Tencent Music Entertainment Group

Good evening and good morning. Welcome to Tencent Music Entertainment Group's first quarter 2023 earnings webinar. TME announced quarterly financial results today after market close. An earnings release is now available on our IR website at ir.tensormusic.com, as well as via Newswire services. Today, you'll hear from Mr. Kashin 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 5 to ask a question. If you're 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. We are off to a great start in 2023. Our strategic emphasis on quality growth propels strong growth of our online music revenues in the first quarter. As the revenue size of our online music services has now catch up with social entertainment services for the first time, it signifies that our long-term commitment to developing a sustainable online music business model is bearing fruits. In addition to a healthy increase in our total revenues, our focus on efficiencies optimization also drove robust net product growth. Content is the bread and butter of our businesses. We continue to deepen partnerships with top music labels and artists, so as to enrich our iconic music catalog and vertical content offerings, as well as to expand our users' benefits. we established a strategic collaboration with Rock Records, Guanxi Changpian, providing musicians with iconic Chinese songs and original soundtracks of popular TV dramas, such as the works of Zhang Zhengyue, Li Miuqiao, Zhou Huajian, Jonathan Lee, Li Zhongsheng, Wu Bai, and Mayday Wu Yutian. We also strengthened our strategic partnership with Li Yonghao and Fenghua Qiu Shi, whose master artists including Luhan and Black Panthers, K-pop band, as well as with Hype from South Korea, who has artists such as BTS and Seventeen on his roster. Additionally, with the feature of a seven-day head-start period, our partnership with JJ Lin for his new digital album was well-received among users. The new album also broke his previous sales record in terms of GMV on our platform. On top of that, we also reached a collaboration with well-known artists including Kun, Caixi Kun, and All In, leading me. for head-start benefits on their new songs releases on other areas, such as merchandise saving sales, online and offline performances, and artist-band interaction events. As for music verticals, to satisfy the increasing demand for rap music among younger audiences, we enriched our rap offerings by adding a number of new songs from heavyweight rappers, such as Mark Siwei. Meanwhile, we reinforced our competitiveness in different genre verticals, such as electronic music, gaming, and classical music, among others. In parallel with our efforts to expand our content library, we have facilitated the production of high-quality original content, unlocking more opportunities in the growing music industry. We have taken it upon ourselves to foster creativity and nurture artists for a rich variety of support programs, stage performances, and modernization opportunities. With dedication to amplifying the influence of musicians and their works, with this goal in mind, we participated in and promote the artist's growth through our Tencent Musician platform, which offers abundant resources and diverse monetization avenues. As a result, the number of active musicians and singers who release new songs kept growing sequentially on our platform during the quarter, adding to the vibrance of our ecosystem. For example, we unveiled a new initiative, the Emerging Force Programme to discover musicians with high potential and encourage the production of high class music. The programme offers a wide range of IT services, including travel support, weaponry sharing, and on and offline performance opportunities. By increasing the exposure and popularity of quality songs, along with amplifying artists' influence, we enhanced the virtuality of the musicians' ecosystem on our platform. As of the first quarter, we had assisted 260 up-and-coming musicians in reaching their first million streams and helped multiple artists make their debut performance on stage. Notably, after joining our Amazing Force program, the singing songwriter, Zhang Yuxian, and slow-mo, Ouyang Mingyang, both saw a stretch in their followers and streams. Going forward, we will continue to discover musicians with great potentials by bringing together top artists, producers, and music programs, particularly in bands, rap, and pop music letters. Recently, QQ Music also launched a customized homepage for musicians. Through this page, musicians can access data and insights in terms of streaming, followers, and comments. This can empower better management of song distribution and promotion. In addition, this page also provides up-to-date support resources and policies of our platform. Jackson Musician's Christie, Niu Jingwei, was one of the many success cases that demonstrate our powerful ability to cultivate and promote artists. In the first quarter, we signed her to our Tencent Musician platform, elevating her profile and promoting new songs through a variety of internal and external resources. As a result, the number of her followers more than