Tencent Music Entertainment Group

Good evening and good morning. Welcome to Tencent Music Entertainment Group's second quarter 2023 earnings webinar. TME announces quarterly financial results today before the U.S. market opens. 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. Kashan 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 statements in our earnings press release, which applies to this call as we will make forward-looking 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, and please be advised that today's webinar is being recorded. With that, I'm pleased to turn the call over to Kushan, Executive Chairman of TME. Kushan?

Thank you, Tony. Hello, everyone, and thank you for joining our call today. We are pleased to report a solid second quarter, with total revenues increasing by 6% and adjusted net profit of 48% year-over-year. These solid results were once again supported by our online music service's strong momentum. Many years, D&E has been dedicated to driving the healthy development of China's online music industry. Following our long-standing efforts, we are pleased to see users becoming increasingly accustomed and willing to pay for copyrighted music. whether for songs they want to listen to or for the premium listening features they enjoy. Right in this way, we are happy to see that our online music paying ratio and monthly ARPPU reached an all-time high of 16.7% and 9.7% RMB respectively. Such achievements drove revenues from this business pillar in the recorded quarter to exceed that of social entertainment services for the first time in our history. This is a strong testament to our progress in developing a robust online music business model and marks a significant step along T&E's growth path. Looking at our social entertainment services, starting from the later part of the second quarter, We have proactively implemented several service-intensive and risk-control measures to provide users with a more music-centric, live-streaming atmosphere, as well as to reinforce risk controls. While these measures are expected to put pressure on revenues from our social entertainment services throughout the second half of 2023, and first, investing the impact on the total revenue for this year, We believe they will provide users with an optimised user experience, as well as pave the way for the group's healthier and more resilient development in the long term. Moving on to our operation focus on content. As the key components fostering our music ecosystem, our comprehensive content ecosystem sets us apart from other industry players. During the quarter, we continue pushing the vibrancy of our content ecosystems among actors, creators, and labels. On the front of top tier labels and artists, we strengthened our partnership with them to expand our industry influence and content appeal. In July, we held the Tencent Music Entertainment Awards 2023, also known as TMDA, in Macau. It was a two-day event, comprising of two music ceremonies and two music festivals, joined by a prominent nightclub of over 80 well-known domestic and overseas musical groups and singers. such as JJ Lin, Lin Junjie, Zhou Linsai, Cai Mingling, Laura Shang, Shangwen Jie, Zhou Sen, Tia Ray, Yuan Yawei, and Seventeen. Being able to successfully organize such a large-scale offline performance of all music events over a single weekend, coupled with an exceptional roster of musicians, demonstrates our strong industry influence and organizational capabilities, with an audience of nearly 40,000 people offline, participating in our two-day event. Our TMEA also inspired a social media bust of over 10 billion views, once again creating a national music sensation. Furthermore, we remained the partner of choice for famous labels and artists on a wider range of content offerings and merchandise. This enabled us to provide music lovers a rich selection of music content and products, as well as a unique and trendy experience at TME. For example, in the second quarter of 2023, we renewed our strategic cooperation with Forward Music, allowing us to offer a wider variety of Chinese pop music to users in China and abroad. In addition, we cooperated with Jackson Yi, Liang Tianxi, on the release of his new physical album, Liu Yanfen, featuring a headstart release with TME. This partnership delivered an outstanding sales record of Niu Yanfen on our platform. Another highlight was the debut of Chris Lee's Lee Yuchun's brand new digital album, Have a Nice Weekend, So More You Cry, plus the sales of her album's limited edition merchandise. In addition, we continue expanding our vertical music content to attract a more younger audience. For example, Mind Stone Records, a key hip-hop label, recently joined our platform, adding over 440 songs to our hip-hop music library, some of which include 30-day head-start releases. On the front of up-and-coming musicians, we are helping new artists rise their visibility within the industry by providing critical technological assistance and integrated resources that support their growth throughout their entire music journey. In July, we upgraded Venice, our all-in-one music production and promotion destination to better help indie musicians improve their efficiencies in producing, transacting, and promoting songs. Winner's latest iteration and integrated our full suite of AIGC music networking tools into Winner's. As an AI-enabled music separation, sheet music generation, line rep writing, and creations of cover for songs, significantly improving creators' efficiencies at each step of the music creation process, and elevating their music quality. Venice is also creating enhanced efficiencies of resources called consolidation as it gathers a wealth of demos on its platform and empowers convenience music transaction and promotion processes. Having attracted a diverse range of creators and labels, Venice has recorded music transactions with a total value of over 10 million RMB as of the second quarter. Furthermore, we've leveraged our differentiated and comprehensive set of resources and opportunities to nurture up-and-coming musicians and foster creativity. For example, our Tencent Musician platform strengthened its holistic support system for musicians. which ranges from offering additional exposure for offline performances to launching theme programs to promote creative content production, and even extends to helping musicians find commercial opportunities. In the second quarter, our Immersion Force program sends several of its emerging artists to seven offline music events. We also offer them more film and indie band the opportunity to produce a film song for Beyond This Car sales and production events. Our deep involvement across the music value chain enable us to be in a unique position of having extensive insights in China's music industry, which we, in turn, hope to give back to the industry by contributing to its advancement. In June this year, our TME Research Institute released its first consecutive annual edition of 2022 year-end report of digital music in China. Through in-depth data analysis and multifaceted interpretation, we provided comprehensive and pioneering insights as well as case studies aiming to promote healthier and more sustainable industry development. That concludes the overview of our second quarter and the progress we have made across our growing content capabilities. I'll now have to turn the call over to Ross. He will share more about our platform strategies. Ross, please go ahead.

