Tencent Music Entertainment Group - Q4 2023
March 19, 2024
Transcript
Millicent Tu (Head of Investor Relations)
Good evening, good morning, and welcome to Tencent Music Entertainment Group's fourth quarter and full-year 2023 earnings conference call. I'm Millicent Tu, Head of IR at TME. We announced our quarterly financial results today before the U.S. market opened, and earnings release is now available on our IR website and via Newswire services. Today you'll hear Mr. Cussion Pang, our Executive Chairman, and Mr. Ross Liang, our CEO, who will share an overview of our company strategies and business updates. 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 well as 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 remarks, there will be a Q&A session. Please bear in mind that today's call is being recorded. With that, I'm 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. 2023 marked a pivotal transition at TME, as we remained dedicated to driving growth and prosperity across our music ecosystem while propelling the development of the entire music industry. Notably, our subscriber count surpassed the 100 million milestone in 2023. We added 18.2 million subscribers for the full year, up from 12.3 million in 2022, a compelling testament to our content leadership, platform value, and high-quality user experience. These streams show consistent growth in music paying users and per-user spend, anchoring our subscription revenues accelerating year-over-year growth throughout the year. In particular, in the fourth quarter of 2023, online music recorded faster-than-expected revenue growth, paying users and ARPPU rose by over 20% year-over-year to 107 million and RMB 10.7, respectively.
These results mitigated top-line headwinds from the social entertainment business and reciprocally contributed to a lift in net profit for the quarter and the full year. Entering 2024, we are also seeing strong momentum in subscriber growth in the first quarter. Such solid performance was driven by our powerful content and platform dual engines. Now, I'd like to share these aspects of our content development efforts fueling this robust, sustainable growth. First, by leveraging and deepening partnerships with domestic and international record labels, we consistently reinforced our competitive edge with an ever-growing selection of copyrighted music. As a result, by the end of 2023, we had over 200 million music and audio tracks on our platform. In addition, self- and co-produced content further differentiated our offerings, increasing our popularity among users.
Lastly, our rich foundation of content and relationships with label partners empowered us to capture diverse opportunities across the music industry, amplifying content's value. Let me walk you through some concrete examples. On content coverage and appeal, we recently renewed our multi-year partnership with Universal Music Group, UMG, to bring users ongoing access to its vast and growing music catalog, as well as a notable sound quality upgrade with music streaming in Dolby Atmos and high-definition formats. Taylor Swift's recorded album, 1989 (Taylor's Version), topped all charts in the first week of its release on our platform in October. We also capitalized on this success and further promoted fan engagement with a series of customized interactive song guesting contests.
In addition, we renewed the collaboration with Peacock Records, the record label for renowned duo Legend of Phoenix, 凤凰传奇, deepening cooperation across headstart song releases, physical albums, and various other artist-related services. We further enhanced our content appeal and leadership across pop, rock, and Chinese ancient style music genres, allowing us to better attract and retain young users. Next, on differentiated content offerings through in-house and collaborative creation. For mid- to long-tail music content, we leveraged our wealth of multi-faceted resources to enrich our offering and promote its prosperity. As of the year of 2023, over 480,000 indie musicians had contributed over 3 million songs across multiple genres on Tencent Music platform. By providing comprehensive music training programs and other support, we effectively unlocked their creativity and nurtured their music careers. To accumulate our music access in different genres, we are bolstering collaborations with our strategic partners' artists.
For these more mature artists, we boosted their popularity and advanced their career through increasingly tailored support. For example, this quarter, we assisted jazz singer Liu Lian with her EP production and release, greatly raising her profile and strengthening the fan-artist relationships. Our in-house and collaborative content continued to grow from strength to strength. As a case in point, we had 10 songs showcased during China Media Group 2024 Spring Festival Gala. Our self-produced song, She Basks in the Light, 枕着光的她, was a standout. Such performances generated massive social buzz, pushing user engagement on our platform and greatly elevating our national influence. Another notable example is our self-produced hit song, Xilou Ernu, performed by our strategic partner artist Hailai Amu and covered by our popular Chinese crosstalk performer, Yue Yunpeng. This song went viral, totaling over 1 billion streams on our platforms as of March this year.
Last but not least, on maximizing content value through innovation, we scaled up our live performance business through diverse event formats in 2023. Capitalizing on the resurgence of offline music events, we host a growing number of offline music tours, festivals, and livehouse performances to meet strong demand. In the fourth quarter, we hosted world-renowned DJ Alan Walker's Six City Electronic Music Tour in China. During the tour, we facilitated unique offline merged online services and encompassing interactive fan activities, artist merchandise, ticket sales, and performance management, which in turn boosted our industry influence. In the fourth quarter, we collaborated with HYBE to launch a line of artist merchandise for K-pop bands such as SEVENTEEN and NewJeans, diversifying our offerings of content-related peripherals in various formats. As a result, revenue from artist merchandise recorded robust year-over-year growth. Moving on to our continued commitment to social responsibility.
