Tencent Music Entertainment Group

Good evening, good morning, and welcome to Tencent Music Entertainment Group's first quarter 2024 earnings conference call. I'm Osun Tu, head of IR. We announced our quarterly financial results today before the U.S. market opened. An earnings release is now available on our IR website and via Newswire services. Today, you'll hear from Mr. Kushan Pang, our executive chairman, and Mr. Ross Liang, our CEO, who will share an overview of our company's strategies and business updates. And then 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 statement in our earnings release, which applies to this call as we made four looking 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 earnest release and filings with the SEC. At this time, all participants are muted. After management's remarks, there will be a Q&A. And please be advised that today's call is being recorded. With that, I'm pleased to turn the call over to Khushan, Executive Chairman of TME Khushan.

Thank you, Melissa. Hello everyone, and thank you for joining our call today. 2024 is off to a great start. Strong execution of our dual engine content and platform strategy is yielding impressive results and pushing vitality industry-wide. In the first quarter, the number of music paying users increased to 113.5 million, propelling 43% year-over-year growth in online music revenues. Our high quality growth strategy also drove a robust net profit margin expansion. Subscriber growth in this quarter significantly exceeded our expectations, reaching a quarterly historic high of 6.8 million net ads, What's more, we maintain the ARPPU at a healthy level. Both achievements demonstrate our keen understanding of users' needs and our knack for anticipating and meeting their demands operationally. As you have seen in our earnings release, supported by our strong fundamentals, we are very pleased to announce an annual cash dividend policy and 210 million US dollars in cash dividends for the year of 2023. On top of our ongoing buyback program, this reflects our confidence in future growth and commitment to sharing our success with shareholders. Next, I would like to share an overview of this quarter's content development efforts. Through a balanced combination of copyright music and original content, we enable users to discover the latest and trendiest content and enjoy a superior experience on our platform. Let me go over a few highlights. First, we renewed and reinforced the partnership with Record Labels to broaden our music library's comprehensiveness and popularity. Our innovative value-added privileges, features, and promotion services extend far beyond mere licensing, further unlocking the value of music content industry-wide. We renewed our cooperation with Time Feng Jun Entertainment, Shi Lai Feng Jun, featuring 30-day Head Starts benefits on new songs, and adding Dolby Atmos upgrades for popular groups like TFBOYS and Teens In Time. We also expanded our agreement with HIM International Music, incorporating an industry-first component authorizing TME to use licensed AI feature to promote HIM's iconic CPOP content. This will ensure the authentic and responsibility double use of AI. Showcasing TME's commitment to protecting artists' rights and interests in the AIGC era. Artists benefits from TME's tech powered promotions and copyright protection while users enjoy the latest in interactive features, which is a win-win. Yoga Link's new album, Love Lord is one recent success. For its premiere on our platform, we connected our AI sync song along feature and TME live offline concerts, spurring fan interaction within new scenarios. We enriched our K-pop content and related offerings with various artist fan activities, digital albums, and artist merchandise for new generation groups like iLIT, Babymonster, and Rise. In the first quarter, K-pop user engagement and streams both grew year over year. Next, we expanded our original content, a key differentiator to attract users and enhance engagement. Based on our keen grasp of trends, we delivered an array of his catering to users' ever-changing taste, that's quota. We produced the original soundtracks for his TV dramas, The Legend of Sun Li, Yu Fengxin, and in Bronson, Hua Jianlin, including 17 songs and 38 scores. featuring top tracks by TME strategic partner artists, such as Jess Lee, Li Jiawei, and Wang Jingwen. These catchy OSTs create a massive social media buzz that boosts the streams and viewerships. Their outstanding performance showcases our ability to spot and set content trends while maximizing the value of content. Our OST for The Legend of Zeng Li produced by Tencent Video also highlighted the power of collaboration within the Tencent ecosystem. It smashed the records with over 150 million streams within 30 days of release, making it the number one OST debut so far this year. We also partnered with strategic artists and indie musicians on music production and promotion to build our performance qualities music offering. Our self-produced song, River Flow, Ru He, by Tia Wei, Yuan Ya Wei, and what I anticipate is Not Snow, Wo Qi Dai De, Bu Xi Xue, by Zhang Miao Ge, became the top-rated hits on social media this quarter. Moving on to our commitment to social responsibility. We cooperate with Tencent Charity for a third consecutive year on our film program to drive autism awareness. If music has a shape, this year, Fiona Shih, Shui Kai Qi, performed the project's theme song, Do You Understand What's Left of Me? More than 60 other renowned artists and groups, including Jay Chou, Zhou Jianlun, Su Kezhen, Shi Jixian, and New Jeans, also share songs in support of children with autism. We then host an art exhibition featuring artwork by children with autism inspired by these musical works, leveraging multimedia to amplify our caring message and boost music's social value. In conclusion, by expanding contents and introducing more tailored platform offers that resonate deeply with users, we continue strengthening our vibrancy to drive industry development. We are confident that our powerful contents and platform dual engines and ever deepening understanding of content will propel our sustainable growth 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, Kaixin.

