6 million. We have also managed to improve profitability along with content enhancement, mainly attributable to cost optimisation of our copyright structure. As a result, we achieved a positive gross margin of 2.0% for the full year of 2021.

Looking ahead, we are strategically expanding our prospects by:

• cultivating our users' willingness to pay and pursuing commercialisation potential, via improved user experience, innovative products and content offerings, and deepened user engagement;
• exploring innovations in social networking, utilising user behaviour and music preference to connect users with each other, providing additional social networking options; and
• further diversifying our content offerings with better investment efficiency, via active negotiation with copyright holders, as well as progress in in-house music production.

We expect to generate incremental contribution from these initiatives going forward.

Product and service innovations

We continued our innovation efforts in 2021. Innovation and superior quality have been the core competitive advantages for our products and services. Innovative features on our platform enable users to express themselves and interact with others.

• We introduced a new function called "Sheet Music Library" in November. Through the official copyright cooperation with the world-famous digital music score providers, we have launched millions of authorised music scores, ranging from classical music to pop music. Through this function, our users can quickly and accurately check and use the authorised music scores of their favourite music tracks. In addition to providing more professional and efficient content services for music lovers, we are further exploring more possibilities in the music education fields including music score videolization. At the same time, we are allowing our users to upload music scores to further diversify our user-generated content and music ecosystem.
• We launched our brand-new "Beat transaction platform" in mid-December, accommodating transactions between beat-makers and musicians or music lovers. We believe this innovation could not only allow beat-makers to realise commercial value, but also liberate content creativity by individual musician with better linkage with upstream content creators, enriching our content ecosystem.
• We launched innovative function "Audio Artists Comments" in November, allowing music talents to publish audio-formatted messages in the comment section under their new music tracks. The new function provided artists with broadened scenario and formats to promote their new songs and better connect with audiences, through their unique voice texture and characteristics.
• Our new function "Music Gift Box" has been well received by our users, which allows individual users to send customised video content to friends. The new function not only fosters music content recreation and distribution, but also enhances the resonance between users.
• We actively expanded our footprint in the IoT market in 2021 with the growth of smart speakers at an accelerated pace beginning in November 2021 in conjunction with music copyright opening on smart devices. We believe broader IoT coverage can help us attract new users, as well as improve our users' overall activity and stickiness across multiple devices.

Content enhancement

We offer a full spectrum of various content as our young users' demands are increasingly diverse and personalised. Our content library consisted of approximately 80 million music tracks by the end of 2021, including music from established labels as well as independent artists. Our robust library, together with UGC content, brings users broad and differentiated content.

Music labels. We continued to secure more high-quality content with better return on investment (ROI). In July 2021, regulators in the People's Republic of China (the "PRC") issued an order on anti-monopoly, which has the effect of preventing exclusivity in the music content of music labels going forward. We welcomed this favourable shift as it fosters healthier development of the overall online music industry in China.

• In August 2021, we completed a direct agreement with Warner Music Group, which means we now have direct digital distribution contracts with all three of the world's largest recording labels.
• We are also actively completing our major Chinese music library, adding new copyrighted music from popular labels in the second half of 2021, including Modern Sky, Emperor Entertainment Group, China Record Group, Feng Hua Qiu Shi, and Yuehua Entertainment, among others. In addition to bringing on more music copyrights, we strive to deepen our collaboration with music labels, including customised music, ticketing and live shows.

More importantly, we are pleased to see favourable industry trends in more reasonable copyright fees and cost structures, providing us with the flexibility to optimise our investment in content using a more disciplined and predictable approach.

Independent artists. In addition to music labels, we became a natural incubator of music talent looking for an audience, empowered by our massive community and large cohort of young users with diverse and personalised tastes. By the end of 2021, we were serving more than 400,000 registered independent artists on our platform. Despite our rapid scale expansion, the activity of our independent artists continued to steadily improve. Within our content library, about 1.9 million music tracks came from our registered independent artists, which represents an increase of approximately 80% from that at the end of 2020.

In 2021, our support projects for independent artists helped them create and promote music, as well as realise commercial value.

• In late November 2021, we launched "Project Cloud Ladder 2022," upgrading our independent artists' project with enriched traffic and commercial support. We firstly extended our independent artist identification system to music arrangers and producers, in addition to singers and composers/lyricists. Comprehensive support projects such as this one help nurture talent across the value chain of music development and production, further enriching our music ecosystem.

