Tencent Music Entertainment Group - Q1 2023

Transcript

Tony Yip (Chief Strategy Officer)

Good evening and good morning. Welcome to Tencent Music Entertainment Group's first quarter 2023 earnings webinar. TME announced quarterly financial results today after market close. Earnings release is now available on our IR website at ir.tencentmusic.com, as well as via Newswire services. Today, you'll hear from Mr. Cussion 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. 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&A session. For participants who have dialed in by phone, please press 5 to ask a question. If you're accessing the call from Tencent Meeting or VooV Meeting application, please click the Raise Hand button at the bottom left. Please be advised that today's webinar is being recorded. I'm pleased to turn the call over to Cussion, Executive Chairman of TME. Cussion?

Cussion Pang (Executive Chairman)

Thank you, Tony. Hello, everyone, 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 first quarter. As the revenue size of our online music services has now caught 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. 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 users' benefits.

We established a strategic collaboration with Rock Records (Gun Shi Chang Pian), providing users with iconic Chinese songs and original soundtracks of popular TV dramas, such as The Works of Chang Chen-yue, Muqiao Yu, Wakin Chau, Jonathan Lee, Li Zongsheng, Wu Bai, and Mayday Wu Yue Tian. We also strengthened our strategic partnership with Li Ronghao and FengHua Qiushi, whose managed artists including Lu Han and Black Panthers, Heibao Yuedui, as well as with HYBE from South Korea, who has artists such as BTS and Seventeen on his roster. Additionally, with the feature of a 7-day headstart period, our partnership with JJ Lin for his new digital album was well-received among users. The new album also broke his previous sales record in terms of GMV on our platform.

On top of that, we also reached a collaboration with well-known artists, including Taiyi, and A-Lin, Li Linyi, for headstart benefits on their new songs releases on other areas, such as merchandising sales, online and offline performances, and artist-fan interaction events. As for music verticals, to satisfy the increasing demand for rap music among younger audience, we enriched our web offerings by adding a number of new songs from heavyweight rappers such as Ma Siwei. Meanwhile, we reinforced our competitiveness in different genre verticals such as electronic music, gaming, and classical music, among others. 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 through 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 artists' growth through our Tencent Musician Platform, which offers abundant resources and diverse monetization avenues. As a result, the number of active musicians and singers who release new songs kept growing sequentially on our platform during the quarter, adding to the vibrance 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 wide range of artist services, including traffic support, revenue sharing, and on and offline performance opportunities.

By increasing the exposure and popularity of quality songs, along with amplifying artists' influence, we enhance the vitality of the musicians' ecosystem on our platform. As of the first quarter, we had assisted 260 up-and-coming musicians in reaching their first 1 million streams and helped multiple artists make their debut performance on stage. Notably, after joining our Emerging Force Program, the folk singing-songwriter Zhang Yaxian and Su Hu, Ouyang Nana, 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 genres. Recently, QQ Music also launched a customized homepage for musicians, [foreign language]. Through this page, musicians can access data and insights in term of streaming, followers, and comments.

This can empower better management of song distribution and promotion. In addition, this page also provides up-to-date support resources and policies of our platform. Gen Z musician Christy, [foreign language], was one of the many success cases that demonstrate our powerful ability to cultivate and promote artists. In the first quarter, we signed her to our Tencent Musician Platform, elevating her profile and promoting new songs through a variety of internal-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-round support in music production, we have been dedicated to elevating the influence of Christy and other aspiring indie musicians alike. Furthermore, we team up with Billboard China to hold our first original music contest, THE ONE.

Our collaborative contest is designed to discover emerging artists with the ability to produce quality original Chinese music, as well as to help expanding their global reach. To that end, we invite excellent singer-songwriters and renowned singers in China and abroad, including Greyson Chance, Lang Lang, Mika, and Tia Ray (Yuan Yawei), 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 musicians 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 content.

We are also excited to see that we produce a number of blockbuster songs, creating many mega hits in the first quarter. For instance, Rose of No Man's Land, by Xu Lanxin, has accumulated streams over 100 million, with its melody and lyrics paired with traded on our 5Sing platform. Not only did this song make its way onto several music charts, but also it garnered additional music market exposure via writing re-relay of fiction stories inspired by its lyrics on short video platforms.

