Tencent Music Entertainment Group - Q3 2023

Transcript

Millicent Tu (Head of Investor Relations)

Good evening, good morning. Welcome to Tencent Music Entertainment Group's Q3 2023 earnings webinar. I'm Millicent Tu, Head of IR at the company. TME announced its quarterly financial results today before the U.S. market opened. Our earnings release is now available on our IR website and via newswire services. Today, you'll hear from Mr. Cussion Pang, our Executive Chairman, who will start the call with an overview of our company strategies and business updates. Next, Mr. Ross Liang, our CEO, will share additional thoughts on our platform strategies and developments. Finally, Ms. Shirley Hu, our CFO, will discuss our financial results before we open the call for questions. Before we continue, I refer you to our safe harbor statements in our earnings release, which applies to this call as we make forward-looking statements.

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

Cussion Kar Shun Pang (Executive Chairman)

Thank you, Millicent. Hello, everyone, and thank you for joining our call today. We are pleased to report another quarter of strong growth in our online music services, despite the top-line headwinds from the social entertainment business, while adjusting certain industry-wide live streaming interactive features represented some challenges for the quarter. It ultimately places us on even stronger footing for our long-term sustainable development. As a case in point, our evolving businesses have become more resilient, illustrated by group-wide margin expansion and strong cash flows for the quarter. What's particularly worth mentioning is our online music subscriptions. This business has registered accelerated year-over-year revenue growth. Growth momentum carried into the Q3, with expansion in both of our subscriber base and ARPPU. Our paying user base grew further to 103 million, a strong testament to the broad appeal and high value of our music products and services.

Our impressive content offerings, compelling subscribers privileges, and interactive product features, together with strong execution, enabled us to attract new subscribers while retaining existing ones. We are also pleased to see that monthly ARPPU expanded to CNY 10.3, thanks to disciplined promotions, effective member acquisitions, and our high subscriber retention rates. These achievements were results from the solid execution of our dual-engine content and platform strategy. It further unlocks the value of music and paved the way for our long-term success. I'd like to share a few highlights. First, we cultivate deeper, mutually beneficial partnerships with record labels and artists. Our insights across content and users, as our holistic approach to growing the industry, supported our strengthened cooperations with music partners.

For instance, we strengthened our collaboration with TFBoys on the 30-day headstart release of their 10-year anniversary single, See You Tomorrow, as the sale of their themed album, Ten Years. To amplify user engagement and strengthen their bond with the artists, we launched several online song guessing contests and music-based interactive features for this single. We expanded our partnership with YG Entertainment into ticketing, where we opened a dedicated channel for users to purchase BLACKPINK's concert tickets, further expanding subscriber privileges. In addition, we formed a new partnership with Cube Entertainment, bringing in a prominent lineup of brands and groups such as BtoB, Pentagon, (G)I-DLE, and LIGHTSUM. This collaboration not only enriched our our music catalog, but also granted us the privileges of a 30-day headstart period on new song releases. Each of these examples strengthens our registered cycle and creates win-win situation.

Our evolved relationships with artists and labels fortify our music ecosystem, bringing more intriguing privileges to our users, while also creating prosperity for all stakeholders along the industry value chain. Second, leveraging TME's integrated resources and expertise, we expanded our industry influence by assisting artists at different stages with their career growth. With respect to top-tier artists, in August, we host an online/offline concert for Zhou Shen, celebrating the 9-year anniversary of his debut, highlighted by sales of sought-after tickets and social media buzz of nearly 2 billion event views in just 3 weeks. This event generated great excitement and acclaim among users. As for our strategic partnership artists, this quarter, we assisted Tia Wei with her appearance at the Mid-Autumn Festival Galas, organized by CCTV and Hunan Satellite TV, significantly increasing her influence nationwide. Among our emerging musicians, we have Wang Yilong.

Our indie musicians perform and showcase his talent on the variety show, The Treasured Voice. Through music exposure and social media, we helped him attract more users to explore his original songs on our platform. In quarter three this year, we also had over 20 up-and-coming musicians performing at Rye Music Festival. Many rising musicians from our Tencent Musician Program showcased their talents at the Coca-Cola-sponsored 2023 Summer Limited Refreshing Music Festival. Such activities with high-quality brands also encourage us to further explore sponsorship advertising opportunities. Third, we enhance our technology capabilities in content creation, promotion, and distribution. Some of this content also recorded initial success overseas. In the Q3, Venus introduced its ZeroShot AI-powered music production tool, featuring fast and convenient generation of a user's AI voice to produce musical works. Kugou Music's Vocal Producer also upgraded its functions to allow AI-generated music content in multiple languages.