doubled, growing from 50,000 to over 100,000 within just two weeks of her onboarding. With our diverse performance stage and all-round support in music production, we have been dedicated to elevating the influence of Christie and other aspiring indie musicians alike. Furthermore, we teamed up with Billboard China to hold our first original music contest, The One. Our collaborative contest is designed to discover emerging artists with the ability to produce quality original Chinese music. as well as to help expanding their global reach. To that end, we invited excellent singer-songwriters and renowned singers in China and abroad, including Grayson Chance, Lenka, Mika, and Tiawei Yuanyaowei. Among others, to inspire contestants to produce original music and assess their performances, through this cooperation, we will leverage Billboard's global resources, influence, and high international standards to provide talented musicians with end-to-end services, ranging from family evaluation, song release, worldwide promotions, and all the way to customized performances. Upon the solid foundation of our Tencent Musician platform, we are well positioned to effectively facilitate the production and promotion of original content. We are also excited to see that we produce a number of rock buster songs, creating many mega hits in the first quarter. For instance, Rose of No Man's Land by Xunlanxin has accumulated streams over 100 million, with its melody and lyrics paired with Twitter on our 5SYN platform. Not only did this song make its way onto several music charts, but also it garnered additional market exposure. We are writing a relay of friction stories inspired by its lyrics on short video platforms. Articles in the first quarter included OK Go, Yong Ji Da Ba Ba, Regret in the Wind, Feng Zhong De Yi Han, The Wind We Can't Hold, Liu Bu Zhu De Feng, Baby I Love You, Love on Fire, Ai Ru Huo, Sea and Sky, Hai Yu Tian, and The Wanderer. Excelling in producing prime original content, we have created an integral role in expanding IP values across the entertainment industry. As a case in point, we have created quite a few musical works for iconic films, games, animations, and other media. In the first quarter, we co-produced Josen's Chinese cover of the film song of Makoto Sinkai's Sinkai-chan movie, Susume Rinya-ji. This song ranked in over 100 million streams within only three weeks of its release. It also ranked first on the CMG Global Chinese Music Popularity Chart and topped the 12 other music charts. As you may notice, this song is also the whole music for today's earning call. Meanwhile, we continue to cooperate with the broader Tencent ecosystem, producing singles for 11 well-known games and four animations in the first quarter. Notable examples including Praying for the Mountain and the Sea, Qi Yuan San Hai, For Honor of Kings, Wang Jiu Rong Yao, and Light of Dawn, Li Ming de Guang, for Undone, Li Ming, Jue Xing, Sheng Ji, which are meticulously enhanced users' gaming and listening experience. Before I conclude, I would also like to highlight the progress of TME Live, our comprehensive online-merged offline performance brand. Amid the performance market recovery, we are exploring innovative ways to monetize and interact with users. TME Live is well positioned to capture this market opportunities via our online-merge-offline capabilities, allowing us to provide users with superior audio-visual experience anytime and anywhere. In the first quarter, we host a total of 29 online and offline concerts, including online concerts for Justin Huang, Huang Minghao, Cai Qi Kun, Meng Meiqi, Ren Xianqi, and Ju Zhengting. Notably, funds and rich sales in concerts received well-spread user acclaim, generating a total of 1.4 billion social media views and attracting almost 70 million unique visitors in the Tencent ecosystem. We also provided fans with the option to purchase custom merchandise while enjoying the shows. TME Live's unique performances format coupled with its high profile in the industry and with users, appeal to many well-known advertisers for sponsoring, such as PepsiCo, Yang Yuanqing, and JD.com. We also continuously increase our presence in the offline performance, particularly as the public shows a growing interest for offline activities. In the first quarter, we organized tours in cities such as Shenzhen, Changsha, and Hangzhou for musicians including Kola, Xiao Ku, Kafei Hu, Fa Lao, Liu Xijian, and the rock and roll band White Paper, Bai Pi Shu Yue Dui. To foster closer and more encouraging and more engaging connections between musicians and their followers, We encourage online audience to share their thoughts and feelings through online bullet charts during performances. Going forward, we will continue to explore the on and offline integrated performance formats, offering integral artist lineups and exciting music experience, evaluating our 10 ecosystem and user engagement, and first capture incremental monetization opportunities. That concludes the update on our growing content capabilities. Now I would like to turn the call over to Ross. He will share more about our platform strategies. Ross, please go ahead.

