Tencent Music Entertainment Group - Q2 2024

Transcript

Millicent Tu (Head of Investor Relations)

Good evening and good morning, and welcome to Tencent Music Entertainment's Second Quarter 2024 Earnings Conference Call. I'm Millicent Tu, Head of IR. We announced our quarterly financial results earlier today before the U.S. market opened. The earnings release is now available on our IR website and via PR Newswire services. During today's call, you will hear from Mr. Cussion Pang, our Executive Chairman, and Mr. Ross Liang, our CEO, who will share an overview of our company's strategies and business updates. 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 the safe harbor statement in our earnings release, which applies to this call as we make forward-looking statements.

Please note that we discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in our earnings release and filings with the SEC. All participants are muted at this time. After management's remarks, there will be a Q&A session, and please be advised that today's call is being recorded. With that, I'm very pleased to turn the call over to Cussion, Executive Chairman of TME. Cussion?

Cussion Kar Shun Pang (Executive Chairman)

Thank you, Millicent. Hello, everyone, and thank you for joining our call today. We are excited to report another solid quarter, underpinned by a 28% year-over-year growth in online music services, as well as a 26% year-over-year growth increase in adjusted net profit. The outstanding net addition of over 10 million music subscribers in the first half of 2024, coupled with a rise in ARPU, once again demonstrated our strong ability to break new grounds within China's streaming landscape. We remain optimistic about the music industry's long-term potential and are committed to our mid- to long-term goals. In the meantime, we are consistently adjusting ourselves to better adapt to changing external environments, evolving user mindsets, and our different business development stage to continuously innovate and achieve sustainable growth at a healthy pace and with the right balance.

Let me now share some recent highlights on our expansive content ecosystem, which is getting increasingly rewarding. First of all, we continue to expand and reinforce partnerships with artists and record labels to enrich our music library and to bring the best content available to our users. Our long-standing and extensive win-win partnerships with music labels enable us to secure more content-centric privileges for users, including, but not limited to, early access to the latest hits. This quarter, we extended our collaborative licensing agreements with some well-known Chinese bands such as Sodagreen, Sudalu, and a top Korean label, CJ ENM, which owns the highly popular K-pop boy band, ZEROBASEONE. All these contract renewals include a 30-day headstart privilege of their new songs. Overall, we are pleased to see that such privilege has effectively improved the membership's conversion and engagement.

Second, we continue to explore more engaging ways for users to enjoy music. During the quarter, we combined the proprietary fans-artist interaction benefits, such as live video calls with digital album releases, and it effectively increased the sales. [Foreign language] Shen Zhou, Fan Shen Dai Ci, the new digital album of a popular Chinese singer, Zhou Shen, is a recent success. It features artist-themed in-app decorations and virtual souvenirs, and exceeded 1 million copies in sales within three months of release, ranking as the top seller year-to-date on our platform. We have also seen solid digital album sales results from other artists, such as Chinese singer Lay Zhang, Zhang Yixing, and the popular K-pop girl group, Aespa. Third, as the demand for offline live performances continues to surge, we stepped up our efforts to host concerts and music festivals with more value-added services.

In July, we host our upgraded flagship annual event, TMEA, Tencent Music Entertainment Awards 2024, in Macau. We broadened our horizons this time, featuring A-list domestic singers and rising musicians, as well as international idols. Notably, over 60 household names, including Zhou Shen, Tia Ray, Yuan Yawei, Jane Zhang, Zhang Liangying, and the K-pop girl group BABYMONSTER, performed at this year's event. TMEA 2024 sparked billions of social media buzz, showcasing our elevated industry influence. We are also bolstering our capabilities to organize large-scale concerts for top-notch singers. For instance, we hosted Tia Ray's landmark concert tour and helped her all achieve a milestone of over 10,000 attending fans. We are happy to see a significant year-over-year growth in our revenues from offline performances in the second quarter.

This quarter, as a new initiative, we customized the event-themed artist merchandise for Karen Mok, Mo Wenwei, concerts with headstart sales on our platform. We also provided our subscribers with member-only access to the online premier concerts of a popular Chinese band, Teens in Times, Shidai Shao Nian Tuan, as remarkable benefits. Fourth, our self-produced content continue to win popularity and boost user convention, conversion. We strategically leveraged our extensive resources, advantage in TV, films, IPs, and artists to elevate production, promotion, and success of our self-produced content. For example, we invited popular artists Zhou Shen, Kenji Wu, Wu Kequn, and Mika to perform the original soundtracks for Tencent Video's blockbuster TV series, Joy of Life 2, [Foreign language] 庆 余 年 第 二 季, and The Tale of Rose, 玫 瑰 的 故 事.

