Tencent Music Entertainment Group

Good evening and good morning. Welcome to Tencent Music Entertainment Group's fourth quarter and full year 2022 earnings webinar. TME announced quarterly financial results today after market close. An earnings release is now available on our IR website at ir.tencentmusic.com, as well as via Newswire services. Today, you'll hear from Mr. Kushan Pang, our Executive Chairman, who will start the call with an overview of our recent updates. Next, Mr. Ross Liang, our CEO, and I, Tony Yip, a CSO, will offer additional thoughts on our product strategies, operations, and business developments. Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forelooking statements. Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in the company's earnings release and filings with the SEC. At this time, all participants are muted. After management's presentation, there will be a Q&A session. For participants who have dialed in by phone, please press five to ask a question. If you are accessing the call from Tencent meeting or VOOF meeting application, please click the raise hand button at the bottom left. And please be advised that today's webinar is being recorded. With that, I'm pleased to turn the call over to Kashin, Executive Chairman of TME.

Kashin. Thank you, Tony. Hello, everyone, and thank you for joining our call today. Looking back on 2022, firm execution of our dual-engine content and platform strategy viewed solid progress in a fast-changing macro environment. With a keen focus on high-quality growth and product innovation, as well as our highly effective cost optimization measures, we led the industry in the rebound of bottom-line growth and delivered steady growth in online music subscriptions throughout the year. Our diversified suite of monetization tools expanded and made progress during the years such as ad support mode, long-form audio, as well as audio live streaming, and our international expansion, among many more. With our confidence in the long-term prospects of the company, we had completed the US dollar 1 billion shares buyback program approved by the board in 2021. Looking ahead into 2023, as we are repositioning ourselves to better capture future growth areas, we currently expect our quarterly revenues from online music services will exceed those from social entertainment services at some point within this year. Meanwhile, with our relentless focus on executing our growth strategies and operating efficiencies, We are confident to achieve year-over-year growth in total revenues and profitability, as well as continuous improvement in user quality in 2023 while fueling the thriving user industry. Next, I would like to talk about remarkable achievements we have made in many aspects of our business's build-up point, our insistence on excellencies and innovation. One integral part of our strategy in 2022 was to continue improving TME's content ecosystem. First, we are building extensive collaboration with top artists, labels, and industry partners, both at home and abroad to bring our users and artists most compelling content and experiences. We have recently reached an agreement with JDR to extend our close strategic partnership and will continue to provide our users with the high quality music created by JDR, accentuated by the extraordinary experience on our platform in the fourth quarter. we deepened our strategic cooperation with leading records such as BEAM Music , providing users with songs from May Day and other renowned singers. Our flourishing library in various music verticals also reinforced our reputation as a go-to destination for music lovers. Importantly, we began extensively teaming up with Billboard, the industry bellwether. In addition to co-produce the playlist, we jointly released the 2022 Annual Music Report, which attracted participation from a record high number of unique visitors. Most recently, we announced the integration of TME Unichart on Billboard as its only music chart for Mainland China, introducing Chinese music to a global audience. Second, as we strive to increase the breadth and depth diversity of our music library, our ability to empower original content production has significantly improved with new tools launched. We have been investing in intelligent tools to support music-related content production with technology and have delivered promising results. With virtualization setting the trend, one strategic move in 2022 was to build a lineup of virtual performers In the fourth quarter, we unveiled our first hyper-real virtual pop idol, Lucy , who is also the whole music presenters for today's call. With a record-grade, automatically generated vocal print developed by PME, Nira Labs, Nira Singing Engine, Tianqin ShiYanShi de QinYunYiQing. Lucy, as a highly productive singer, has created three chart-dominating original songs across different styles within just one month of her debut, and has already received partnership interest for fashion shots or joint performances from a broad array of global brands, including Elle, Coca-Cola, and KFC. At the forefront for cutting-edge virtual idol field, our virtual performers also include Xiaoqin, Sanbao and Anke, who we brought to life with original content, unique voices, dance moves and more. Musicians are also increasingly flourishing on our Tencent Music platform. thriving content prosperity both on our platform and in the industry. By the end of fourth quarter, we have empowered our indie musicians to create more than 2.3 million musical works. Meanwhile, we consistently pay close attention to music ecosystem development. In the fourth quarter, we launched more smart features and tools for indie musicians to accelerate song composition and release, and foster deeper interactions with their fans. For example, in December, we unveiled a record release feature, which allows indie musicians to upload their original albums and earn revenue from listeners who want to show extra gratitude in addition to album sales. What's more, the tech tools we launched during the quarter enable our musicians to generate lyrics and album covers automatically, as well as assist in singing enhancement and song evaluation. all of which help form a modularized and automated music production process. We are proud that our end-to-end services have been instrumental in realizing a year of harvest for the creation of close to 1,000 original blockbusters. leading the streams exceeding 100 million each in 2022. In the fourth quarter, the hit song, Grant Me, Shi Wo, dominated trending lists on our platform and took the market by storm. ranking in nearly half a billion streams. Another hit was turned into fireworks and fall for you, which has been extensively used as background music and generated over 5 billion social media discussions. Meanwhile, we deepened our collaboration with the Tencent ecosystem and launched a total of 111 songs in the gaming and animation category in 2022. A number of our co-produced songs have garnered awards this year. Notably, Fairy Tale Love , made for peacemaker elite He Ping Jing Ying, was among the finalists for the best original songs in the mobile video game category of the 13th Hollywood Music in Media Awards. But behind this high-quality musical work, more up-and-coming artists are finding opportunities and stages to shine and realize their music dreams on the back of TME's all-round promotional resources. One example in the fourth quarter was the strategic musician's partner Recultivate, Crystal Chen . We invited well-known producers to launch her first EP from which the song, Skylights, Tian Fang topped the QQ Music's best new release music chart, helping her build her profile as a high-quality singer. Another standout fan was the campus musician Pan Yuqi, who was featured on the cover of Billboard's December issue with her first single, Let Us Alive, and also came in the third place in 2022 Sing China, with our co-chair. In addition, we collaborated with Coca-Cola to create a large-scale New Year's Eve music event and promote emerging musicians such as Pan Yuqi to the world stage through WeBoss global network. Many newly-joined musicians have grown quickly into rising stars with our support, representing just a few of our success stories among a strong pipeline of emerging talents we are grooming to fill the thriving music industry. That concludes my review of our growing content strategy. Now I would like to turn the call over to Ross, who will share more about our platform updates. Ross, please go ahead.