Hello, everyone. Strong execution once again resulted in solid online music growth. Record high net subscriber ads, steady AR PPU and the healthy emails all reflect this robust performance. Our efforts to attract and retain users were the driving force behind it. Utilizing our extensive industry experience and peerless insights into users and content, we are later focused on anticipating and meeting users' needs with enhanced experiences and trendy musical journeys. First, I want to talk about user retention. We have taken a multi-pronged approach to engaging users through constant innovation of trend-setting filters. I will walk you through a few examples. Our new AIGC applications make music discovery more fun, engaging, and convenient. In the first quarter, we launched a large audio model that increases promotion accuracy. helping users discovery more high quality music content. Initial results showed that streaming share of promoted songs increased notable following the model's release. We also tested an AI assistant that supports text and voice chatting for more customized search experiences, as well as an AI playlist assistant to curate playlists, a key personal music site that strengthens users' techniques. Recently, we introduced an interactive rewards program. Users can exchange the points they earn for benefits such as trail subscription, digital albums, and personalized privileges. We are enhancing user experience. The program also opens new avenues for commercialization for the future. Ongoing platform upgrades continue to reinforce our products appeal. This quarter, we introduce a light listening mode to facilitate a smooth listening experience in low bandwidth environments. Our enhancements allowing greater interface customization are driving increased user adoption of our platform's players. Beyond the listening experience, we captivated users with a variety of interactive activities, including themed song guest contests, subscriber badges, and more. These interactive features not only boosted the song streaming volumes, but also boosted more artists' follows and additions to favorites. As users' personal music assets on our platform grow, so does their loyalty to TME. Moving now to user acquisition, our focus here is on discovering and cultivating users with long-term paying potential through refund marketing and operations. During Chinese New Year, riding on the favorable seasonality, we utilized our deep understanding of users across various demographics to roll out a series of effective promotion activities. Our targeted multi-channel promotions with e-commerce, telecom operators, and long-form video platforms contributed to a stronger than expected subscriber growth in the first quarter. We also team up with auto companies to launch holiday themed playlists and common share promotions. This organically broadened our reach to new users and increased the user activity, contributing positively to the sequential MAO recover in our online music services. On partnerships, we recently followed the pre-installation partnership with Xiaomi Suqi. We also enhanced our collaboration with ride share leader, Cao Cao Chuxing. Our new self-service, real estate music selection filters, offers ride share passengers a easy to navigate music consumption, further extending our reach. Our trend-setting annual QQ Music Dianfeng Awards, QQ Music Dianfeng Shengdian, for the first time, included online merch offline offerings, participation in interactive online filters, rewarded fans with tickets to artists' meet and greets, artists' merchandise, and more. Thanks to a lineup of popular artists and inspired performance, This event reinforced our appeal among our core young user base. In short, our rich content and unparalleled product offerings continue to fill users' acquisition and engagement. With user needs at the heart of everything we do, we remain committed to creating a music platform that users cherish. 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 success in effective monetization for musical services and operational efficiency management continued to need to strong financial results in the first quarter of 2024. RFIS net profit increased by 28% year-over-year to RMB 1.5 billion, and non-RFIS net profit rose by 24% to RMB 1.8 billion. Our total revenues were RMB 6.8 billion, down by 3% year-over-year. Our online music services achieved significant revenue growth, which largely offset the decline in revenue from social entertainment and other services. In the first quarter of 2024, our online music revenues increased by 43% to RMB 5 billion on a year-over-year basis. This surge was driven by the strong expansion of our music subscription and the growth in advertising business, supplemented by an increase in revenues from offline performances. Music subscription revenues in the first quarter reached RMB 3.6 billion, marking a 39% increase year-over-year and a 6% rise sequentially. Our refined operation and effective pricing strategy enabled us to achieve higher than expected growth in music subscribers while maintaining a health monthly ARPPU Monthly AIR-PPU was 10.6, up from 9.2 in some period last year. Taking the difference in number of days into consideration, our monthly AIR-PPU would have remained relatively stable sequentially. The number of online music paying users were 113,000. 