Thank you, Kashen. Hello, everyone. Moving on to our platform innovations. In the first quarter, we further refined users' music consumption experience. We are advancing our audio live streaming services. In addition, by further exploring large language models, we energize our platform ecosystem with a broader range of AIGC applications. and at meeting users' diverse and nuanced music tastes in new and exciting ways. On the front of users' music consumption experience, our efforts to enhance sound quality and effects, combined with our optimized operations in different listening scenarios, have been well recognized by users. This further bolsters users' stickiness and over-monetization capabilities. As a result, higher users' engagement brought us a year-over-year growth of average daily time spent per daily active user who listened to the music on our platform. We have extended our premium sound quality and effects to cover a wider range of scenarios during the quarter. In addition to rolling out the auto-mix sound effect, we also introduced a customized sound effect for Teens in Time's Shidai Shao Nian Tuan's album Wu Tou Bang Shao Nian. This sound effect highlights vocal details and instrumental layers, creating an air of live performance. A total of 2.3 million users have used these sound effects in 170 million streams. Moreover, we extended our premium sound quality to in-car use cases. For example, our QQ Music's Galaxy sound effect, 银河音效, maximized the performance of in-car audio systems, as it can fine-tune its sound effect to match many in-car audio systems of mainstream car models. This has further enhanced our users' listening experience. In addition, we also offer a highly personalized and engaging music experience that caters to users' unique preferences and tastes. For instance, we launched a 3D music player interface and customized playlists with various design templates, where users may choose their favorite styles. Beyond that, we tailored playlists to specific holidays and festivals, such as the Chinese New Year and World Sleep Day, to offer a listening experience for this special occasion and users' current state of mind. Thanks to our ongoing algorithm upgrades and product optimizations, we are able to constantly advance our recommendation efficiency. This brings us deeper insights into content and users' behavior, allowing us to create a more personalized listening experience. In the first quarter, QQ Music and Google Music's recommendation stream volume, together with its time spent per user, increased both year-over-year and quarter-over-quarter, taking the proportion of recommended streaming to a new high on our platform. On the front of audio live streaming, It has become an important growth driver for us, as we offer a unique engagement venue for our users and performers. With our differentiated content and interactive features that drive its growth, we keep enhancing user experience and attracting more vibrant audio anchors. In terms of content, we differentiated our audio live streaming content offering with focus on audio categories of music, emotional hearing and talk shows, highlighting our performance exception talent. Meanwhile, our vibrant audio anchor ecosystem also benefits our musician community, as it provides them with a platform to showcase their skills and reach a wider audience. We have natural rising musicians on our OQQ music live streaming platform. For example, Chi Kou Xiao Ye, Du Yao, Su Mo and Zhang Qing, these four musicians contributed a total of 110 million song streams. Notable, upon the promotion in one of our audio live streaming programs, Xu Changqing's arranging single, Girl, quickly made it to QQ Music's new song recommendation chart. In the first quarter, the number of performers in audio live streaming continued to rise year over year and quarter over quarter. In terms of user interactions, we added new social interactive features to our platform. This has created additional user traffic and scenarios, and will better serve users' entertainment needs. As important as breaking tools between performers and users, these interactive features also draw year-over-year and quarter-over-quarter increases in its daily time spent per user. Going forward, we will keep upgrading and expanding our social interactive offerings to higher user retention and additional commercialization opportunities. Turning to AIGC, LMS has empowered us to produce content more efficiently, as well as to create an increasingly engaging user experience. In the first quarter, we launched TME Studio, an AI-enabled smart tool for music production. We also introduced the Vocal Producer 音音色制作人 feature, pulled by our 林音音琴. With these tools, musicians can be more efficient in lyric writing, composing, music content analysis, and editing. Such tools also help generate outstanding content by seamlessly blending users' original voices into different songs. On top of that, our first AI music company, Xiaoqin, hosted a live streaming show. Her singing and dancing provided an immersive entertainment experience. Users were also able to interact with Xiaoqin through AI-generated virtual gifts and personalized gameplays. Furthermore, in fostering a more customized listening experience, QQ Music pioneered an AIGC-improved music player. With various AI-generated virtual styles, users can enjoy different themes of music players. 