Thank you, Kashen. Hello everyone. With our refined mission in 2022 to create endless possibilities with music and technology, 2022 was a year of our continued exploration for TME. We stepped up creative efforts to satisfy our users' nuanced and diverse music tastes and to provide all-around musical companionship to our users through each of our four entertainment pillars, listen, watch, sing, and play. We have been deploying and developing breakthrough AIGC tools to further improve music-related content creation and enhance production efficiency. In addition to the Lyrai singing engine, which we used to develop our virtual idols such as Kashin mentioned. We rolled out the Muse engine in the fourth quarter, which enables automatic large-scale music posters production based on melody and lyrics. We have also expanded use cases for our patented technology, to launch several popular audio books, read by the synthetic voice of Yang Chaoyue, including the Gray Robber's Chronicles . What's more, ahead of the new year, receivers of QQMusic's newly launched VR greeting card can walk into the gift generated automatically and receive blessings as avatars in an exquisite virtual space. In the future, we will continue to explore the application of large language models in the field of pictures, text, video, and other content, as well as music recommendation and search to meet the massive demand for music-related content. Next, one of the biggest advancements in the year was to holistically improve our sound quality and sound effects and bring users a clearer and more vivid listening experience, which also contributes to the growth of music subscription as well as we are adding this compelling privilege to our memberships. For example, nearly half of our QQ Music music tracks now support a superior quality or above, and our high-rise standard has also been upgraded to high-rise loose-lice, high-rise , which parallelize the top tier studio qualities for a mass-mass resolution of 192 kilohertz, 24-bit. Second, we continue to optimize our preparatory technology for the premium sound series. Launching premium master type ZhenPin Mudai, premium surround sound ZhenPin QuanJingSheng and premium sound quality 2.0 ZhenPin YinZhi 2.0 to enhance sound clarify and expressiveness. We also extended the application of these premium sound quality features to TME Live's online concert, as well as Richie Sakamoto's concert. As we concentrated on building a new benchmark in sound quality for the domestic streaming industry, more users are opting for songs with high sound quality. On QQ Music, their number exceeded 5 million on a daily basis, totaling nearly 100 million daily streams. We also launched and enhanced a number of features to allow users to flexibly customize their listening experience. Google Music and QQ Music all unveiled a pitch and tempo alteration feature, ,, with which users can remark their favorite songs. Our algorithm upgrades also contributed to a more personalized listening experience, leading to sustained healthy year-over-year growth in QQ Music and Kugel Music's recommendations, streaming volumes, and time spent per user in the first quarter. Specifically, QQMusic's recommendation inspired more listening behavior than searches, which continues increase in the percentage of streams coming from our recommendation. Another focus in 2022 was to enrich users' virtual experiences on our platforms, particularly through comprehensive collaboration with Weixin video accounts in the Tencent ecosystem. First, through TME Live, our performance brand which hosted 63 online and offline events throughout 2022. We held hands with Weixin Video Accounts to innovate interactive formats and build new avenues to distribute music and video content. For instance, at Han Ken Lee, Li Keqin's concert, nearly 20,000 users cast their votes on either our platform or WeChat video accounts to select the final encore. We also joined attractive over 23,000 paying viewers to watch the eminent Japanese pianist, Ritchie Sakamoto, Banben Longyi's solo concert. which is the highest number to date among TME Live's musical instrument performance. Second, we further applied our song recognition feature to automatically identify the background music of videos from WeChat video accounts and direct users to QQ Music to listen, set their WeChat ringtone, or use in their own videos. What's more, by the end of 2022, over 60,000 Indian musicians on our Tencent Musician platform have used the one-click release feature to publish their original songs on WeChat video accounts. Beyond professional music content, during the fourth quarter, we also promoted youth engagement by allowing our WeChat users to share music videos of their own scene on WeChat video accounts. The head song on WeChat video accounts, Good Morning, 轮回, 早安, 轮回, racked up nearly 100 million music streams on TME's platforms in the fourth quarter. a stronger testament to the vibrancy of our joint built music ecosystem with virtual elements. The singing features have also been upgraded to create more enjoyable experiences for our karaoke users. In the fourth quarter, we rolled out several real-time features, namely the one-player model, SingMaster , two-player model, Karaoke King 2.0 and the multi-player model, Microm to install users with the excitement of simultaneous singing and computation. On top of these new entertainment choices, during the fourth quarter, we also continued to engage V-SYNC users with SYNC effect updates, such as the vocal enhancement, 人声增强 filter, for V-SYNC VIP users to create a studio-quality acoustic immersive SYNC environment. Music lovers, particularly the young ones, are getting attracted by our music-based virtual use cases. At TME Land, our immersive virtual theme park, 8 million users in their avatars join Coca-Cola and KFC's virtual parties and celebrate a super new year alongside artists joining the fourth quarter. We also released We Are Listening Together, We Are Yixi Ting Xiao Wo on TME LAN, which brings users' avatars together to listen to content in virtual scenarios such as camping, rooftop charts, and a New Year celebration. Lastly, to incubate a vibrant, young, and trendy culture community, we upgraded the Kugel concept, Kugel概念版, and the 播点音乐, two of our music products designed for Gen Z users. During the fourth quarter, these updates include more real-time interactive features to help the young generation identify people with shared music tastes and encourage them to actively create, share, and socialize. Thanks to the genuine swarm receptions and the adoption of their diverse functions, these two apps both tripled their MAUs year over year. With that, I'd like to give the floor to Tony to reveal our business operations.

