This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk12: Good evening. Good morning. Welcome to Tencent Music Entertainment Group's third quarter 2023 earnings webinar. I'm Millicent Tu, Head of IR at the company. CME announced its quarterly financial results today before the US market opened. Our earnings release is now available on our IR website and via newswire services. Today, you'll hear from Mr. Kushan Pan, our executive chairman, who will start the call with an overview of our company's strategies and business updates. Next, Mr. Ross Liang, our CEO, will share additional thoughts on our platform strategies and developments. Finally, Ms. Shirley Hu, our CFO, will discuss our financial results before we open the call for questions. Before we continue, I refer you to our safe harbor statements in our earnings release, which applies to this call as well as the following statements. Please 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 for the SEC. At this time, all participants are muted. After management's prepared remarks, there will be a Q&A session. And please be advised that today's webinar is being recorded. With that, I'm very pleased to turn over the call to questions. Executive Chairman of the company, questions?
spk08: Thank you, Melissa. Hello, everyone, and thank you for joining our call today. We are pleased to report another quarter of strong growth in our online music services. Despite the top-line headwinds from the social entertainment business, while adjusting certain industry-wide live streaming interactive features represented some challenges for the product. It ultimately placed us on even stronger footing for our long-term sustainable development. As a case in point, our evolving businesses have become more resilient, illustrated by group-wide margin expansion and strong cash flows for the quarter. What's particularly worth mentioning is our online music subscriptions. This business has registered accelerated year over year revenue growth. Growth momentum carried into the third quarter with expansion in both of our subscriber base and ARPPU. Our paying user base grew further to 103 million, a strong testament to the board appeal and high value of our music products and services. Our impressive content offerings, compelling subscribers privileges and interactive product features together with strong execution enabled us to attract new subscribers while retaining existing ones. We are also pleased to see that monthly AR PPU expanded to 10.3 RMB thanks to disciplined promotions, effective member acquisitions and our high subscriber retention rates. These achievements will result from the solid execution of our dual-engine content and platform strategy. It further unlocks the value of music and paves the way for our long-term success. I'd like to share a few highlights. First, we cultivate deeper, mutually beneficial partnerships with record labels and artists. our insights across content and uses, as well as our holistic approach to growing the industry, supported our strengthened cooperations with music partners. For instance, we strengthened our collaboration with TFBOYS on the 30-day headstart release of their 10-year anniversary single, See You Tomorrow, as well as the sale of their themed album, 10 Years. To amplify user engagement and strengthen their bond with the artists, we launched several online song guessing contests and music-based interactive features for this single. We expanded our partnership with YG Entertainment into ticketing, where we opened a dedicated channel for users to purchase Blackpink's concert tickets, further expanding subscriber privileges. In addition, we formed a new partnership with Cube Entertainment, bringing in a prominent lineup of brands and groups such as B2B, Pentagon, G-IDLE, and Lightsum. This collaboration not only enriched our music catalog, but also granted us the privileges of a 30-day head start period on new song releases. Each of these examples strengthens our research cycle and creates a win-win situation. Our evolved relationships with artists and labels fortify our music ecosystem, bringing more entertainment privileges to our users, while also creating prosperity for all stakeholders along the industry value chain. Second, leveraging TME's integrated resources and expertise, we expanded our industry influence by assisting artists at different stages with their career growth. With respect to top tier artists, in August, we host an online offline concert for Zousen celebrating the nine year anniversary of his debut. Highlighted by sales of sought after tickets and social media buzz of nearly 2 billion event views in just three weeks. This event generated great excitement and acclaim among users. As for our strategic partnership artists, this quarter we assisted Tia Wei with her appearance at the Mid-Autumn Festival Gala organized by CCTV and Hulan Satellite TV, significantly increasing her influence nationwide. Among our emerging musicians, we have Wang Yi Luo. Our indie musicians perform and showcase his talents on the variety show The Treasured Voice. Through music exposure and social media, we helped him attract more users to explore his original songs on our platform. In Q3 this year, we also had over 20 up-and-coming musicians performing at Line Music Festival. Many rising musicians from our Tencent Musician Program showcased their talents at the Coca-Cola-sponsored 2023 Summer Limited Refreshing Music Festival. Such activities with high-quality brands also encouraged us to further explore sponsorship advertising opportunities. Third, we enhance our technology capabilities in content creation, promotion, and distribution. Some of this content also recorded initial success overseas. In the third quarter, Venus introduced its zero-shot AI-powered music production tool, featuring fast and convenient generation of a user's AI voice to produce musical works. Google Music's Vocal