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 first quarter, we have seen enhanced monetization in our online music services. We booked robust year-over-year growth in online music services revenues, driven by the advancement of both subscription and non-subscription businesses. On the subscription side, its strong performance was propelled by the growing number of paying users and its ARPPU, which comes to 94.4 million and RMB 9.2 respectively. Notably, our online music paying ratio hit a record high at 15.9%, while our ARPPU expanded sequentially for the fourth consecutive quarter. All these results reflect our refined content operations, users' higher willingness to pay for premium sound and effect features, as well as more effective promotions. In addition, our IoT service has been growing over the past few quarters. Seeing its increasing importance to our overall business development, we began to include certain IoT devices in the disclosure of operating metrics for our online music services starting from the first quarter. On the non-subscription side, it also delivered strong year-over-year growth. Advertising revenue grew notably year-over-year, mainly due to lower revenues last year caused by COVID-19 impact, increasing interest from advertisers in our innovative advertising formats, as well as improved macro environment. In particular, we have seen an increasing advertising spend from advertisers in the e-commerce, gaming, travel, and food and beverage industries. Meanwhile, revenue from our ad-supported mode also grew well as more users adopted this model. In addition to TME Live's advertiser sponsorship mentioned by Kashin earlier, we cooperated with Uni President Sukh Dharan, Tony Thangdharan, and Heineken in the first quarter to create customized brand zones, playlists, and music festivals, helping advertisers increase brand visibility with our innovative ad formats. On top of advertising, we also enhanced our ability to monetize through artist merchandise, long-form audio and music distribution. In terms of artist merchandise, in the first quarter, we worked with well-known artists such as Ren Jialun, Lu Han, Huang Minghao to introduce collection cards, action figures, T-shirts and more. As a highlight, platform within two days As a highlight, sales of the album Utopia by Teens in Time exceeded 1 million copies on our platform within two days of its release. In the future, we will keep expanding the offerings of artist merchandise on our platform, and we also have a number of artist corporation projects underway. In terms of long form audio, its revenues expanded year over year as we increased our offerings of popular content in the first quarter. For example, we introduced a new format that combines leading IP and radio drama. During the quarter, we released Reunion, The Sound of the Providence, CHONG QI ZI JI , adapted from the original work of Nanpai Sanshu. Its streaming volume exceeded 340,000 in the first week after launch. These distinguished content further complemented our music offerings and increased overall user engagement. Moving on to our social entertainment services. Facing a tough market environment, we focus on product innovation to differentiate ourselves and gain user mindshare. For WeSing, based on our multi-person singing room in both video and audio settings, we upgraded our chorus features to Chorus for All, which can support a real-time chorus of 1,000 people, further enriching users' immersive experience. In addition, we released extra interactive features in our singing rooms, such as score competition and red envelope sharing. These features allow the singing room's penetration rate to grow year over year for the fifth quarter in a row. In the future, we will leverage these chorus and singing features to explore collaboration across different products on our platform, such as TME Live, artist-fan interaction events, and sponsored advertising. In terms of WeSync membership, we expanded VIP privileges to include features such as customizable sound effects, recording interface themes, and name tags, all resulting in year-over-year revenue growth in the first quarter. Meanwhile, WeSync's revenue grew steadily in the overseas market. We will expand its presence further through both organic growth and M&A. For live streaming services, although revenue from traditional live streaming remain adversely affected by the macro environment, our audio live streaming delivered double-digit year-over-year growth rate in the first quarter. Audio has become a growth engine for our live streaming services as we keep providing differentiated content and interactive features. We also strive to build a growth path for more live streaming performers, further tapping into their potential while strengthening their connection with users, which in turn cultivates users' willingness to consume and pay for content. In the first quarter, Kugel Music rolled out its singing room feature following QQ Music's successful validation, delivering the over-year revenue growth as well. Lastly, we remain committed to fulfilling our social responsibilities through music. For example, TME provided care for people with autism through music for the seventh consecutive year. We launched a caring program called If Music Has a Shape. We invited over 50 groups of singers and musicians from China and abroad, including and to perform in our program and share their love. Simultaneously, we debuted at the carrying through music theme song, Secrets Hitting in the Stars. Hang Zai Xing Li De Mi Mi, sung by Lucy, TME's first hyperreal virtual pop idol. This program's social media views have exceeded 500 million, raising awareness of autism among the public. In conclusion, we started 2023 on high notes with innovations across content and platform. This establishes a clear path for our creative and sustainable development in the coming year and beyond. Our progress in monetization efficiency, cost optimization, commercialization, and user experience has also positioned us for ongoing business growth. Going forward, we'll continue to explore the intersection of music and technology, pioneering new forms of art and entertainment while upholding our commitment to society and fostering a healthy, more diverse music industry. 