13.5 million, representing a 20% increase year-over-year, and a record-breaking quarterly net ads of 6.8 million users. Our enriched content offerings and enhanced member privileges, such as 2B automation upgrades, have made our products more attractive and improved users' thickness. Advertising revenue also had strong year-over-year growth, primarily due to the growth in ad-supported advertising. We upgraded our incentive ad experience and provide more attractive interactive features to our users, which helped the improvement in entry rate. We continue to innovate and diversify our product suite and advertising formats, social entertainment services and other revenues will be 1.8 billion, down by 15%. year over year. This was mainly due to adjustments in certain live streaming inactive functions and more stringent compliance procedures as we implemented several service enhancement and risk control measures since the second quarter of 2023. As these adjustments and the procedures are largely completed, we expect our social and terminal services to remain relatively stable Our growth margin for Q1 reached 40.9%, marking an increase of 7.8 percentage points year over year due to a few factors. First, growth of revenues in online music subscription and advertising has generated the benefits of economies of scale. Over the years, we have made significant efforts and investments in the music industry and have built win-win relationships with labels and artists. And now, these efforts and investments started bearing fruits. Additionally, the ramping up of our own content continued to impact our margin favorably. Lastly, we have optimized the revenue sharing ratio for live streaming and also improved the monetization in VC membership and advertising, which also benefit our growth margin. All of our factors have collectively enabled us to move to a health margin model. Moving on to operating expenses, in the first quarter of 2024, they amounted to RMB 1.1 billion, representing 16.8% of our total revenues compared with 70.5% in the same period to last year. Selling and marketing expenses were RMB 187 million, down by 12% year over year. We will continue to spend in areas such as online music with long-term growth perspective, as well as content promotions. General and administrative expenses were 949 million, down by 7% year-over-year, primarily driven by lower employee related expenses. Our effective tax rate for Q1 was 19.9% compared to 12.2% in the same period of 2023. This increase was primarily attributable to the accrual of withholding tax of RMB 107 million, related to earnings to be remitted by our PRC sub-trades to offshore entities. Additionally, changes in preferential tax rates for certain entities also impacted our effective tax rate. For Q1 2024, our net profit and net profit attributable to equity holders of the company will unbeat 1.5 billion and unbeat 1.4 billion respectively. Non-office net profit and non-office net profit attributable to equity holders of the company will unbeat 1.8 billion and unbeat 1.7 billion respectively. Our diluted earnings for ADS reached a record high this quarter at RMB 0.91, up 25% year-over-year. Now RFS diluted earnings for ADS increased to RMB 1.1, up 23% year-over-year. These results underscored our robust financial performance, enhanced operating efficiency, and the beneficial impact of our share repurchase program. As of March 31st, 2024, our combined balances of cash equivalents and the term deposits were RMB 34.2 billion as compared with RMB 32.2 billion as of December 31st, 2023. This combined balance was also affected by changes in the exchange rate of RMB to USD at different balance sheet dates. And the share repurchase program announced in March, 2023 as of March 31st, 2024, We had repurchased 32.2 million eddies from the urban market for total cash consideration of US$ 235.5 million, of which approximately US$ 61 million were repurchased in the first quarter. Looking forward, we will continue to invest in high quality contents and original content productions, as well as new products and technologies such as AIGC. We remain confident in the prospects of music industry and our music suppression and advertising business. This concludes our prepared remarks. We are now open to taking your questions.