These self-produced songs amassed over 200 million streams in total on our platform within three months of debut, ranking top three on OST charts in today. In addition, our self-produced pop songs, Heard of You, [Foreign language] 听 说 你, and Who Am I? [Foreign language] 何 物, went viral on short video platforms soon after being featured on the National Music Reality Show, The Treasured Voice Season Five, [Foreign language] 可 见 的 声 音 第 五 季, which significantly boosted streams on our platform. Our high-quality original content, combined with unique fan-artist interactions, fulfills diverse music taste and entertainment needs, fostering an increasingly dynamic content ecosystem. We always strive to inspire society and share our love through music.

In the second quarter, we jointly launched another Little Red Flower concerts with Tencent Charity, partnering with volunteer artists and teachers to support the local education for children in rural areas through online and offline performances. We amplified its online reach and social influence this time by deeply collaborating with WeSing video accounts to live stream the concerts. In summary, we record a solid second quarter performance, finishing the first half of the year on a strong note, both operationally and financially. We believe the power of our platform, the value of premium music content, and expanding members' privileges will have a snowball effect, leading to a healthy and sustainable growth. Guided by our long-term view, our goal is to lay a strong, solid foundation for future progress and to promote the vibrant win-win development of the industry.

Now, I would like to turn the call over to Ross for more details on our overall platform development. Ross, please go ahead. Thank you.

Ross Liang (CEO)

Thank you, Cussion. Hello, everyone. Our focus on user-centric innovation has effectively increased the music subscribers and enhanced retention during this quarter. This reflected our ongoing efforts to advance our products and services, especially the focus on the high-value subscription plan, the Super VIP membership. Our approach to continuously delight users keeps us at the forefront of the streaming industry. A few quarterly highlights to share. First, we further enhanced sound quality and effects as part of our premium offerings. For example, QQ Music upgraded its self-developed Audio 3D 2.0, [Foreign language] 臻 品 全 景 声 2.0, and the Kugou Music launched Viper UltraSound, [Foreign language]彗 蛇 超 清 音 质, both featuring ultra-clear sound quality. We also presented users with new ways to enjoy the music, including sound quality for certain high-end headphones and playlists with best-in-class audio quality.

These improvements have led to not only higher user adoption, but also increased music consumption. Second, to meet users' personalized needs, we have launched a series of benefits, including customized players and ringtones based on well-known IPs and artists. These features resonate with users' desire for self-expression and proved effective in user conversion and retention. Third, our premium SVIP membership is gaining more traction, employing a holistic and seamless listening experience across various devices and multiple scenarios. SVIP integrates music with long-form audio and online karaoke services, all with superior sound quality. It wins the hearts of our higher active members with comprehensive online and offline privileges, such as priority access to digital albums and ticket booking for live music events, including our TMEA. We are pleased with the early progress of SVIP membership adoption, and are looking forward to sharing more exciting news down the road.

Next, our more personalized music discovery and optimized listening experiences. A few key projects to spotlight. We upgraded our recommendation middleware across our music apps, enabling users to discover songs better, better to their taste. During the quarter, nearly 40% of streams were generated from recommendations. With our evolving large audio models, we continue to employ more efficient music distribution and discovery of new and long-tail content.... We also elevated our platform's overall experience with AIGC applications. For example, we introduced the data-saving AI-enhanced SQ Lite mode, [Foreign language]无 损 省 流 模 式, while preserving superior sound quality, and the Kugou Music Virtual DJ filters, and the QQ Music 3D avatar offer users a sense of companionship. On the visual side, we refined our streaming UI design to offer a more inviting and effortless experience.

For example, QQ Music launched an industry-first multi-device matching playback feature and a compact half-screen music player. Users can now enjoy seamless music streaming when switching across different devices and applications. Last but not least, we further expanded our rewards program to include more benefits, such as artist merchandise. Its growing popularity among users has effectively boosted music content consumption and increased user engagement. To sum up, all the above efforts contributed to a high stickiness on our platform, as reflected by both year-over-year and quarter-over-quarter increases in time spent per user in the second quarter. Moving forward, we are committed to offering more compelling services that better align with needs of diverse music lovers, ultimately expanding our paying user base and increasing user loyalty. With that, I would like to turn the call over to Shirley, our CFO, for a deep dive into our financials.

