Tencent Music Entertainment Group

Let me walk you through some concrete examples. On content coverage and appeal, we recently renewed our multi-year partnerships with Universal Music Group, UMG, to bring users ongoing access to its fast and growing music catalog, as well as a notable sound quality upgrade with music streaming in Dolby Atmos and high-definition formats. Taylor Swift's re-recorded album, 1989 Taylor's Version, topped all charts in the first week of its release on our platform in October. We also capitalized on this success and further promoted fan engagement with a series of customized interactive song guesting contests. In addition, we renewed the collaboration with Picard Records. the record label for renowned duo Legend of Phoenix, 凤凰传奇, deepening cooperation across head-starter song releases, physical albums, and various artist-related services. We further enhanced our content appeal and leadership across pop, rock, and Chinese ancient style music genre, allowing us to better attract and retain young users. Next, on differentiated content offerings through in-house and collaborative creation. From mid to long-tail music content, we leveraged our wealth of multi-faceted resources to enrich our offering and promote its prosperity. As of the year of 2023, over 480,000 Indian musicians had contributed over 3 million songs across multiple genres on Tencent Musician platform. By providing comprehensive music training programs and art support, we effectively unlocked their creativity and nurtured their music careers. To accumulate our music access in different genres, we have broadening collaborations with our strategic partners artists. For these more mature artists, we boost their popularity and advance their career through increasingly tailored support. For example, this quarter, we assisted jazz singer Liu Lan with her EP production and release, greatly rising her profile and strengthening the fan-artists' relationships. Our in-house and collaborative content continue to grow from string to string. As a case in point, we had 10 songs showcased during China Media Group 2024 Spring Festival Gala. Our self-produced song, She, Boughing in the Light, 整着光的她, was one standout. Such performances generated massive social buzz, pushing user engagement on our platform and greatly evaluating our national influence. Another notable example is our self-produced hit song, Performed by our strategic partner artist, and covered by our popular Chinese crosstalk performer, This song went viral, totaling over 1 billion streams on our platforms as of March this year. Last but not least, on maximizing content value through innovation, we scale up our live performance business through diverse events formats in 2023. Capitalizing on the resurgence of offline music events, we host a growing number of offline music tours, festivals, and live house performances to meet strong demand. In the fourth quarter, we hosted world-renowned DJ Alan Walker's Six City electronic music tour in China. During the tour, we facilitated unique offline merged online services, encompassing interactive fan activities, artist merchandise, ticket sales, and performance management, which in turn boosted our industry influence. In the fourth quarter, we collaborated with Hype Entertainment to launch a line of artist merchandise for K-pop bands such as Seventeen and Lee Jin, diversifying our offerings of content-related peripherals in various formats. As a result, revenue from artist merchandise recorded robust year-over-year growth. Moving on to our continued commitment to social responsibility. In the fourth quarter, in collaboration with local government agencies, we conducted a series of music events to promote cultural and economic development in African minority regions. For example, we partnered with Tencent Charity to organize the 2023 Shenzhen music festival, leveraging offline music performances to help rejuvenate the rural economy with increased tourism. These initiatives not only broaden music's reach geographically, but also expand its positive impact across the industries, maximize its societal value. In conclusion, we're excited about the rising growth of the music industry for the years to come. Our powerful content and platform dual engines, underpinned by online music's relatively contrast cyclical nature, will enable us to capture more multi-faceted opportunities in 2024 and beyond. Now, I would like to turn the call over to Ross for more color on our platform development. Ross, please go ahead.