Thank you, Shirley. If you're dialing in by phone, please press five to ask a question and then six to unmute yourself. If you're accessing from the Tencent meeting or Role Meeting application, please click the resend button. At the bottom left. For the benefit of all participants on today's call, please limit yourself to one question. And if you have additional one, please re-enter. If you ask your questions in Chinese, please repeat in English. And the first question comes from the line of Alicia Yap from Citigroup. Alicia, please.

Hi. Thank you, Madison. Good evening, management. Thanks for taking my questions. Congratulations on solid results. I'm going to ask in Chinese first, then I will translate myself. My question is about the overall growth and growth in 2024. After we achieved a strong performance in the first quarter, especially with the music members competing to create a new record, What are your expectations for the second quarter and the following quarters? What are your expectations for ARPPU? Can you share with us? What are your expectations for the overall growth of online music? If you have any, please share with us. I'll translate it myself. My question is for 2024 outlook. So after achieving strong set of results, especially with record high quarterly net ad, what should we be expecting for the net ad trend for the second quarter and also the ARPPU trend for the second quarter and also the rest of the year? And any comment on the overall growth rate expectation for the total online music revenue? Thank you.

Okay, thank you so much Alicia for your questions and for the full year of 2024, our online music and subscription revenue are well on track and the profitability is also expected to be slightly better than the previously anticipated. So for the subscription side, I think that we are pleased to see that the Q1, the net S is really quickly existing our expectation. So it really give us a really strong start for this year. And therefore we are confident that the total net S for the 2024 will exceed our initial projections and indicating to be a total greater than the year of 2022 and yet slightly slower than last year, which is 2023. But on the other hand, we remained really committed in a healthy long-term growth of our business. So on a full year ARPPU side, we expect it to continue to expand year over year. Although at the moment, I think a more modest growth rate compared to 2023. And to recap, I think the last year's rapid year over year growth was primarily due to the scale back of the discounts. So based on the last year healthy ARPPU level and benefits of some of the operational optimization to be introduced throughout this year. We expect a slightly ARPPU growth in the second half of this year when compared to the first half. However, we will remain unchanged and confident in long-term ARPPU expansion potential, supported by our experience in user's education and also a variety of operational strategies. A couple of points that I would like to add should be, we have a valid and effective Q1S, which is primarily due to a couple of reasons. First of all, I think Q1 is a typically the peak season for the entire year, especially due to the Chinese New Year. So as users are more willing to pay for the entertainment. And secondly, we are also expanding the effective promotional activities which attract more high potential users. So we food are multi-channel promotions across different areas and will significantly drive the good growth of our user base. But I think that As we communicate and seeing the 2023 pattern, I think rolling off the strong seasonality, the net-edge should return to more normalized and sustainable levels over the next few quarters. So besides the subscription business, I think that for the long subscription business, we will also had a strong start in Q1 this year. And we expect growth to be solid in the remaining of this year as we continue to innovate the advertising products and expand the merchandise sales with labels and others as well.

Thank you. The next question comes from the line of Alex Boon from Morgan Stanley.

Congratulations management on a very strong quarter. My question is related to gross margin. In Q1, while we have negative seasonality for both advertising and social entertainment, we still expanded gross margin significantly sequentially from 38 to almost 41%. Can management share how the revenue and cost structure has changed on sequential basis? And how should we think about gross margin in rest of 2024? Thank you very much.

Thank you very much. Thank you, management. Congratulations to everyone for achieving a very strong business performance in the first quarter. My question is related to the interest rate. In the first quarter, we can see that although from a seasonal point of view, advertising and social entertainment businesses, as well as related services, have had a negative increase, but the interest rate has still returned and achieved a significant increase, from 38% to nearly 41%. The gross margin is 14.9% in Q1.

increased by 7.8% year-over-year and increased 2.6 quarter-over-quarter. There are several reasons as follows. The first, music subscription revenues and advertising revenues have significant growth. Second, we have made significant efforts and investments in the music industry and have built win-win relationships with labels and artists. Additionally, we focused on ROCE to manage content costs more efficiently. Our online music revenue growth ratio was higher than net growth ratio of content cost. And the third, we gradually ramp up our self-owned content, which is a positive impact on our growth margin. And the fourth, even the live streaming revenue decrease, we optimized the live streaming revenue sharing strategy. The live streaming revenue sharing ratio decreased, and the VIP revenue and the advertisement revenue on WeChat platform increased. All about our benefit, our gross margin. Our gross margin has improved for eight consecutive quarters. Looking forward to Q2, we expect subscription revenue and advertisement revenue will continue to be health 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 each cost items for ROC model. We expect our gross margin will be increased in Q2 continually. And look forward in the second half of 2024, we think our, we expect our gross margin will be also increased.