Tony, please go ahead. Thank you, Ross. Hello, everyone. During the fourth quarter, the surge in COVID cases and churn of our casual users amid competition led to the year-over-year decline in online music mobile MAUs, along with cost optimization measures aimed at boosting monetization efficiency as a platform of scale. Meanwhile, we continue to strengthen our amortization capabilities with improved operating efficiency and have achieved high-quality growth in both subscription and non-subscription revenue during the fourth quarter. Most excitingly, our subscription revenue delivered healthy growth year-over-year and quarter-over-quarter. Reflecting our balanced approach, online music paying users, a high-quality user cohort, maintained a strong growth trend, and ARPPU also continued to improve sequentially for the third consecutive quarter and increased year-over-year. The strong paying user and ARPPU momentum was driven by our improved operating strategy leading to optimized content quality, more attractive member privileges, broadened sales channels, and more effective promotions. Subscribers to our super VIP membership, 超级会员, continued to grow during the fourth quarter as we expanded our offerings to provide premium sound quality and premium master tape and added a wealth of privileges such as long-form audio, digital album, and karaoke to the membership package. On the non-subscription side, its revenue also improved year over year and quarter over quarter during the fourth quarter. Revenues from our advertising business continue to recover quarter over quarter. Specifically, ad supported mode delivered strong performance during the quarter with sequential growth in its revenues. Through our Music with Brands partnership, leading advertisers, including Wu Liangchun, Coca-Cola, KFC, and JD.com, embraced TME Live and TME Land as innovative channels for musical format advertising in the fourth quarter, particularly given their appeal to young users. On the merchandising side, we worked with a wide range of A-list artists, including Lu Han, Lin Junjie, Wang Jiaer, Wang Yibo, Wang Yuan, Xue Zichen, Zhang Yixing this quarter, to release their physical albums, digital albums, vinyl records, or customized artist merchandise with Head Start benefits. Moreover, during the fourth quarter, we launched artists' collection cards, 明星典藏新光卡 , a new series of photocards as collectibles in Putao Mall. We commenced the rollout with Kiku, Ju Jingyi's card, which became highly sought after among young users, demonstrating our end-to-end content release advantage, spanning Head Start benefits, artist-related products, and multi-channel promotion. Moreover, we have strengthened our long-form audio content offerings with more audio books based on novel IPs and self-produced paid children's literature. Subscribers doubled year over year to surpass 10 million during the fourth quarter, driving solid year-over-year growth of revenues from long-form audio subscription. Our IoT service MAUs achieved double-digit growth year-over-year thanks to our expanded model coverage as well as a diversified content library with Dolby Surround Sound library and TME live content added respectively on selective electric vehicle and smart TV terminals. Moving on to our social entertainment services. During the fourth quarter, as a result of macro headwinds, increased competition from other platforms, and the surge in COVID cases, social entertainment services, MAUs, and paying users declined year over year. Against this backdrop, we will focus on product innovation and content differentiation while exploring fresh ways to fulfill users' social entertainment needs. For WeSing, its multi-person singing room in both video and audio settings have continued to enrich real-time interaction scenarios on the platform, resulting in increased penetration rate and user time spent in these rooms. And we are planning to roll out the feature to our other platforms in the future. Meanwhile, we took the operation experience from our singing and social products and our proven monetization models to the international market, expanding our presence through both organic growth and M&A. Revenues from our overseas business continue to increase year over year in the fourth quarter. For live streaming services, though macro environment continue to wait on our revenues from traditional video live streaming, we focus on providing differentiated content and entertainment experiences to explore new value generators. Specifically, we are fostering a tighter connection between audio live streaming and our music platforms. Following the successful expansion into live streaming by QQ Music, Google Music has also started to build up its audio live streaming service, which has a huge growth potential given its massive music user base. What's more, leveraging our expertise in cultivating rising talents, we are creating more room for our indie musicians to grow into promising live streaming performers. For instance, in the fourth quarter, self-produced hit songs like the puppetry and echo helped their singers grow the number of fans substantially, thereby increasing both copyright revenue and live streaming income. Another example is our musician Li Wai. His original song, Worthless Relationship, 年价关系, has attracted high streaming volume and landed a spot on many of our music charts. As we are building a bridge between performers and their fan bases, revenues from audio live streamings increased by double digits year over year, with solid growth in paying users and ARPPU year over year. Last but not least, during 2022, we continue to fulfill our social responsibilities with an innovative model to translate music's emotional expression and influence into social practices. The spirit of Chinese song, 中国韵, our core cultural project, is now in its fourth year. In the fourth quarter, it launched an initiative for the Guangxi music style and partnered with singers Hu Xia and Liu Yuxing to promote Chinese traditional culture through the power of digital music. In December 2022, many of the musical works from the Spirits of Chinese Song 2020, a public welfare album we released previously, officially entered the first digital collection of the National Archives of Publication and Culture, supporting the preservation and inheritance of Chinese culture. In conclusion, we exited 2022 with solid performance across our business, where we made significant advancements in content and platform upgrades, refined user experience, pushed forward with monetization models, and optimized costs, all together laying a solid foundation to fuel growth in revenues and profitability into 2023. As we move forward, we will remain committed to creating endless possibilities with music and technology to blaze a new trail in 2023 and in the years to come, while contributing to better fulfilling our responsibilities as a key music industry player. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.