Other hits in the first quarter included [foreign language]. Excelling and producing prime original content, we have played an integral role in expanding IP values across the entertainment industry. As a case in point, we have created quite a few musical work for iconic films, games, animations, and other media. In the first quarter, we co-produced Zhou Shen's Chinese cover of the film song of Makoto Shinkai's movie, Suzume. This song ranked in over 100 million streams within only 3 weeks of its release.

It also ranked first on the CMG Global Chinese Music Popularity Chart, CMG, and topped the 12 other music charts. As you may notice, this song is also the whole music for today's encore. We continue to cooperate with the broader Tencent ecosystem, producing singles for 11 well-known games and 4 animations in the first quarter. Notable examples including Praying for the Mountain and the Sea, For Honor of Kings, and Light of Dawn, for Undawn, which simultaneously enhances users' gaming and listening experience. Before I conclude, I would also like to highlight the progress of TME Live, our comprehensive online merge offline performance brand.

Amid the performance market recovery, we are exploring innovative ways to monetize and interact with users. TME Live is well-positioned to capture this market opportunities via our online merge offline capabilities, allowing us to provide users with superior audio-visual experience anytime and anywhere. In the first quarter, we host a total of 29 online and offline concerts, including online concerts for Justin Huang Minghao, KUN, Cai Xukun, Meng Meiqi, Ren Xianqi, and Ju Jingyi. Notably, KUN's and Richie Jen's concert received well-spread user acclaim, generating a total of 1.4 billion social media views and attracting almost 70 million unique visitors in the Tencent ecosystem. We also provided fans with the option to purchase custom merchandise while enjoying the shows.

TME Live's unique performances formats, coupled with its high profile in the industry and with users, appeal to many well-known advertisers for sponsoring, such as PepsiCo, Yang Yuanqing, and JD.com. We also continuously increase our presence in the offline performance, particularly as the public shows a growing interest for offline activities. In the first quarter, we organized tours in cities such as Shenzhen, Changsha, and Hangzhou for musicians including Kola Xiao Ke, [foreign language], Liu Xijian, and the rock and roll band WhitePaper. To foster closer and more engaging connections between musicians and their followers, we encourage online audience to share their thoughts and feelings through online bullet charts during performances.

Going forward, we will continue to explore the on and offline integrated performance formats, offering integral artist lineups and exciting user experience, evaluate our content ecosystem and user engagement, and first capture incremental monetization opportunities. That concludes the update on our growing content capabilities. I would like to turn the call over to Ross, who will share more about our platform strategies. Ross, please go ahead.

Ross Liang (CEO)

Thank you, Cussion. Hello, everyone. Moving on to our platform innovations. In the first quarter, we further refined users' music consumption experience. We are advancing our audio live streaming services. In addition, by further exploring Large Language Models, we energize our platform ecosystem with a broader range of AIGC applications, aimed at meeting users' diverse and nuanced music tastes in new and exciting ways. On the front of users' music consumption experience, our efforts to enhance sound quality and effects, combined with our optimized operations in different listening scenarios, have been well-recognized by users. This further bolsters users' stickiness and our monetization capabilities. As a result, higher users engagement brought us a year-over-year growth of average daily time spent per daily active user who are listening to the music on our platform.

We have extended our premium sound quality and the 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 Times album, Utopia Shao Nian. This sound effect highlights vocal details and the instrumental layers, creating an air of a live performance. A total of 2.3 million users have used this sound effects in 970 million streams. We extended our premium sound quality to in-car use cases. For example, our QQ Music's Galaxy sound effect, YinHe YinXiang, maximizes 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 tastes. For instance, we launched a 3D music player interface and a customized playlist with various design templates, where users may choose their favorite styles. Beyond that, we tailored playlists to specific holidays and festivals such as the Chinese New Year and the World Sleep Day to offer a listening experience for this special occasion and the user's current state of mind. Thanks to our ongoing algorithm upgrades and product optimizations, we are able to constantly advance our recommendation efficiency.