Thank you. And then this question comes from Goldman Sachs, Lincoln Kong. Lincoln, please.

Thank you, management, for taking my question. So congrats on that very strong water. So my question is about the online music services, specifically advertising. So could management comment on what we have seen in terms of advertising in the first quarter and into the second quarter? And by the different formats, what are the new advertising format companies are thinking to implement? and any of the fans of those sponsorship ads or freedom member ads. Thank you.

Q1 and Q2 will continue to grow. Q2 will continue to grow. Thank you very much. Thanks for your question. Indeed, for the advertisement service in Q1, we have a very strong growth. And I think in Q2, we're going to maintain such a strong growth.

Because with the growth of the number of members, the main challenge here is the use of the flow of non-members.

You know that we're not extending our subscriber base, but I think the key challenge for the advertisers is how we're going to leverage the traffic of the non-subscribers.

So in this case, the traffic that can be used is decreasing, because the number of members has increased. So we still need to continue to optimize the solution for advertisers, and use more attractive rights to support traffic.

So you can say that we see the traffic from the non-subscribers continue to go down because we are now having more subscribers. That is a reason for us, we need to continue to optimize the solution we provided to the advertisers and making sure we can also provide a very attractive interest package to continue to operate and optimize the traffic operation.

Since last year, our advertising industry has performed well, and we expect to see a steady increase this year. In the first quarter, we mainly contributed to the sales of e-commerce, video games, and quick sales. We also contributed to the sales of e-commerce at the beginning of the year.

You can see that a start from the year of 2023, we already registered a very good performance regarding the advertisement business. Well, regarding what we're going to do for this year, I think for this year, we're also going to maintain a very stable growth for the advertisement business. At least from what I can see from Q1 of this year, we have a very strong growth, especially we have the key revenue contributor coming from the e-commerce, the gaming industry, the content, information, and the faster consumption industry. And especially due to the e-commerce, they are launching the large scale promotional activities during the new Chinese year. So welcome to say that in Q1 of this year, we also have a very good growth coming from the e-commerce channel regarding the advertisement business.

So for Q2, a more important node is 618. So in the case of 618, we need to better serve the e-commerce industry. We hope to achieve a better growth trend than last year at the important e-commerce node of 618. At the same time, we have prepared a richer advertising model for these e-commerce advertisers.

Well, talking about the Q2 of 2024, I think the key event we're going to have in Q2 would be the 680 shopping festival online. In that way, we're going to leverage this great occasion to serve our e-commerce advertisers because we hope that by serving that, we will be able to have a very, very good growth compared with last year. And we also prepared many of the good solutions in order to continue to serve the e-commerce advertisers.

You know that besides that, we are also leveraging the very enriched and diversified music ecosystem of TME, continue to roll out more diversified formats of advertising and new advertising business models.

For example, for the investment advertising, it could also be well combined with our Earth-like performance and concepts.

As I mentioned, in Q1 of this year, we also launched an incentive-based advertisement format that is based upon the coin. By launching this new model, we hope that we will be able to continue to improve the user retention, while at the same time, to start a new stream of the revenue for the advertising business. So basically, for us, we can, under the three modes of pricing, contract, and recruitment, because we have a very rich, diversified advertising product, so we believe that this can better support the health and growth of our advertising business.

You can say that based upon the three business models regarding the price competition, the contracted advertising and investment advertising, we do have a full portfolio of the advertisement solution. In that way, we will be able to leverage this full mix of the product to continue to grow our advertising business in housing and sustainable approach.

Okay.

Thank you. And the next question from Zhang Lei, Bank of America Merrill Lynch. Zhang Lei, please.

Hi, good evening. Thank you for accepting my question. Congratulations on your performance. My question is mainly about the trend of overall profit and profitability. I see that EQ is much better than expected in terms of profit. Especially in terms of sales and marketing, there has been a significant improvement in the exchange rate. But in terms of MAU, the overall exchange rate is relatively stable. So I would like to ask about the driver behind this. How do you see the future trends? Thank management for taking my question. My question is mainly regarding the margin trend, especially the sales and marketing trend. Consider we have a Q and Q control on the sales and marketing best to maintain the MAU sequentially largely stable. So how should we look at the driver and the overall sales and marketing and the margin trend in the following quarter. Thank you.

