Tencent Music Entertainment Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2023

There are 10 speakers on the call.

Operator

Good evening and good morning. Welcome to Tencent Music Entertainment Group's Q1 2023 Earnings Webinar. TME announced quarterly financial results today after market close. An earnings release is now available on our IR website at ir. Tensamusic.com as well as VIA Newswire Services.

Operator

Today, you'll hear from Mr. Ka Chun Pang, our Executive Chairman, who will start the call with an overview of our recent updates. Next, Mr. Ross Liang, our CEO and I, Tony Yip, as CSO, will offer additional thoughts on our product strategies, Operations and Business Developments. Finally, Ms.

Operator

Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which applies to this call as we will make forward looking statements. Please also note that the company will discuss non IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in the company's earnings release and filings with the SEC. At this time, All participants are muted. After management's presentation, there will be a Q and A session.

Operator

For participants who have dialed in by phone, please press 5 to ask a question. If you are accessing the call from Tencent Meeting or Voof Meeting application, please click the raise hand button at the bottom left. And please be advised that today's webinar is being recorded. With that, I'm pleased to turn the call over to Ka Shing, Executive Chairman of TME. Ka Shing?

Speaker 1

Thank you, Dongmi. Hello, everyone, and thank you for joining our call today. We are off to a great start in 2023. Our strategic emphasis on quality growth propelled strong growth of our online music revenues in the Q1. As the revenue size of our online music services As now catch up with social entertainment services for the first time, it signifies that our long term commitment to developing a sustainable online music business model is bearing fruit.

Speaker 1

In addition to a healthy increase in our total revenues, Our focus on efficiencies optimization also drove robust net profit growth. Content is the bread and butter of our businesses. We continue to deepen partnerships with top music labels and artists, so as to enrich our iconic music catalog and vertical content offerings as well as to expand our user's bandwidth. We established a strategic collaboration with Rock Records Providing users with iconic Chinese songs and original soundtracks of popular TV dramas, such as the works of Zhang Zhen Yue, We also strengthened our strategic partnership with Lionghao and Phuong Hua Shuxi, Goose matched the artists including Wuhan and Black Panther's, K pop Yoogeun, as well as with Hype from South Korea, whereas artists such as BTS and Seventeen on the flow cell. Additionally, with the feature of a 7 day head start period, Our partnership with JJ Lee for his new digital album was well received among users.

Speaker 1

The new album also broke his previous sales record in terms of GMV on our platform. On top of that, we also wish the collaboration with well known artists including Quan, Tai Xu Feng And all in, meeting me for head start benefits on their new songs releases on other areas such as merchandise sales, online and offline performances and artist spend interaction events. As for music verticals, to satisfy the increasing demand for web music among younger audience, we enriched our web In parallel with our efforts to expand our content library, we have facilitated the production of high quality original content unlocking more opportunities in the growing music industry. We have taken it upon ourselves to foster creativity and nurture artists for a rich variety of support programs, stage performances and monetization opportunities. With dedication to amplifying the influence of musicians and their works with this goal in mind, We participated in and promoted artist growth through our Tencent Musician platform, which offers abundant resources and diverse monetization avenues.

Speaker 1

As a result, the number of active musicians and singers who released new songs kept rolling sequentially on our platform during the quarter adding to the vibrant of our ecosystem. For example, we unveiled a new initiative, The Emerging Force program, to discover musicians with high potential and encourage the production of high class music. The program offers a wider range of IT services, including traffic support, revenue sharing and on and offline performance opportunities. By increasing the exposure and popularity of quality songs, Along with amplifying artist influence, we enhanced the vitality of the musicians' econ system on our platform. As of the Q1, we had assisted 260 up and coming musicians in reaching their first million streams And how can multiple artists make their debut performance on stage?

Speaker 1

Notably, after joining our Imagine Force program, The singing songwriter, Zhang Yuxian and slow mo, Aoyang Ming Yang, Both saw a surge in their followers and streams. Going forward, we will continue to discover musicians with great potentials by Bringing together top artists, producers and music programs, particularly in bands, rap and pop music legends. Recently, QQ Music also launched a customized home page for musicians. Through this page, musicians can access data and insights in terms of streaming, followers and comments. This can empower better management of song distribution and promotion.