Thank you, Katrin. Hello, everyone. Our laser focus on execution resulted in a year of solid music growth and efficiency gains. Our platform's strength, our insight into users and content, and our dedication to innovation were crucial in achieving this success, all translating into enhanced music journeys for users. Now I would like to elaborate on three areas we prioritized to enhance users' experience. First, we expanded users' privileges. This included more industry-leading sound quality selections, rich sound effects, more individualized players, new skins, and additional interactive features. For example, We amassed China's largest Dolby Atmos music library, offering users a more immersive listening experience. Currently, our Dolby Atmos music service is available on mobile, in-car, and PC platforms, enabling higher quality music experiences across more comprehensive use cases. Furthermore, we hosted a dedicated online MV premiere event for J-Hope's new single, Christmas Star, promoting closer fan-artist bonding and a deeper sense of community. Millions of viewers signed up for the event within 24 hours of the registration opening. We also launched an AI voice feature for this single to further boost user engagement. Thanks to these tailored activities and features, we have recorded a total of over 100 million streams from tens of millions of users. Second, We deepened connections with users through major upgrades across multi-device experiences. QQ Music launched a significant upgrade on mobile and PC in December last year, offering customized user interfaces and music players. As part of Chinese Lunar New Year's offerings, we introduced an annual music report feature that captures each user's unique music journey. Tens of millions of QQ music users joined this annual review activity. This comprehensive report reflects the important personalized mutual bonds that we have built with users on a massive scale. They highlight how and when a user connected with us emotionally. From special moments captured, artist favorite, storage discovery, and the songs streamed to time spent. We also enhance the in-car music entertainment services. For example, we recently upgraded QQ music in-car app for Tesla. bring users a more intelligent interface with better recommendations. Kugoo Music newly added the Viper 3D Music Library to its in-car offerings, specially optimizing audio performance in a closed-cabin environment. Furthermore, we maintained our leadership in smart vocal coverage and recently renewed partnership with Li Auto. Last but not least, our technology infrastructure continued to play a vital role in content promotion, distribution, and discovery. More accurate recommendations drove greater content consumption, effectively improving our user conversion and retention. We are pleased to share that in the fourth quarter, both QQ Music and Google Music recorded another record high share of music streams from recommendations. Finally, AI. We continued to expand AIGC applications to enhance user experience and foster artists' music creation while improving efficiency. On the product side, we integrated AIGC into music streaming and creation, as well as seeing and socializing, creating an increasingly intelligent and personalized music experience for users and creators. For example, By enhancing QQ Music's AI-enabled listening-together feature with additional virtual DJs, each specializing in different music genres, we have made music discovery faster and more personalized. Furthermore, we launched an AI composition tool in Venus, supporting artists' music creation using their original text promos or rhythm clips. Lastly, we integrated an AI-themed function into Google and WeThink. Initial results suggest that users are increasingly willing to pay for this function as it enables easy creation of sound covers in multiple styles and languages. On the operations side, We are using AIGC to make our advertising more efficient and effective, employing us to a better target and convert users. We are also leveraging LLMs to better promote and distribute new songs. They help us analyze songs' audio characteristics and identify the content. that resonates most with users. To sum up, we will continue to leverage technology to achieve more efficiency gains in the future. Our dedication and passion for serving hundreds of millions of music users will further inspire us to deliver more compelling music entertainment experiences seamlessly across a broader range of user cases. With that, I will turn the call over to Shirley, our CFO, for a deep dive into our financials.