Producer also upgraded its functions to allow AI-generated music content in multiple languages. Through a brief training section, it can effectively and efficiently produce songs in Mandarin, Cantonese, English, Korean, and Japanese. Both tools substantially boosted creators' creativity TME's music promotion and distribution toolkits, such as the TME Music Cloud and Google's To More Music platform, make advancement in helping record labels, creators, and musicians efficiently promote their musical work. Our deep industry insights and assist data analytics enable us to successfully promote Chinese songs overseas. For example, we helped Angela Zhang's Biz and Yang Junnan Summer Love Chart on various popular music lists in Singapore during the quarter. Moving on to our continuous efforts on ESG. In the third quarter, we joined hands with Tencent's SSV and launched our 2023 Youth Music Tech X program, inviting high school students to explore our technology-inspired music journey. Working side by side with the student, we commissioned a film song, the most beautiful song in the world, to campaign the public here and support the hearing-inspired senior citizens. In addition, we organized a special music education project, Music Garden Space, to help children from ethnic minorities and remote areas appreciate the beauty and power of music. These initiatives demonstrate the value and positive influence we can bring to a wide range of communities. Summary, our holistic and strategic approach is strengthening and expanding our capabilities, making our platform and ecosystem increasingly robust. We continue to grow our music subscriptions and strengthen our partnerships with labels and artists, enriching our content and perpetuating our virtual circle. We are also fostering new talent and leveraging our advanced technology to support our efficient growth. This powerful combination and evolution will drive our company's sustainable development in the long run and support the broader industry advancement. Now, I would like to turn the call over to Ross for more color on our platform development. Ross, please go ahead.
spk09: Thank you, Ka-hsuan. Hello, everyone. Music is the heart and soul of TME. I would like to begin by commenting that Q3 results highlighted the efficiency gains across our platforms. Specifically, our ecosystem's strong platform skill and AI-important technology have enabled us to transition into an increasingly robust music powerhouse. From the operational level, one key highlight is our effort to expand the application of AI technologies across our products and services. based on our upgraded music LLM. This quarter, we integrated our LLM integration platform, allowing third-party models to be better integrated with an adaptive to the music vertical. With the power of AI, we enhanced the music discovery and the conception efficiency, creating a more engaging user experience. First, better content connection and discovery. This quarter, we continued to upgrade our recommendation middle platform and enhance personalized recommendations on each of our music apps. As a result, we reached a new record in the share of streams from recommendations, as well as an increase in the number of songs added to users' personal favorites. We also significantly allowed the barriers to music discovery. For example, QQ Music introduced its Quick Listen mode, which allows users to listen to a song's chorus and then quickly locate the full sound. Another example is Google Music's revived version, featuring faster discovery of multiple songs, song covers, as well as AI-rendered versions played by different instruments. Second, better for facilitating music consumption through more user cases and entertainment scenarios. In the in-car use case, we extended our mobile and offerings, such as our seamless user interface, premium sound quality, and a tailored playlist to enrich in-cabin music consumption. To increase our coverage, we recently sent additional car models including Mercedes-Benz Smart and more BYD models. Partnering with hardware manufacturers, we led the industry by leveraging Qualcomm's latest AI computer capabilities to enhance users' music listening experience with richer details and mobile sensations. In terms of broadening entertainment content consumption, we customized our music services, including content production, promotion and data analysis, across the areas of film and television, gaming and animation. Through tailored music works, We create unique touch points for original IPs, unlocking their value. For example, we co-produced both the theme and end credits songs for the blockbuster No More Bats, Gu Zhu Yi Zhi. We also produced original soundtracks for mobile games, including Peacekeeper Elite, Crossfire, and Dungeon and Fighter, all of which have received widespread acclaim. Third, for our immersive user connections, we have created a striving community where music lovers can bond, ultimately making their experience on our platform more enjoyable and long-lasting. For example, QQ Music launched over 30 interactive song-guessing contest featuring artists such as Jay Chou, Zhou Shen, Blackpink, and Teens In Time. These events quickly went viral across social media platforms and over in-app community and fun groups, amplifying TME's influence. To sum up, these three dimensions of connections inspire us to further unlock music's value. AI-powered technology is supporting us to provide better user experience and making the platform increasingly efficient. Our online music business has become a diversifying and crucial growth pillar. Social entertainment services remain adaptive as part of our holistic music offerings. For 2024 and years ahead, we will stay laser focused on providing enlightening user experiences while driving operational efficiencies across the platform. With that, I will turn the call over to Shirley, our CFO, for a deep dive into our financials.