This bring us deeper insights into content and the user's behavior, allowing us to create a more personalized listening experience. In the first quarter, QQ Music and the Kugou Music 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 to a new high on our platform. On the front of audio live streaming, it has become an important growth driver for us as we offer a unique engagement venue for our users and performers. With our differentiated content and interactive features that drive its growth, we keep enhancing user experience and attracting more vibrant audio anchors. In terms of content, we differentiated our audio live streaming content offering with focus on audio categories of music, emotional hearing, and talk shows, highlighting our performers' exceptional talent.

Meanwhile, our vibrant audio anchor ecosystem also benefits our musician community, as it provides them with a platform to showcase their skills and reach a wider audience. We have nurtured rising musicians on our QQ Music live streaming platform. For example, Chake Xiaoye, DOUDOU, Su Mo, and Xu Changqing. These four musicians contributed a total of 110 million song streams. Notable, upon the promotion in one of our audio live streaming programs, Xu Changqing's original single, Girl, Gu Niang, quickly made it to QQ Music new song recommendation chart. In the first quarter, the number of performers 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. This have created additional user traffic and scenarios, and we are better serving users' entertainment needs.

As important icebreaking tools between performers and users, these interactive features also drove 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, LLMs have empowered us to produce content more efficiently, as well as to create an increasing engaging user experience. In the first quarter, we launched TME Studio, YinYue ChuangZuo ZhuShou, an AI-enabled smart tool for music production. We also introduced the Vocal Producer, YinYue ZhiZuo Ren, feature, powered by our Lingyin Engine. With these tools, musicians can be more efficient in lyric writing, composing music, content analysis, and editing. Such tools also help generate outstanding content by seamlessly blending users' original voices into different songs. On top of that, our first AI music companion, Xiaoqin, hosted a live streaming show.

Her singing and dancing provided an immersive entertainment experience. Users were also able to interact with Xiaoqin through AI-generated virtual gifts and personalized gameplays. In fostering a more customized listening experience, QQ Music pioneered an AIGC-empowered 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.

Tony Yip (Chief Strategy Officer)

Thank you, Ross. Hello, everyone. During the first quarter, 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 ARPU, which comes to 94.4 million and RMB 9.2 respectively. Notably, our online music paying ratio hit a record high at 15.9%, while our ARPU expanded sequentially for the fourth 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 first quarter. On the non-subscription side, it also delivered strong year-over-year growth. Advertising revenue grew notably year-over-year, mainly due to lower revenues last year caused by COVID-19 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 Cussion earlier, we cooperated with Uni-President Soup Daren (Tang Daren), and Heineken in the first quarter to create customized brand zones, playlists, and music festivals, helping advertisers increase brand visibility with our innovative ad formats. 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 first quarter, we worked with well-known artists such as Ren Jialun, Lu Han, Huang Minghao to introduce collection cards, action figures, T-shirts, and more. As a highlight, sales of the album Utopia, by Teens in Times, exceeded 1 million 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 cooperation projects on the way. In terms of long-form audio, its revenues expanded year-over-year as we increased our offerings of popular content in the first quarter. 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, [foreign language] adapted from the original work of Nan Pai San Shu. Its streaming volume exceeded 340,000 in the first week after launch. These distinguished content further complemented our music offerings and increased overall user engagement. Moving on to our social entertainment services. 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 chorus of 1,000 people, further enriching users' immersive experience. We released extra interactive features in our singing rooms, such as score competition and red envelope sharing. These features allow the singing rooms penetration rate to grow year-over-year for the fifth quarter in a row. We will leverage these chorus and singing features to explore collaboration across different products on our platform, such as TME Live, artist fan interaction events, and sponsored advertising. 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 first quarter.