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. Next, I'll discuss our results from a financial perspective. In the first quarter of 2023, our total revenue resumed year-over-year growth and reached R&B 7 billion, up by 5% year-over-year. With the success of effective cost control and improved operation efficiencies, our non-RFI net profit margin reached 20.9% this quarter. In Q1, milk subscription revenue continued its rapid growth and reached RMB 2.6 billion, up by 30% year-over-year and by 11% sequentially, propelled by rapid expansion of both online milk paying users and ARPPU. Specifically, mass ARPPU in Q1 was RMB 9.2, increased by RMB 0.9 from last year and RMB 0.3 from last quarter. recording four consecutive quarter of expansion. Online mutual paying user grew to 94.4 million, up by 18% year-over-year, representing a 5.9 million net ads sequentially. The strong AIPPU and paying user growth resulted from high quality contents and services, attractive member privileges, and more effective promotions. As we expand use cases and the service offerings, We are seeing growing demands in IoT services and expect more opportunities to monetize this in this era in the future. Therefore, starting from this quarter, we have updated the definition of online music MAUs and include certain IoT devices users in our online music MAUs. Additionally, revenue from advertising achieved strong growth year-over-year due to strong performance from our data-based free listening model, as well as lower advertising revenues for comparison in Q1 2022 due to the impact from COVID-19. We are pleased with such results and remain confident about the long-term growth potentials in advertising business. Social entertainment service and other revenues were RMB 3.5 billion down by 13% year over year due to the evolving macro headwinds and the competition from other platforms to adapt to the changing environment We focused on cultivating talented performers and differentiating our contents to stabilize the revenue scale of the traditional live streaming, and making efforts in increasing our competitiveness through ongoing product innovation and the new initiatives in social entertainment services, such as audio live streaming, real-time interactive appearance, and international expansion. Growth margin in Q1 was 33.1%, up 5.1% points year-over-year, primarily due to the strong growth of online music revenues, our effective control of content costs, as well as improved operational cost efficiencies. Now moving on to operating expenses. Total operating expenses for Q1 were RMB 1.2 billion, or 70.5% as a percentage of total revenues, down by 2.7% from 20.2% as a percentage of total revenues in the same period last year. Then in the market expenses were RMB 212 million, down by 36% year-over-year. Overall, the reduced spending on user acquisition had impacted on our MAUs. Our core music subscription service delivered us jungles. We continued to take measures to improve efficiency, closely monitor the ROI of each promotion channel, better utilize external promotion channels, and leverage our internal traffic to attract users and promote our brands. When elevating the healthiness of business and assessing ROI, we focused more on matters such as level of engagement, user retention rate, etc. General and administrative expenses were unbeaten. One billing, which was relatively stable comparing to the same period of 2022. We continue to closely manage employee-related businesses by improving high-count efficiency and invest in research and development to further empower music-related content creation, enhance production efficiency, and improve sound quality and effects. Our effective tax rate for Q1 2023 was 12.2%. For Q1 2023, our net profit and net profit attributable to equity holders of the company were RMB 1.2 billion and RMB 1.1 billion respectively. Non-RFIS net profit and non-RFIS net profit attributable to equity holders of the company were RMB 1.5 billion and RMB 1.4 billion respectively. Diluted earnings per ADS was RMB 0.73 up 97% on a year-over-year basis. None of us diluted earnings per ADS with RMB 0.89, up 65% on a year-over-year basis. Such results demonstrate our commitment and the continued success on operating business improvement, as well as the impact from share repurchase program. We are endeavoring to provide high-quality investment returns for our investors and shareholders, and remain confident about our financial performance, the development of our business, and the overall industry. As of March 31, 2023, our combined balances of cash equivalents and term deposits, or RMB, 28.5 billion as compared with RMB 27.4 billion as of December 31, 2022. The increase was primarily due to our healthy operating cash inflow of RMB 1.9 billion for the first quarter of 2023. Such combined balance was also affected by the change in exchange rate of RMB to USD at different balance sheet dates. In conclusion, we started 2023 with strong revenue growth momentum and revenue size of our online mailing services. caught up with social entertainment services for the first time. Going forward, we continue to expect balanced growth of both AIPPU and paying users, and remain confident in the growth of potential of our advertising business. Social entertainment services continue to face evolving micro headwinds and competition from other platforms, and we will continue to differentiate our content and entertainment appearance and create more high quality contents to create a stabilized revenue scale for social entertainment services. Meanwhile, we continue to invest in new products and services, high quality contents and technologies, especially in areas such as IoT, game, sailing room and original contents and AIGC to build up a solid foundation for our healthy long-term growth This concludes our prepared remarks. Operator, we are ready to open the poll for questions.