spk02: Thank you very much. Hello everyone. Next, I'll discuss our results from financial perspective. In the third quarter of 2023, revenues from online mills increased by 33% to RMB 4.6 billion on a year-over-year basis, driven by strong growth in our musical subscription and advertising business. Our total revenues will be RMB 6.6 billion, down by 11% year-over-year due to decline of revenues from social entertainment services and other services. Music subscription revenues in Q3 reached RMB 3.2 billion, up by 42% year-over-year and by 10% sequentially. Driven by further expansion of both online music paying users base and monthly up, specifically, the number of online music paying users grew to 103 million, up by 21% year-over-year, representing net ads of 3.6 million users sequentially. Monthly up was on B, 10.3, up by 17% year-over-year, and 6% sequentially. Mark is six consecutive quarters of growth and another record high amount. This will result from our product's more appealing member privileges, interactive product features, attractive music content, and disciplined promotion and member acquisition strategies, as well as high subscriber retention rate. Additionally, Revenues from advertising achieved strong growth on a year-over-year basis, as our diversified product portfolio and innovative AD formats, including AD-supported model and sponsorship advertising, are highly attractive to advertisers. Our campus music contest, QQ Music 2023, Young Music Campus Trend Music Competition, and Coca-Cola-sponsored 2023 Summer Limited Refresh Music Festival were two good examples of how our portfolio of music IPs attracted various branded advertisers. Social entertainment services and other revenues were RMB 2 billion, down by 49% year-over-year. The decrease was mainly caused by our adjustments to certain live streaming interactive functions and more stringent compliance procedures as we implemented several servers enhancement and risk control measures. This is in line with our expectation about live streaming revenues as discussed previously. We believe these measures are necessary and beneficial to our users, which will help pave the way for the long-term sustainable development of our business. Growth margin in Q3 was 35.7%, up 3.1 percentage points year over year, primarily due to the following factors. First, our milk subscription revenues had strong growth this quarter. Specifically, expansion in paying user base and improvement in monthly ARTPU both had favorable impact on our growth margin. Second, our advertising revenues also had strong growth, which also benefited our growth margin. Third, as we gradually ramp up our own content, it has positively impacted our margin. As you see here, shifting to win-win relationships with laborers and artists, and increasing subscription ARPP, over the past several years have enabled us to move to a health margin model and more than offset the impact from decline in live streaming revenues. Now moving on to operating expenses. Total operating expenses for Q3 will be 1.3 billion or 19.3% as a percentage of total revenue, down by 0.2% from 19.5% of total revenues in the same period last year. Selling and marketing expenses were around 290 million, down by 11% year-over-year, as we closely monitored the ROI of each promotion channel and improved the effectiveness of promotions. General and administrative expenses were 1 billion, down by 12% year-over-year. This decrease was primarily due to reduced employee-related expenses as a result of improved high-count efficiency and expenses related to the Hong Kong secondary listing incurred in the same period of 2022. Our effective tax rate for Q3 was 12.2%. For Q3, our net profit and net profit attributable to equity holders of the company were RMB 1.3 billion and RMB 1.2 billion, respectively. Non-office net profit and non-office net profit attributable to equity holders of the company were RMB 1.5 billion and RMB 1.2 billion. 1.4 billion, respectively. Diluted earnings per ADS were on B, 0.74, up 12% on a year-over-year basis. Non-offensive diluted earnings per ADS was on B, 0.89, up 3% on a year-over-year basis. As of September 30, 2023, Our combined balances of cash, cash equivalents and term deposits were RMB 31 billion as compared with RMB 30.5 billion as of June 30, 2023. Such combined balances was also effected by the change in exchange rate of RMB to USD at different balance sheet dates. In March 2023, we announced a share repurchase program of US$500 million. As of September 30, 2023, we had repurchased 15.8 million ADS from the open market with cash for a total consideration of approximately US$103 million. In conclusion, our music subscription business has demonstrated strong growth trajectory prepared by quarterly growth in both ARPPU and paying users, and we expect such trend to continue. With keen focus on ROC management and improved efficiency in operating costs and promotion channels, we expect to continue driving our overall profitability. Last but not least, we will keep investing in new products and services, high-quality content, as well as new technologies through organic development and M&A to solidify the foundation for our long-term growth. This concludes our prepared remarks. We are ready to open the call for questions.