Thank you, Ross, and greetings to everyone. I will now turn to our financial results. Our strong financial results for year 2023 reflected success in effective monetization for our music services and operational efficiency management. With accelerating year-over-year growth in subscription revenues throughout the year, our online milk services delivered faster-than-expected revenue growth, which largely mitigated the revenue decline in social entertainment services and others. IFRS net profit and non-IFRS net profit were RMB 5.2 billion and RMB 6.2 billion, respectively, up by 36% and 27%, respectively, on a year-over-year basis. In the fourth quarter of 2023, our total revenues will unbeat 6.9 billion, down by 7% year over year, primarily due to decline of revenues from social entertainment services and others. Our online music revenues in Q4 2023 increased by 41% to RMB 5 billion on a year-over-year basis. This surge was driven by the strong expansion of our music subscription and advertising business, supplemented by an increase in artist-related merchandise sales. Delving deeper into our music subscription performance for Q4, music subscription revenues reached RMB 3.4 billion, which is a 45% increase year-over-year, and a 7% rise sequentially. Our refund operation allowed us to expand our online music paying user, this while enhancing monthly ARPPU. The number of online music paying users expanded to 106.7 million, representing a 21% increase year-over-year, with quarterly net ads of 3.7 million users. The monthly AIPPU rose to only 10.7, up by 20% year-over-year, and by 4% sequentially. marking the seventh success quarter of growth and setting another record. The continued growth in our paying user base was largely attributable to our enriched content offerings, enhanced member privileges, such as industry-leading sound quality selections, rich sound effects, more individualized players, new skins, and interactive product features, such as in-car enhancement, and interactive features for GX House, NewSync, Christmas Star, Our advertising revenue also had strong growth year-over-year and sequentially, supported by our diversified product suite and innovating advertising formats. Advertise-supported advertising delivered strong performance this quarter, as entrance rate improved significantly. Additionally, the new Double 11 e-commerce sales event generated a higher demand for advertising and contributed to a sequential increase in advertising revenues. Social entertainment services and other revenues were 1.9 billion, down by 52% year-over-year. This was mainly due to adjustments in certain live streaming interactive functions and more stringent compliance procedures as we implemented several service enhancement and risk control measures in the past couple of quarters. We continue to innovate for social entertainment service and have seen growth in advertising revenues and VIP membership revenues this quarter. Our growth margin for Q4 stood at 38.3%, marking an increase of 5.3 percentage points year over year and an increase of 2.6 percentage points sequentially. Increasing user base together with higher monthly AIPPU, growth in advertising revenues, as well as ramping up of our own content have enabled us to move to a health margin model. Additionally, we have built win-win relationships with labels and artists and managed the content costs more efficiently using ROC approach. These efforts have collectively resulted in the increase of our growth margin year over year. Moving on to operating expenses, in the fourth quarter of 2023, they amounted to RMB 1.3 billion, representing 18.4% of our total revenues, compared with 18.3% in the same period of last year. Selling and marketing expenses were RMB 255 million, down by 4% year-over-year. Our marketing strategy is ROI-focused, where we allocate the budget towards areas with long-term growth prospects. We strategically curtailed expense for promotion channel fees associated with live streaming and increased expenses to promote our own content. As our music service continues to grow rapidly, we will continue to spend on channel promotions for these eras. General and administrative expenses were RMB 1 billion, down by 8% year-over-year, primarily driven by low employee-related expenses, partially because we incurred expenses related to laser audio acquisition in Q4 2022, but such expenses did not recur in Q4 2023. Our effective tax rate for Q4 2023 was 17.3% compared to 12.2% in the same period of 2022. This increase was primarily attributed to the accrual of withholding tax related to earnings to be remit by our PRC subsidiaries to offshore entities. For Q4 2023, our net profit and net profit attributable to equity holders of the company were RMB 1.4 billion and RMB 1.3 billion. Non-authorized net profit and non-authorized net profit attributable to equity holders of the company were RMB 1.7 billion and RMB 1.6 billion, respectively. Our diluted earnings per ADS reached a record high this quarter at RMB 0.83, up 15% year-over-year. Non-RFI diluted earnings per ADS increased to RMB 1, up 10% year-over-year. These results demonstrated our robust financial performance, enhanced operating efficiency, and the positive impact from our sure repurchase program. As of December 31, 2023, our combined balances of cash, cash equivalents and term deposits were RMB 32.2 billion as compared with RMB 31 billion as of September 30, 2023. This combined balance was also impacted by changes in the exchange rate of the RMB to USD at different balance sheet dates. Under the Share Repurchase Program announced in March 2023, as of December 31st, 2023, we had repurchased 25.3 million ADs from the open market for total cash consideration of US dollar, 175 million of which approximately US dollar, 72 million were repurchased in the fourth quarter. Next, I'll briefly discuss our performance for full year 2023. Total revenues were RMB 27.8 billion, down by 2% year over year. Revenues from online music service were RMB 17.3 billion, up by 39% year over year. The increase was driven by strong growth in music subscription revenues and revenues from advertising services. supplemented by growth in other music services. Our music subscription revenue will only be 12.1 billion, up by 39% year-over-year, driven by growth in both paying users and monthly AIPPU. Revenues from social entertainment service declined by 34% year-over-year due to adjustments in certain live streaming interactive functions and more stringent company procedures as we implemented several service enhancements and risk control measures in the past couple of quarters. Gross margin in 2023 was 35.3%, up by 4.3% year-over-year, due to the reasons discussed earlier. Total operating expenses for 2023 will unbeat $5 billion, down by 10% year-over-year. Selling and marketing expenses in 2023 will unbeat $0.9 billion, down by 2020. percent year-over-year, largely due to more efficient how I focus the promotional strategies. General and administrative expenses will only be $4.1 billion, down by 7% year-over-year, primarily due to reduced employee-related expenses, including expenses related to lazy audio acquisition and expenses related to the Hong Kong secondary listing incurred in 2022. In 2023, we achieved the highest level of profitability in our company's history. Net profit and net profit attributable to equity holders of the company was RMB 5.2 billion and RMB 4.9 billion respectively. Non-advanced net profit and non-advanced net profit attributable to equity holders of the company was RMB 6.2 billion and RMB 5.2 billion respectively. the 9 billion respectively. Finally, I'll conclude with some remarks on our outlook for 2023. We are excited about the growth of the music industry and remain dedicated to driving our growth across our musical ecosystem. We will continue to focus on effective monetization and operational efficiency while exploring new growth opportunities and expanding our suite of monetization tools such as customized artist merchandise, concerts, etc. Additionally, we will continue to invest in high-quality contents and original content productions, as well as new products and technologies such as AIGC. We are confident about the long-term health growth of the music industry and our company. We remain focused on providing high-quality investment returns for our shareholders. This concludes our prepared remarks. We are now ready to open the call for questions.