Speaker 1

In addition, this page also provides up to date Support Resources and Policies of Our Platform. Gen Z Musicians Christie, New Jin Wei, was one of the Many success cases that demonstrate our powerful ability to counterfeit and promote artists. In the Q1, We signed her to our Tencent decision platform, elevating her profile and promoting new songs through a variety of internal and external resources. As a result, the number of her followers more than doubled, growing from 50,000 to over 100,000 within just 2 weeks of her onboarding. With our diverse performance stage and all around support in music production, We have been dedicated to elevating the influence of Christie and other aspiring indie musicians alike.

Speaker 1

Furthermore, we teamed up with Billboard China to hold our 1st original music contest, The 1. Our collaborative contest is designed to discover emerging artists with the ability to produce quality original Chinese music as well as to how expanding their global reach. To that end, we invited excellent song singer songwriters And renowned singers in China and abroad, including Grayson Chen, Lengka, Mika and Tierway, Yuanyao, Among others, to inspire contestants to produce original music and assess their performances, Through this cooperation, we will leverage billboard's global resources, influence and high international standards to provide talented metrics with end to end services ranging from demo evaluation, song release, worldwide promotions and all the way to customized performances. Upon the solid foundation of our Tencent Musician platform, We are well positioned to effectively facilitate the production and promotion of original contents. We also We are also excited to see that we produced a number of blockbuster songs, Creating many mega hits in the Q1.

Speaker 1

For instance, Rose of No Man's Land, Xinanxing has accumulated streams over 100,000,000 with its Melodi and Nearest pair that we have traded on our 5 Sing platform. Not only did this song make its way onto several recent charts, but also it garnered additional music market exposure. We are writing a relay of fraction stories inspired by Nurex on short video platforms. Other things in the Q1 include Hi, Yucian and the Wanderer. Excelling and producing prime original content, We have created an integral role in expanding IP values across the entertainment industry.

Speaker 1

As a case in point, We have created quite a few musical works for iconic films, games, animations and other media. In the Q1, We co produced Zhou Shen's Chinese cover of the film song of Makoto Sing Kai's movie. This song ranked in over 100,000,000 streams within only 3 weeks of the series. It also ran the 1st on the CNG Global Chinese Music Popularity Chart, CNG, Quanshou, Huayu, Ying Yue, Lu Xing Ba And top of the 12 other music charts, as you may notice, this song is also the whole music for today's earnings call. Meanwhile, we continue to cooperate with the broader Tencent ecosystem, producing singles for 11 well known games and 4 animations the Q1, notable examples including Crane for the Mountain and the Sea, For Honor of Kings, Wang Zhe Rong Yao and Light of Before I conclude, I would also like to highlight the progress of DMD Live, our comprehensive online merch offline performance brand.

Speaker 1

Amid the performance market recovery, we are exploring innovative ways to monetize and interact with users. TMB Live is well positioned to capture this market opportunities via our online merch offline capabilities, allowing us to provide users with superior audio visual experience anytime and anywhere. In the Q1, we host a total of 29 online and offline concerts, including online concerts for Justin Huang, Notably, Quants and Richard Sam's Eat Concerts received well spread user acclaim, generating a total of 1,400,000,000 social media views and attracting almost 70,000,000 unique visitors in the Tencent ecosystem. We also provide the fans with the option to purchase custom merchandise while enjoying the shows. TME Live's unique performances formats Covered with this high profile in the industry and with users, appeal to many well known advertisers for sponsoring such as PepsiCo, Yang Yuanqing and JD.com.

Speaker 1

We also continuously increased our presence In the offline performance, particularly as the public shows a growing interest for offline activities. In the Q1, we organized tours in cities such as Shenzhen, Changsha And Hangzhou for musicians, including Kola Xiaocou, Kevin Hu, Fa La, and the Rock and Roll Band white paper, to foster closer and more encouraging and more engaging connections between musicians and their followers. We encourage online audience to share their thoughts and feelings through online border charts during performances. Going forward, we will continue to explore The on and offline integrated performance formats offering integral artist lineups an exciting news experience. We evaluate our content ecosystem and user engagement and first capture incremental monetization opportunities.

Speaker 1

That concludes the update on our growing content capabilities. Now I would like to turn the call over to Ross. He will share more about our platform strategies. Ross, please go ahead. Thank you, Ka Chun.