Thank you, Kajit. Hello, everyone. We are excited to have reached an important milestone of 100 million online music paying users in June. This demonstrates our strength as China's leading online music platform and reflects our growing appeal to music lovers. As we see an increase in growth potential materializing from users involving music consumption mindset. We are continually elevating our music experience to meet users' higher standards and a stronger desire for quality. On top of the progress in our content ecosystem, as Kashin shared earlier, we are continuing to optimize user experience on our platform in order to reinforce the traction of our lovely and passionate music community among music lovers. Along with ongoing refinements to our distinctive and immersive listening experience, we are also exploring more innovative and personalized means of entertainment and interaction. In terms of user experience, we optimized premium feature and the product experience to attract higher user engagement and stickiness to our platform. For example, QQ Music upgraded its series of QQ Music audio to ensure optimal sound quality and the effects, which are now also available in our in-car service. We also launched QQ Music Audio Certification, which sets industry standards for sound quality across hardware devices such as earphones, speakers, music players, and car audio speakers, allowing access to superior sound quality among users in their daily lives. QQ Music also expanded in 3D music player offerings such as players customized for subscribes or designed for classical music to bolster product attractiveness and thus user use. In Google Music flagship apps recently upgraded, we highlighted a more intuitive interface and an engaging unlimited music discovery function. Google also unveiled its Viper 3D, Queerious Quan Jing Sheng, bringing an immersive live concert-like listening experience to users. Furthermore, we introduced a brand new function in drone that enhances users' recording and singing experience, including optimized vocal details, enhanced balance between human voice and accompaniment, and a wider selection of sound effects as well as recording skins. Coupled with these enhancements, we also stressed our ability to recommend music through refined user preference analysis and optimized algorithms, allowing a convenient and individualized music discovery. All of these efforts contributed to higher DAOs derived from various recommendation scenarios and a larger portion of recommendation-related streaming share. In terms of listening scenarios, we expanded our music services to additional use cases, such as various IoT scenarios, to serve a large audience in a more immersive way. specifically for the in-car use case. We improved user experience across sound quality and the effects, music recommendation and the interactive functions. For example, QQ Music launched its in-car version 2.0 in June this year and forged partnerships with more car makers, such as SAIC, Volkswagen, FAW, Volkswagen, and Volvo, among others. We also expanded the collaborations with more car makers and embedded our in-car offerings in more car models, potentially typing into a wider base of users who then can enjoy a seamless native in-car music listening experience. Alongside the recovery of offline tourism, driving times have length, thus increasing the use of in-car music services As a case in point, during the holiday period on the summer vacations, we saw a notable uptick in user activities and stickiness for our in-car service. In terms of user engagement and interaction, we created a highly individualized and the defragmentation agent in music entertainment experience for users through our AIGC endeavors. We are fulfilling their desires for trendy filters to keep up with the AIGC bomb. On the online music side, we started test AI-enabled listening together that allows Xiaoqin, our AI music company, to join users' music listening journey, share a variety of topics, include their views on music, and recommend songs or playlists based on their real-time interaction. This new function will offer users an interactive, fun way of discovering music as well as a more personalized and engaging music listening experience. On the live streaming side, we innovated AIGC import virtual gifts to facilitate a more trendsetting interaction between users and anchors. Such virtual gifts can be automatically virtualized quickly as users input text descriptions, promoting a more creative and unique user-performer bonding during live streaming. All these efforts have in turn reinforced our platform's traction among users. As we continue exploring opportunities and possibilities in China's online music arena, our dedication to copyrighted music will position us to better ride the wave of users changing music consumption habits. Promoting great prosperity across the music industry, we are creating long-term value for our shareholders. With that, I'd like to give the floor to Tony to review our business options.