We have just analyzed the interest rate. The interest rate has grown significantly in the past year. This is the starting point. We expect that it will continue to grow in the future. We can see that in Q1, the operating costs have dropped in the past year. This is the situation.

Thank you very much. Thanks for your question. Just now, in our previous answer, we also mentioned about the GP margin. Actually, for our GP margin, we registered a significant growth no matter on YYY or MOM basis. That should be a very solid baseline for our performance. I do believe in the near future, we're going to continue to grow this down there. And in Q1 of this year, talking about the marketing expenses, it was ever going down on YYY and MOM basis.

Q1 is relatively low in terms of marketing costs. Q1 itself is a relatively low season in terms of seasonality. In Q1, compared to Q4, we actually did a little less in terms of brand promotion and promotion activities.

We're talking about the seasonality of the marketing expenses. Q1 of each year are traditionally being considered as a low season of the marketing events because majority of the brand promotions and the promotion activities being conducted in Q4 of each year. So in Q1, we launch less marketing events.

But with the improvement of our overall music platform, with the improvement of our overall music platform, with the improvement of our overall music platform, with the improvement of our overall music platform, with the improvement of our overall music platform,

But I can say that our platform, or should I say the monetization of our music platform continues to be improved. And also with the well-established ROI management method in place, we do expect we're going to spend more market expenses in order to regain the traffic for our channels. 同时会减少在直播方面的这个渠道的一些费用。 where at the same time, we're also going to reduce the market expenses in the channel of live streaming.

Well, my second point is regarding the content, especially the self-commissioned or self-divided content. This is going to serve as a key driver for our future business. So we're going to make good investment for the content promotion. So we foresee in Q2 of this year, the market expenses will rise, but overly speaking, the market expenses for 2024, the full year, will be in line with what we saw last year in 2023. And then we come to our G&A fees. The main part of this is the cost of our employees' investment. In the past year, we have actually done a lot of work to reduce the cost. In fact, the number of people has also been greatly reduced.

So coming next, let me comment on GNN Extensive and especially the investment we made on the team. And actually for the past one year, we have already adopted the cost initiative and continue to downsize the team.

On the other hand, we will continue to invest in new technologies and new products. Similar to AIGCL, we will continue to invest in these aspects.

where at the same time, we're also going to continue the investment in new technologies and a new product, for example, like the AIGC.

So, generally speaking, regarding G&A, we still believe that the total G&A expenses in 2024 would be in line with 2023. So overall, in terms of our net profit growth, we expect that our revenue will also grow in the next half of the year. Our promotion costs and G&A costs will remain stable. We expect that our net profit and net profit rate will increase.

So, overly speaking, as you can see, we continue to grow the GDP margin, and also we foresee the revenue in H2 of this year also going to go up, while at the same time, we also stabilize the promotion expenses and the G&A expenses. So I do believe for the full year, the net profit rate and the net profit will be improved.

We are coming next. Please allow me to talk about ERT, the effective tax rate. Yes, as you can see, our QE has risen to 19.9%. The main reason for this is, as mentioned earlier, that we have to pay a cost of maintenance and holding tax from the domestic paper companies to foreign entities. In 2024, our efficiency will increase, similar to the situation in QE.

Regarding the effective tax rate, in Q1 of this year, it has been risen to 90.9%. The key reason is because the dividend payout need to be made from the onshore company to the offshore company. So we're going to pay for the withholding tax. So that's a reason in Q2024, the effective tax rate in Q1 has been on the up,

But generally speaking, the sum is quite small and it's not going to impact the net profit and the net profit rate that much. So, overall speaking, I do foresee for net profit and the net profit in 2024, it's going to keep arriving on the net.

Thank you. And the next question from Macquarie L. Chang.

Thank you so much management for taking my question and congrats on the great results. It's been very great to see the improvements in our music paying conversion. So if you compare the existing users versus the newly acquired users, just wondering, can management shed some light on the average pricing gaps between these two cohorts? Also during the opening remark, management shared some very exciting AI empowered initiatives that have been driving better user engagement. Just wondering anything you can share on the recent trends for the next month retention and whether there could be more operating leverage for a higher customer lifetime value down the road. Thank you.