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

Thank you, management, for taking my question and congratulations on very strong results. My first question is regarding our music subscriber growth business. 5.9 million net ads is our record high number and it's been accelerating from the last two quarters. Can management explain the drivers behind this and how should we think about the net ads growth outlook for the rest of the year? Thank you very much.

The subscription revenue, which is very much our focus as we are seeking for balance growth between both paying users as well as ARPU. Subscription revenue grew at a 30% rate on a year-over-year basis, which as you pointed out is an accelerated pace compared to previous quarters. This can be attributed to a number of factors. First, the quality as well as the value of our subscription service continues to improve. It was a long-term effort in the making, and we're providing more and more attractive content and features within that subscription service. Secondly, as a result of our long-term effort and focus, users' willingness to pay for premium features such as sound quality as well as sound effects continue to increase. Thirdly, we continue to improve the promotion of those high-quality content and product features. And finally, more effective as well as targeted promotional discounts around new subs as well as better retention programs also help drive ARPU higher. And as a result, we continue to expect a very strong growth in our subscription revenue looking forward.

Thank you. And our next question comes from Alicia Ye from Citigroup. Alicia, your line is open. Please go ahead.

Hi, thank you. Thanks for taking my questions. Good evening, management. I would like to get some update if management could provide us how are we thinking about overall growth outlook, especially for online advertising and also the music subscription, if you can give some color as well on the social entertainment as well. Thank you.

Overall, we continue to expect that 2023 to be a year of positive growth for both top line revenue as well as bottom line net profit. In addition, most likely from the second quarter, we expect our quarterly revenue from online music services to exceed social entertainment services to become a primary source of revenues. In terms of online music specifically, we expect subscription revenue to continue to deliver quality, strong growth, driven by both paying users and ARPPU. In addition, a combination of advertising, long-form audio, artist merchandise, and IoT services are all expected to contribute to the growth meaningfully. In terms of social entertainment, while traditional video live streaming will continue to face competitive pressure, our audio live streaming and international business can partially compensate. Combining all of that with our continued focus on cost management to improve efficiency, we expect net profit margin to continue to improve, resulting in net profit growth that are likely stronger than previously expected.