Through a brief training section, it can effectively and efficiently produce songs in Mandarin, Cantonese, English, Korean, and Japanese. Both tools substantially boosted creators' creativity. TME's music promotion and distribution toolkits, such as the TME Music Cloud and Kugou's Tomore Music Platform, make advancement in helping record labels, creators, and musicians efficiently promote their musical work. Our deep industry insights and associated data and analytics enable us to successfully promote Chinese songs overseas. For example, we helped Angela Zhang's Beast and Yang Junnan Summer Love chart on various popular music lists in Singapore during the quarter. Moving on to our continuous efforts on ESG. In the Q3, we joined hands with Tencent SSV and launched our 2023 Youth Music Tech X Program, inviting high school students to explore our technology and inspire the music journey.

Working side by side with the student, we commissioned a theme song, The Most Beautiful Sound in the World, to campaign, to campaign the public here and support the hearing-inspiring, inspired senior citizens. In addition, we organized a special music education project, Music Garden Space, to help children from ethnic minorities and remote areas appreciate the beauty and power of music. These initiatives demonstrate the value and positive influence we can bring to a wide range of communities. In summary, our holistic and strategic approach is strengthening and expanding our capabilities, making our platform and ecosystem increasingly robust. We continue to grow our music subscriptions and strengthen our partnerships with label and artists, enriching our content and perpetuating our virtual cycle. We are also fostering new talent and leveraging our advanced technology to support our efficient growth.

This powerful combination and evolution will drive our company's sustainable development in the long run and support the broader industry advancement. Now, I would like to turn the call over to Ross for more color on our platform development. Ross, please go ahead.

Ross Liang (CEO)

Thank you, Cussion. Hello, everyone. Music is the heart and soul of TME. I would like to begin by commenting that Q3 quarter three results highlighted the efficiency gains across our platforms. Specifically, our ecosystems are strong, platform scale, and AI-important technology have enabled us to transition into an increasingly robust music powerhouse. From the operational level, one key highlight is our effort to expand the application of AI technologies across our products and services based on our upgraded music LLM. This quarter, we integrated our LLM integration platform, allowing third-party models to be better integrated with and adapt to the music vertical. With the power of AI, we enhanced the music discovery and the consumption efficiency, creating a more engaging user experience. First, better content connection and discovery.

This quarter, we continued to upgrade our recommendation middle platform and enhance personalized recommendations on each of our music apps. As a result, we reached a new record in the share of streams from recommendations, as an increase in the number of songs added to users' personal favorites. We also significantly lowered the barriers to music discovery. For example, QQ Music introduced its Quick Listen mode, which allows users to listen to a song's chorus and then quickly locate the full song. Another example is Kugou Music's revamped version, featuring faster discovery of multiple songs, song covers, as AI-rendered versions played by different instruments. Second, better for facilitating music consumption through more user cases and entertainment scenarios.

In the in-car use case, we extended our mobile and offerings, such as our seamless user interface, premium sound quality, and tailored playlist to enrich in-cabin music consumption. To increase our car coverage, we recently signed an additional car models, including Mercedes-Benz, Smart, and more BYD models. Partnering with the hardware manufacturers, we led the industry by leveraging Qualcomm's latest AI computer capabilities to enhance users' music listening experience with richer details and more vivid sensations. In terms of broadening entertainment content consumption, we customized our music services, including content production, promotion, and data analysis, across the areas of film and television, gaming, and animation. Through tailored music works, we create unique touchpoints for original IPs, unlocking their value. For example, we co-produced both the theme and end-credit songs for the blockbuster No More Bets, Gu Zhu Yi Zhi.

We also produced the original soundtracks for mobile games, including Peacekeeper Elite, Crossfire, and Dungeon and Fighter, all of which have received widespread acclaim. Third, for our immersive user connections, we have created a thriving community where music lovers can bond, ultimately making their experience on our platform more enjoyable and long-lasting. For example, QQ Music launched over 30 interactive song guessing contests, featuring artists such as Jay Chou, Zhou Shen, BLACKPINK, and Teens in Times. These events quickly went viral across social media platforms and our in-app community and fan groups, amplifying TME's influence. To sum up, these three dimensions of connections inspire us to the further unlock music's value. AI-powered technology is supporting us to provide better user experience and making the platform increasingly efficient.

Our online music business has become a diversifying and a crucial growth pillar. Social entertainment services remain adaptive as part of our holistic music offerings. For 2024 and the years ahead, we will stay laser-focused on providing enlightening user experiences while driving operational efficiencies across the platform. With that, I will turn the call over to Shirley, our CFO, for a deep dive into our financials.

Shirley Hu (CFO)

Thank you, Ross. Hello, everyone. Next, I'll discuss our results from financial perspective. In the Q3 of 2023, revenues from online music increased by 33% to CNY 4.6 billion on a year-over-year basis, driven by strong growth in our music subscription and advertising business. Our total revenues were CNY 6.6 billion, down by 11% year-over-year, due to decline of revenues from social entertainment services and other services. Music subscription revenues in Q3 reached CNY 3.2 billion, up by 42% year-over-year, and by 10% sequentially, driven by further expansion of both online music paying user base and monthly ARPU. Specifically, the number of online music paying users grew to 103 million, up by 21% year-over-year, representing net adds of 3.6 million users sequentially.