Meanwhile, WeSing's revenue grew steadily in the overseas market. We will expand its presence further through both organic growth and M&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 first quarter. Audio has become a growth engine for our live streaming services as we keep providing differentiated content and interactive features. 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 first quarter, Kugou 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, CME provided care for people with autism through music for the seventh consecutive year. We launched a caring program called If Music Has a Shape. We invited over 50 groups of singers and musicians from China and abroad, including Xue Zhiqian, Xiao Zhan, Yuan Yawei, and to perform in our program and share the love. Simultaneously, we debuted the Caring Through Music theme song, Secrets Hidden in the Stars, sung by Lucy, CME's first hyperreal virtual pop idol. This program's social media views have exceeded 500 million, raising awareness of autism among the public. In conclusion, we started 2023 on high notes with innovations across content and platform. 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'll 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.

Shirley Hu (CFO)

Thank you, Tony. Hello, everyone. I'll discuss our results from financial perspective. In the first quarter of 2023, our total revenue resumed year-over-year growth and reached RMB 7 billion, up by 5% year-over-year. With the success of effective cost control and improved operation efficiencies, our non-GAAP net profit margin reached 20.9% this quarter. In Q1, music subscription revenue continued its rapid growth and reached RMB 2.6 billion, up by 30% year-over-year and by 11% sequentially, propelled by rapid expansion of both online music paying users and ARPPU. Specifically, monthly ARPPU in Q1 was RMB 9.2, increased by RMB 0.9 from last year and RMB 0.3 from last quarter, recording four consecutive quarter of expansion.

Online music paying user grew to 94.4 million, up by 18% year-over-year, representing a 5.9 million net adds sequentially. The strong ARPPU and paying user growth resulted from high-quality contents and services, attractive member privileges, and more effective promotions. As we expand use cases and service offerings, we are seeing growing demands in IoT services and expect more opportunities to monetize in this area in the future. Therefore, starting from this quarter, we have updated the definition of online music MAUs and included certain IoT device users in our online music MAUs. Additionally, revenue from advertising achieved strong growth year-over-year due to strong performance from our ad-based free listening model, as well as lower advertising revenues for comparison in Q1 2022 due to the impact from COVID-19. We are pleased with such results and remain confident about long-term growth potentials in advertising business.

Social entertainment service and other revenues were RMB 3.5 billion, down by 13% year-over-year due to the evolving macro headwinds and competition from other platforms. To adapt to the changing environment, we focused on cultivating talented performers and differentiating our contents to stabilize the revenue skew of the traditional live streaming, and making efforts in increasing our competitiveness through ongoing product innovation and new initiatives in social entertainment services, such as audio live streaming, real-time interactive periods, and international expansion. Gross margin in Q1 was 33.1%, up by 0.1 percentage points year-over-year, primarily due to strong growth of online music revenues, our effective control of content costs, as well as improved operational cost efficiencies. Moving on to operating expenses.

Total operating expenses for Q1 were RMB 1.2 billion, or 70.5% as a percentage of total revenues, down by 2.7% from 20.2% as a percentage of total revenues in the same period last year. Selling and marketing expenses were RMB 211 and 12 million, down by 36% year-over-year. Although the reduced spending on user acquisition had impacted on our MAUs, our core music subscription service delivered strong growth. We continued to take measures to improve efficiency, closely monitored ROI of each promotion channel, better utilize external promotion channels, and leverage our internal traffic to attract users and promote our brands. When evaluating the healthiness of business and assessing ROI, we focused more on measures such as level of engagement, user retention rate, et cetera.

General and administrative expenses were RMB 1 billion, which was relatively stable comparing to the same period of 2022. We continued to closely manage employee-related expenses by improving headcount efficiency and invest in research and development to further empower music-related content creation, enhance production efficiency, and improve sound quality and effects. Our effective tax rate for Q1 2023 was 12.2%. For Q1 2023, our net profit and net profit attributable to equity holders of the company were RMB 1.2 billion and RMB 1.1 billion, respectively. Non-GAAP net profit and non-GAAP net profit attributable to equity holders of the company were RMB 1.5 billion and RMB 1.4 billion, respectively. Diluted earnings per ADS was RMB 0.73, up 97% on a year-over-year basis.

Non-GAAP diluted earnings per ADS was RMB 0.89, up 65% on a year-over-year basis. Such results demonstrate our commitment and continued success on operating efficiency improvement, as well as the impact from share repurchase program.