Tony, please go ahead. Thank you, Ross. Hello, everyone. For online music services, our efforts over the years to cultivate users' copyright awareness are bearing fruit. Paralleling users increased willingness to pay for premium music content and optimal listening experience. We continue to see exciting growth in online music subscriptions. The number of paying users reached a record high of 99.4 million in the second quarter. driven by a combination of operational measures, such as refined operation strategies, which explore opportunities associated with trending topics or special occasions, more subscriber privileges, and additional attractive music content. These factors translated into new paying users, returned churned subscribers, and improved user retention. In addition, we launched a premium package tailored to couples in June, promoting customized features and privileges between couples. In terms of paying users spending, we witnessed a monthly ARPPU increase for the fifth consecutive quarter to reach an all time high at RMB 9.7 in the second quarter. The ongoing uptake was mainly a result of effective promotional activities, a consistently high user retention rate, and the increased appeal of our subscriber privileges among others. In addition, We made notable progress in our in-car music services as well, seeing expanded user base and enhanced monetization primarily as a result of our extensive relationships with more car makers and its applications in more car models. Online music services other than subscriptions also delivered robust growth as we further enhanced monetization. For advertising, our diversified product portfolio and innovative ad format remained highly attractive to advertisers across different industry verticals. Advertisers from e-commerce, gaming, and travel industries were outperforming on the advertising spent list. Ad supported mode continued outperforming our overall advertising services with penetration steadily improving and revenues significantly increasing. Sponsorship advertising also attracted various types of brand advertisers as our IP mix provided them with a broad and diverse target audience, such as our campus music contests, NYX Singer 2023, our signature music events, Wavemaker, QQ Music's Dianfeng Music Festival, and Cool Music's Music Festivals with barbecue-related themes. Such a portfolio of music IPs attracted Sprite, Tong Yi Shuang Qu, and JD.com to sponsor, among others. As for artist merchandise, we also saw an exciting performance driven by our strong relationships with well-known artists, which normally gives us a head start in the release of their albums and sales of various merchandise. Moving to social entertainment services, as Kashin mentioned, starting from the latter part of the second quarter of 2023, we have implemented several service enhancements and risk control measures across our live streaming services to provide users with more music-centric user engagement experience, such as adjusting certain live streaming functions and adopting more stringent compliant procedures. Such measures led to a weaker than expected performance in our social entertainment services for the reported quarter and will bring continued adverse effects on its revenues throughout the rest of this year. As a result, we expect our total revenues for the company to experience a low to mid teens percent decrease year over year for the third quarter of 2023, and a low to mid single digit percent decrease for the full year 2023 as compared with 2022. Nonetheless, we remain confident that we will deliver year-over-year bottom line growth for 2023, driven by the continued strong performance of online music services. We also believe all these efforts will lay a more solid foundation for TME's sustainable and resilient development in the long run. Meanwhile, we are also trying out new interactive features such as AIGC empowered virtual GIFs and functions of bullet chats in our live streaming services to enhance user interaction experience while increasing our product competitiveness. In addition, we continue to explore overseas opportunities, leveraging our operational experience in the domestic market. For example, we further enhanced user experience in overseas singing rooms and introduced new localized features to boost engagement, showing satisfactory initial results in both penetration rate and time spent. Last but not least, TME continued to fulfill its social responsibilities in a unique and distinctive way through its strong commitment to music-based social welfare activities. In the second quarter, we cooperated with Tencent Charity and other public welfare organizations and held two Little Red Flower charity concerts. for children. In May, we hosted the first concert to raise public support for children with hearing impairment. We helped seven hearing impaired children replicate their own voices with our AI capabilities, then utilize their AI generated voices to create and perform a concert along with several musicians. On Children's Day in June, we hosted another concert for children in rural areas, offering them a platform to express themselves through music while showcasing music aesthetic education in those villages. These programs not only raise the public's emotional resonance, they also allow us to explore music's possibilities and impact across different areas. Going forward, we will continue to drive progress across our content and platform to bring users a differentiated, superior music entertainment experience that can only be obtained on TME's platform while sharing the fruits of industry development with all other stakeholders across the music value chain. I am so proud of the progress we have made, both as a company and as an architect of the online music industry's future. Thank you once again for allowing me to be a part of this incredible journey. Now, I would like to turn the call over to Shirley, our CFO, for a closer look at our financials.