In the benefit of all participants of today's call, please limit yourself to one question at a time. And if you have additional ones, you can re-enter the queue. If you ask your question in Chinese, please repeat them in English. And the first question comes from the line of Alice Poon from Morgan Stanley. Alice, please.

Hi, management. Congratulations on a very strong quarter. My question is regarding our 2024 and first quarter revenue growth expectation. Can you share some color, particularly about the music segment? Thank you so much.

Thank you, Alex, for your questions. And in year 2023, I think our online music business has consistently delivered a very strong performance. And our total monthly subscribers have reached 107 million already, which is a new milestone to us. And the total revenue from the music subscriptions has 39% year-over-year growth. The reason behind it basically due to the very efficient execution of TME's content and platform dual engine strategy and the counter cyclical nature of the music industry. We believe that the fourth quarter's accelerated growth in the subscription revenue really laid a strong foundation for this year's growth. We are optimistic about the industry's future and believe that our user-centric operations and expertise will continue to drive the business forward. We are committed to build a popular all-in-one music and audio platform And from the product point of view, we will use the industry-leading technology and know-how to provide the best user experience for our users. From content point of view, we will continue to provide the best coverage of songs and also some of the new other formats like live performances of concerts and music festivals, etc. So, in a nutshell, I think for this year, we are confident that the online music business will maintain a solid growth, with subscription services serving as a primary driving force, while continuing to explore the new opportunities in advertising and artist merchandise to grow the business. And as part of our holistic music ecosystem, our social entertainment side will focus on banner serving the core users, and the revenue from this part will be relatively stable this year.

Next question coming from Alicia Yap from City Group. Alicia, please.