In the fourth quarter, in collaboration with local government agencies, we conducted a series of music events to promote cultural and economic development in ethnic minority regions. For example, we partnered with Tencent Charity to organize the 2023 Shenzhen Litchi Music Festival, leveraging offline music performances to help rejuvenate the rural economy with increased tourism. These initiatives not only broadened music's reach geographically but also expanded its positive impact across the industries, maximizing its societal value. In conclusion, we're excited about the thriving growth of the music industry for the years to come. Our powerful content and platform dual engines, underpinned by online music's relatively congested nature, will enable us to capture more multi-fenced opportunities in 2024 and beyond. Now, I would like to turn the call over to Ross for more color on our platform development. Ross, please go ahead.
Ross Liang (CEO)
Thank you, Cussion. Hello everyone. Our laser focus on execution resulted in a year of solid music growth and efficiency gains. Our platform's strengths, our insights into users and content, and our dedication to innovation were crucial in achieving this success, all translating into enhanced music journeys for users. Now, I would like to elaborate on three areas we prioritized to enhance users' experience. First, we expanded users' privileges. This included more industry-leading sound quality selections, rich sound effects, more individualized players, new skins, and additional interactive features. For example, we amassed China's largest Dolby Atmos music library, offering users a more immersive listening experience. Currently, our Dolby Atmos music service is available on mobile, in-car platforms, enabling higher quality music experiences across more comprehensive use cases.
Furthermore, we hosted a dedicated online MV preview event for Jay Chou's new single, "Christmas Star," promoting closer fan-artist bonding and a deeper sense of community. Millions of viewers signed up for the event within 24 hours of the registration opening. We also launched an AI voice feature for this single to further boost user engagement. Thanks to these tailored activities and features, we have recorded a total of over 100 million streams from tens of millions of users. Second, we deepened connections with users through major upgrades across multi-device experiences. QQ Music launched a significant upgrade on mobile and PC in December last year, offering customized user interfaces and music players. As part of Chinese Lunar New Year's offerings, we introduced an annual music report feature that captures each user's unique music journey. Tens of millions of QQ Music users joined this annual review activity.
These comprehensive reports reflect the important personalized mutual bonds that we have built with users on a massive scale. They highlight how and when a user connected with us emotionally, from special moments captured, artist favorites, storied discovery, and songs streamed to time spent. We also enhanced in-car music entertainment services. For example, we recently upgraded QQ Music's in-car app for Tesla, bringing users a more intelligent interface with better recommendations. Kugou Music newly added the Viper 3D Music Library, 蝰蛇全景声, to its in-car offerings, specially optimizing audio performance in a closed cabin environment. Furthermore, we maintained our leadership in smart vocal coverage and recently renewed partnership with Li Auto. Last but not least, our technology infrastructure continued to play a vital role in content promotion, distribution, and discovery. More accurate recommendations drove greater content consumption, effectively improving our user conversion and retention.
We are pleased to share that in the fourth quarter, both QQ Music and Kugou Music recorded another record high share of music streams from recommendations. Finally, AI. We continued to expand AIGC applications to enhance user experience and foster artist music creation while improving efficiency. On the product side, we integrated AIGC into music streaming and creation, as well as singing and socializing, creating, and increasingly intelligent and personalized music experiences for users and creators. For example, by enhancing QQ Music's AI-enabled listening together feature with additional virtual DJs, each specializing in different music genres, we have made music discovery faster and more personalized. Furthermore, we launched an AI composition tool in Venus, supporting artists' music creation using their original text promos or rhythm clips. Lastly, we integrated an AI sync function into Kugou Music and WeSing.
Initial results suggest that users are increasingly willing to pay for this function as it enables easy creation of song covers in multiple styles and languages. On the operations side, we are using AIGC to make our advertising more efficient and effective, enabling us to better target and convert users. We are also leveraging LLMs to better promote and distribute new songs. They help us analyze songs' audio characteristics and identify the content that resonates most with users. To sum up, we will continue to leverage technology to achieve more efficiency gains in the future. Our dedication and passion for serving hundreds of millions of music users will further inspire us to deliver more compelling music entertainment experiences seamlessly across a broader range of use cases. With that, I will turn the call over to Shirley Hu, our CFO, for a deep dive into our financials.