Thank you, Tony. Hello, everyone. Next, I'll discuss our results from a financial perspective. In the second quarter of 2023, driven by significant growth in our muted subscription and advertising feelings, our total revenues reached the 7.3 billion, up by 6% year-over-year. Revenues from online mail services contributed 58% of total revenues, passing the revenue contribution from social and challenge service for the first time in our history and marking a significant milestone for us. Our price and non-price net profit was RMB 1.3 billion and RMB 1.6 billion. Respectively, non-price net profit margin reached 21.7% this quarter. Million subscription revenues in Q2 reached R&B 2.9 billion, up by 37% year-over-year, and by 11% as a result, with regular expansion of online mail-to-pay users and a continued increase in monthly ARTQ. Specifically, number of online mail-to-pay users grew to 19.4 million, up by 20% year-over-year, representing 9x of 5 million users sequentially. Monthly AI PPU has grown for five consecutive quarters and reached a record high of RMB 9.7 this quarter, up by 14% year-over-year and 5% sequentially. Our optimized user operations, more appealing member privileges, attractive music contents, and disciplined promotions have driven the growth and will continue to strengthen the foundation for sustainable growth in our music subscription business. Additionally, revenues from advertising achieved strong growth on a yearly basis due to strong performance from our aid-based model, as well as low advertising revenues for compensation in Q2 2022. The annual six 1.8 e-commerce sales event generated a higher demand for advertising and contributed to a sequential increase in advertising revenues. We continue to explore new products and formats to offer more diversified options for our advertisers and remain confident about the long-term growth potentials in our advertising business. Social entertainment services and other revenues, or RMB, three point billing, down by 25% year over year, starting from the later part of the second quarter of 2023. We have proactively implemented several adjustments to live streaming functions and certain risk control measures, including more stringent requirement for containers intended to offer better music-centric user appearance. These measures have negatively impacted our live streaming revenues this quarter, and we expect the negative impact to continue in the second half of 2023, resulting in lower than previously expected revenues for full year 2023. Lastly, we believe these measures are necessary and are beneficial to our users, which will help lay down a healthier and more sustainable foundation for our long-term growth. Growth margin in Q2 was 34.3%, up 4.4 percentage points year-over-year, primarily due to the following factors. First, online music services have shown strong growth momentum with high quality growth of music subscription revenues driven by the continued uptick in online music paying users base and AIPPU and robust growth in advertising revenues. Second, as we gradually ramp up our own content, it has a positive impact on the margin and will continue to be a favorable factor for our margin. In addition, the continuous improvement of operational cost efficiency also contributed to the increase in gross margin this quarter. Now moving on to operating expenses. Total operating expenses for Q2 were RMB 1.3 billion or 17.2% as a percentage of total revenues. down by 3.3% from 20.5% as a percentage of total revenues in the same period last year. Sales and marketing expenses were on B, 211 million, down by 30% year-over-year. As we have optimized our promotion strategies by reducing user acquisition spending, monitoring the ROI of each promotion channel, and being more focused on high-quality paying user growth, With the effective promotion measures, we have seen significant growth in subscription revenues this quarter. General and administrative expenses were 1 billion, down by 6% year-over-year. This decrease was primarily due to decrease in employee-related expenses as a result of improved high-count expenses. Expenses related to our application for secondary leasing last year also contributed the year-over-year decrease. We continue to closely manage employee-related expenses by improving headcount 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 Q2 was 12.2%. For Q2 2023, our net profit and net profit attributable to equity holders of the company were RMB 1.3 billion. Non-offensive net profit and non-offensive net profit attributable to equity holders of the company were RMB 1.6 billion and RMB 1.5 billion respectively. Diluted earnings per ADS was on B, 0.82, up 55% on a year-over-year basis. Non-offense diluted earnings per ADS was on B, 0.97, up 54% on a year-over-year basis. As of June 30, 2023, our combined balance of cash equivalents and term deposits were RMB 30.5 billion as compared with RMB 28.5 billion as of March 31, 2023. The increase was primarily due to strong cash flow generated from operations of RMB 2.1 billion for the second quarter of 2023. Such combined balance was also impacted by the change in exchange rate of RMB to USD at different balance sheet dates. In conclusion, our multi-subscription business has demonstrated significant growth trajectory propelled by quality growth in both ARPPU and paying users, and we expect such momentum to continue. With keen focus on user ignorance and monetization, we will continue to invest in new products and services, include high-quality contents, differentiated premium packages with appearing privileges, and new technologies such as AIGC through organic development and M&A to certify our foundation for long-term growth. This concludes our prepared remarks. With that, I'll turn the call back to Ka-Ching.