Monthly ARPU was CNY 10.3, up by 17% year-over-year, and 6% sequentially, marking its sixth consecutive quarters of growth and another record high amount. This was a result from our product's more appealing member privileges, interactive product features attractive music content, and a disciplined promotion and member acquisition strategies, as a high subscriber retention rate. Additionally, revenues from advertising achieved strong growth on a year-over-year basis as our diversified product portfolio and innovative AD formats, including AD-supported model and sponsorship advertising, are highly attractive to advertisers. Our campus music contest, QQ Music 2023, Young Music Contest, Trend Music Competition, and the Coca-Cola sponsored 2023 Summer Limited Refresh Music Festival, were two good examples of how our portfolio of music IPs attracted various branded advertisers. Social entertainment services and other revenues were CNY 2 billion, down by 49% year-over-year.

The decrease was mainly caused by our adjustments to certain live streaming interactive functions and more stringent compliance procedures, as we implemented several service enhancements and risk control measures. This is in line with our expectation about live streaming revenues, as discussed previously. We believe these measures are necessary and beneficial to our users, which will help pave the way for the long-term sustainable development of our business. Gross margin in Q3 was 35.7%, up 3.1 percentage points year-over-year, primarily due to the following factors. First, our music subscription revenues had strong growth this quarter. Specifically, expansion in paying user base and improvement in monthly ARPU both had a favorable impact on our gross margin. Second, our advertising revenues also had strong growth, which also benefit our gross margin. Third, as we gradually ramp up our own content, it has positively impacted our margin.

As you see here, shifting to win-win relationships with labels and artists, and increasing subscription ARPU over the past several years have enabled us to move to a healthy margin model and more than offset the impact from decline in live streaming revenues. Now, moving on to operating expenses. Total operating expenses for Q3 were RMB 1.3 billion or 19.3% as a percentage of total revenue, down by 0.2% from 19.5% of total revenues in the same period last year. Selling and marketing expenses were RMB 219 million, down by 11% year-over-year, as we closely monitor the ROI of each promotion channel and improved the effectiveness of promotions. General and administrative expenses were RMB 1 billion, down by 12% year-over-year.

This decrease was primarily due to reduced employee-related expenses as a result of improved headcount efficiency and expenses related to the Hong Kong secondary listing incurred in the same period of 2022. Our effective tax rate for Q3 was 12%, 12.2%. For Q3, our net profit and net profit attributable to equity holders of the company were RMB 1.3 billion and RMB 1.2 billion, respectively. Non-IFRS net profit and non-IFRS net profit attributable to equity holders of the company were RMB 1.5 billion and RMB 1.4 billion, respectively. Diluted earnings per ADS were RMB 0.74, up 12% on a year-over-year basis. Non-IFRS diluted earnings per ADS was RMB 0.89, up 3% on a year-over-year basis.

As of September 30, 2023, our combined balances of cash, cash equivalents, and term deposits were RMB 31 billion, as compared with RMB 30.5 billion as of June 30, 2023. Such combined balances was also affected by the change in exchange rate of RMB to USD at different balance sheet dates. In March 2023, we announced a share repurchase program of $500 million. As of September 30, 2023, we had repurchased 15.8 million ADS from the open market with cash for a total consideration of approximately $103 million. In conclusion, our music subscription business has demonstrated a strong growth trajectory, propelled by quarterly growth in both ARPU and paying users, and we expect such trend to continue.

With a keen focus on RC management and improved efficiency in operating costs and promotion channels, we expect to continue driving our overall profitability. Last but not least, we will keep investing in new products and services, high-quality content, as new technologies through organic development and M&A to solidify the foundation for our long-term growth.

Cussion Kar Shun Pang (Executive Chairman)

This concludes our prepared remarks. We are ready to open the call for questions.

Millicent Tu (Head of Investor Relations)

Thank you, Shelly. Hello, everyone. If you are dialing in by phone, please press 5 to ask a question and then press 6 to unmute yourself. If you are accessing the call from the Zoom meeting or GoToMeeting application, please click the Raise Hand button. For the benefit of all participants on today's call, please limit yourself to one question, and if you have additional ones, please reenter the queue. If you ask your questions in Chinese, may we please ask you to repeat in English? Thank you. And then the first question comes to the line from Alicia Yap from Citigroup. Alicia, please go ahead.

Alicia Yap (Managing Director and Senior Equity Research Analyst, Asia-Pacific Internet)

Hi, thank you. Good evening, management. Thanks for taking my questions. Congrats on the solid result. I'm gonna ask the questions in Mandarin first. I'm going to translate myself. So I wonder if management can share your preliminary view on your expectation for the online music's revenue growth in 2024, and how you expect the business and, you know, the competitive landscapes to evolve in the next three years. In addition, wondering if management could share how you think the macro environment might affect the growth prospect in next year and also the next three years. Thank you.