Speaker 2

Hello, everyone. Moving on to our platform innovations. In the Q1, We further refined users' music consumption experience. We are advancing our audio live streaming services. In addition, by further exploring large language models, we energized our platform ecosystem With a broader range of AIGC applications, I am not meeting users diverse and nuanced music testers in new and exciting ways.

Speaker 2

On the front of users' music consumption experience, Our efforts to enhance sound quality and effects, combined with our optimized operations in different leasing scenarios, have been well recognized by users. This further bolsters users' stickiness and our monetization capabilities. As a result, higher user engagement brought us a year over year growth of Average daily time spent per daily active user who listen to the music on our platform. We have extended our premium sound quality and effects to cover a wider range of scenarios during the quarter. In addition to rolling out the auto mix sound effect, we also introduced a customized sound effect For teens in time, Shunai Shao Nian Quan's album, This song effect highlights vocal details and instrumental Layers, creating an air of live performance.

Speaker 2

A total of 2,300,000 users have used these song effects in 170,000,000 streams. Moreover, we extended our premium sound quality For example, our QQ Music's Galaxy Sound Effect maximized the performance of in car audio systems as it can fine tune its sound effect to match many in car audio systems of mainstream car models. This has further enhanced our users' listening experience. In addition, We also offer a highly personalized and engaging music experience that caters to users' unique Preference and statistics. For instance, we launched a 3 d music player interface and customized playlist with various design templates, where users may choose their favorite styles.

Speaker 2

Beyond that, we tailor playlists to specific holidays and festivals, such as the Chinese New Year and the World Sleep Day, to offer our listening experience for this special occasion and users' current state of mind. Thanks to our ongoing algorithms, upgrades, and product optimizations, We are able to constantly advance our recommendation efficiency. This brings us deeper Insights into content and the users' behavior, allowing us to create a more personalized listening experience. In the Q1, QQ Music and Qugomusic's recommendation stream volume, together with its time spent per user, Increased both year over year and quarter over quarter, taking the proportion of recommended streaming On the front of audio live streaming, it has become an important growth Driver for us as we offer a unique engagement revenue for our users and performers With our differentiated content and interactive features that drive its growth, we keep enhancing user Meanwhile, our vibrant audio anchor ecosystem also benefits our musician community. ICT provides them with a platform to showcase their skills and reach a wider audience.

Speaker 2

We have nurtured rising musicians on our OQQ Music live streaming platform. For example, Shikou Xiaoye, Duyang, Sumo, and Shangqing, these 4 musicians contributed a total of 110,000,000 song streams. North Ball, upon the promotion in one of our audio live streaming programs, Xuchangqing's arranging single, Go, Gunya quickly made it to QQ Music's new song recommendation chart. In the Q1, The number of performance in audio live streaming continued to rise year over year and quarter over quarter. In terms of user interactions, we added new social interactive features to our platform.

Speaker 2

This has created additional youth traffic and scenarios, and will better serve users' entertainment needs. As important ice breaking tools between performance and users, these interactive features also draw year over year and quarter over quarter increases in its daily time spent per user. Going forward, we will keep upgrading and expanding our social interactive offerings to higher user retention and additional commercialization opportunities. Turning to AIGC. IRMS have important us to produce content more efficient centrally, as well as to create an increasing engaging user experience.

Speaker 2

In the Q4, We launched TME Studio, an AI enabled Smart Tools for music production. We also introduced the local producer, Yinsheng feature, followed by our Liyingqing With these tools, musicians can be more efficient in lyric writing, composing, music content analysis and editing. Such tools also have generated outstanding Content by seamlessly branding users' original voices into different songs. On top of that, our first AI music company, Xiaoxing, hosted a live streaming show. Hexing and Dancing provide an immersive entertainment experience.

Speaker 2

Users were also able to Furthermore, in fostering a more customized listening experience, QQ Music pioneered an AIGC's important music player. With various AI generated virtual styles, users can enjoy different themes of music players. With that, I'd like to give the floor to Tony to review our business operations. Tony, please go ahead.

Operator

Thank you, Ross. Hello, everyone. During the Q1, we have seen enhanced monetization in our Online Music Services. We booked robust year over year growth in Online Music Services revenues driven by the advancement of both subscription and non subscription businesses. On the subscription side, its strong performance was propelled by the growing number of paying users and its AR PPU, which comes to 94,400,000 and RMB 9.2, respectively.