Thanks, Shirley. Before we enter the Q&A section, I would like to take a few minutes to express our gratitude to Tony. During his tenure, Tony played a key role in our two successful public listings and contributed his professional expertise to advance T&E's prosperous development. We really appreciate Tony's ease of excellent work and invaluable contribution to the group. Thank you, Tony. Now we are ready for questions. Operator, please.

Hello, everyone. If you are down here by phone, please press 5 to ask a question and then press 6 to unmute yourself. If you are accessing the poll from the latency-making or home-making application, please click the raise hand button at the bottom left. For the benefit of all participants on today's poll, 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. Okay, our today's first question comes from Alex Yao from JP Morgan. Please go ahead. Thank you.

Thank you, management, for talking us through the fundamental development during the quarter. And Tony, best wishes to your future in Denver. My question is around the revenue. given the very different dynamic between music and social entertainment business can you elaborate a bit more on the underlying assumptions of these two segments in the next couple of quarters and then I have a Related follow-up question, if we take a multi-year view, should we think of the nature of this risk management initiative as a permanent loss of certain high-risk revenue streams, such that you have at least four quarters of rebasing period? Thank you.

Okay, thanks Alex for the questions and I'll take the first part regarding the revenue outlook and maybe Tony can take the second part of the questions. This quarter our online music services revenue contributions reached nearly sixty percent. We were presenting a significant growth from only thirty percent five years ago. So looking at the revenue contribution of our subscription businesses, It has from percentage 5 years ago to 40 this quarter. So, this progress really demonstrating that since we go IPO, TME has been continuously expanding and solidifying our core online music business. This is where our long term development is built upon. and the exact reason why we are confident of our solid development for this year and beyond. Looking ahead to the second quarter of 2023, our online music business is expected to maintain a robust growth, driven by both the paying user growth and ARPPU expansion for the subscription business, as well as the continued advertising and merchandise business expansion. Its robust growth will be a stronger driver to both of our top line and also bottom line. Meanwhile, our social entertainment service will be expected to continue facing some pressure on its revenues due to the adjustment related to certain live streaming functions. Nevertheless, bearing any major unexpected events, we anticipate that the impact level of this adjustment will stabilize by the end of Q3. And subsequently, monthly revenue in Q4 will become relatively stable on a month-to-month basis. So therefore, we expected the total revenue for this year will decline by low to mid-single digital percent year-over-year, but our full-year profits and profit margins will see further improvements. So at the group level, I think our development strategy is focused on exploring the diverse business opportunities in the music arena, and discovering the long-term growth potentials. As for our social entertainment services, our current goal is to maintain stable business scale. Although social entertainment revenue is currently facing some pressure, when compared to the five years ago, but we now have more resources and a growing accumulation of industry insights to strategically plan for the group's long-term development. So we believe that the adjustment made to our live streaming business will allow us to unlock the next level of development on a more solid footing.

Thank you. That's a fairly elaborate answer. The only thing I'd add is that the social entertainment services revenue adjustment took place in the later part of Q2, which means that that downward pressure will continue into the second half, which effectively resets the level of the social entertainment revenue at a lower level. However, barring any significant unexpected events, we currently do anticipate that impact level of these adjustments to stabilize by the end of Q3. And therefore, we expect monthly revenue for social entertainment services to stabilize on a month-on-month basis in Q4. Yeah, I think that's the only thing I can add.

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

Hi, management. Thanks for taking my question. And the best wishes to Tony on your new journey. And if I may want to follow up on social entertainment said, can you give us some, you know, the rationale behind this project? significant adjustments and how should we look at the social entertainment segment outlook for the full year and when do we expect the revenue growth to bottom out? Thank you.

I think the motivation behind these adjustments are to create a more music-centric live streaming atmosphere for our users. And these adjustments include stricter compliance procedures and also adjustments to certain live streaming functions. It enables us to better control potential risks that the platform may face in the future. And so even though these results in significant short term pressure on our revenues, we see these as necessary in order to provide a solid foundation for our platform's healthy development in the long run. And I think, like I said, I think in terms of outlook for the social entertainment revenues, it effectively resets it at a lower level, although the impact of that is likely going to stabilize by the end of Q3, so that when we look at each month in Q4, monthly revenues for social entertainment services are likely to be relatively stable on a month-to-month basis within Q4.

Okay, thank you Lei. And our next question comes from Alex Fung from Monticelli. Alex, your line is open, please go ahead, thank you.