Cussion Kar Shun Pang (Executive Chairman)

Thank you for your question, Alicia. I think 2023 is a critical year for us. We have been transitioning and expanding our music ecosystem, making our business mix them much more resilient, and this is actually reflected in a number of aspects. First, we responded quickly to the challenges facing the live streaming industry, taking proactive actions to adjust our social entertainment business and making it more sustainable. Secondly, we continue to drive the prosperity of our music ecosystem while diversifying our revenue streams. And thirdly, our core business, like the online music subscriptions and advertising, record the robust growth amid an evolving macro environment. So you can seeing this in our second and Q3 financial results.

For 2022, I think that assuming we are going to have a stable external environment, and we see the opportunity to drive our overall top-line growth and margin expansion compared to 2023. Especially, we will continue to drive solid growth of our online music business, with subscription revenue driven by the subscription-based growth and also ARPU expansion. Outside of the subscription revenue, we expected the revenues from advertising and new initiatives, such as artist merchandise, to continue to grow healthily. For the social entertainment services, we will continue to execute our current operational strategy with the backdrop of the macro factors and competition. For 2024, our primary target is to stabilize the business and better serve our core users.

As a part of our holistic music ecosystem, we expect our social entertainment business to continue generating a healthy cash flow for us. For 2024 earnings, we aim to build upon our strong results so far in 2023 and continue to drive both gross and net margin expansion. For the 3-year outlook, I think, TME's core businesses, especially our online music services, still have lots of room to grow over the next three years. We are excited to see the growth opportunities in existing areas, including the subscription, ARPU, advertising, and more potential from the long-form audio.In addition to the online music services, we have been extended our reach and expanding capabilities along the entire music value chain. We have successfully developed our new monetization models to increase our target adjustable market with the diversifying revenue streams.

These include the live performances, like concerts and music festivals, artist merchandise, and more. With all these initiatives still in their early stage, we believe that we have built a strong foundation to tap into more areas for the long-term growth. So in a nutshell, I think that we are glad that our core businesses, like the online music service, show great resilience amid the current macro environment, and we are confident that our content and platform dual engine strategy will continue to capture more opportunities for our future healthy growth.

Millicent Tu (Head of Investor Relations)

Thank you. The next question comes from the line of Alex Wong from Morgan Stanley. Alex, please.

Alex Poon (Vice President and Equity Research Analyst)

Congratulations, management, for very strong quarterly results, especially the subscription business. My question is related to our ARPU growth. So Q3, we have achieved record high absolute number and also on a year-over-year and sequential growth basis. Going forward, because our blended ARPU is still even lower than our Double Eleven promotion price, and a lot of users are paying the fifty auto-renewal price of 15 CNY. So how should we think about the trajectory? How much visibility do we have for continuing this very strong pool growth in the next two, three years. Maybe because there is also a macro issue, deflationary environment, also competition with NetEase, which is still charging at a lower price than us. Thank you very much.

Shirley Hu (CFO)

好的，我们的这个 monthly ARP，这个持续这个增长了这个 6 个季度了，到这个季度呢，已经到了 CNY 10.3。那么这个主要是由于我们这个比较有纪律的这个减少了我们的这个推广活动，然后我们也给了我们的会员更多的这个会员的权益，更有吸引力。还有就是我们的一些价格政策的一些调整。

Speaker 13

Thank you very much. Thanks for the question. Regarding the ARPU, actually, we maintained our ARPU growth for six consecutive quarters, and for this quarter, it's already CNY 10.3. And because we also continue to downsize our promotional events and also make the membership benefits more attractive, and we also adjusted the price policies.

Shirley Hu (CFO)

特别是我们在连续包月的这个续费的优惠的调整方面呢，我们减少了这个优惠，但是我们同时通过极其非常有效的这个运营策略，用户也得到了很好的一个留存，所以使得我们整个的ARP这个在Q3有一个比较好的表现。

Speaker 13

At the same time, you can see that we actually make some concessions regarding the discount rate for the consecutive subscription business, but we also proactively adopting the effective operational strategies. Therefore, we will be able to retain our users. That's the reason our ARPU in Q3 of this year actually show a very good performance.

Shirley Hu (CFO)

基于我们对我们未来的这个，包月这个收入和广告.

包月收入的这个增长是比较有信心的。所以在未来来讲，我们觉得，整体的ARPU值应该在Q4来讲，是继续有所增长的。那么在刚刚你问到的这个未来的这个，3到5年里面，我们整体的这个会员的价格大概在15元，我们其实也是在根据这个行业的这个竞争情况和我们自己的运营情况，其实，还有刚刚提到的这种，这个通货膨胀的这些情况，那其实是我们有可能去做更好的运转，逐步地去接近这个ARPU值的。

Speaker 13

At the same time, we are still very confident regarding our future subscription business revenue growth. You were also asking about the Q3-Q4 performance, and we are also very happy and confident we're going to grow the number. In the second part of the question, you asked about the outlook for the next three to five years, and you mentioned actually our fee is around CNY 50, and we're going to keep an eye on the industrial competition, our own operationals, and also factoring the elements you mentioned, for example, like inflations, and then to further optimize our performance.