Shirley Hu (CFO)

Thank you, Ross, and greetings to everyone. I will now turn to our financial results. Our effective monetization of online music services and operational efficiency management continued to drive strong financial results in the second quarter of 2024. Non-GAAP net profit increased by 33% year-over-year to RMB 1.8 billion, and the non-GAAP net profit rose by 26% to RMB 2 billion. Our total revenues were RMB 7.2 billion, down by 2% year-over-year. Revenues from online music service had strong growth, largely offsetting the decline in revenues from social entertainment and other services. In the second quarter of 2024, our online music revenues increased by 28% to RMB 5.4 billion on a year-over-year basis.

This increase was driven by the strong expansion of our music subscription revenues, supplemented by growth in advertising revenues, as well as growth in revenues from offline performances. Music subscription revenues in the second quarter of 2024 reached RMB 3.7 billion, marking a 29% increase year-over-year, and a 3% rise sequentially. Monthly ARPPU was 10.7, up from 9.7 in the same period last year. The number of online music paying users were 117 million, representing an 18% increase year-over-year, with quarterly net adds of 3.5 million paying users. With a large scale of music subscribers, our focus is to manage music subscription revenue growth with the right balance and pace to achieve growth in both subscribers and monthly ARPPU.

Our enriched content offerings and enhanced member privileges, such as QQ Music introducing Audio 3D 2.0, and Kugou Music rolling out Viper UltraSound, have made our products more attractive and improved user stickiness. Our VIP membership program is our strategic focus operationally and will lead to ARPPU improvement in the long run. Advertising revenues also had strong year-over-year growth, primarily due to the growth in ad-supported advertising. We provided more attractive interactive features to our users, which helped improving interest rate for our ad-supported advertising. Promotions for the 618 Mid-Year Shopping Festival also contributed to increased advertising revenues. Moreover, our interactive rewards program opened new avenues for commercialization in advertising for our users. Additionally, we continued to innovate and diversify our product offerings and advertising formats while deepening the integration of brand sponsorships with our offline performances.

Social entertainment services and other revenues were RMB 1.7 billion, down by 43% year-over-year. We will continually monitor market conditions, the competitive landscape, regulatory environment, and our product futures for social entertainment services. Our gross margin for Q2 reached 42%, marking an increase of 7.7 percentage points year-over-year due to the following factors. First, the expansion in paying user base and improved monthly ARPU for online music, as well as increased advertising revenues, had a favorable impact on our gross margin. Second, we have been focused on ROC as a key metric to manage our costs. Third, the ramping up of our own content continue to help improve our gross margin. Lastly, we have enhanced monetization of recent membership and advertising within social entertainment, which positively impact our gross margin.

All above factors have collectively enabled us to move to a healthy margin. Moving on to operating expenses. In the second quarter of 2024, they amounted to RMB 1.1 billion, representing 16% of our total revenues, compared with 17.2% in the same period of last year. Selling and marketing expenses were RMB 210 million, and remained relatively stable comparing with the same period of last year. We continue to maintain our AI-focused approach for promotion expenses, and will continue to invest in areas such as online music, with a long-term growth perspective, as well as in content promotions. General and administrative expenses were RMB 938 million, down by 10% year-over-year, primarily driven by lower employee-related expenses.

Our effective tax rate for Q2 was 19.4%, compared to 12.2% in the same period of 2023. This increase was primarily attributable to the accrual of withholding tax of RMB 111 million related to the earnings to be remitted by our PRC subsidiaries to offshore entities. Additionally, changes in preferential tax rates for certain entities also impact our effective tax rate. For Q2 2024, our net profit and net profit attributable to equity holders of the company were RMB 1.8 billion and RMB 1.7 billion, respectively. Non-IFRS net profit and non-IFRS net profit attributable to equity holders of the company were RMB 2 billion and RMB 1.9 billion, respectively. Our diluted earnings per ADS reached a record high this quarter at RMB 1.07, up 30% year-over-year.

Non-IFRS diluted earnings per ADS increased to RMB 1.19, up 23% year-over-year. These results underscored our robust financial performance, enhanced operating efficiencies, and the beneficial impact of our share repurchase program. As discussed during Q1 2024 earnings call, we declared a new cash dividend for the fiscal year 2023 in May, and have made a payment of $212 million in June 2024. As of June 30, 2024, our combined balance of cash, cash equivalents, term deposits, and short-term investment were RMB 35 billion, as compared with RMB 34.2 billion as of March 31, 2024. This combined balance was also affected by changes in the exchange rate of RMB to USD at different balance sheet dates.