Thank you, Tony. Hello, everyone. I'll discuss our results from financial perspective. The fourth quarter of 2022 marked another quarter to evidence our firm commitment to cost control and operating efficiency improvement, with continuous growth in RFIs and non-RFIs profit for the fourth consecutive quarter. In Q4, ARF's net profit was RMB 1.2 billion. Now ARF's net profit was RMB 1.5 billion, up by 71% year-over-year and by 6% sequentially. Total revenues were RMB 3.4 billion, up by 0.8% sequentially. In Q4 2022, music subscription revenues grew to RMB 2.4 billion, up by 21% year-over-year and by 5% sequentially. Online milk pay users grew to 88.5 million, up by 16% year-over-year, representing a 3.2 million net ads sequentially. Mass up in Q4 was RB 8.9, up by RB 0.1 sequentially, and by RMB 0.4 from Q4 2021. The strong paying user and ARPPU growth were driven by more attractive member privileges, such as improved sound quality, broadened sales channels, more effective promotions, optimized content quality, and high-quality services. This also resulted from our ongoing efforts to cultivate users' willingness to pay for music and improvement in operating phases. Revenues from advertising continued to recover and grow sequentially as market started to recover and we launched new monetization models. To give our users more options, we launched AD supported model and provided them more inventory, which contributed to our revenue growth. With increased interest in innovation advertising channels, TME Live and TME Land became popular and have attracted many leading advertisers for music format advertising. We remain confident about the long-term growth potentials in advertising business. Social entertainment services and other revenues were RMB 3.9 billion, down by 18% year over year. due to the evoking macro headwinds, computations from other platforms, and the surge in COVID-19 cases in the first quarters of 2022. To adapt to the changing environment and to stabilize revenue scale, we continue to differentiate our content offerings by enriching our visual interactive product offerings and the cross-platform collaboration. Growth margin in Q4 was 33%, up by 4.2% year-over-year, and by 0.4% sequentially. The increase was primarily due to improvement of monthly ARPPU for music suppression, growth of paying users, lower revenue sharing fees for live streaming services, and improved operating cost efficiencies. Now, moving on to operating expenses. Total operating expenses from Q4 to RMB, 1.4 billion, or 18.3% of total revenues, down by 5.6% from 23.9% of total revenues in the same period last year. Selling and marketing expenses will be 266 million, down by 65% year-over-year. And this is our fourth quarter, with more than 50% cut in selling and marketing expenses on a year-over-year basis. Although the reduced spending on user accretion had impacted on our MAUs, our core music subscription services continued its rapid and health growth trajectory. We continue to closely monitor the ROI of each promotion channel by recognizing external promotion channels and the leverage of internet traffic to attract users and promote our brands. General and administrative expenses were RMB 1.1 billion, up by 26% year-over-year. The increase was mainly due to increased investment in research and development in areas such as international food range, non-formal audio, AD-supported model, etc. Our effective tax rate for Q4 was 12.2% compared to 11.5% in the same period of 2021. The increase in effective tax rate was mainly because some of our entities are entitled to different tax benefits in 2021 and 2022. OQ4, our net profit and net profit attributable to equity holders of the company were RMB 1.2 billion. Non-RFI's net profit and non-RFI's net profit attributable to equity holders of the company reached a rate of high to RMB 1.5 billion and RMB 1.4 billion respectively. Non-RFI's net profit margin was 20.1%. Our basic and dilute earnings per ADS continued to grow in the fourth quarter of 2022. Basic and diluted earnings per ADS were RMB 0.73 and RMB 0.72 respectively, up 121% and 