Operator (participant)

Okay. The next question comes from the line of Zhang Lei from Bank of America Merrill Lynch. Zhang Lei.

Lei Zhang (Equity Research Analyst)

Hi, 管理层，晚上好！谢谢接受我的提问。我的问题主要是关于我们的利润率的，特别是毛利率在过去几个季度都持续提升，然后呢看到Q3的时候也是达到了2019年以来的一个高点吧。所以可以分享一下我们两大音乐跟这个，就是social entertainment业务的毛利率的一个趋势，还有我们怎么看我们整个集团未来的利润率的一个.

尤其是毛利率的一个提升空间吧。谢谢，我自己翻译一下。Thanks management for taking my question. Notice that our gross margin is pretty on track in past quarters and reached a record high since 2019. And can you share with us the trend of music and social entertainment sub-business in terms of gross margin, and how should we look at the, the margin trend going forward? Thank you.

Shirley Hu (CFO)

Gross margin is 35.7% in Q3, increased by 4.1% year-over-year due to the factors as follows: first, music subscription revenues had significant growth, expansion in paying users base, and improvement in monthly ARPU both had positive impact on our gross margin. Second, the robust growth of advertising revenues also has the favorable impact on gross margin. Third, we gradually ramp up our self-owned content, which benefit our gross margin. Fourth, we optimize the content cost model of RC and increase RC requirement of content cost. Our online music revenues growth ratio was faster than natural ratio of content cost. Fifth, license cost of long form audio decreased at a year-over-year base.

Sixth, after the adjustment to live streaming business, the proportion of revenues from recent membership and advertising in social entertainment revenues have increased, which had a favorable impact on our gross margin. Seventh, the optimized the technology and operation strategy related to bandwidth and storage capability, and improved utilization of our service and equipment. Our gross margin has improved for six consecutive quarters. Looking forward Q4, we expect subscription revenue and advertisement revenue will continue to be strong growth. On the cost side, we expect our in-house made content will have positive impact on gross margin continually, and we will continue to increase our operational efficiency and monitor cost items by RC model. Despite the live streaming revenue will be decreased in Q4, we expect our gross margin will be increased, sequentially.

Speaker 13

And look forward in next three to the next year, we expect our gross margin will be increased, but the increase degree will be stable, will be little than this year.

Millicent Tu (Head of Investor Relations)

Okay, the next question comes from the line of Lincoln Kong from Goldman Sachs. Lincoln, please.

Lincoln Kong (Equity Research Analyst)

Thank you, management, for taking my question. So, my question is about the online music business, the non-subscription business. So first of all, is can management elaborate a bit more on how this business in terms of different segment doing in the Q3? So including advertising, license, digital album, etc. We're particularly interested in the advertising business trend into the Q4, as we just passed the Singles' Day. So how do we see the advertising wrapping up for the year or for the for this Q4? And when we think about the 2024, what are the areas we think have still have growth potential for this type of music?

Speaker 13

Okay. Q4的时候，应该我们的包月业务跟. 首先包月业务还是应该会维持我们，还是维持一个增长，跟基本上会跟Q3相对比较接近嘛，主要，主要我们的策略相对比较一致。然后广告因为有电商的双十一，所以我们预计应该也是在Q4的时候，相比Q3有应该有一个比较好的增长。

Thank you very much, and thanks for your question. In Q4 of this year, and we do believe we're going to maintain a good growth for the subscription business, along as what we've seen performed in Q3 of this year. Regarding the advertising business, because in Q4 of the year, we're going to have a Double Eleven shopping festival, so we do believe the Q4 performance would outperform Q3.

对，对于明年的情况，我们认为说，我们的包月会员应该会仍然维持增...还是应该去保持增长，但是很,很可能增长率会相比今年是有，会有所放缓。

Regarding the outlook of 2024, and in 2024, we believe our subscriber base will continue to grow, but maybe the growth rate would be slowed down compared with 2023.

等于到2024年，我们重点在包月业务上，主要还是会更多地去拓展。除了移动端，我们可能会更多地去拓展车载等IoT的领域，同时我们会大力发展超级会员。随着音质音效的持续特权的加入，那也希望通过，超级会员以及，类似于家庭跟情侣会员这个方式，去增大我们的会员的整个的一个ARP。

Regarding the subscription business model in 2024, besides working on the mobile internet solution, we are also going to intensify our efforts in the in-car application and IoT application. We are also going to step up our efforts regarding the Super VIP business, providing additional functions like the effect of the music and the tones of the music, and we're also going to continue to roll out household or the family membership and the couple membership, and continue to grow our ARPU.