Hi, thank you. Good evening, management. Thanks for taking my questions and also congrats on the solid quarter. I have two very quick questions. One is just curious if management can elaborate a little bit in terms of the user profile for those that newly converted to the membership sub for the past 12 months. Any colors in terms of the geographic location, cities, tiers, age group, and the song library they tend to prefer. You know, anything you can share would be helpful. And then very quickly on second questions is if you can update on any upcoming strategies and expectations for the long-form audio in terms of the user adoption rate and also the revenue trends. Thank you.

Thank you very much. Thanks for your question. Actually, our user base is already more than 100 million, as I mentioned in the presentation. So the demographic profile of our user base is very relative to the population demographic structure in China. From the activity of the user, we can see the most active user, or the largest group of our users, is still aged between 80 to 30 years old.

We can see that the activity of the most active users, or the largest group of our users, is still aged between 80 to 30 years old.

And we can also say that our subscription user is also very active among all the user groups we have. We're still regarding the user profile and their allocation geographically. I think it is the same as the demographic allocation of China. And we may have a more active user in the first tier cities where majority of our users are still distributed in tier two and tier three cities in China. Well, in our later operations, we're also going to keep an eye and be more focused on the young user groups, because they are still the ones with the most potential to tap.

For long-term audio platforms, our current strategy is to combine our entire music platform with QQ Music and Google Music Platform. This strategy is very effective from the current point of view.

Well, regarding your question of the long audio, our current strategy is still we're going to make the long audio fully integrated with our music platform as QQ Music and Google Music. And until now, we found out the strategy is very effective.

We pay more attention to the overall activity and transformation of each long audio content. And then based on the ROC method, we also go to purchase the relatively hot content on the market.

Well, at the same time, we're also going to keep an eye on the long audio and especially how active it is and the monetization capacity of this long audio. And we're also going to leverage ROC in order to source the most popular content in the market. Where at the same time, for the long audio, we are also going to accelerate its penetration into the in-car market, because we clearly notice that indeed, the content like the novels are very popular for the in-car application.

So in summary, from 2023, the transformation of the long audio business in TME has exceeded our expectations. Basically, we can continue to promote the long audio content in the future in a relatively good business development situation in 2023. The distribution and commercial efficiency of the entire music platform.

Well, at the same time, generally speaking, that 2023 would be a very important year for the long-form audio, or we call it 2023, a year of the transformation. The result and performance of the long audio is also better than our expectation. So based upon our great performance in 2023, we hope that the audio can also continue its distribution and commercial efficiency improvement on our music platform.

Thank you. The next question comes from the line of Lincoln Kong from Goldman Sachs.

Thank you, management, for taking my question. And congrats on a very strong quarter. So my question is on the margin, especially the gross margin side. We have seen in fourth quarter accelerating gross margin expansion on a Q and Q basis, more than 200 basis points. Could you elaborate in terms of what are the reasons for that? And when we're thinking about 2024, What will be the key drivers for further gross margin expansion in terms of output growth and operating leverage from content costs and minimum guarantee or our increasing mix of our self-produced content? What will be the ceiling or medium-term target for our music business gross margin under this context? Thank you.

Yes, the gross margin is 38.3% in Q4, increased by 5.3% year-over-year. And the main factors as follows. The first, music subscription revenues have significant growth. Higher monthly up and paying user base growth both have positive impact on our gross margin. And the robust growth of advertising revenues also has the favorable impact on gross margin. And the third, we gradually ramp up our self-owned content, which benefits benefit our growth margin. And we can see the piece of our own content is increased rapidly in Q4. And we have been focused on ROC to manage content costs more efficiently and build win-win relationships with labels and artists. Our online music revenue growth ratio was faster than that ratio of content cost. And for gross margin in the Q4 2024, we expect our gross margin will be keep increase and compare to the compare the piece will be lower than the Q4 in 2023, but with our revenue from subsequent revenue and advertising revenue also expect have increased rapidly. So we think that the gross margin will be keep increase in Q1 2024.

The next question comes from the line of Fang Wei from Mizuho.