125% on a year-over-year basis. Non-office basic and downloaded earnings per ADS were RMB 0.92 and RMB 0.91 respectively, up 80% and 82% on a year-over-year basis. Such results demonstrate our initial success on operating efficiency improvement, as well as the impact from share repurchase program. As of December 31st, 2022, Our combined balances of cash, cash equivalents, term deposits, and short-term investments were RMB 27.4 billion as compared with RMB 25.4 billion as of September 30, 2022. The increase was due to our health operating cash flow of RMB 2.1 billion for the fourth quarter of 2022. Such combined balance was also effected by the change in the exchange rate of RMB to USD at different balance sheet states. Next, I'll briefly discuss our performance for 4 years 2022. Total revenues were RMB 28.3 billion, down 9% year-over-year. RFS net profit was RMB 3.8 billion. Non-RFS net profit was RMB 4.9 billion, up by 13% year-over-year. Revenues from online mail services were RMB 2.5 billion, up by 9% year-over-year, to which music subscription revenue was the largest contributor. Our music subscription business grew rapidly throughout the year with annual revenues of RMB 8.7 billion and a 19% annual growth rate. Revenues from social entertainment services declined by 20% year-over-year due to the changing macro headwinds, increased competition, and the impact related to COVID-19. Gross margin in 2022 was 31%, up by 0.9% year-over-year. The increase was primarily due to our effective control of content costs, including revenue-showing fees for allowing for live streaming services and improved operating cost efficiencies. Total operating expenses for 2022 were unbeaten, 5.6 billion, down by 70% year-over-year. Particularly, selling and marketing expenses in 2022 decreased by 57% from 2021, as we reduced inefficient use-acquisition costs and promotion activities during the year. Net profit and net profit attributable to equity holders of the company was RMB 3.8 billion and RMB 3.7 billion respectively. Non-office net profit and non-office net profit attributable to equity holders of the company was RMB 4.9 billion and RMB 4.7 billion respectively. Finally, I'll close with some comments on Outlook for 2023. Build upon the success of effective cost and expense controls and operational efficiency improvement in 2022. We will focus on monetization expansion and revenue growth in 2023 while keeping cost and efficiency management. Our core online music services, particularly music subscription, will continue to be our key growth driver. Paying user and monthly up are expected to continue to grow. Meanwhile, we continue to expand the suite of monetization tools, such as AD-supported models, physical elements, customized artistic merchandise, super VIP memberships, etc., and expect them to become important revenue contributors in 2023. For such untamed services, with challenges from competitions and changing micro-headways, We expect to face pressures in keeping revenue still and will continue to invest in audio livestream and extend our international footprint for long-term growth. Furthermore, we will keep investing in high-quality contents and original content productions, as well as new products and technologies such as AIGC. We are confident about the long-term health growth of our company and the overall music industry and remain focused on providing high-quality investment returns for our shareholders. This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Hello, everyone. If you are downloading by phone, please press 5 to ask a question and then press 6 to unmute yourself. If you're accessing the call from the Tencent meeting or Vault meeting application, please click the raise hand button at the bottom left. For the benefits of all participants on today's call, please limit yourself to only one question. And if you have additional questions, you can enter the queue. If you answer questions in Chinese, please repeat them in English. And today's first question comes from Alicia Yap from Citigroup. Alicia, your line is open. Please unmute yourself and go ahead.