那对于广告收入来说，首先我们还是对明年的经济情况，相比今年应该还是保持一个乐观吧。所以我们预计我们的广告收入应该，我们的目标还是，和今年维持一个大概的增长的情况。

Regarding the revenue from the advertising business, and for next year in 2024, we still would like to keep a positive attitude over the total growth, economic growth. So we're going to maintain our revenue growth target of advertising business in 2024, the same as 2023.

在明年的时候，我们可能会还会.

我们重点，除了激励广告以外，我们重点会去重点去看招商这部分的一个收入，也是，主要也是跟线下的演唱会这种活动有个紧密的结合。那希望通过招商这样的一个广告形态，能够让我们的一种商业化的行为，和我们线下的这样的一个演出业务能够有一个很，很紧密的结合，这个也是我们可能会预期的明年的一个广告的一个增长点。

Regarding the growth for next year, and besides what we mentioned, the ad supported mode, we are also going to intensify our efforts regarding the commercial promotion, and we are going to leverage the commercial promo, promotion along with the Earthlight events and concepts. Because by so doing, we will be able to make sure we find a deep bond between our commercialization and the Earthlight events. This would also be a great growth driver for our next year advertising business.

Okay.

Millicent Tu (Head of Investor Relations)

Thank you. The next question comes from Thomas Chung, from Jefferies. Thomas, please.

Thomas Chong (Managing Director and Head of China Internet)

Hi, good evening. Thanks management, for taking my questions. My question is relating to, AI and LLM. Given we have been seeing, AI is so important, on content creation and also supporting our musicians and also driving the user engagement, I just want to get some color with regard to our three-year strategies, in, LLM and AI, and, what level of spending, should we expect, over the next, couple of years?

谢谢管理层接受我的提问，我的问题是关于AI跟LLM的。我们看到了，AI那边对我们呢，从音乐人那边，还有用户端那边，都是有一个非常好的一个提升。想问一下未来三年的话，管理层在这方面的投入可以跟大家分享吗？谢谢。

Speaker 13

对，这个我们，我们其实应该跟我们的，母公司腾讯应该保持一个非常，应该一个态度，就我们认为说AI在未来几年之内会是一个非常强的一个驱动力，是有可能会驱动一些，一些新的业务的发展的。

Thank you very much. Thanks for the question. Regarding the AI related question, I believe we are going to in line with what has been provided by our parent company, Tencent. We do believe AI going to be a very strong and robust driving force for the next few years.

对，就像我之前说过，我们其实因为我们跟腾讯这样的关系，其实我们会在这个基础模型上，我们基本上不会太做更多的研究，那主要还是去跟混元，你也知道我们腾讯发布了混元系统，所以我们也是要跟混元大模型这边有更加紧密的结合。

You know that due to our relationship with Tencent Group and for some basic models, actually, we are not going to dive deep for more research, because Tencent Group has already released its Hunyuan system, and we're also going to leverage the Hunyuan produced by Tencent Group to continue to deep our business with their model.

对，因为我们是更加偏重于应用，所以我们基本上重点主要是在大模型的这样的一个集成的方案上。我们可以让我们的应用非常无缝地去切换目前行业里面比较领先的语言模型的基座，比如混元也好，包括百川，包括我们正在去测试的元相。

Actually, you know, our business is more application driven. So what we're going to do in the near future is to leverage the existing LLM to fully support the solution with great integration, and we do believe that we will be able to seamlessly switch to the leading language models in the industry, including Baichuan, Hunyuan, and Yuanxiang.

Q3的时候，我们也已经推出了文曲大模型的一个接入平台2.0，然后我们同时也会致力于在推理模型的，在模型上的推理加速，主要是为了在我们，在我们整个的这个生产环境中，能够让这样一个大模型的应用能够非常的就成本降低，同时它的使用方式上也非常的高效。

As you probably noticed, in Q3 of this year, we have already launched our music large model connection platform 2.0. We are also fully committed in accelerating the model use, and especially making the model be a part of our production system, so that it can help us to trying to continue the low cost, and they also going to boost our work efficiency.

所以在未来的三年，未来几年之内，我们重点主要还是在AI的大应用上去扩展它的一个使用范围，使用场景。这里比如包括我们已经迭代的“一起听”的底座模型，就能够让用户在一起听歌的情况下，能够很流畅地去进行聊天。我们自己也发现，最近我们通过模型的接入，我们的问答效果也得到了非常大幅度的提升。

You can also say that in the next three years, what we are trying to do is still leverage the existing LLM to continue to expand its application. For example, we already have the listening together product that is based on the updated LLM. In other words, it can allow the users to listen to the same music, we are also able to chat with each other. And we also find out by having those models, the Q&A, and also the chat efficiency has been greatly improved.

相比于基座模型，我们还是更加地重视就AIGC的这样的能力。我们也，通过研究本身的一些行业最领先的引擎，我们通过AIGC已经在，视频、图片和，声音这部分已经取得了比较好的成果，已经在我们的直播，直播里面取得了一个相对，初步的一些商业化的结果。

While at the same time, compared with what I mentioned, the fundamental LLM, what we trying to improve is actually our AIGC capacity, and we are also research and adopting the leading engines in the industry, and some preliminary result has already been achieved in video, in graphics, and in audio. You know, some of the commercial result has already been harvested in our live streaming performance.