Thank you for taking my questions and congrats on the print. I have an ARPU related question. So looking at your music ARPU trajectory, right? You guys finished the year with 16% year-week growth and I believe your largest peer also delivered a positive growth. But despite that, I think your paying user growth maintained a very solid expansion, right? So it looks like consumers are happily paying up. So I was just wondering if management can help elaborate on your techniques behind and is it fair to assume continued momentum into 2024? Thank you.

Yeah, I think for the ARPU, we have adopted a holistic approach to grow the subscription revenue with flexibility in balancing between the subs growth and also the ARPU expansion. So, I think that we have a strong start on the subs growth in Q1 2024 and partially because of the effective promotion during the Chinese New Year. And so marginal ARPPU fluctuation needs to be expected. But I think for the remaining quarters in 2024, overall, I think the trend should be slightly upward. So I think that we will monitor and also manage it very wisely to ensure that we have a good balance between the subs growth and also the ARPPU expansion. But you're right that we believe that for a number of years of education, I think that all of the music lovers in China right now do see the value of music and they are willing to pay more in the future.

Thank you. So the next question comes from Zhang Lei from Band of America, Merrill Lynch.

Well, hi, management. Thanks for taking my question and congrats on the third quarter. Two questions here. First is, I think you have pretty good margin and cash flow trend. So do we consider any shareholder returns in the future? And secondly, it's about the user trend in Q4, which is slightly Q1-Q decline. So how should we look at the user trend for 2024? Thank you.

Okay.

I think that for the share buybacks, we have proactively doing this in the last, especially in Q4 for 2023. And we will continue to doing this under the current 500 million share buyback plan that we have. And I think that we have already achieved a really good progress in it. And

So maybe Rossi talks about it. Okay.

Thank you very much. And I'd like to say the same as a trend a few years ago in Q4. And actually, the key reasons because the students going back to school as school opens, where at the same time, we also see some impact from the short form video to our mobile and business.

From the analysis, we can see that in terms of the total loss, the largest loss is mainly due to the low number of active days. Basically, the group of high active days is still in a relatively stable development.

Well, from the data analytics, we can see that regarding the loss of the user, actually, especially according to the days of the active, the majority of them leaving us are actually those low active users. Still, we maintain our highly active users, and they are quite stable.

In terms of the actual impact, due to a decrease in sales and marketing fees in the past 23 years, we have also reduced the amount of promotion in the entire channel, which is also an important factor that keeps us under pressure.

Well, from the practice, we can also say that in the year of 2023, we further downsized the marketing expenses. And that is the reason we also reduced the channel promotion. And this is also another reason. And that can respond to your question.

In fact, we also need to pay more attention to the development of the whole, in addition to the mobile end of our current MEO, in addition to the PC and vehicle IoT channels, a traditional channel, a new channel. Because in terms of operation, we may pay more attention to the size of the entire channel user.

Well, at the same time, besides the mobile end, we are also keeping our eye on some traditional channels and emerging channels, including PCN, the in-car channel, and IoT channel. Because regarding the operation, we would like to indeed have the only channel user base to be further improved.

So currently, the IOT part of the MEO has maintained a relatively stable growth. In the PC part, Windows and Mac, we have maintained a stable basis. But we are also continuing to release new versions to continue exploring such opportunities at the PC end.

But at the same time, you can also see that regarding IoT, and we still remain a very steady growth, where for the PC end, including the Windows and the Mac system, and we're also going to maintain our stability there, but we're also trying to roll out new versions to continue to explore new opportunities on the PC end.

From the perspective of the year 2024, because Q1 has the presence of the Christmas factor, it is a common thing. People don't use music apps very often. So in Q1, there is a possibility that there will be a slight drop in the number of music apps due to the Christmas factor.

Well, at the same time, you can also see that regarding the trend of 2024, at the very beginning of 2024, we will be impacted by the Spring Festival in China. So during the Spring Festival, people seldom use music apps. So that's a reason in Q1 of 2024, you're going to see the MUAUs being slightly decreased due to the Spring Festival reason.