I would like to thank the management team for their excellent performance in this quarter. We can see that in the first quarter, we have achieved a lot of progress in terms of the overall user conversion. I would like to ask the management team to compare our current users and the new users. I would like to know if you can share some information on the average price difference between these two groups. Also, as the management team mentioned in our speech, we have a lot of plans for artificial intelligence. to further improve our operations. In addition to further helping users to participate, can you also share with us the basic trend of user retention in the next few months?

Thank you very much.

Thanks for the question. Regarding the existing customer, yes, indeed. For the existing customer or the user, we do have a very high retention rate. And because many of them are our long-term users, And if we're going to convert them, that means they just continue to renew our service. So originally speaking, the conversion rate of our existing user would be very high. Well, for the newly acquired users, as we mentioned just now, in order to engage those users, we provide some discount. and some of the promotional activities, even if we're already scaling back the discounts, but actually the conversion rate of the new users will go in line with our promotional activities and sometimes is subject to the change of the promotional activity timeline.

We need to be clear about the growth of the user memory in the AI model. All the recommendation systems for music platforms now are related to the model of the neural network. Currently, we are also... It is actually different from the modern language model. But we say that based on the current model of the neural network, we will introduce more parameters at the same time. will be very helpful to our current recommendation and search capabilities. This is what we can see from the actual data. So for us, we should say that our users' storage capacity, because of these technical applications, our overall storage capacity has been improved considerably.

The second part of the question is regarding how AI can empower the user retention. I have to say that the AI large model indeed helped to grow the retention. But let's be clear first, for the music platform, the recommendation system was based upon the neural network model. And it is different from the large language model we're talking about today. But generally speaking, I do believe as we're having those great models and by introducing a large set of the parameters into our existing platform, we will be able to continue to improve the recommendation capacity and search capacity. And you can see from our actual operationals that can help us to continue to grow and optimize the user retention. So indeed, by leveraging those cutting edge technologies, our overall retention rate is being improved.

Based on the current large-scale model and the technology of the generation system, we have released a video model drive of a virtual person in Q1. This is actually a good reflection in the entire open source community.

Actually, we talk about large language model and generative technology. In Q1 of this year, we also launched an open source self-developed minicam video model drive, which has already received very positive feedback from the open community.

In addition, we have a new result. We have developed a new model for audio. Based on the characteristics of the audio, it can determine the relationship between the two songs. This is a very significant and positive result for us in promoting songs.

And something that we're truly proud of is that we also newly introduced a large model, we call it audio model. This audio model can help to distinguish the correlations between two notes and the sounds based on the characteristics of the audio. And this is also a very good result that has been harvested from the cutting edge technology.

In terms of content creation, we have achieved good results in terms of AI voice generation across the entire platform. Whether it's in terms of user size or user income, we are developing it according to our expected results. Through AI voice generation, we can discover more interesting songs and content.

Well, regarding the content creation, we have already received a very good result from artificial intelligence generated vocals. No matter from the user scale or from the revenue of the users, we are all seeing very good progress being made. In that way, it can actually facilitate the users of identifying new lyrics and new sounds and new content. And another milestone I'd like to mention in Q1 of this year was we're working with Tencent AI Lab and introduced the first music generation model for the folk music. And it is through this model we're working with Shanghai National Orchestra to organize the ever first AI-empowered concert in China.

And besides that, we're also keeping an eye on those leading models in the industry. One is Sona and another one is UBIO. And we're exploring those new models to see how they can fit into our platform.

Thank you. And the next question comes from Fang Wei from Mizuho. Fang Wei, please. Are you with us, Fang Wei? OK, let's.

Hello?

Yes, we can hear you. Go ahead, please.

OK, thank you. Sorry about that. Yeah, thank you for taking the question. So I want to double click on the offline concerts. So we see pretty good coming back last year and so far this year. Just wondering if management can help remind us your position and your strategy for this segment. And also, what's the business models there other than sponsored advertising? Thank you.

OK, thank you so much for your questions.

Thank you very much. Thank you for giving me the opportunity to ask this question. My question is more about offline performances and offline performances. We can see that offline performances have recovered. They performed very well in 2023 and 2024. Could you briefly introduce the positioning and strategy of the company's business in the offline performance segment market? In addition to sponsorship advertising, are there any other good business models? Thank you.