Hi, thank you. Good evening, management. Thanks for taking my questions and also congrats on the solid quarter. So with TME concluding 2022 with improving margins and also the fundamental trends, I think Sherry just now also commented a little bit on the 2023 outlook. So if management can elaborate a little bit more detail in terms of um you know overall what are you expecting for the online music revenue growth specifically uh is there any change on your music subscriber growth target or any um ar ppu trend that you are expecting and also for the social entertainment do you still expect the revenue to experience the year-over-year declining trend into the 2023 thank you

Thank you for your question. So overall, we currently expect that 2023 will be a year of positive growth for both top line revenues of around mid single digit percentage, as well as a bottom line net profit of around low teens percentage. In addition, we expect quarterly revenue from our online music services to exceed that of social entertainment services to become a primary source of revenue during some point within this year. This is driven by both China's pro-growth policies at the macro level, as well as our continued investments to strengthen our operations. In terms of online music, we expect subscription revenue to continue to deliver healthy growth of over 20% year-over-year, driven by both growth in paying users as well as ARPPU. In addition, advertising, long audio, IoT services are all expected to contribute meaningfully to the growth. In terms of social entertainment, while traditional video live streaming continue to face a competitive pressure, our audio live streaming and international businesses can partially compensate by delivering healthy growth. That means social entertainment is expected to see a milder rate of decline compared to last year. And combining all of the above with our continued focus on cost management to improve efficiency, we currently expect net margins to also improve into 2023. Thank you.

Our next question comes from Alex from Morgan Stanley. Alex, your line is open. Please unmute yourself and go ahead.

Congrats management on very strong results. My question is related to growth margin trend in 2023, maybe even longer. In 2022, because we have New Say growing faster than social segment, we are still able to achieve growth margin expansion. And how sustainable is this in 23, maybe even 24? As music segment, for now, the gross margin is still lower than the social segment. And music continues to grow faster than social. So how will our gross margin profile change over the next one to two years? Thank you very much.

Okay, I will talk about the gross margin. Gross margin is 33% in Q3, increased by 4.2% over year, and increased by 0.4% sequentially. There are several positive factors on our gross margin. First, the increase of net ads, monthly up of music suppression, and the growth of non-subscriber revenue such as digital albums, artist-related merchandise, Long-form audio revenue will all have positive impact on our gross margin. And second, decrease the efficiency promotion actives and increase the content quality of performance. Revenue showing ratio of live streaming have been controlled and decreased on year-over-year basis. And the third, we increased RC requirement of content cost and optimize the model of RC. We restricted the agreements with some music labels, tried to switch MG model to revenue sharing model, or got more reasonable MG, and we have the positive feedback. And the fourth, the optimized technology and the operation strategy related to the device and the storage capability and the improved utilization of our service and equipment. Our operational costs decreased year over year based on the sequestering. While the decrease of social entertainment revenue and the change of revenue mix in social entertainment revenue has the negative impact on growth margin. Looking forward to 2023, all these positive factors will continue, and the negative factors will also continue. We will continue to expand the suit of monetization to us, such as AD-supported advertisement, artist-related merchandise, super VIP membership, and we expect our online music revenue will help keep growth. So we will continue to focus on increase efficiency of all business units and tighten all cost terms control in 2023. So we expect our source margin will be increased on year-over-year base in 2023.

Thank you. And our next question from Lincoln Kong from Goldman Sachs. Lincoln, your line is open. Please unmute yourself and go ahead.

Thank you, management. Congrats on the good result. My question is on the advertising business. you know, how do we see so far, let's say here today, the enterprise in demand recovery for us, and we talk about this ad support, you know, model. So in terms of the new format of ads or in creating more ad inventory, how do we think about our progress here, especially how to better monetize our, you know, big MAU in 2023? What's our, you know, outlook here?