But in the future, we may continue to optimize the future of the large versions of QoS and Google. At the same time, our marketing strategy will have an increase in marketing costs based on ROI in 23 years, so we are more concerned about the flow of the channel. We believe that in the future, there will be a certain rebound in the whole MEO.

We are in the following quarters as we are going to have the major version update regarding QQ Music, and we're also going to continue to improve the performance of Google Music. So I do believe, compared with 2023, our marketing strategy also going to have a ROI-based improvement. We're also going to pay more attention to the channel part, including the channel new user engagement and the returning of the old user back to our platform. So in the upcoming quarters, we're also going to expect the MAU improvement.

Okay, in response to your first questions, besides the share buyback, we are also proactively looking into the different possibilities as well. So we'll be working on the detailed plan and then we would like to improve the shareholders' equity benefits in the future.

The next question comes from the line of CICC.

Thank you. Thanks for taking my question. And also congratulations on this, John Carter. My question about AIGC, as you mentioned in the prepared remarks, PME has been using AIGC in many aspects. So can management elaborate a bit more about that? How you leverage AI in your business? and how does AI-empowered products contribute to the subscriber conversion and retention? Thank you.

Thank you very much. We have been closely monitoring the latest development of large language models and integrated it into music recommendations and creations, as well as seeing and socializing.

Well,

Because some were different from other companies, we're going to be more focused on the large language model application use case. So regarding the application use case, actually, I have three parts to share with you.

First of all, we hope to improve the fun and interesting experience of the product through the large model. Recently, we have also upgraded our listening function in the new version.

First of all, we would like to leverage the large language model to make our product more appealing and more attractive to provide the user the brand new experience. So that is the reason in our latest version, we also updated ListenTogether functionality.

Yes, so that users can find some virtual images in QA, and they can quickly find, through this virtual image, they can very quickly recommend songs that match their current mood and mood, and then consume them together.

So the user in our QQ music, they will be able to draw and profile their avatars. And through this avatar, they will also be able to find the recommended music that really fit into their mood and emotions. And then they're going to consume all content.

Yes, in the other product, in the Q-music pet product, we also enhance our large-shape chat ability, so that users can have a very interesting chat with their pets, so that they can enhance the sense of companionship of our pets.

Well, at the same time, another product is actually the small patch in QQ Music, and we're also going to leverage a large language model to improve the conversation and the dialogue between the user and the patch, so that we're going to have some very interesting chats to continue to improve the sense of the companion to our users.

The second part is to improve the creative efficiency of the content. We provide different creative tools for musicians to improve their content.

The second point I'm going to talk about is how we can leverage large language model to improve the creation efficiency to the content. We do provide the effective tools for music creation to the creators.

Recently, the whole function of song separation in Qimingxing can basically separate life from songs. Now it has been welcomed by musicians.

Well, we can say that recently we have already enabled the separation function in the Venice functions. So generally speaking, it can directly separate the vocals from the entire composition of the song, which is very popular among musicians.

We have currently launched the ability to use our own sound to AI the ability to make songs so that users can make works in different languages and styles.

In addition, we also launched the AI-based composition functionalities through WeSing and Venus as well as Kugoo. In other words, that user can actually create their own preferred sounds or the compositions according to their preferred style.

And we also found that it has a very good business prospects. Users are willing to pay their own costs for the songs made by AI.

Well, at the same time, through those functions and enablement, we also find a very promising commercial prospects because users, they are actually willing to pay some of their money for those sounds that has been produced with AI-enabled tools.

We also use AIGC to generate different promotional materials. We also found that through such investment materials, we have a better transfer efficiency.

Well, regarding the customer acquisition, we can also leverage AIGC to generate different promotional materials. We find out after allocating those materials to the market, it can also help to boost the conversion rate.

We also found that by using the large model, we can get a better data increase in terms of music promotion in the field.

Well, at the same time, we also find out after applying large language model, we will also have a very good growth regarding the music recommendations within the app, a huge improvement compared with before.