We are interwoven 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. As of March 31, 2023, our combined balances of cash equivalents, and term deposits were RMB 28.5 billion, as compared with RMB 27.4 billion as of December 31, 2022. The increase was primarily due to our healthy operating cash flow of RMB 1.9 billion for the first quarter of 2023. Such combined balance was also impacted by the change in exchange rate of RMB to USD at different balance sheet dates. In conclusion, 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 ARPPU and paying users, and remain confident in the growth of potential of our advertising business. Social entertainment service continue to face evolving micro headwinds and competition from other platforms, and we will continue to differentiate our content and entertainment experience and create more high-quality contents to gradually 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 contents, 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.

Operator (participant)

Hello, everyone. If you are dialing in by phone, please press Five to ask a question and then press Six to unmute yourself. If you are accessing the call from the Tencent Meeting of Voov Meeting application, please click the Raise Hand 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 questions, you can re-enter the queue. If you ask your questions in Chinese, please repeat them in English. Today's first question comes from Alex Poon from Morgan Stanley. Alex, your line is open. Please go ahead.

Alex Poon (Analyst)

Thank you, management, for taking my question, and congratulations on very strong results. My first question is regarding our subscriber, music subscriber growth business. 5.9 million net adds is a record high number, and it's been accelerating from the last 2 quarters. Can management explain the drivers behind this? How should we think about the net adds growth outlook for rest of the year? Thank you very much.

Tony Yip (Chief Strategy Officer)

The subscription revenue, which is very much our focus as we have, are seeking for balance growth between both paying user as well as ARPU. Subscription revenue grew at a 30% rate on 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, we're providing more and more attractive content and features within that subscription service. 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. Finally, more effective as well as targeted promotional discounts around new subs, as well as better retention programs also help drive ARPU higher. As a result, we continue to expect a very strong growth in our subscription revenue looking forward.

Operator (participant)

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

Alicia Yap (Managing Director and Senior Equity Analyst)

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.

Tony Yip (Chief Strategy Officer)

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 second quarter, 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 will all 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.

Cussion Pang (Executive Chairman)

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.

Operator (participant)

Thank you. Our next question comes from Lei Zhang from Bank of America. Lei, your line is open. Please go ahead.

Lei Zhang (Analyst)

Hi management. Thanks for taking my question, and congrats on the strong set of results. My question mainly on the music growth margin. Can you give us some updates on your music growth margin in the fourth quarter? How should we see the trend going forward since we have a better outlook on our sub and music business for the rest of the year? Thank you.

Shirley Hu (CFO)

About music growth margin, we don't give the very specific detail number on this business. We will talk about the whole growth margin on our whole business. Growth margin is 33.1% in Q1, increased by 4.1% year-over-year. Now, there are some positive factors as follows. One, the strong growth of monthly app PPU and net adds of new subscriptions. Two, the growth of advertisement revenue. Three, even social entertainment revenue faced a downside pressure, and revenue mix change also have the negative impact on our growth margin. The revenue sharing cost of live streaming has been controlled. We decreased in effect promotion activities and increased operational effect efficiency. We focused on good performers and high quality contents.

Fourth, we optimized the content cost model of ROC and increased the ROC requirement. We also benefited from the development of our in-house original content productions. Fifth, we optimized the technology and operational strategy related to bandwidth and storage capacity, and improved utilization of our service and equipment. Looking forward, in Q2, in 2023, we expect subscription revenue and advertisement revenue will continue to be strong growth. We will continue to increase our operational efficiency and monitor our costs. We expect our growth margin will increase sequentially in Q2.

Operator (participant)

Thank you. Our next question comes from Wei Xiong from UBS. Wei, your line is open. Please go ahead.

Wei Xiong (Analyst)

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

Cussion Pang (Executive Chairman)

Okay. Sure. Thank you for your questions. Yes, after reopening, the live concerts and music festival market has been really successful and flourishing so far. Our unique positioning will be both of our online and offline capabilities. We will be also focusing on the quality rather than the quantity of the shows. We will continue to upgrade and also improve our TME Live IP by more in-depth partnerships with our potential partners, in the shows content, production, et cetera. Also we will definitely bring additional revenues to us and also will further contribute to the healthy development of the TME's content ecosystem in the long run.