spk12: Thank you, Shelley. 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 on the terms of meeting or role meeting application, please click the raise hand button. For the benefits of all participants on today's call, please limit yourself to one question, and if you have additional ones, please re-enter the queue. If you ask your questions in Chinese, may we please ask you to repeat in English. Thank you. And then the first question comes to the line from Alicia Yeap from City Group. Alicia, please go ahead.
spk04: Hi, thank you. Good evening, management. Thanks for taking my questions. Congrats on the solid result. I'm going to ask the questions in Mandarin first. So, I would like to ask Mr. Guan to share with us his initial expectations and views on the growth of online music revenue in 2024. uh i'm going to translate myself so i wonder if management can share your preliminary view on your expectation for the online music's revenue growth in 2024 and how you expect the business and the competitive landscapes to evolve in the next three years. In addition, wondering if management could share how you think the macro environment might affect the growth prospect in next year and also the next three years. Thank you.
spk08: Thank you for your questions, Alicia. And I think 2023 is a critical year for us. We have been transitioning and expanding our music ecosystem, making our business mix and much more resilient. And this is actually reflected in a number of aspects. First, we responded quickly to the challenges facing the live streaming industry, taking proactive actions to adjust our social entertainment business and making it more sustainable. Secondly, we continue to drive the prosperity of our music ecosystem while diversifying our revenue streams. And thirdly, our core business like the online music subscriptions and advertising record the robust growth amid an evolving macro environment. So you can see this in our second and third quarter financial results. For 2022, I think that assuming we are going to have a stable external environment and we see the opportunity to drive our overall top line growth and margin expansion compared to 2023. Especially we will continue to drive solid growth of our online music business. with subscription revenue driven by the subscription-based growth and also ARPPU expansion as well. Outside of the subscription revenue, we expected the revenues from advertising and new initiatives such as artist merchandise to continue to grow healthily. For the social entertainment services, we will continue to execute our current operational strategy with the backdrop of the macro factors and competition For 2024, our primary target is to stabilize the business and better serve our core users. As a part of our holistic music ecosystem, we expect our social entertainment business to continue generating a healthy cash flow for us. For 2024 earnings, we aimed to build a point, our strong results so far in 2023, and continue to drive both gross and net margin expansion. For the three years outlook, I think TME's core businesses, especially our online music services, still have lots of room to grow over the next three years. We're excited to see the growth opportunities in existing areas, including the subscription, ARPPU, advertising, and more potential from the long-form audio as well. In addition to the online music services as well, we have been extending our reach and expanding capabilities along the entire music value chain. We have successfully developed our new monetization models to increase our target addressable market with the diversifying revenue streams, and these include the live performances like concerts and music festivals, artist merchandise, and more. With all these initiatives still in their early stage, we believe that we have built a strong foundation to tap into more areas for the long-term growth. So in a nutshell, I think that we are glad that our core businesses like the online music service show great resilience amid the current macro environment, and we are confident that our content and platform dual-engine strategy will continue to capture more opportunities for our future healthy growth.
spk12: Thank you. The next question comes to the line of Alice Tung from Morgan Stanley. Alice please.
spk05: Congratulations management for very strong quarterly results, especially the subscription business. My question is related to our ARPU growth. So third quarter we have achieved record high absolute number and also on a UVA and sequential growth basis. Going forward, because our blended output is still even lower than our double 11 promotion price. And a lot of users are paying the auto renewal price of 15 RMB. So how should we think about the trajectory? How much visibility do we have for continuing this very strong pull growth in the next two or three years, maybe because there is also a macro issue, deflationary environment, also competition with NetEase, which is still charging at a lower price than us. Thank you very much.
spk02: Yes, our monthly up has continued to grow for six seasons. This season has reached $10.3. This is mainly due to our more record-breaking promotion activities, and we have given our members more rights and more attraction, as well as some adjustments to our price policy.