Operator

Notably, Our online music paying ratio hit a record high at 15.9%, while our AR PPU expanded sequentially for the 4th consecutive quarter. All these results reflect our refined content operations, users' higher willingness to pay for premium sound and effect features as well as more effective promotions. In addition, our IoT service has been growing over the past few quarters. Seeing its increasing importance to our overall business development, We began to include certain IoT devices in the disclosure of operating metrics for our online music services starting from the Q1. On the non subscription side, it also delivered strong year over year growth.

Operator

Advertising revenue grew notably year over year, mainly due to lower revenues last year caused by COVID-nineteen impact, increasing interest from advertisers in our innovative advertising formats as well as improved macro environment. In particular, we have seen an increasing advertising spend from advertisers in the e commerce, Gaming, Travel and Food and Beverage Industries. Meanwhile, revenue from our ad supported mode also grew well as more users adopted this model. In addition to TME Live's advertiser sponsorship mentioned by Kashan earlier. We cooperated with Uni President, Sukh Daren, Tony Tang Daren and Heineken In the Q1, to create customized brand zones, playlists and music festivals, helping advertisers increase brand visibility with our innovative ad formats.

Operator

On top of advertising, we also enhanced our ability to monetize through artist merchandise, Long Form Audio and Music Distribution. In terms of artist merchandise, in the Q1, we worked with well known artists such as Renjiadun, Lu Han, Huangmin Hao to introduce collection cards, action figures, t shirts and more. As a highlight, sales of the album Utopia by Teens in Times exceeded 1,000,000 copies on our platform within 2 days of its release. In the future, we will keep expanding the offerings of artist merchandise on our platform and we also have a number of artist corporation projects underway. In terms of long form audio, its revenues expanded year over year as we increased our offerings of popular content in the Q1.

Operator

For example, we introduced a new format that combines leading IP and radio drama. During the quarter, We released Reunion: The Sound of the Providence, adapted from the original work of Nan Pai Sanshu. Its streaming volume exceeded 340,000 in the 1st week after launch. These distinguished content further complemented our music offerings and increased overall user engagement. Moving on to our social entertainment services.

Operator

Facing a tough market environment, we focus on product innovation to differentiate ourselves and gain user mindshare. For WeSing, based on our multi person singing room in both video and audio settings, we upgraded our chorus features to Chorus for All, which can support a real time course of 1,000 people, further enriching users' immersive experience. In addition, we released extra interactive features in our Singing Rooms such as score competition and red envelope sharing. These features allow The Singing Room's penetration rate to grow year over year for the 5th quarter in a row. In the future, We will leverage these course and singing features to explore collaboration across different products on our platform such as TME Live, artist fan interaction events and sponsored advertising.

Operator

In terms of WeSing membership, we expanded VIP privileges to include features such as customizable sound effects, recording interface themes and name tags, all resulting in year over year revenue growth in the Q1. Meanwhile, WeThink's revenue grew steadily in the overseas market. We will expand its presence further through both organic growth and M and A. For live streaming services, although revenue from traditional live streaming remained adversely affected by the macro environment, Our audio live streaming delivered double digit year over year growth rate in the Q1. Audio has become a growth engine for our live streaming services as we keep providing differentiated content and interactive features.

Operator

We also strive to build a growth path for more live streaming performers further tapping into their potential while strengthening their connection with users, which in turn cultivates users' willingness to consume and pay for content. In the Q1, Kugom Music rolled out its Singing Room feature following QQ Music's successful validation, delivering year over year revenue growth as well. Lastly, we remain committed to fulfilling our social responsibilities through music. For example, TME provided care for people with autism through music for the 7th consecutive year. We launched a caring program called If Music Has A Shape.

Operator

We invited over 50 groups of singers and musicians from China and abroad, including Xue Zixian, Xiao Zhan, Yuan Yanwei and to perform in our program and share the love. Simultaneously, we debuted the Caring Food Music theme song, Secrets Hitting in the Stars. Sung by Lucy, TME's 1st hyper real virtual pop idol. This program's social media views have exceeded $500,000,000 raising awareness of autism among the public. In conclusion, we started 2023 on a high note with innovations across content and platform.