This also we are seeing that there are positive trend in the industry, driven by the increasing demand for live entertainment experience and also the willingness of consumer to spend money on tickets and events. However, it's also worth noting that although the on- offline performances have been very flourishing so far, but this is also a low margin business for the organizers. With this in mind, our approach will continue to be ROI-based with a prudent investment mindset. We continue to think that this is going to be exciting project for us in the long run.

Operator (participant)

Thank you. Our next question comes from Xueqing Zhang from CICC. Xueqing, your line is open. Please go ahead.

Xueqing Zhang (Analyst)

Thanks, management, to take my question. Congratulations on strong performance. My question is about pro-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? Thanks.

Shirley Hu (CFO)

Yes. Last question, I guided the gross margin, so I will talk about the operational expenses. In 2023, we will continue focused on improving on our efficiency. Q1, selling and promotion expenses operating on low cost level, down by 36% year-over-year. Although the reduced spending on user acquisition had impact on our MAUs, our core music subscription service delivered a strong growth. For the account management, we will continue to invest in product enhancements, technology innovations, new products and new business, such as IoT, overseas business, and innovation program, in-house content productions.

Meanwhile, we will pay more attention to improve the profitable profitability of business and the products. Q1, the adjusted net profit margin is 20.9%, an increase on a year-over-year basis and sequentially. Looking forward to Q2, we expect our selling and the promotion business and the general CA will be stable, compare that of in Q1. With the growth of our revenue, we expect the adjusted net profit and adjusted net margin all will be increased.

Operator (participant)

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

Wei Fang (Analyst)

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

Tony Yip (Chief Strategy Officer)

First of all, you know, we continue to add more and more attractive member privileges behind our Super VIP package. While we're not ready to disclose specific numbers, we are pleasing to see the continued growth in the number of subscribers under the SVIP membership. In terms of the IoT services, you know, we are seeing very good growth trajectory primarily in the in-car space. You know, we continue to penetrate more and more car models. You know, for example, recently we penetrated into several notable Mercedes-Benz models. In those models, you know, we are offering subscription services. Very often you do see those offered at a full price point, you know, at the full price as opposed at discount price.

Increasingly, we'll be separating the price plan between the IoT services as well as the mobile device. You have to actually pay, you know, separate fee in order to access for IoT subscription in addition to being able to access the subscription for mobile device.

Operator (participant)

Thank you. Our next question comes from Yiwen Zhang from China Renaissance. Yuan, your line is open. Please go ahead.

Yiwen Zhang (Analyst)

Hey, good evening, management, and thanks for taking my question. My question regarding the cooperation with Tencent. We've seen some very successful cooperation regarding the TME Live. How should we deepen such cooperation? Do we expect, you know, we should, you know, expand the cooperation to more areas? Thank you.

Tony Yip (Chief Strategy Officer)

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. This cooperation enable us to help music creators tap into the significantly broader reach that are offered by WeChat. As a way to promote this service, WeChat users can enjoy our service for free for a limited time between now and June 30th. From July 1st onwards, to access certain premium content and features, users will be required to become a paying subscriber. We believe this cooperation will generate incremental revenues for TME, as it will allow us to attract incremental subscribers in the long run.

Given the significantly broader reach of WeChat vis-a-vis TME, 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 cooperation with WeChat as we go.

Operator (participant)

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

Lei Zhang (Analyst)

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

Tony Yip (Chief Strategy Officer)

[foreign language] 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 to listen to and to discover new content. We'll be cooperating closely with Tencent, they 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 MusicLM, we will look to provide tools to help musician significantly reduce 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.

Finally, in the areas of social entertainment, we look to create virtual idols that will ultimately be used in live streaming type use cases.

Operator (participant)

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

Tony Yip (Chief Strategy Officer)

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.

Cussion Pang (Executive Chairman)

Thank you.