Thank you for your question. You know, we continue to see a recovery in the advertising revenues, especially following the reopening post-COVID. The splash screen ad continued to recover at a healthy pace. In addition to that, ad-supported mode advertising continued to ramp up and currently account for roughly about mid-teens percentage of the advertising revenue. And then thirdly, in terms of sponsorship advertising, while during the fourth quarter it temporarily weakened due to COVID, we do expect with the reopening there to be many more live events and as a result, sponsorship advertising opportunities. So all in all, we do expect this year to be a strong recovery year and a year of positive growth for the ad business. And then in terms of verticals, in the fourth quarter, given the e-commerce seasonality, we did saw a meaningful increase in the e-commerce vertical. And then in addition to that, internet services in general, food and beverages, consumer electronics, as well as local services are also verticals where we saw continued demand from advertisers.

Thank you. And our next question comes from Lei Jiang from Bank of America Securities. Lei Jiang, your line is open. Please unmute yourself and go ahead.

Thank you for taking my question and congrats on the results. My question is mainly regarding your self-marketing and investment plan in 2023. Since we have a pretty good cost control last year, so can you give us more color for 2023? Thank you. Okay.

About the selling and the promotion expenses, we have taken tight control to selling and marketing expenses in Q4 continuously, and resulting in a 65% decrease on a year-over-year basis. And we balanced MAUs and monetization when evaluating the healthiness of business. We focused more on measures such as level of user engagement, user retention rate, and paying users. We will further monitor ROI of each promotion channel and manage the internal and external resources more effectively, improve efficiency of selling and marketing expenses in the future. In 2023, selling and promotion expenses will be operated at a very low level and will be continued decrease on year-over-year basis, but the cutting degree will be limited compared to those in 2022. And in 2023, we will invest in the content promotion. So that will be a new way for our creating our MNUs.

Thank you. And our next question comes from Weixiong from UBS. Weixiong, your line is open. Please unmute yourself and go ahead.

Hi, good evening, management. Thank you for taking my question. I want to get some of your thoughts around AIGC. As management mentioned, we are exploring possibilities and leveraging technology in that area. So how do we assess TME's strategic positioning around AIGC? What are some of the potential benefits and business opportunities that we plan to pursue this year? And what could be the potential investments or cost implications related to that? Thank you.

Yes, we have been investing in the field related to AI. Of course, it is mainly due to the emergence of the large-scale model that will change some of our other applications. Of course, TME is mainly based on top-level applications, and we will continue to cooperate with Tencent Group. We will use a relatively advanced engine to drive our applications. These applications include... We will consider using dialogue-like song recommendations when recommending songs. When we create songs, we may also use such a mode to increase human interaction and to change the previous experience. In addition, we can see that in the production area of images, in terms of image and video, as well as in terms of voice. We are currently working on the music player. We are working on the app's icon. We are working on the lyrics poster. We are working on the music card. We are working on the music card. We are working on the music card. We are working on the music card. We are working on the music card. So in the coming year, we will put a lot of effort into a self-proclaimed LRM language model. Through our own research and development, we will be able to drive us in the field of dialogue related to music in the future, as well as in the field of images and video, including music, including our current songs, Now we can see that more and more large models are being used to generate music to reduce the threshold for music creators. So in summary, our current experience is to use LRM. The most important core logic is to reduce the threshold for many of our current segments, because it does not affect creativity. By increasing efficiency and lowering the threshold, we can hope that in the future, through AI-generated content, we can get a very sufficient application in our actual operation.

We've always invested in AI, in particular recently with a focus in LLM, large language models. Clearly that will lead to more applications. We'll continue to leverage partnerships with Tencent. Examples of our applications would include recommendation as well as playlists in a more conversational setting. Other examples would include music posters, greeting cards, synthetic voice, all of which are already currently being applied to our platform. Into 2023, we'll invest in our own R&D in LLM. to drive music-related conversational applications, and also to help musicians dramatically reduce the barrier to their creativity. And overall, that should result in more creativity and high-quality content, which is good for the overall industry.

Thank you. And our next question comes from Xueqin Zhang from CICC. Xueqin, your line is open. Please unmute yourself and go ahead.

Hey, thanks for taking my question and just a follow-up on APU of milk subscription business. We noticed that the APU ground milk side continue to improve this quarter and how does management think about the APU momentum in the first quarter and the in 2023. You mentioned in the prepared remarks, it may be driven by optimized content quality, more attractive member privileges, more sales channels, and more effective promotions. So could you give us more colors on this way? Thank you.

Well, the short answer is yes, we do expect the output to continue to improve driven by all the things that we mentioned. So a combination of continued improvement in the quality of our membership offering, the quality and the comprehensiveness of the privileges in our membership. you know, more broadened sale channels, which include internal kind of within platform channels, as well as external outside of our platform channels, as well as more effective promotions. You know, and by more effective promotions, obviously that would lead to a higher ROI when we do engage in promotions, which are helpful to ALPP.

Thank you. And our next question comes from Thomas Strong from Jefferies. Thomas, your line is open. Please unmute yourself and go ahead.