这个我们相信呢，生成式的AI在音乐创作跟体验方面还是具有很大的潜力的，所以也可以给用户带来更加个性化的、多样化和沉浸式的音乐体验。所以在未来，我们也会继续投资和探索在这种生成式AI领域中的创新，并且与我们的技术合作伙伴和音乐创作者然后紧密地合作，就共同地真正地去推进音乐内容行业的发展和创新。

Last but not least, we also believe that AIGC play a vital role for music creation and user experience enhancement. It can provide the user a more personalized, diversified, yet immersive music experience. In the near future, we will continue to invest and explore the improved innovation in this field. We're also going to join hands with our technical partners and music creators, so that we will continue to develop and to create in the content industry.

Millicent Tu (Head of Investor Relations)

Thank you. The next question comes from Alex Yao from JP Morgan. Alex, please. And Alex?

Alex Yao (Co-Head of Asia Pacific TMT Research)

Hi guys, can you hear me OK?

Millicent Tu (Head of Investor Relations)

We can hear you now.

Alex Yao (Co-Head of Asia Pacific TMT Research)

OK. Thank you management for taking my question and congrats on a good quarter. I have a question on sales marketing. You guys has been rationalizing the sales marketing spending very successfully in the past few years. Sorry, past a few quarters.

Speaker 13

Now that the revenue mix has significantly shifted towards music, and on the back of potentially more online offline integration and you know, involvement in the offline music activities. How should we think about the sales modeling strategy going forward? For example, next year, are we still going to see a flattish or even slightly lower sales marketing expenses versus this year? Or should we think about as you focus increasingly more on music, with more potential offline activities, the sales marketing will gradually ramp up in the next few quarters. Thank you.

在过去几个季度当中，确实我们的这个销售费用其实是得到了一个很好的管理，因为我们一直坚持着用ROC的方式去管理这个销售费用。

Thank you very much, thanks for your question. Yes, indeed. For the first few quarters, our sales expense being well managed, because we always adopted ROC to well manage our expenses.

对，那么对于未来呢，因为随着我们自己音乐的这个盈利能力的这个增加，那么其实我们在渠道这一块，就是对音乐的渠道这一块的投入可能还是会稍有增加的，因为，如果我们的ROC管理到位的话，那么投入的其实是可以赚到这个收入的，这是一个策略，对。

Regarding the future, actually we do believe we are going to improve our profitability regarding the music of the business, and we are still going to invest in the music channel business. But as we are adopting the ROC, we will be able to confidently translate the investment into returns.

对，另外一个方面呢，这个我们随着我们，自制和共创的内容，还有您提到的这个线下活动的增加，那么我们对这一块的这个promotion的活动也会增加。那么当然它同时的，管理的原则也是在ROI的这个管理之下，那么，相当于说我们希望我们投入的这个销售费用是整体来讲是有效率的。

As you may probably noticed, and on the other side, we continue to strive for a better self-produced and co-creation content, and we're also going to launch more offline events or activities. So for sure, we are going to need more promotional activities to do so. But because we adopted the ROI management methodology, so in other words, our investment is highly efficient and effective.

对，那么具体到Q4的这个，费用来讲呢，因为Q4传统上是我们的这个，营销的这个，活动比较多的一个季度，那我们预计那么整体的营销费用可能会跟去年的这个Q4基本持平。

Regarding the Q4 of 2023, as you probably notice, Q4 is always the season packed with marketing and promotional events, so I think our sales and marketing expenses in Q4 of this year would be the same as what we saw last year.

具体到明年来讲呢，我们估计我们整体的这个，营销费用可能在绝对值上会稍有增长，但是相对于收入的这个，这个，效率来讲，应该来讲是更有效率的。

Regarding the 2024, the sales and marketing expenses from the absolute value perspective, it might be some growth, but compared with the revenue growth, I do believe our investment is truly efficient.

Millicent Tu (Head of Investor Relations)

Thank you. The next question coming from Zhang Xueqin from CICC. Xueqin please.

Xueqing Zhang (Analyst, Communication and Media)

Thank you, management. I want to follow up and ask about the IoT question, because just now Ross mentioned you will expand IoT membership subscriptions. So, want to please ask about the current user scale for the IoT in-car segment, as how many among them are paying users. In the future, how will we convert them into paying users, as how to view the long-term monetization potential? Thanks. Follow up on the questions about IoT, as Ross mentioned before, you will expand IoT membership in the future.

So I'd like to ask about the question that what's the scale of IoT and the EV MAU, and how many are paying users? What's our plan to convert them into paying users in the future? And how should we think about the long-term monetization potential? Thank you.