Thank you so much for your questions. Basically, I think 2023 is a big year for the live performance businesses. We are also seeing that you continue to trend in this year, but definitely it's going to be normalized and will not have such a big growth when compared to last year's performances. I think from TME point of view, we have different pillars of strategy in order to support our overall strategies. First of all, we are committed to build our own IP, for example, like the TMEA music festivals and also the award ceremony. This year is going to be the fifth year of us and we have already received a lot of very good results. and form our partnerships as well. And we are focusing on not just bringing the local artists, but also the international artists to our stage as well. Besides our own IP music festival and awards, we also team up and also help to organize and produce top tier artists live tour as well in China and also in Southeast Asia that we have successfully launched out in year 2000. and we are continuing to doing that. And the last one, which is we will continue, besides the top-tier artists, we will be focusing on building some of the smaller stages, for example, like Live House events for the Tencent musicians, which will help us to incubate a lot of younger generation of musicians in order to continue to improve through the live performance events. Besides the strategies that we are, the different types of concerts that we are organizing, we will have different business model as well. First of all, we have the ticketing. We can also have the advertising sponsorship model. And as what we have mentioned before, we are also working on the fan space economy, like the merchandise and all these kinds of things that we are working on. We will also continue to collaborate our live event, not just offline, but together with online, with different privileges, with our super VIP panel as well. So we have an exciting journey that we are looking forward, and we will continue to pull in more resources in order to grow the live performance business in TMD.

Okay, in the interest of time, we'll take the last question from Thomas Chung. Jeffrey, please. Thomas?

Hi, good evening. Thanks management for taking my question. My question is about our new initiative, such as long-form audio, IoT. Can management comment about our thoughts about the outlook in these areas? And my second question is about our long-term target. Given we have talked about our 2024 outlook on the top line and the bottom line, can management comment on how we should envision TME in three to five years' time down the road? Thank you.

Thank you for answering my question. My first question is about some of the new strategies we mentioned before, such as a long-term IoT. I want to know what the management thinks about its future in this area. The second question is about the company's long-term development goals. We have just mentioned the company's vision for revenue and profit in 2024. I would like to ask, from a three to five-year perspective, what is the management's vision? Thank you. Let me answer the first question first.

Thank you very much. Thanks for your question regarding the long-form holding from the business strategy perspective.

it's going to complement to our existing online music service. It will help us cater to the needs of the diversified customer base, especially including the user from different agencies. So that's the reason we'll now continue to introduce the top content and the new content in the market. Essentially, we do see some very good performance in the children-related music market.

The main point here is that we still need to keep in touch with our Tencent Group, especially with Yuewen. We should focus more on Q2 in this Q2. If there is a match in Q2, I believe the content of our long video will also provide a better result for users' storage.

And the second point is that we're going to keep a very close collaboration with Tencent Group, especially with Huobin. And I do believe in Q2 of this year, the key event we're going to see is a robot for release of Qingyun in a second phase. If that were to be successfully rolled out, I do believe, and it's also going to help us to continue to improve the user retention for the long-form board.

Dr. Chang, you can...

I think for the entire overall strategy of an entire company, I think that we are right now on a really good pace in driving the online music services in a really good form. So we will do it going to be one by one, for example, to continue to improve our music the overall subscribers and also our ARPPU as well. But at the same time, this is the core, the most of our company I think is very, very important is we have to continue to build our content ecosystem, which ensuring that we will have a good coverage of all of the music libraries that we should have. And also we will continue to pull in more resources in doing content co-productions. And besides that, we will also extend our footprint, not just locally, but we also can doing some of the international development, for example, according to not just the business side, the platform side, but also the content side as well. So I think that is definitely going to be a lot of interesting and exciting projects ahead. I think from our company point of view, I think we definitely is not just doing a 100-meter sprint. We are doing a marathon. So I think that we should strike the balance. At the same time, we continue to to have a quarter by quarter growth, but at the end of the day, we'll be focusing on a long-term sustainable development of the entire group. And we are ensuring that we are going to have to ensure to drive a good investor's returns to all of our investors as well. So we would like to share our success, not just doing the business well, but also ensuring that we have a good dividend policy and also somehow continue to have our share buyback program at the right moment. Okay, I think that's it for today.

Thank you. Thank you everyone for joining us today. If you have any further questions, please feel free to contact our IR team. And this concludes today's call. And thank you so much again and look forward to speaking to you next quarter.

Okay, thank you very much. Thank you. Thank you.