Thank you. And our next question comes from Lei Zhang from Bank of America. Lei, your line is open. Please go ahead.

Hi, Benjamin. Thanks for taking my question and congrats on a strong set of results. My question is mainly on the music growth margin. Can you give us some updates on your music growth margin in the fourth quarter? And how should we see the trend going forward since we have a better outlook on our sub and music business for the rest of the year? Thank you.

About music growth margin, we don't give very specific detail number on this business. We will talk about all growth margin on our business. Growth margin is 33.1% in Q1, increased by 4%. 0.1% year-over-year. Now, there are some positive factors as follows. One, the general growth of monthly air PPU and net ads of new subscriptions. And two, the growth of auto testament revenue. And the third, even social entertainment revenue faced a downside pressure and revenue mix change also have the negative impact on our gross margin. The revenue showing cost of live streaming has been controlled. We decreased the effect promotion activities and increased operational efficiency. We focused on good performance and high quality contents. And the fourth, we optimize the content cost model of ROC and increase the ROC requirement. We also benefit from the development of our in-house original content productions. And the fifth, we optimize the technology and operational strategy related to bandwidth and storage capacity and improve the utilization of our service and equipment. And looking forward in Q2 2023, we expect the subscription revenue and the advertisement revenue will continue to be strong growth. And we will continue to increase our operational efficiency and monitor our costs. We expect our growth margin will increase sequentially in Q2.

Thank you. And our next question comes from Wei Xiong from UBS. Where your light is open, please go ahead.

Hey, good evening, management. Thank you for taking my questions. You guys mentioned just now that you've seen good recovery in offline and also in the performance market. So just wondering if management could elaborate on how we can participate more and potentially benefit from the offline event opportunities. And could these offline events generate meaningful incremental revenues for us and contribute to the better growth of online music segment this year? Or do they have synergies with our

you know online music subscription business thank you okay sure thank you for your questions and yes after reopening the live concerts and music festival market is being really successful and forcing so far our unique positioning will be both of our online and offline capabilities And we will be also focusing on the quality rather than the quantity of the shows. So we will continue to upgrade and also improve our TME Live IP by more in-depth partnership with our potential partners in the shows content, production, et cetera. And also, it will definitely bring additional revenue to us. And also, it will further contribute to the healthy development of the TME's content ecosystem in the long run. There's also a seeing that there are positive trend in the industry, driving by the increasing demand for live entertainment experience and also the willingness of consumer to spend money on takers and events. But however, it's also worth noting that although the offline performances have been very fortunate so far, but this is also a low margin business for the organizers. So with this in mind, our approach will continue to be ROI-based with a prudent investment mindset. But we will continue to think that this is going to be an exciting project for us in the long run.

Thank you. And our next question comes from Shan Zhao from CICC. Shan, your line is open. Please go ahead.

Thanks, management, for taking my question. Congratulations on strong performance. My question is about profit guidance. How does management view the trend of OPEX and net profits in 2023 and in the long term? Is it possible to share some guidance? Thanks.

Last question, I guided the gross margin, so I will talk about the operational expenses. And in 2023, we will continue to focus on improving our efficiency. Q1, selling and promotion expenses operating at a low cost level. down by 36% year-over-year. Overall, the reduced spending on user curation had an impact on our MAUs. Our core music subscription service delivered strong growth. And for the high-count management, we will continue to invest in product enhancements, technology innovations, new products, and new business. such as IoT, overseas business, and relation program in house accounting productions. Meanwhile, we will pay more attention to improve the profitability of business and the products. And Q1, the Just Net Profit module is 20.9%. and increase on a year-over-year basis and sequentially. And looking forward to Q2, we expect our selling and promotion basis and Gen A will be stable compared to Q1. And with the growth of our revenue, we expect the adjusted net profit and adjusted net margin all will be increased.

Thank you. And our next question comes from Wei Fang from Isoho. Wei, your line is open. Please go ahead.