Speaker 13

对，简单来说，现在在 IoT 领域中，我们的策略是，我们要持续地去，让音箱业务跟电视业务比较健康，然后同时会大力地去拓展，车载这部分用户的这个业务的用户的规模。

Thank you very much. Thanks for your question. Regarding the IoT business, our strategy is to make sure we have a very healthy growth for the loudspeaker and the TV business, where at the same time, we are also going to step up our efforts in further expanding the user base for the in-car service.

对，因为音箱业务跟电视业务都相对来说，增量市场不算太高，所以我们主要是在存量的用户市场上如何去做更好的商业化的变现，以及提升我们在这几个领域中的UP值。

So as you probably notice, for the loudspeaker and the TV business, because the future growth potential might be limited. So what we are doing now is to trying to dive deep into the existing user base, making sure we have a very good monetization and also making sure we can grow the up in the existing customer base.

对，那对于在车载领域，我们非常看重新能源车的一个发展，就新能源，新能源汽车的一个快速的一个演进。

使得智能车本身的规模有非常非常大的进步，在中国。

Regarding the in-car service, actually, we attach great importance to the new energy vehicle as the new energy vehicle industry continue to grow. We also believe that in China, we also see a ever-increasing growth regarding the intelligent cars.

所以这部分我们应该说策略还是比较清晰，我们主要要跟头部的这些厂商建立非常好的一个关系，能够让他们在，整个的，国内的厂商，包括特斯拉，都能够，让我们的内容很好地传播到车载用户群众。

So actually, regarding the strategies for the in-car business, we're going to keep very good relationship with the auto OEMs, and including the domestic auto OEM and even Tesla. We are going to make sure our content could be well provided into their driver in the cockpit.

另外，我们就更加地，因为我们的音质和音效这样的技术在整个应该是最为领先的，所以我们也非常关注在整个汽车，在车载这个领域里面，音质音效的一个进步，这里包括了我们的自研的这样一个真品音质的技术，以及我们引入的杜比这样的一个技术，能够使车载体验有一个比较质的飞跃。

At the same time, you know that still for us, we lead the way regarding the sound quality and also the sound effect. So we really want to make sure we continue with our high quality, sound quality, and the sound effect in the in-car service. And we also have our indigenous technology regarding the premier sound quality and also the Dolby sound effect, making sure the users, when they are in their cars, they can also enjoy the high quality service from us.

从最近这两年的车载用户发展来看，就是整个在车载里面的ARPU值还是比相对移动端是有一个比较好的一个绝对值的。那么我们也，其实这样我们也可以，如果在里面深究的话，其实也可以看到我们在，还是有很大的一个付费用户的一个增长空间。所以，但是我们重点还是希望能够先把这部分车载用户的用户规模能够做到一定的规模，然后再持续地去，提升这样一个，通过这种商业化策略去提升我们的付费的ARPU。

For the past two years, we also clearly noticed that the user ARPU from the apps of that, absolute value perspective, the in-car service is better than the mobile end service. Where at the same time, we also noticed that what we are doing now is still trying to expand the user base for the in-car service. When we grow our customer base to certain number, we're going to leverage more commercial activities and strategies to turn them into the paying user.

Millicent Tu (Head of Investor Relations)

Thank you. In the interest of time, we take the last question from Wei Xiong from UBS. Wei Xiong, please.

Wei Xiong (Equity Research Analyst)

Thank you, management, for taking my question, and congrats on a good quarter. My question is around shareholder returns. So good to see the execution of buyback program in the past quarter. Looking ahead, how should we think about the pace of buyback? And what factors do we consider in determining the timing and maybe the pace of the buyback execution? And also, what are the ways do we think about to drive better shareholder returns? Thank you.

Speaker 13

对，我们今年，在一季度宣布了一个5亿美金的股份回购计划。那么截止到9月30号，我们已经用现金从公开市场回购了1,580万的ADS，那么总计有1亿吧。因为，基本上我们也是按照这个节奏去做这个回购的。那么，我们也会继续关注这个市场和股票的表现，那么抓住这个机会进行这个回购吧，那么为股东创造更多的价值，可能未来也会考虑更多的这个情况，回购的情况吧。对。

Thank you very much. In Q1 of this year, we announced a $500 million share, US dollar share repurchase program for repurchasing the Class A ordinary shares. As of September 30, 2023, we made cash repurchases of approximately 50.8 million ADS in the open market, for a total consideration of nearly $103 million. We will continue to keep an eye on the market, especially the latest market trend, and also capture the opportunities to create more value for our shareholders. By keeping an eye on the market, we will also consider further repurchase program if the time and the opportunity allows.

Millicent Tu (Head of Investor Relations)

Okay, with that, I'll turn the call over to Cussion for closing remarks.

Cussion Kar Shun Pang (Executive Chairman)

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

Speaker 13

Thank you.

Millicent Tu (Head of Investor Relations)

Thank you.

Cussion Kar Shun Pang (Executive Chairman)

Thank you.