Looking forward, we will continue to focus on high-quality growth in our music business, such as expanding SVIP membership, as well as operating efficiency improvement. We will continue to invest in high-quality content, original content production, as well as innovative technologies to further improve user engagement and enhance user experience. This concludes our prepared remarks. We are now ready to take your questions.

Millicent Tu (Head of Investor Relations)

Thank you, Shirley. 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 or Web Meeting application, please click the Raise button at the bottom left. For the benefit of all participants on today's call, please limit yourself to one question, and then if you have additional one, please re-enter. Thank you.

If you ask questions in Chinese, please, can we ask you to repeat in English? The first question comes from the line of Citigroup, Alicia. Alicia, please go ahead.

Alicia Yap (Analyst)

Hi. Thank you. So, good evening, management. Thanks for taking my questions. Congrats on the solid results. I'm going to ask in Chinese first, then I translate myself.

Can management, you know, share with us as we pass the second half?

... this year second half 2024 outlook for the top-line growth, profitability trend, and also the online music growth rate. Will the net add or the ARPPU to be the more important growth driver? Thank you.

Cussion Kar Shun Pang (Executive Chairman)

Thank you so much, Alicia, for your questions. Our view and outlook for the year 2024 actually remains unchanged, which means that we are expecting to achieve a healthy and positive revenue and profit growth this year. For the online music businesses, as mentioned, we have over 10 million net subscriber adds in the first half of 2024, and also the ARPPU has reached RMB 10.7, up from RMB 9.7 in the same quarter last year, which laid a very good foundation for us, and we are confident that our online music growth will continue to be solid, fueled by both of the net adds and also the ARPPU expansion.

So over the past few quarters, our net adds comes in much better than expected, primarily due to the accelerated increase of the paid content and also the effective marketing strategies. So as the pace of the net adds will return to a normal level and grow in a steadier pace, we will be more focusing on growing the ARPPU, which is expected to have a faster growth than the net adds. One of the good news that we are pleased to seeing that our enriched privileges and holistic service offerings have started to gain more popularity among our existing users. So our SVIP plan has very good momentum and which give us confidence on the ARPPU growth in the future.

So as a result, in the near term, I think that the net adds in the second half of 2024 will be smaller compared to the first half, but the ARPPU will expand at a more noticeable pace, moving into 2025, which help to further improve our margin as well. In terms of the advertising revenue, I think it's expected to have a good performance in the coming quarters due to the growth in the ad-supported advertisement and also the sponsorships of the offline event, etc. For the social entertainment side, we expect to have a continuous challenges from the competition, macro and other factors, but with this contribution to our total revenue becomes much smaller, impact will be largely offset by the solid growth from online music business.

In terms of the profitability, our strategy is to focus on the high quality growth in providing effective and, and proven to be effective, and we are now expected a slightly better full year net profit than the previous forecast.

Millicent Tu (Head of Investor Relations)

Thank you. The next question comes from Lincoln Kong from Goldman Sachs. Lincoln, please.

Lincoln Kong (Analyst)

Hi. Thank you, management, for taking my question, and congrats on a solid quarter. I just want to follow up in terms of the ARPPU and net adds. In the ARPPU, I think, Cussion, you mentioned, we will have a more meaningful increase into the second half. So could management just elaborate a bit more on, you know, in what way we plan to do that, in terms of price hike, you know, promotion, you know, reduction? Or and can we elaborate a bit more in terms of the Super VIP progress or other high-value added service here? What kind of magnitude of the increase should we expect in the ARPPU?

Would that result in any sort of higher churn of the members because of this increase amid this you know overall weak macro backdrop? Thank you.

Speaker 10

Thank you very much. Thank you for your question. Yes, indeed, I think the key driver of the future ARPU growth in H2 of this year truly rests with the SVIP plan we are going to launch. In the SVIP plan, besides providing the content privilege, we also hope that we're going to offer other privilege, providing higher value to our members.

We're talking about the key drivers of SVIP business. There are three points. The first point is that our existing digital album business allows SVIP to enjoy the start to head listening privilege. This can allow us to engage the high-value customers. If our SVIP customer, they'd like to hear certain music ahead of the start, that would be a great contribution to the value of the members.

Cussion Kar Shun Pang (Executive Chairman)

[Foreign language] ...第二部分来说，我们也发现对于高价值用户，他们对于音质的诉求，音质音效的诉求是非常高的，包括在我们实际的运营数据里面可以看到，他们的使用率也是非常的高，所以我们在后面后续也继续去升级我们的音质跟音效。

Speaker 10

Well, my second point is that for those high value customer who SVIPs, they also pursue higher and better sound quality and sound effect, and we can also see that from our actual operational data, they also have a very high adoption rate for the high quality sound and high quality sound effect. This is also what we are going to do in the near future. Continue to upgrade the sound quality and sound effect.