spk11: Thank you very much. Thanks for the question. Well, regarding the ARUP, actually, we maintained ARUP growth for six consecutive quarters. And for this quarter, it's already 10.3 RMB. And because we also continue to downsize our promotional events and also make the membership benefits more attractive, and also adjusted the price policies.
spk02: Especially in terms of the monthly fee adjustment, we have reduced the fee. But at the same time, we have used a very effective operation strategy to get a very good flow of users, so that our entire up has a better performance in Q3.
spk11: Well, at the same time, you can see that we actually make some concessions regarding the discounted rate for the consecutive subscription business. But we're also proactively adopting the effective operational strategies. Therefore, we will be able to retain our users. That's the reason our ROP in Q3 of this year actually showed a very good performance.
spk02: based on our confidence in the growth of our monthly income. So in the future, we think that the overall uptrend should continue to grow in Q4. In the next three to five years, our total membership price will be around 15 yuan. Based on the competitive situation in the industry and our own operations, as well as the inflation, we may be able to operate better and approach the uptrend gradually.
spk11: But at the same time, we are still very confident regarding our future subscription business revenue growth. You were also asking about the Q4 performance, and we are also very happy and confident we're going to grow the number. In the second part of the question, you asked about the outlook for the next three to five years. And you mentioned actually our fees around 50 RMB. And we're going to keep an eye on the industrial computation, our own operationals, and also factoring the elements you mentioned, for example, like inflations, and then to further optimize our performance.
spk12: Okay. The next question comes from a line of John Lee from Benefit America, Maryland. John Lee.
spk00: Hi, 管理层,晚上好,谢谢接受我的提问。 Thanks, management, for taking my question. Notice that our growth margin is pretty on track in past quarters and reached a record high since 2019. And can you share with us the trend of music and social entertainment business in terms of growth margin? And how should we look at the margin trend going forward? Thank you.
spk02: Gross margin is 35.7% in Q3, increased by 4.1% year-over-year. Due to the factors as follows. First, milk subscription revenues had significant growth expansion in paying users base. and improvement in mass ARPPU both had positive impact on our gross margin. Second, the robust growth of adult housing revenues also has the favorable impact on gross margin. Third, we gradually ramp up our self-owned content, which benefit our gross margin. Fourth, We optimized the content cost model of IRC and increased IRC requirement of content cost. Our online milk revenues growth ratio was faster than net ratio of content cost. Fifth, license cost of long-form audio decreased at a year-over-year pace. And sixth, after the adjustments to live streaming business, the proportion of revenues from VC membership and advertising in social entertainment revenues have increased, which had a favorable impact on our gross margin. And the statement, the optimized technology and operation strategy related to bandwidth and the shortage capability and improved utilization of our service and equipment. Our gross margin has improved for six consecutive quarters. Looking forward to Q4, we expect subscription revenue and 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 LC model. Despite the live streaming revenue will be decreased in Q4, we expect our gross margin will be increased sequentially. And look forward in next three to the next year, we expect our gross margin will be increased, but the increased degree will be stable, will be little than this year.
spk12: Okay, then this question comes to the line of Lincoln Kong from Goldman Sachs. Lincoln, please.
spk06: Thank you, management, for taking my question. So my question is about the online music business, the non-subscription business. So first of all, can you elaborate a bit more on how this business in terms of different segments are doing in the third quarter, so including advertising, supply sense, digital album, etc.? ? We're particularly interested in the enterprising business trend into the fourth quarter as we just passed the single stay. So how do we see the enterprising wrapping up for the year or for this fourth quarter? And when we think about the 2024, what are the areas we think still have growth potential for this type of business?
spk09: In Q4, we should still maintain a growth. We will be relatively close to Q3. Our strategy is relatively consistent. Because of the double 11 of e-commerce, we expect a relatively good growth compared to Q3 in Q4.
spk11: Thank you very much. Thanks for your question. In Q4 of this year, and we do believe we're going to maintain a good growth for the subscription business, along as what we've seen performed in Q3 of this year. Well, regarding the advertising business, because in Q4 of the year, we're going to have the Double Eleven Shopping Festival. So we do believe the Q4 performance would outperform Q3.