Thank you management for taking my question and all the best Tony to your next journey. My first question is congratulations on reaching the 100 million paying user milestone. Can management share your next targets, one or two targets for your subscription business and the timing of that target? And my follow-up question is regarding our share buybacks and dividends, if any consideration. Thank you.

On the subscription side, you know, we continue to expect the subscription revenue to grow at a healthy trend, you know, driven by a number of factors. And frankly, I think many of these have been our results of years and years of hard work. I think from a top-down perspective, we spent years of market education encouraging users to develop a music consumption mindset to support copyrighted music. We have continued to refine our operational strategies, enrich user privileges such as sound quality and sound effects, As a result, we are seeing a gradual shift towards increasing willingness to pay for music services as well as for privileged product features. On the ARPPU side, as we mentioned for several quarters now, we will continue to follow our strategy towards optimizing our promotional discounts, gradually reducing them, and to enhance the user's perception of the value that they're paying. And for those users who are who have higher expectations for sound qualities and additional demand for use scenarios, we do have other premium product options at a higher price point. Besides SuperVIP, as well as other IoT memberships, You know, we also launched premium packages that are tailored to couples, for example. And so I think as we continue to see increasing willingness to pay among the user group, we are confident to be able to continue to grow the paying user, both the paying user and ARPPU at a healthy pace to drive the subscription revenue moving forward. And then on buyback, obviously, I think we have announced the buyback, as you saw. We haven't conducted buyback to date, but we will be actively looking for opportunities to do so if the right opportunities present itself, especially in times of share price weakness.

Okay, thank you, Alex. And our next question comes from Lincoln Cole from Goldman Sachs. Lincoln, your line is open. Please go ahead. Thank you.

Thank you, management, for taking my question. And all the best to Tony as well. So I want to ask about AIGC. I think management emphasized the importance of AIGC to our platform and to our business. Could management elaborate a bit more on the latest development of any AIGC tools or the large language model we're currently leveraging? How we think about the whole AIGC to empower our business? Thank you.

So we... I still think that this is a big wave, and we need to seize this opportunity. But as I have mentioned many times before, we are still working hard on the application in terms of the basic research on large models. Of course, we are also waiting. After Tencent launches its hybrid, we will be able to do more top-level applications based on the hybrid model. Of course, we can also see In this year's changes, applications are still the most important scene. We still need to continue to explore. For us, in terms of content, as we mentioned earlier, we want to provide creators with a more convenient tool for content production. So we also released Qimingxing, and provided a series of tools in Qimingxing, including AI lyric support, music separation, intelligent music score, and intelligent cover. All of these can help musicians improve their efficiency. So this part is still in the area of supporting creation. But will there be an end-to-end, where all the songs can only be produced by the characters? We are still observing this. But we are also developing some functions to automatically identify whether the song can be identified in the background of the system, whether it was created by a person or a machine. In addition, Kugel has also released a music sound producer. It can generate a very fast, because we know that through ZeroShot and FieldShot, it can generate a very low sample of the user's sound library. Through these sound libraries, you can generate different styles and language. At the same time, we also discovered some business models in which users can spend a small amount of money to create their own songs with their own style, and at the same time reduce their own personal, and then spread it. In addition, as mentioned before, we can still shorten our development time during the generation stage. This is something that can be seen in many places. For example, in Office and GitHub, we can improve the efficiency of our work through code generation and file generation. In terms of user interaction experience, we focused on a virtual idol, Xiaoqin. What can he do right now? First of all, he can listen to music with others. You can recommend different songs based on their characteristics. If you can't find a real person, you can use an AI robot, a virtual person, to recommend some songs for you to listen to. You can also chat with them. They will tell you the evaluation of the work and talk to you about your emotions. From what we've seen, the users are very... There will be a lot of dialogue with Xiaoqin. They will talk to Xiaoqin as a real person. They will talk about their feelings and other things. In addition, we have also started to talk about Xiaoqin's musical works. to make comments. It can make AI comments based on the music of many musicians. We also found that its comments promote the creator of the song and the user's comments. They have a very good flow rate. Under the live broadcast, we actually created a new business model for AI gifts. When you go to give gifts, you can... Because all people's gifts are the same. In this season, we made an AI-generated virtual gift. You can input different words when you give gifts to the host. Then you can use this Promote and this prompt to generate various gifts that belong to you and then give them to the host. and then let reward become a personalization. Everyone can actually generate their own. As long as you create different keywords and promote them, you can generate different gifts. And the most important thing about this is that we have done a lot of reasoning optimization. This can greatly shorten the time it takes to generate this gift. Because we also know that in the process of generating AI, the core part is the speed of generation. If you can't reach the speed of generation, your cost and your experience will be greatly discounted. So we have also done a lot of optimization in terms of generation and reasoning speed. In addition, we are exploring an app called Weiband, which is an AI social media app. This is similar to Carrick's AI in the US. It allows you to choose a different person. You can choose a different IP. You can choose a boy, or you can choose a girl in a game. and talk to it. At the same time, the robot can send out voice messages, it can send out friends, it can send out pictures, it can send out videos, allowing it to have a very real communication environment. This is one of the things we are currently working on. We also hope to have a better attempt here.