Cussion Kar Shun Pang (Executive Chairman)

[Foreign language] 从实际的运营角度来说，我们上半年所推出的Dolby全景声，以及我们自己的3D全景声2.0，以及七月份刚刚推出的DTS，这些都是从实际的运营效果来看，对于SVIP都有一个非常好的贡献的效果。

Speaker 10

Well, from the application perspective, in H1 of this year, we launched the Dolby Atmos, and we also launched the Audio 3D 2.0, and in July, we just launched DTS. All those very premier sound quality will help to further contribute the value to our SVIP members.

Cussion Kar Shun Pang (Executive Chairman)

[Foreign language] 第三部分就是对于内容部分来说，对于SI，SVIP，我们的进一步把整个有声的，就原来的长音频的内容也都合并到里面，然后去给SVIP去提供服务，那意味着同时也能够去给他们提供一个，多设备的一个畅听的特权。也就是说，对于SVIP来说，在整个TME的平台上，对于内容，音乐内容跟有声的内容，长音频的内容，以及在多设备上，我们就可以构建一个基本全面畅听的一个特权的能 力。

Speaker 10

Well, at the same time, regarding the content creation for SVIP, we make sure they can enjoy the long form audio content in their existing privilege. We provide them the premier service. In other words, they can enjoy the seamless listening experience from device to device. In other words, for SVIP on TME platform, they can enjoy the music content, the long form video, and also enjoy the seamless listening experience from device to device.

Cussion Kar Shun Pang (Executive Chairman)

[Foreign language] 因为 SVIP 的整个刊例价是在 40 RMB，相比于 15 RMB 的，整个的绿钻来，绿钻跟豪华就普通的包月会员来说，其实我们有一个比较大的一个运营的空间，也能帮助我们去更好的去在 APP 的贡献上去做更多的运营的动作。

Speaker 10

You can say that for SVIP, the membership fee is around RMB 40 per month, and which is actually allow us to have more room to provide better benefits and more experience to the SVIP compared with normal subscribers.

Cussion Kar Shun Pang (Executive Chairman)

[Foreign language] 那么，另外就是说我们对于基础会员这一部分，因为它仍然是我们非最大规模的一个群体，那我们也会继续地去做更精细化的内容驱动跟运营，能够让我们在基础会员这边的APP能够保持一个比较稳健的增长。

Speaker 10

Well, at the same time, for our paying users, they are still the majority of our user base. We are going to continue to refine the content and the operation and making sure they're going to have a steady growth within our app.

Cussion Kar Shun Pang (Executive Chairman)

[Foreign language] 那我们也预计就是在下一个季度的时候，我们能跟各位去分享一下我们在超级会员这边的更好，更，更明确的一些数据跟节奏。

Speaker 10

I believe in next quarter's earnings call, we are going to share with you more data and more strategies within SVIP.

Millicent Tu (Head of Investor Relations)

Thank you. The next question comes from Alex Poon, Morgan Stanley. Alex, please.

Alex Poon (Analyst)

[Foreign language] 谢谢管理层接受我的提问，非常恭喜，很好的业绩。我的问题还是关于SVIP的，很高兴听到这个从下半年开始就会开始提升我们的ARPU。这个SVIP的渗透率我们应该怎么去思考？2019年我们有绿钻，有Basic VIP，八块、十二块，这个当时是55的一个比例，过了好几年，现在大部分的会员都变成绿钻。所以这个超级会员的话，我们应该怎么思考这个渗透率未来几年的一个提升的节奏。谢谢。My question is related to Super VIP, how should we think about the penetration, as a percentage of total paying user, the trajectory in the coming few years?

Thank you very much.

Cussion Kar Shun Pang (Executive Chairman)

[Foreign language] 对，我们应该说今年就等于今年的这个尝试呢，就包括，因为有了除了音质音效和长，就是刚才三方面的驱动，使我们现在目前是保持一个比较快速的增长，我们等于在这两，应该从去年开始，从零做了一个相对比较目前比较乐观的一个增速。但这个我们，我们想可能在下个季度来，去披露吧，因为这个，这部分我们可能目前还...