spk09: We are regarding the outlook of 2024, and in 2024, we believe our subscriber base will continue to grow, but maybe the growth rate would be slowed down compared with 2023. In the next 24 years, our focus will be on the packaging business. In addition to mobile, we will expand to the field of vehicles and IoT. At the same time, we will greatly develop our super members. With the continuous participation of sound quality and sound effects, we hope to increase the number of our members through super members and similar family and couple members.
spk11: We're regarding the subscription business model in 2024. Besides working on the mobile engine solution, we're also going to intensify our efforts in the in-car application and IoT application. We're also going to step up our efforts regarding the super VIP business, providing additional functions like the effect of the music and the tones of the music. And we're also going to continue to roll out household or the family membership and the couple family ship and continue to grow our app.
spk09: In terms of advertising revenue, compared to this year, we are still optimistic about the economic situation of next year. So we expect that our advertising revenue... Our goal is to maintain an approximate growth rate this year.
spk11: We're regarding the revenue from the advertising business, and for next year in 2024, we still would like to keep a positive attitude over the total economic growth. So we're going to maintain our revenue growth target of advertising business in 2024, the same as 2023.
spk09: In the next year, we will focus on recruiting advertisers. We will focus on recruiting advertisers. We will focus on recruiting advertisers. We will focus on recruiting advertisers. We will focus on recruiting advertisers. We will focus on recruiting advertisers. We will focus on recruiting advertisers. We will focus on recruiting advertisers.
spk11: We're regarding the growth for next year. And besides what we mentioned, the ad supported mood, we're also going to intensify our efforts regarding the commercial promotion. And we're going to leverage the commercial promotion along with the offline events and concerts. Because by so doing, we will be able to make sure we find a deep bond between our commercialization and the offline events. This would also be a great growth driver for our next year advertising business. Okay.
spk12: Thank you. And this question comes from Thomas Chung from Jefferies. Thomas, please.
spk07: Hi, good evening. Thanks management for taking my questions. My question is relating to AI and LLM. Given we have been seeing AI is so important on content creation and also supporting our musicians and also driving the user engagement, I just want to get some color with regard to our three-year strategies. in LLM and AI, and what kind of, what level of spending should we expect over the next couple of years?
spk09: Yes, we should keep the same attitude as our mother company, Tencent. We believe that AI will be a very powerful driving force in the next few years. It is likely to drive the development of some new businesses.
spk11: Thank you very much. Thanks for the question. Well, regarding the AI-related question, I believe we're going to align with what has been provided by our parent company, Tencent. We do believe AI is going to be a very strong and robust driving force for the next few years.
spk09: As I said before, because of our relationship with Tencent, we won't do much research on the base model. You know that Tencent has released a member system, so we need to have a closer combination with the member model.
spk11: Well, you know that due to our relationship with Tencent Group and for some basic models, actually, we're not going to dive deep for more research because Tencent Group has already released its Huanyuan system. And we're also going to leverage the Huanyuan produced by Tencent Group to continue to debunk our business with their model.
spk09: Yes, because we are more biased towards applications, our main focus is on large-scale models. We can make our applications switch very seamlessly with the leading language models in the industry, such as mixed languages, including Baichuan, which we are testing right now.
spk11: Actually, you know, our business is more application driven. So what we're going to do in the near future is to leverage the existing RRM to fully support the solution with great integration. And we do believe that we will be able to seamlessly switch to the leading language models in the industry, including Baichuan, Kunyuan and Yuanxia.
spk09: When we launched Q3, we also launched Q2.0, which is an integration platform for text-based models. At the same time, we will also try to accelerate the reasoning in the model, mainly to reduce the cost of such a large model application in our entire ecological environment. At the same time, its usage is also very efficient.
spk11: As you probably noticed in Q3 of this year, we have already launched our music large model connection platform 2.0 and we are also fully committed in accelerating the model use and especially making the model be a part of our production system so that it can help us to trying to continue the cost and also going to boost our work efficiency.
spk09: So in the next few years, our main focus will be on the application of AI to expand its usage scenarios. For example, we have already added a background model that we listen to together, which allows users to chat fluently when they listen to music together. We have also found that through the intervention of the model, our Q&A results have been greatly improved.
spk11: Well, you can also say that in the next three years, what we're trying to do is still leverage the existing LLM to continue to expand its application. For example, we already have the listening together product that is based on the updated LLM. In other words, it can allow the users to listen to the same music. We are also able to chat with each other. And we also find out by having those models, the Q&A and also the chats efficiency has been greatly improved.