UGC content. In 2021, we continued fostering our UGC content ecosystem through constant innovation and product improvement across multiple content formats, including but not limited to Moments (picture/text), Hot Topic, Podcasts (audio) and Mlogs (video/picture). We also developed multiple assistant tools to facilitate UGC creation on our platform, further enhancing our UGC ecosystem and users' engagement. Furthermore, we have accumulated 3.1 billion UGC playlists on our platform. Our unique user base and supportive community culture makes our UGC content unparalleled in the market.

In-house music. In 2021, we made progress with our in-house music production initiatives, which further diversify and differentiate our content offering. Some of our popular in-house music includes "Dislocation of Time and Space" 《錯位時空》, "Take My Heart" 《以愛為囚》, "Masquerade" 《假面舞會》 and "Delete It" 《刪了吧》, demonstrating our ability to produce hit songs in house.

Going forward, we plan to bring more quality content to our platform to augment our music library, while working together with other industry players to benefit all music lovers.

Future Development

We seek to further expand the boundaries of our platform and focus on long-term growth. To that end, we plan to implement the following strategies over the next three years:

(a) Relentlessly innovating our products and services. We will continue to relentlessly innovate and refine our products and services while deepening our understanding of users' evolving needs and preferences. By creating a more intelligent, thoughtful user experience, we believe we will further strengthen our ability to attract and engage users and to increase their loyalty and commitment to our products and services. We will also continue to enrich and diversify our music and music-inspired content to deepen our connection with our users and strengthen our market position. At the same time, we will actively explore new business models to keep our finger on the pulse to ensure that we remain adaptive to trends in the online music entertainment industry.

(b) Further developing our community. We will focus on providing more personalised and diversified music and music-inspired content to our users, while continuing to encourage and empower them to create content. In particular, we will uphold our commitment to supporting independent artists, attracting and cultivating them by leveraging our unique, engaging community culture, organising various online and offline events, and inspiring them to continually create high-quality content on our platform. We are committed to improving user engagement and deepening users' connection with each other and with our platform. By further stimulating user participation and content creation, we believe we are able to organically grow our user base, increase user stickiness and improve paying user conversion.

(c) Continuing to invest in technological capabilities. We will continue to invest in improving our technological capabilities to better understand our users and improve user experience. In particular, we will invest in research and development for artificial intelligence, machine learning and data analytics to gain more insight into our users' needs and preferences and to refine our ability to make personalised content recommendations. At the same time, we will continue to invest in and upgrade our AI-enabled creative assistance technologies to empower independent artists and users in their creative pursuits. We may also explore virtual reality and augmented reality technologies to offer a more engaging experience of music and music-inspired content, especially in our music-inspired social entertainment services space.

(d) Pursuing win-win collaboration with our partners. Leveraging our brand, user base, community culture and technological capabilities, we will continue to deepen our collaboration with a variety of partners, such as content partners, brands and advertisers and technology companies, to strengthen our synergy with them and to achieve more win-win situations. For example, we are able to achieve further content enrichment and revenue diversification while empowering our partners with our valuable user and content pool. We will seek to explore new business models with existing and potential partners to realise the steady, long-term growth of our platform.

(e) Further diversifying our monetisation capabilities. In response to the continuously evolving needs of our users, we will continue to leverage our innovations to explore new monetisation channels, further diversifying our sources of income and realising the commercial potential of our platform. We will continue to enrich our content offerings and commercialise our platform. For our online music services, we will continue to strengthen our leadership position in music streaming services through diversified music content offerings that appeal to our users. For our social entertainment services, we plan to expand our offerings of music-inspired content, such as audio and video live streaming content by attracting premium performers to our platform. We will also promote our paid content and services available in our community and therefore increase the number of paying users.

About Cloud Village Inc.

Launched in 2013 by NetEase, Inc. (NASDAQ: NTES; HKEX: 9999), Cloud Village Inc. (HKEX: 9899) is a leading interactive music streaming service provider in China. Dedicated to providing an elevated user experience, Cloud Village Inc. provides precise, personalised recommendations, promotes user interaction and creates a strong social community. Its focus on discovering and promoting emerging musicians has made Cloud Village 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 http://ir.music.163.com/ 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 adjusted net loss 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 Village Inc.
music.ir@service.netease.com

Media Enquiries:

Li Ruohan
NetEase, Inc.
globalpr@service.netease.com

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