[Foreign language] 但只能告诉大家，就是说我们现在目前的增速还是比较符合预期的。那在长远来看，我们当然，就刚才你所说的，就是目前来看，大部分就已经是基础会员的 RMB 15，也就是包括酷狗的VIP跟，QQ音乐里的绿钻，那付费音乐包的 RMB 8已经相对来说就比较少，那，后面的就应该是绝大多数，就是这是目前的趋势。那你说未来在后面的10年以后呢，有可能会变成就是我们的，就很长，长期内，当然我们会认为说SVIP就会是我们一个更加跟以前这样的一个绿钻这样模式来这样运营的一个节奏吧。

Speaker 10

Thank you very much. Thanks for the question. And I have to say that for SVIP, and because as I mentioned in the previous answer, because we ever upgrade the sound quality, the sound effect, along with other drivers, we will be able to maintain a relatively fast growth of the SVIP members, where at the same time, I have to say, we start SVIP almost from zero. So till now, we see the growth is pretty satisfactory, but I think we still need to give some time till we disclose further information to you.... What I can share with you is that SVIP, the growth is still in line with our expectation.

We're looking into the future, as you just mentioned, those used to be 8 RMB per month users have already been converted into QQ Music paying users, and they are now the majority of our user base. This is what we see now. We're looking forward to the next 10 years, or in the very long term, I think maybe SVIP will be our future driver of the growth trajectory.

We hope that we can still maintain a steady and solid growth of SVIP, but we are going to disclose the corresponding data in due time. Thank you.

Millicent Tu (Head of Investor Relations)

Okay. The next question comes from Lei Zhang from Bank of America Merrill Lynch. Lei, please.

Lei Zhang (Analyst)

[Foreign language] Hi. Management, good evening. Thank you for taking my question and congratulations on the very strong performance. I want to follow up on the membership section. Because you just mentioned that maybe starting in the second half of the year, it will enter a steady growth. And I want to ask, I don't know, this, we mentioned before that every quarter, maybe 3 million of this net add, can it still be maintained? The other thing is, management, now for our long-term membership, the penetration rate of paid subscriptions, are there any new considerations? Thank you. I will translate it myself. Thank management for taking my question and congrats on the solid quarter. Want to follow up on membership, net add trend, is 3 million per quarter.

Do you hold since we entered a steady growth stage? And how to look at our long-term paying user penetration. Thank you.

Ross Liang (CEO)

[Foreign language] Yeah, just like Cussion mentioned earlier, we expect that our UP in the future, actually the growth of UP, may be relatively... comparatively speaking, the growth of net adds will be more optimistic. Because it is also due to the fact that in the first half of the year, after we went through the effect of a holiday, we still hope that in the second half of the year, we can maintain a more stable growth. So, specifically, I can talk about it later. But for us, in terms of our operating pace, we basically ensure that UP has a relatively good growth, and the net add will also increase, increase.

[Foreign language] At the same time, of course, the most important goal is still our revenue and profit. If our revenue and profit are in line with the expected growth we discussed with you for the whole year, then what we pursue more is that after our UP has high-quality user growth, what kind of result will be obtained in terms of net adds? This is the current operating rhythm. So, in terms of the second half of the year, I think we will... it should still be as clear as before, we still hope that we can make our user base more stable in scale. At the same time, because in addition to new openings, there is also the issue of user retention. Only this kind of high-quality growth can ensure that our subsequent monthly subscriptions can maintain a very strong level, or even have a small positive growth.

Speaker 10

Thank you very much. Thanks for your question. I think the Cussion has already shared in his remarks. When we look into the paying users, we hope that in the near future, the growth would be much better than what we have on net adds. But to be sure, in H1 of this year, after a few holidays, as we see the paying users and net adds full growth. But in H2 of this year, we're still going to maintain a very solid growth. From the operational strategy perspective, we still would like to maintain a good growth of the paying users. We'll naturally grow the net adds. But the most important thing we have to keep in mind is always the revenue and the profit. We do hope that the revenue and the profit, as we discussed with all of you, would hit our full year target.

If we will be able to do so, then we will be able to continue to grow our subscriber base in a quality approach. Then you can expect what the result might be. Well, from the operational strategy perspective, I think we have already made it very clear, we would like to maintain a steady growth of our user base. Besides paying attention to the net adds, we should also pay attention to the user retention, because only by having the high quality growth of the subscriber, we will be able to maintain a very strong retention of our high quality subscribers. That will help us to further grow our business substantially. [Foreign language] Yes, so from what was mentioned earlier, we should have no change in terms of penetration rate.