spk09: Compared to the machine model, we still pay more attention to AIGC's capabilities. Through the research of the most leading engines in the industry, AIGC has achieved better results in video, images, and sound. It has achieved relatively initial commercial results in our live broadcasts.
spk11: Well, at the same time, compared with what I mentioned, the fundamental LLM, what we're trying to improve is actually our AIGC capacity. And we're also researching and adopting the leading engines in the industry. And some preliminary results have already been achieved in video, in graphics, and in audio. And you know, some of the commercial results have already been harvested in our live streaming performance.
spk09: Therefore, we believe that AI in the field of music creation and experience has great potential. It can also bring more personalized, diversified, and immersive music experiences to users. In the future, we will continue to invest and explore innovation in the field of AI, and work closely with our technical partners and music creators to really promote the development and innovation of the music industry.
spk11: Last but not least, we also believe that AIGC plays a vital role for music creation and user experience enhancement. It can provide the user a more personalized, diversified, yet immersive music experience. In the near future, we will continue to invest and explore the improved innovation in this field. We're also going to join hands with our technical partners and music creators so that we will continue to develop and to create in the content industry.
spk12: Thank you. The next question comes from Alice Liao from J.P. Morgan. Alice, please.
spk01: Alice? Hi, guys. Can you hear me OK?
spk12: Yeah, I can hear you now, yeah.
spk01: Yeah, okay. Thank you, management, for taking my question, and congrats on a good quarter. I have a question on sales marketing. You guys have been rationalizing the sales marketing spending very successfully in the past few years, sorry, past a few quarters. Now that the revenue mix has significantly shifted towards music, and on the back of potentially more online offline integration and involvement in the offline music activities. How should we think about the sales modeling strategy going forward? For example, next year, are we still going to see a flattish or even slightly lower sales modeling expenses versus this year? Or should we think about as you focus increasingly more on music with more potential offline activities, the sales marketing will gradually ramp up in the next few quarters? Thank you.
spk02: In the past few weeks, our sales costs have been well managed. Because we have been using the ROC method to manage sales costs.
spk11: Thank you very much. Thanks for your question. Yes, indeed, for the first few quarters, our sales expense being well managed, because we always adopt ROC to well manage our expenses.
spk02: Yes, for the future, with the increase of our own music revenue, our investment in the music channel may still increase slightly. Because if our ROC management is in place, then the investment can actually earn income. This is a strategy.
spk11: Well, regarding the future, actually, we do believe we're going to improve our profitability regarding the music of the business, and we're still going to invest in the music channel business. But as we are adopting the ROC, we will be able to confidently translate the investment into returns.
spk02: On the other hand, with the increase of offline activities, we will also increase the promotion activities. Of course, at the same time, the principle of management is also under the management of ROI. It is equivalent to saying that we hope that the sales cost we invest in is overall efficient.
spk11: As you may probably notice, on the other side, we continue to strive for a better self-produced and co-creation content. And we're also going to launch more offline events or activities. So for sure, we're going to need more promotional activities to do so. But because we adopted the ROI management methodology, so in other words, our investment is highly efficient and effective.
spk02: Yes, in terms of Q4 costs, because Q4 is traditionally a period where we have more marketing activities, we expect that the overall marketing cost will be equal to last year's Q4.
spk11: Well, regarding the Q4 of 2023, as you probably noticed, Q4 is always the season packed with marketing and promotional events. So I think our sales and marketing expenses in Q4 of this year would be the same as what we saw last year. So regarding the 2024, the sales and marketing expenses, from the absolute value perspective, it might be some growth. But to compare with the revenue growth, I do believe our investment is truly efficient.
spk12: Thank you. And this question coming from Zhang Xueqing from CICC. Xueqing, please.
spk03: Thank you, Mr. Wang. I would like to ask you about IoT. As Russell mentioned, it will expand the subscription of IoT members. I would like to ask you about the size of IoT vehicles and how many of them are paid users. Follow up on the questions about IoT. As was mentioned before, you will expand IoT membership in the future. So I'd like to ask about the question that what's the scale of IoT and EVMU and how many are paying users? What's our plan to convert them into paying users in the future? And how should we think about the long-term monetization potential? Thank you.