Okay, I'll provide a brief translation. We'll continue to ride the wave of innovation that are brought to us with AIGC. While there has been a lot of focus on large models, our own focus more on the application layer, which are primarily twofold on either the content side or on user interaction side. On the content side, we will work on providing productivity tools to assist musicians to become more efficient with their music creation. Whether or not we will see one day a fully automated end-to-end solution remains to be seen, but that's something we would continue to monitor. We are working on and starting to provide synthetic voice creation, where users can pay to use AI to create their own voice, to sing and to do other things. And then finally, we are using AI capabilities to dramatically shorten our R&D time. On the user interaction side with Xiaoqin, which we mentioned previously, it's a companion that guide your music journey. She can recommend songs to you. She can chat with you and tell you her views of particular songs. She can also comment on individual songs. On the live streaming front, we are able to use AI to instantaneously create a customized virtual gift based on the words that users type in so that every user can create a very unique virtual gift and use that to give to their favorite live streamer. And then finally, we are working on a new product called WaveOn, which is similar to a feature where users can chat with various AI characters.

OK, thank you. And our next question comes from Alicia Yip from Citibor. Alicia, your line is open. Please go ahead. Thank you.

Hi. Good evening. Can you hear me OK? Yes. Okay, good evening management. Thanks for taking my questions and also all the best to Tony. So can management share with us what should we expect for the gross margin in the coming quarters? With online music now, contributing also higher proportions of the revenue and then social entertainment continue to face the ongoing pressure. What is the net profit trend for the rest of 2023 and overall 2023? Thank you.

Okay. Let me first talk about the gross margin. Gross margin is 34.3% in Q2, increased by 44%. percentage year-over-year due to some factors as follows. First, online music service have shown strong growth momentum with high quality growth to musical subscription revenues driven by the continued uptake in the online music paying user base and the monthly ARTPU. And second, the robust growth of advertising revenues. And third, our self-owned content gradually ramp up that has a positive impact on our gross margin and will continue to be a variable factor for our gross margin. And fourth, we optimized the content cost model of ROC and increased ROC requirement of content cost this year. And fifth, license cost of long-form audio decreased at a year-over-year basis. Sixth, to optimize the technology and operation strategy related to bandwidth and storage capability and improve the utilization of our service and equipment. Our growth margin has improved for five consecutive quarters. Looking for the Q3, we expect the subscription revenue and the advertisement revenue will continue to be strong growth. On the cost side, we expect our in-house made content will have positive impact on gross margin continually. And we will continue to increase our operational efficiency and monitor cost items by our same model. Despite the live streaming revenue will be decreased significantly in Q3, we expect our gross margin will be increased sequentially and the gross margin in 2023 will be higher than that in 2022. And now we move to our OPEX. We continue to focus on improving our efficiency of OPEX in 2023. Over the past quarters, our ROI-oriented marketing strategy has proven successful in saving costs and enhanced efficiency. Our sales expenses declined year over year for the sixth consecutive quarter. thanks to effective management of sales channels ROI and a well-balanced allocation of internal and external resources. And we will remain committed to this principle. We anticipate a continued year-over-year decrease in selling and marketing expenses. We will also further refine our operations, enhance headcount efficiency, pay more attention to improve the profitability of business and products, adjust the headcount according to profitability of business. Meanwhile, we are continuously monitoring new opportunities within the content ecosystem and cutting age technologies and invest in such areas. Looking forward to Q3, the live streaming revenue will decrease significantly So we anticipate our adjusted net profit will be around stable at year-over-year. And adjusted net profit margin will increase. We also anticipate that adjusted net profit and margin all will increase at year-over-year base in the second half year of 2023. Thank you.

And our next question comes from Thomas Chung from Jefferies. Thomas, your line is open. Please go ahead. Thank you.