Operator

This establishes a clear path for our creative and sustainable development in the coming year and beyond. Our progress in monetization efficiency, Cost optimization, commercialization and user experience has also positioned us for ongoing business growth. Going forward, we will continue to explore the intersection of music and technology, pioneering new forms of art and entertainment, while upholding our commitment to society and fostering a healthy, more diverse music industry. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financial.

Speaker 3

Thank you, Connie. Hello, everyone. Next, I'll discuss our results from financial perspective. In the Q4 of 2023, our total revenue resumed year over year growth and reached RMB7 1,000,000,000, up by 5% year over year. With the success of effective cost control and improved operational efficiencies, Our Langharis net profit margin reached 20.9% this quarter.

Speaker 3

In Q1, Mail subscription revenue continued its rapid growth and reached RMB2.6 billion, up by 30% year over year and by 11 presented sequentially propelled by rapid expansion of both unlimited paying users and AR PPU. Specifically, monthly ARPU in Q1 was RMB9.2 increased by 9 from last year and RMB 3 from last quarter, recording 4 consecutive quarter of expansion. Online mid to pay user grew to 94,400,000 up by 18% year over year, representing a 5.9 Meaning net adds sequentially, the strong AR PPU and paying user growth resulted from high quality contents and services, Attractive member privileges and more effective promotions. As we expand use cases and the service offerings, We are seeing growing demands in IoT services and expect more opportunities to monetize this in this area in the future. Therefore, starting from this quarter, we have updated the definition of online mute MAUs and included certain IoT device Users in our online news MAUs.

Speaker 3

Additionally, revenue from advertising achieved strong growth year over year Due to strong performance from our data based free listening model as well as lower advertising revenues For comparison in Q1 2022, due to the impact from COVID-nineteen, we are pleased with such results and remain confident about the long term growth potentials in advertising business. Social entertainment service and other revenues were RMB3.5 billion, down by 13% year over year due to the evolving macro headwinds and the competition from our platforms. To adapt to the changing environment, we focused on cultivating talented performance and differentiating our content to stabilize the revenue scale of the traditional live streaming and making efforts and increased our competitiveness through ongoing product innovation and the new initiatives in social entertainment services such as audio live streaming, real time interactive periods and the international expansion. Gross margin in Q1 was 33.1%, up 5.1 percentage points year over year, primarily due to Growth of online music revenues, our effective control of content costs as well as improved operational cost efficiencies. Now moving on to operating expenses.

Speaker 3

Total operating expenses for Q1 were RMB1.2 billion or 70.5% as a percentage of total revenues, down by 2.7% from 20 0.2% as a percentage of total revenues in the same period last year. Selling and market basis were RMB212 1,000,000, down by 36% year over year. Borrowed reduced spending on user acquisition had impacted on our MAUs. Our core music subscription service delivered strong growth. We continue to take measures to improve expenses, closely monitor the ROI of each promotion channel, That utilized external promoting channels and leverage our internal traffic to attract users and promote our brands.

Speaker 3

When elaborating the healthiness of business and assessing ROI, we focused more on measures such as level of engagement, User retention rate extra. General and administrative expenses were RMB RMB1 billion, which was relatively stable comparing to the same period of 2022. We continued to closely manage our app loan related business By improving high content business and investing in research and development to further empower music related content creation, enhanced production expenses and improved sound quality and effects. Our effective tax rate for Q1 2023 was 12 point 2%. For Q1 2023, our net profit and net profit attributable to equity holders of the company were RMB1.2 billion and RMB1.1 billion, respectively.

Speaker 3

Non IFRS net profit The non IFRS net profit attributable to active holders of the company were RMB1.5 billion and RMB1.4 billion, respectively. Diluted earnings per ADS was RMB0.73, up 97% on a year over year basis. Non IFRS diluted earnings per ADS was RMB0.89, up 65% on a year over year basis. Such results demonstrate our commitment and continued success on operating business improvement as well as the impact from share repurchase program. We are endeavoring to provide high quality investment returns for our investors and shareholders and remain confident about our financial performance, the development of our business and the overall industry.

Speaker 3

As of March 31, 2023, our combined balances of cash, cash equivalents and term deposits were RMB28.5 billion as compared with RMB27.4 billion as of December 31, 2022. The increase was primarily due to our healthy operating cash inflow of RMB1.9 million for the Q1 of 2023. Such combined balance was also impacted by the change in exchange rate of RMB to USD at different balance sheet dates. In conclusion, we started 2023 with strong revenue growth momentum and the revenue side of our online music services Caught up with social entertainment services for the first time. Going forward, we continue to expect balanced growth of both ARPU and paying users And I remain confident in the growth of potential of our advertising business.