So we believe that AIGC and voice AI in general should have a better promotion effect on our own products. We will also closely monitor the development of the latest technology in the entire industry, including Sonos, and then apply it to our products as soon as possible.

So generally speaking, we do believe AIGC is benefiting our industry and help to further improve the performance of our product. We're also going to keep an eye on the latest development, including Sona and other latest technology and making sure they could also be adopted by our product as soon as possible.

Thank you. And then this question comes from Thomas Chong from Jefferies.

Hi, good evening. Thanks, management, for taking my questions and congratulations on a very solid set of results. I have a question regarding music and net ads. Given the solid performance that we are seeing in Q4, 3.7 million, we thought it's better than the street expectation. How should we think about the next trend coming into Q1 and 2024? And over the long run, how should we think about our music subs number? Thank you.

Thank you very much. Thanks for your question. Well, you can say that because we provided a high-quality product to the market and after years of education to the user, and now they are happy to pay for the service and product, and the user is becoming more mature, and I think we are now stepping into the season of harvest.

In 20 years, we will use IOC as the premise, and we will add some promotion to it, so that more high-end users can access and use our high-quality services, and use our perfect content library and platform to keep them. This is what we are currently doing on NetEase.

In the year of 2024, we're going to keep an eye on ROC and also trying to further improve our product and also with more marketing strategy. And we do hope those high potential customers can get access to our high quality service and product. And our very well-established content library and platform will retain those users with us. So this is indeed the strategy we have for this year.

In the first half of 2023, after the outbreak of the pandemic, due to the resumption of commuting and offline music activities, we have created a very good external environment. In addition, the improvement of our operations and the strong execution power have allowed us to quickly convert and accumulate a large number of paid users than we expected. The total number of members has exceeded two years, reaching 18.2 million. This is a very good foundation for expanding the number of members in the future.

In each one of 2023, after the reopening of the pandemic, because the travel has been allowed and the offline musical event has been restored, which create a very enabling external environment for our business. Along with our very strong operational capacity and very robust execution, we will be able to accumulate many paying users based upon the enabling external environment and the fast conversion rate. So in the year of 2023, actually the net added value for our subscription user reached 182 million and reached a very solid foundation for us to further expand the user base in the near future.

Well, regarding the year of 2024, we're going to balance the net aids and ARAC, and we have every confidence we will be able to maintain the online music business and the subscription revenue at a very healthy level. Since the beginning of this year, we have gained experience from our product innovation and the expansion of service authority and other operational strategies. In addition, we have seen some results that are higher than expected in cooperation with some operational promotion activities in our Spring Festival. We have established a solid foundation for health development for 20 years.

Regarding the year of 2024, right after we entered into the year of 2024, benefited from our product innovation and user privilege expansion, along with our very robust execution strategy, and we offer the high quality experience to their users. Along with our operational and promoting events during the Chinese Spring Festival, we see the performance is better than what we expected. It also laid a very solid foundation for the healthy development of our business in 2024.

We will also pay more attention to the development of our super members, which are high-up members. In the next 24 years, we will mainly focus on the operation of super members in other channels, including the car parts and the TV parts. We also hope to be able to improve our music up in general through these ways. But the most important thing we want to emphasize is that we actually prefer to ensure a more stable growth of our entire monthly income.

Where in the near future, we're also going to keep an eye on the operation and development of the super users, or should I call the high-up value users. Those users are the key. We're going to also further expand their experience in other channels, including in-car experience and TV users. We do hope by operating them and well manage them, it can also help us to overly improve the RF for the music business. But more importantly, I should also say that what we're going to prioritize is to make sure we have a steady and robust growth for subscription revenue.

Thank you. We're approaching the end of the conference call. I'll now turn over to Kachin for closing remarks.

Okay, thank you everyone for joining us today. If you have any further questions, please feel free to contact PME's investor relations team. This concludes today's call and the company looks forward to speaking with you again next quarter. Thank you so much and goodbye.