Hi, good evening. Thanks, management, for taking my questions and all the best for Tony. May I ask a question regarding our content strategies? Given the solid results we achieved in our original content, can management comment about the strategies going forward? Thank you.

Thank you, Thomas, for the questions. As a leading music platform in China, I think one of our key focuses is to discovering and also cultivating the talented musicians and encouraging them to create more music. We're also assisting them in promoting their works on our platform. We are so delighted to witness that the continuous increase in the proportion of original content On our platform nowadays, after years of investment and cultivation, it's increasingly good. So the increase has also contributed to our margin expansion as well. Leveraging our comprehensive resources and technological capabilities, I think that in TME, we are actually offering a holistic support to all of the artists. Firstly, the Tencent Musician platform, as we mentioned before, they always offer offline performance opportunities and also exposure and launches streaming programs to encourage the innovative content production. It also provides various commercial opportunities as well, including the royalty, online gift kings, digital album sales, and overseas distribution. So all these are all solid means of support for the artists. Secondly, our all-in-one music production and promotion platform Venus is designed for producing and transacting the demo and also the cover works. It has attracted numerous content creators and music labels, significantly promoting resources consolidation efficiency. In addition, I think we also collaborate with well-known domestic and international IPs to attract a broader audience and expand TME's industry influence. For instance, in the gaming sector, we have jointly created theme songs with Tencent's Honor of Kings and Peacemaker Elite. And in the animation and theme, we have also partnership with the popular IP, like the Land of Warriors and the Spider-Man. And all of these are really exciting content development project that we have online right now. In terms of the content promotions, we have a wealth of internal and external resources. Internally, we have three major music platforms, and also, externally, we can work with the Tencent ecosystem for our collaboration with Wayscene, and we can promote on the Wayscene official account and Wayscene video account to reach a massive user base as well. And last but not least, we're also helping our content provider to do the music distribution to overseas market as well through our TMB music cloud service, which I think is very meaningful to help promoting Chinese original music in the international market as well.

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

Thanks for taking my question and also best wishes to Tony. Just a quick question on IoT. Do you have any color on in-car service progress such as monetization and revenue contribution? Thank you.

Yes, our layout for IoT is mainly in vehicles, smart cars, and smart TVs. Now, we actually found that vehicles are definitely the main direction of development for everyone, especially smart cars. We also know that BRD has just announced its 500 millionth car line-up, which basically means that smart cars will have a very large market in the future, including globally. In China and overseas, we are actively expanding our cooperation with Jogos. Of course, you can see that more and more car manufacturers are strengthening the ecosystem in their vehicles. It is obvious that audio is their main focus. Recently, we have been working with Doobie and Quanjing Sheng on the long-term layout of sound quality and sound effects. We believe that we are still ahead in the area of car bags. So we can see that we have a very deep cooperation with many car companies, including Shangqi Dazhong, Yixi Dazhong, and even Benz, Tesla. Basically, we are able to provide very professional solutions to these car companies to provide immersive experience. In the last quarter, we released the 2.0 version of Q音乐. If you go and see it, you can get very good feedback from users, especially in terms of user experience. In terms of IoT, we have maintained a relatively good one. From the trend point of view, whether it is the size of the user or the income, we will see a relatively good growth, especially in terms of core vehicles and Q音樂 vehicles, which will have a relatively good market share. At the same time, as mentioned earlier, due to the huge prosperity of the offline travel market during the May 1st and the summer holidays, users' activity and annuality in the car market have increased significantly. Therefore, we believe that from a long-term perspective, the additional user size and market opportunities in the car market can also drive the growth of our entire company's user size and income.

So, with an IoT, our current main focus is in-car services, especially smart cars, which we believe will be a huge market, primarily domestically, but also to some extent overseas for your jokes. Music, as you know, will be a prime entertainment use case within smart cars. And through our premium sound effects, such as our partnerships with Dolby, we stand well positioned to benefit. We also have deep cooperation with the broader set of car makers and we've launched QQmusic's 2.0 version that are dedicated for in-car services. As a result of all these efforts, both our in-car music users as well as revenues are seeing rapid growth. And as an example, during the May holiday, where we've seen a significant increase in holiday and time spent during CARS, we have seen a significant uptake in music consumption and spending. And as a result, over the long term, We're very optimistic that specifically our services will provide us with a good opportunity for subscription and revenue going forward.

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

Well, this closes our call for today. I just want to extend my personal thank you to all the senior management team at TME as well as the company and the board for the trust in me throughout the years. It's been an incredible journey and I'm incredibly proud of everything we've achieved together over the past 5 years. Thank you. Thank you everyone. Thank you everyone. Thank you.