Speaker 3

Social entertainment service continue to face evolving We grow headwinds and competition from our platforms, and we will continue to differentiate our content and entertainment appearance and create more high quality contents to educate and stabilize revenue scale for social entertainment services. Meanwhile, we continue to invest in new products and services, high quality contents and technologies, especially in areas such as IoT, Game, Saving Room and Original Content and AIGC to build up a solid foundation for our healthy long term growth. This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Speaker 4

If you are accessing the call from the Tencent Meeting or Wolf Meeting application, please click the raise hand button at the bottom left. And today's first question comes from Alex

Speaker 5

Thank you, management for Congratulations on very strong results. My first question is regarding our subscriber music subscriber growth Business, 5,900,000 net adds is our record high number, and it's been accelerating from the last two quarters. Can management explain the drivers behind this? And how should we think about the net adds growth outlook for rest of the year? Thank you very much.

Operator

The subscription revenue, which is very much our focus as we are seeking for a balanced growth between both paying user as well as ARPU. Subscription revenue grew at a 30% rate a year over year basis, which as you pointed out is an accelerated pace compared to previous quarters. This can be attributed to a number of factors. First, the quality as well as the value of our subscription service continues to improve. It was a long term effort in the making, and we're providing more and more attractive content and features within that subscription service.

Operator

Secondly, as a result of our long term effort and focus, users' willingness to pay for premium features such as sound quality as well as sound effects continue to increase. Thirdly, we continue to improve the promotion of those high quality content and product features. And finally, more effective as well as targeted promotional discounts around new subs as well as better retention programs also helped drive ARPU higher. And as a result, we continue to expect a very strong growth in our subscription revenue looking forward.

Speaker 4

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

Speaker 6

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

Operator

Overall, we continue to expect that 2023 to be a year of positive growth for both top line revenue as well as bottom line net profit. In addition, most likely from the Q2, we expect our quarterly revenue from online music services to exceed social entertainment services, to become a primary source of revenues. In terms of online music specifically, We expect subscription revenue to continue to deliver quality strong growth, driven by both paying users and ARPPU. In addition, A combination of advertising, long form audio, artist merchandise and IoT services are expected to contribute to the growth meaningfully. In terms of social entertainment, while traditional video live streaming will continue to face competitive pressure, Our Audio Live Streaming and International business can partially compensate.

Operator

Combining all of that With our continued focus on cost management to improve efficiency, we expect net profit margin to continue to improve, resulting in net profit growth that are likely stronger than previously expected.

Speaker 4

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

Speaker 7

Hi, management. Thanks for taking my question and congrats That's a strong set of results. My question is mainly on the music gross margin. Can you give us some updates on your music gross Margin, in the Q4, and how should we see the trend going forward since we have a better outlook

Speaker 3

About music Gross margin, we don't give the very specific detail number on this business. We will talk about all Gross margin on our business. Gross margin is 33.1% in Q1, increased by 4 0.1% year over year. Now there are some positive factors as follows. 1, the strong growth of monthly ARPU and net adds of new subscriptions and 2, the growth of advertisement revenue.

Speaker 3

And the 3rd, even social entertainment revenue faced a downside pressure and the revenue mix change also have the negative impact on our gross margin. The revenue sharing cost of Livestream has been controlled. We decreased the effect promotion activities and increased operational effectiveness. We focus on good performance and high quality contents. And the 4th, we optimized the content cost model of ROCE and increase the ROC requirement.

Speaker 3

We have also benefited from the development of our in house original content productions. And the 5th, we optimized the technology and operational strategy related to bandwidth and storage capacity and include utilization of our service and equipment. And looking forward in Q2, 2023, We expect the subscription revenue and advertisement revenue will continue to be strong growth and we will continue to increase our operational business and monitor our costs. We expect our gross margin will increase sequentially in Q2.

Speaker 4

Thank you. And our next question comes from Wei Hsu from UBS. Your line is open. Please go ahead.