Thank you for taking my question, management. Firstly, can you help update us on your Super VIP membership program in terms of adoption? And secondly, I was just curious, how's your IoT monthly fee compared to your average mobile monthly fee? Thank you.

Well, first of all, we continue to add more and more attractive member privileges behind our super VIP package while we're not ready to disclose specific numbers. We are pleasing to see the continued growth in the number of subscribers under the VIP membership. In terms of the IoT services, we are seeing very good growth trajectory, primarily in the in-car space. We continue to penetrate more and more car models. For example, recently, we penetrated into several notable Mercedes models. And in those models, you know, we are offering subscription services. And very often you do see those offered at a full price point, you know, at the full price as opposed at the discount price. And increasingly, we'll be separating the price plan between the IoT services as well as the mobile device. So you have to actually pay a separate fee in order to access for IoT subscription, in addition to being able to access the subscription for mobile device.

Thank you. And our next question comes from Ewen Zhang from China Renaissance. Ewen, your line is open. Please go ahead.

Hey, good evening, management. Thanks for taking my question. So my question is regarding the cooperation with Tencent. We see some very successful cooperation regarding the TME Live. So how should we deepen such cooperation? Do we expect we should expand the cooperation to more areas? Thank you.

The WeChat Music feature is actually powered by QQ Music to a large extent. Our objective is to extend the QQ Music service onto WeChat to provide WeChat users with high quality music experience. And this cooperation enable us to help music creators tap into the significantly broader reach that are offered by WeChat. And as a way to promote this service, WeChat users can enjoy our service for free for a limited time between now and June 30th. From July 1st onwards to access certain premium content and features, users will be required to become a paying subscriber. We believe this corporation will generate incremental revenues for TME as it will allow us to attract incremental subscribers in the long run. And given the significantly broader reach of WeChat vis-a-vis TME. We are delighted to be able to work very closely with WeChat on this cooperation to bring our music service to more users. And we have no doubt we'll continue to deepen the cooperation with WeChat as we go.

Okay, now we will take our last question today from Lei Zhang from Back America. Lei, your line is open. Please go ahead.

Hi, Matt. Thanks for taking my follow-up question. Can you give us some updates on a very hot topic recently on AIGC and how we can use this technology and do we see this could help us to save in general have some cost control or save OPEX? Any updates or any feedback on AIGC topic? Thank you very much.

We are still working on it. We are still working on it. We are still working on it. to make a more self-defined dialogue. You can go with a robot. We can create a different robot on top of us. You can listen to songs and chat with the robot. Based on this model, it will recommend songs that you like more. But in the current situation, we are still working on it. We will work closely with Tencent later on. If Tencent releases a large base model, we will adjust a model that is more suitable for us, a model that we use in our product. In addition, based on the current open source models, we will do our own adjustment, reasoning, and acceleration. In terms of actual applications, we can use a relatively fast way to achieve the production of text and images. We can now reach the fastest speed in the industry in terms of image production. In the third quarter, we are planning to launch a music LLM similar to the one launched by Google. We will provide a more effective way to help musicians write lyrics, compose music, and sing, so that they can greatly reduce

We'll continue to deepen our research into the applications that are based on LLMs. One example of that is we'll be looking to develop a chatbot where users can chat to the chatbot about the kind of music they like to listen to and to discover new content. We'll be cooperating closely with Tencent to develop application based on their LLMs as well as to work with open source LLMs to develop other applications such as those around image creation. Similar to Google's Music LM, we'll look to provide tools to help musicians significantly reduce the barrier to music creation and lower the cost and to improve the efficiency to help them with song creation as well as lyrics writing. And then finally, in the areas of social entertainment, we'll look to create virtual idols that will ultimately be used in live streaming type use cases.

I am now approaching the end of the conference call. I will now turn the call over to our host, Mr. Tony Yip for closing remarks.

Thank you everyone for joining us today. If you have further questions, please feel free to contact TME's IR team. This concludes today's call and we look forward to speaking to you again next quarter. Thank you. Thank you.