Hi, good evening. Thanks, management, for taking my questions and congratulations on a solid set of results. My question is about the competitive landscape. Given that in terms of the sales and marketing spending and margin improvement, are we seeing the competitive landscape more stabilized and there's less threat from the short-form video And my second question is about online music services surpassing social entertainment at some point for this year. I just want to get some color with regard to the long-term revenue mix. How should we think about online music services revenue contribution in the long term? Thank you.

I'll tackle the second part first about the revenue mix. As we mentioned, we do expect the online music services revenue to surpass social entertainment. And so clearly what that would mean over the long run, we expect that to continue to the long run. So we do expect the online music services to be the primary revenue source going forward. as opposed to being a one-off effect. Within online music services, obviously in the fourth quarter, you've seen that music subscription grow just north of 20%, and then non-subscription revenue grow at a faster pace than that. primarily due to the low base in 2021. And then looking into 2023, we obviously think that the effects would be slightly different. Music subscription would grow at over 20% on a year-over-year basis, as I mentioned. And then non-subscription revenue, you know, we will see pockets of growth in the areas of advertising, which is growing very well, long audio, IoT services, but somewhat offsetted by volatility in digital album, as well as sub-licensing.

Thank you. And our next question...

And also with the unique platform and content strategy of TME, TME is now starting to have some monetization for the content productions, content licensing, and also advertising sponsorship with our live event as well. And also, as we mentioned, we started to have some artist-related merchandising revenue, which can help us to explore further e-commerce opportunities. Those will also help us to be some new revenue stream in the future.

Okay, thank you. And our next question from Charlene Liu from HSBC. Charlene, your line is open. Please unmute yourself and go ahead.

Thank you so much. I have two questions. First, can you share your expectations for subscriber growth for paid music? And how should we think about impact from resumption of offline entertainment First is willingness to pay as macro recovers pose reopening. That's the first question. Separately on gross profit margin, I think management had mentioned that it still has room to improve further. What could be a midterm target for GPM? And also I think kind of subset to that question is how would investment into LM impact us from a P&L standpoint? Thank you so much.

I'll take the first part on the subscriber growth, and perhaps Shirley can add a bit of comments around gross margin. Our subscriber growth has been following a secular trend. So irrespective of COVID, irrespective of reopening, we continue to see a secular trend behind the subscriber growth. Our focus is much more on subscription revenue as a whole, which is driven by both paying user growth as well as ARPPU. Barry, you mentioned offline and more offline activities. I think bear in mind that that also benefit us in the form of advertising monetization, as Kashin mentioned, because we organize a vast number of offline music events and we generate a meaningful amount of sponsorship advertising revenue as a result. During the fourth quarter, that part of the business actually saw some temporary impact because of COVID. Now with the reopening and with more offline activities, we actually expect there to be a positive impact to the sponsorship advertising revenue as a result. So that would help act as a second growth driver to our online music revenue in addition to subscription.

And about the gross margin of music, we believe we can have the same gross margin greater about came to the Spotify. And for the overall gross margin of our company, we believe in 2023, our gross margin will be increased and higher than that in 2022. And in the long term gross margin, our target will be 5% that is mentioned in our IPOs.

Thank you. And we will take our last question today from Xueqing Zhang from CICC. Xueqing, your line is open. Please unmute yourself and go ahead.

Hey, thanks for another question. And one more question on labels cooperation. And today we announced that TMU reached an agreement with GVR and B-Music. So can management give us more color on the future trend on labels collaboration? And how does it affect our growth management? Thank you.

Oh, yeah. TAM used to prefer the partners for many music labels and artists domestically and also internationally. We insist to protect the IP right and we'll try our best and be clear to drive the healthy development of the Chinese music industry. So currently, we provide the most comprehensive music library and also the best coverage of music content for users in China. I think that in the continuing in a long-term relationship, we will continue to work with the music labels in content co-productions and also with our meeting technologies that can help us to do the promotions of the music in a better manner. Besides, we are also focusing on some of the live events. As the Chinese market is now reopened, we are seeing that there's a lot of live event opportunity coming up. So for TME Live, that we are doing extremely good quality of music shows in last year. Most of them are online, but this year we are going to have more offline events in partners with our music labels partners. And we are expecting that we can have more shows like the top-tier artist concerts, music festivals, and also some live house events as well. So I think that we have demonstrated a really good long-term partnership with most of the music labels all over the world, and we are the trustworthy and also the preferred partners of them. So we have expected to have more in-depth cooperation coming in the future.

Thank you. We are approaching the end of the conference call. I will now turn over the call to our host, Mr. Tony Yap, for closing remarks.

Thank you, everyone, for joining us today. If you do have further questions, please feel free to contact our IR team. This concludes today's call. Thank you and talk to you next time.