Ross Liang (CEO)

[Foreign language] If we look at it from our previous communication perspective, we are also very confident that we can still achieve our medium and long-term subscriber numbers according to our pace. As for the pace we need to maintain in the second half of the year, we will still, in addition to maintaining our current scale of growth, we will also actively promote our overall sales and promotion. In terms of promotion strategy, we will also pay more attention to attracting new users and increasing the number of monthly subscription users. So in summary, we will maintain our commitment to monthly penetration and our long-term subscriber numbers.

Speaker 10

Well, regarding the subscriber penetration rate, we still would like to maintain what we used to promise to the market, and we also have every confidence that we're going to hit our mid and long term subscriber number. Well, regarding H2 of this year, what we are trying to do that, besides growing our subscriber base, we will also continue to intensify the sales and the promotion strategy, making sure we will be able to engage new customers, and then to grow our subscriber base even higher. This is also what I mentioned; in the long term, we are still very confident to hit our subscriber number and hope we will be able to honor our commitment to the market.

Millicent Tu (Head of Investor Relations)

Thank you. The next question comes from Wei Xiong from UBS. Xiong, please.

Wei Xiong (Analyst)

...

[Foreign language] 谢谢管理层接受我的提问。管理层晚上好。我的问题是关于利润率的。能看到公司这个季度在毛利和净利润率方面在持续健康地增长。那想请教一下，我们应该怎么思考，下半年和明年毛利继续提高的这个速度和空间。那咱们觉得中期能够达到的毛利水平是怎么样的？那净利润这方面，我们应该怎么管控，我们应该怎么考虑这个费用管控的空间和未来的这个净利润率的趋势。那谢谢管理层，我也自己翻译一下。My question is about our profitability and margin trend.

Just wondering could management share how should we think about the pace of gross margin expansion in the second half this year and next year? And what's the level of the gross margin level that we might be achieving in the medium term? For the net margin, how should we think about any further room for cost optimization as well as the net margin trend going forward? Thank you.

Shirley Hu (CFO)

[Foreign language] 公司的毛利率和这个净利润率在过去的九个季度连续保持了增长，那我们在全年看来，我们也是非常有信心，我们的毛利率和净利润率有一个比较好的表现。

Speaker 10

We can say the gross margin and the net margin of the company continue to grow for the past 9 quarters consecutively. Overall speaking, we are still very confident we are going to have a good performance on the GP margin and net margin.

Shirley Hu (CFO)

[Foreign language] 那我们毛利率的增长呢，一个方面呢，是在这个收入端，我们整体的包月业务和这个广告业务有一个快速的增长，那尤其是，讲到未来我们的SVIP如果，运营得比较有结果的话，那对我们的毛利也是一个比较好的贡献，毛利率。

Speaker 10

Regarding the growth of the GP margin, on one side, from the revenue perspective, you continue to see the subscription business and the advertising business, the revenue continue to grow, but at the same time, in the near future, if our SVIP program could be well executed, it's also going to be another positive contribution to our GP margin.

Shirley Hu (CFO)

[Foreign language] 那另外一点呢，在成本端呢，我们多年来在和音乐行业是在进行着深耕，并进行了大量的投入，那我们也和版权方建立了一个比较好的这个合作的关系，那我们也逐步会看到说这些大幅的投入会产生的成果，那我们对这个版权也进行了这个ROC的管理，提升版权的效率。

Speaker 10

Another point is that from the cost perspective, we continue to be committed in the music industry, and we made a heavy investment in the industry. We also maintain very close cooperation with the copyright holder, where we can say that those substantial investment were yield with very fruitful results. We also did the ROC management over the copyright, and IP continue to improve the utilization rate and efficacy.

Shirley Hu (CFO)

[Foreign language] 第三点呢，就是说我们自有内容的这个占比的提升，也会对我们的毛利率也起到一个这个比较好的作用。

Speaker 10

The third point is that the contribution from our self-produced content continue to grow, which will also positively benefit our GP margin.

Shirley Hu (CFO)

[Foreign language] 但是第四点呢，尽管我们的这个，社交的这个收入是在下降的，但是我们的K歌广告和会员的增长，那么也会使得整体的带动我们整体毛利率的一个增长。

Speaker 10

At fourth point, even if we see a slight decrease on the social business, but still our WeSing advertisement as well as the net membership number continue to grow, which will also benefit the overall GP margin.

Shirley Hu (CFO)

[Foreign language] 那具体到这个运营费用的这个层面呢，那么对于这个，销售费用来讲，我们这个，其实，可以看到说在，过去的这个，几个季度里面，其实都是非常自律，非常控制的，那也起到了一个很好的这个效果。

Speaker 10

We're specifically talking about the operational cost. If we take a look at the sales expense, you can say that for the past few quarters, we will be quite self-disciplined and well managed the sales expenses, which also show very good result.