spk09: To put it simply, in the IoT field, our strategy is to continue to make audio and video businesses healthier, and at the same time, to expand the size of car users in this business.
spk11: Thank you very much. Thanks for your question. Regarding the IoT business, our strategy is to make sure we have a very healthy growth for the loudspeaker and the TV business. Where at the same time, we're also going to step up our efforts in further expanding the user base for the in-car service.
spk09: Because the audio and video business is relatively low in the increase market, we are mainly focusing on how to make better commercial transformation in the stock market and improve our up value in these areas.
spk11: So as you probably notice for the loudspeaker and the TV business, because the future growth potential might be limited. So what we're doing now is to try to dive deep into the existing user base, making sure we have a very good monetization and also making sure we can grow the app in the existing customer base.
spk09: In the field of trucking, we value the development of new energy vehicles. The rapid advancement of new energy vehicles has led to a significant improvement in the size of smart cars in China.
spk11: Well, regarding the in-car service, actually, we attach great importance to the new energy vehicle as the new energy vehicle industry continues to grow. And we also believe that in China, we also see an ever-increasing growth regarding the intelligent cars.
spk09: So in this area, we should say that the strategy is still relatively clear. We mainly want to establish a very good relationship with the leading manufacturers, so that they can spread our content to the users in the car market, including Tesla, in a very good way.
spk11: So actually regarding the strategies for the in-car business, we're going to keep a very good relationship with the auto OEMs and including the domestic auto OEM and even Tesla. We are going to make sure our content could be well provided into their driver in the cockpit.
spk09: In addition, because our sound quality and sound effect technology should be at the forefront of the whole thing, we are also very concerned about the progress of sound quality and sound effect in the entire car industry. This includes the real sound quality technology of our Ziyan, as well as the Duobi technology that we introduced, which can make the car experience a relatively quality leap.
spk11: Well, at the same time, you know that still for us, we lead the way regarding the sound quality and also the sound effect. So we really want to make sure we continue with our high quality sound quality and sound effect in the in-car service. And we also have our indigenous technology regarding the primary sound quality and also the 2B sound effect, making sure the users, when they are in their car, they can also enjoy the high quality service from us.
spk09: In the last two years, the value of the app in the car is still better than that of the relative mobile end. In fact, if we dig deeper, we can see that we still have a lot of room for growth for paid users. But our focus is still on so that we can reach a certain level in terms of user size, and then continue to improve our paid up through this kind of commercialization.
spk11: Well, for the past two years, we also clearly noticed that the user app, from the absolute value perspective, the in-call service is better than the mobile end service. Where at the same time, we also noticed that what we're doing now is still trying to expand the user base for the in-call service. When we grow our customer base to a certain number, we're going to leverage more commercial activities and strategies to turn them into the paying user.
spk12: And here, with the interest of time, we take the last question from Weisheng from UBS. Weisheng, please.
spk10: Thank you, management, for taking my question, and congrats on a good quarter. My question is around shareholder returns. So good to see the execution of buyback program in the past quarter. Looking ahead, how should we think about the pace of buyback, and what factors do we consider in determining the timing and maybe the pace of the buyback execution? And also, what are the ways do we think about to drive better shareholder returns? Thank you.
spk02: We announced a $500 million shareholder return plan in the first quarter of this year. By September 30th, we have returned $15.8 million in cash from the public market. That's $100 million in total. Because basically, we are also doing this repurchase according to this rhythm. Then we will also continue to pay attention to the performance of the market and the stock market. Then seize this opportunity to do this repurchase. Then create more value for shareholders. Maybe in the future, we will consider more of this situation and the repurchase situation.
spk11: Thank you very much. In Q1 of this year, we announced a $500 million share, a U.S. dollar share repurchase program for repurchasing the Class A ordinary shares. As of September 30, 2023, we made cash repurchases of approximately 50.8 million EDS in the open market for a total consideration of nearly USD $103 million. We will continue to keep an eye on the market, especially the latest market trend, and also capture opportunities to create more values for our shareholders. By keeping an eye on the market, we will also consider further repurchase programs if the time and opportunity allows.
spk12: Okay, with that, I'll turn the call over to Keshav for closing remarks.
spk08: Thank you, everyone, for joining us today. If you have any further questions, please feel free to contact PME's IR team. And this concludes today's call, and we look forward to speaking with you again next quarter. Thank you so much, and goodbye.
Disclaimer