Speaker 8

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

Speaker 1

Okay, sure. Thank you for your questions. And yes, after the reopening, the live concerts and music festival market is being really successful And for Shing so far, our unique positioning will be both of our online and offline capabilities, And we will be also focusing on the quality rather than the quality of the shows. So we will continue to upgrade And also we improved our TMB Live IP by more in-depth partnership with our potential partners, maybe shows content, co production, etcetera. And also we will definitely bring additional revenues to us and also we will further contribute to the healthy development of the TME's content ecosystem in the long run.

Speaker 1

There's also we're seeing that a positive trend in the industry, driving by the increasing demand for live entertainment experience and also the willingness of consumer to spend money on takers and events. But however, it's also worth Looking at, although the offline performances have been very fortunate so far, but this is also a low margin business for the organizers. So with this in mind, our approach will continue to be ROI based with a prudent investment mindset. But we continue to think that this is going to be exciting project for us in the long run.

Speaker 4

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

Speaker 6

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

Speaker 6

Thanks.

Speaker 3

And last question, I guided the gross margin. So I will talk about the Operational Expenses and in 2023, we will continue to focus on improving our business. Q1 sales and promotion expenses operating on low cost level, down by 36% year over year. Although the reduced spending on user creation has impacted our MAUs, our core music subscription service delivered strong growth. And for the headcount management, we will continue to invest in product enhancements, technology innovations, new products and new business such as IoT, Oasis Business, Annihilation Program, Enhanced Content Productions.

Speaker 3

And meanwhile, we will pay more attention to improve the Profitability of Business and the Products. In Q1, the adjusted net profit margin is 20.9%, increase on a year over year basis and sequentially. And looking forward to Q2, we expect that our sales and promotions business and the general A will be stable compared next in Q1 and with the growth of our revenue, We expect the adjusted net profit and adjusted net margin all will be increased.

Speaker 4

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

Speaker 1

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

Operator

Well, first of all, we continue to add more and more attractive member privileges behind our Super VIP package. While we are not ready to disclose specific numbers, we are pleasing to see the continued growth and the number of subscribers under the SVIP membership. In terms of the IoT services, We are seeing very good growth trajectory, primarily in the in car space. We continue to penetrate More and more car models, for example, recently we penetrated into several notable Mercedes models. And in those models, we are offering subscription services.

Operator

And very often, you do see Those offered at a full price point, at the full price as opposed at the discount price. And increasingly, we'll be separating the price plan between the IoT services as well as the mobile device. So you have to actually pay a separate fee in order to access for IoT subscription in addition to being able to access the subscription for mobile device.

Speaker 4

Thank you. And our next question comes from Yi Wen Jia from China Renaissance. Yi Wen, your line is open. Please go ahead.

Speaker 9

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

Speaker 9

Thank you.

Operator

The WeChat Music feature is actually powered by QQ Music to a large extent. Our objective is to extend the QQ Music service onto WeChat to provide WeChat users with high quality music experience. And this corporation enable us to help music creators tap into the significantly broader reach that are offered by WeChat. And as a way to promote this service, WeChat users can enjoy our service for free for a limited time between now June 30. From July 1 onwards, To access certain premium content and features, users will be required to become a paying subscriber.

Operator

We believe this corporation will generate incremental revenues for TME as it will allow us to attract incremental subscribers in the long run. And given the significantly broader reach of WeChat vis a vis T and E. We are delighted to be able to work very closely with WeChat on this cooperation to bring our music service to more users and we have no doubt we'll continue to deepen The corporation will reach out as we go.

Speaker 4

Okay. Now we will take our last question today from Lei Zhang From Bank of America, Lei, your line is open. Please go ahead.

Speaker 7

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

Speaker 7

Thank you very much.

Operator

We'll continue to deepen our research into the applications that are based on LLMs. One example of that is we'll be looking to develop a chatbot where users can chat to the chatbot about the kind of music they like and to discover new content. We will be cooperating closely with Tencent to develop application based on their LLMs as well as to work with open source LLMs to develop other applications such as those around image creation. Similar to Google's Music L. M, we will look to provide tools to help musicians significantly reduced the barrier to music creation and lower the cost and to improve the efficiency to help them with song creation as well as lyrics writing.

Operator

And then finally, in the areas of social entertainment, we'll look to create virtual idols That will ultimately be used in live streaming type use cases.

Speaker 4

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

Operator

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

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Earnings Conference Call
Tencent Music Entertainment Group Q1 2023
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