Shirley Hu (CFO)

[Foreign language] 我们预计呢，这个，我们的这个营销费用呢，在整体在全年来讲，跟去年的这个占收入的比例其实是基本上一致的。

Speaker 10

At the same time, we foresee for the marketing expenses for the year, and the total contribution from the marketing expenses to the revenue would maintain the same as what we saw last year.

Shirley Hu (CFO)

[Foreign language] 那，具体到这个，G&A的费用这一块，那我们其实也可以看到上半年的数据，那我们的整体的这个，G&A相对于去年来讲，其实还是有一个小幅的下降。

Speaker 10

More specifically, if we take a look at the G&A expenses, if you take a look at the H1 performance of this year, you can see still we register a small decline compared with last year.

Shirley Hu (CFO)

[Foreign language] 我们还是会继续的这个开源提效，来提升这个，G&A，G&A的费用的效率。我们预计整体G&A的费用占收入的比例，是小幅低于去年的。

Speaker 10

We will continue to improve our operational efficiency and the expenses management efficiency. In other words, for this year, we believe the G&A expenses ratio to the total revenue would be lower than what we saw last year.

Shirley Hu (CFO)

[Foreign language] 所以整体而言呢，我们认为我们集团整体的毛利率和净利润率在今年来讲还是会有一个不错的这个提升空间的。

Speaker 10

Overall speaking, we believe no matter for the GP margin or the net margin, we are going to have a good improvement compared with what we saw last year.

Shirley Hu (CFO)

[Foreign language] 净利润和净利润率的表现也还会优于这个毛利率的表现。

Speaker 10

But at the same time, the net profit and the net profit margin, the growth would be better than the GP margin.

Shirley Hu (CFO)

[Foreign language] 从长期来看呢，随着我们这个音乐业务的这个长期稳健的向好，那我们也对这个毛利率的这个增长和净利润率的增长是有信心的。

Speaker 10

...In the longer run, as our online music business continue to grow steadily and, positively, we also have every confidence to the future growth of the GP margin and the-

Millicent Tu (Head of Investor Relations)

Thank you. And the last question comes from Thomas Chong from Jefferies. Thomas, please.

Thomas Chong (Analyst)

Hi, good evening. Thanks, management, for taking my question. My question is about macro headwinds. Given that we have been seeing macro uncertainties these days, how should we think about the impact to our different business segments, subscription, advertising, and social entertainment? And my second question is about competition. Are we actually seeing any changes in the competitive landscape? Thank you.

Cussion Kar Shun Pang (Executive Chairman)

Okay, I take the first questions regarding the macro environment. Frankly speaking, the downturn in the macro environment definitely will bring some challenges to different aspects of the business. But I think that for the TME's online music business is, frankly speaking, is a really value for the money. So which is, frankly speaking, is a really relatively low cost entertainment that is very affordable to all users. So you can see that of the subscription business for us, the online music, what do not have very much impact by the macro environment. In terms of the advertising, we are also doing a great job in the quarters.

Even though some of the advertisers may have some impact in spending on their advertising dollars, but we are seeing that we are still doing a good job, especially in some of the sectors that is related to, for example, tourists and also event related to some of our offline concerts sponsorships. So I think that the advertising, beside the sponsorships, we are also doing some of the new formats of advertising as well, so which can help us to further grow our advertising business in a very good momentum. So I think that the overall macro environment do not have such a big impact to TME, and still we have a very confidence for the long-term and healthy growth of our business.

Speaker 10

Respond to your second question regarding the online music, especially the competition landscape. I think everyone's been clear. We still have the players or those players we usually say in this market.

Well, regarding the competition, you can say that for this year, it marks our eighth anniversary of starting the business, so our focus is still to do our right business, to do the business right. We are still going to follow our strategy of having the content and the platform at the same time.

We firmly believe as long as we continue to improve our content and improve our competition capacity, while at the same time to further refine and optimize the user experience, we are still going to keep our position in this market.

Millicent Tu (Head of Investor Relations)

Okay, since there are no further questions on the queue, I would like to wrap up the call. Thank you everyone for joining us today, and if you have any further questions, please feel free to reach our IR team. This concludes today's call, and thank you very much again, and look forward to speaking to you next quarter. Thank you and goodbye.

Cussion Kar Shun Pang (Executive Chairman)

Thank you. Goodbye.