Shirley Hu (CFO)
Thank you, Ross. Greetings to everyone. I will now turn to our financial results. Our strong financial results for year 2023 reflected success in effective monetization for our music services and operational efficiency management. With accelerating year-over-year growth in subscription revenues throughout the year, our online music services delivered faster-than-expected revenue growth, which largely mitigated the revenue decline in social entertainment services and others. IFRS net profit and non-IFRS net profit were RMB 5.2 billion and RMB 6.2 billion, respectively, up by 36% and 27%, respectively, on a year-over-year basis. In the fourth quarter of 2023, our total revenues were RMB 6.9 billion, down by 7% year-over-year, primarily due to a decline in revenues from social entertainment services and others. Our online music revenues in Q4 2023 increased by 41% to RMB 5 billion on a year-over-year basis.
This surge was driven by the strong expansion of our music subscription and advertising business, supplemented by an increase in artist-related merchandise sales. Delving deeper into our music subscription performance for Q4, music subscription revenues reached RMB 3.4 billion, which is a 45% increase year-over-year and a 7% rise sequentially. Our refined operation allowed us to expand our online music paying users by enhancing monthly ARPPU. The number of online music paying users expanded to 106.7 million, representing a 21% increase year-over-year, with a quarterly net add of 3.7 million users. The monthly ARPPU rose to RMB 10.7, up by 20% year-over-year and by 4% sequentially, marking the seventh success quarter of growth and setting another record.
The continued growth in our paying user base was largely attributable to our enriched content offerings, enhanced member privileges such as industry-leading sound quality selections, rich sound effects, more individualized players, new skins, and interactive product features such as in-car enhancement and interactive features for Jay Chou's new single, "Christmas Star." Our advertising revenue also had strong growth year-over-year and sequentially, supported by our diversified product suite and innovative advertising formats. Ad-supported advertising delivered strong performance this quarter, as enhanced rates improved significantly. Additionally, the new Double 11 e-commerce sales event generated higher demand for advertising and contributed to a sequential increase in advertising revenues. Social entertainment services and other revenues were RMB 1.9 billion, down by 52% year-over-year.
This was mainly due to adjustments in certain live streaming interactive functions and more stringent compliance procedures as we implemented several service enhancements and risk control measures in the past couple of quarters. We continue to innovate for social entertainment services and have seen growth in advertising revenues and VIP membership revenues this quarter. Our gross margin for Q4 stood at 38.3%, marking an increase of 5.3 percentage points year-over-year and an increase of 2.6 percentage points sequentially. Increasing user base together with higher monthly ARPPU, growth in advertising revenues, as well as ramping up our own content, have enabled us to move to a healthier margin model. Additionally, we have built win-win relationships with labels and artists and managed content costs more efficiently using an ROC approach. These efforts have collectively resulted in the increase of our gross margin year-over-year.
Moving on to operating expenses, in the fourth quarter of 2023, they amounted to RMB 1.3 billion, representing 18.4% of our total revenues compared with 18.3% in the same period of last year. Selling and marketing expenses were RMB 255 million, down by 4% year-over-year. Our marketing strategy is ROI-focused, where we allocated budget towards areas with long-term growth prospects. We strategically curtailed expenses for promotion channel fees associated with live streaming and increased expenses to promote our own content. As our music services continue to grow rapidly, we will continue to spend on channel promotions for these areas. General and administrative expenses were RMB 1 billion, down by 8% year-over-year, primarily driven by low employee-related expenses, partially because we incurred expenses related to Lazy Audio acquisition in Q4 2022. But such expenses did not recur in Q4 2023.
Our effective tax rate for Q4 2023 was 17.3%, compared to 12.2% in the same period of 2022. This increase was primarily attributed to the accrual of withholding tax related to earnings to be remitted by our PRC subsidiaries to offshore entities. For Q4 2023, our net profit and net profit attributable to equity holders of the company were RMB 1.4 billion and RMB 1.3 billion. Non-IFRS's net profit and Non-IFRS's net profit attributable to equity holders of the company were RMB 1.7 billion and RMB 1.6 billion, respectively. Our diluted earnings per ADS reached a record high this quarter at RMB 0.83, up 15% year-over-year. Non-IFRS's diluted earnings per ADS increased to RMB 1, up 10% year-over-year. These results demonstrated our robust financial performance, enhanced operating efficiency, and the positive impact from our share repurchase program.
As of December 31, 2023, our combined balances of cash equivalents and term deposits were RMB 32.2 billion, as compared with RMB 31 billion as of September 30, 2023. This combined balance was also affected by changes in the exchange rate of the RMB to USD at different balance sheet dates. Under the share repurchase program announced in March 2023, as of December 31, 2023, we had repurchased 25.3 million ADS from the open market for total cash consideration of $175 million, of which approximately $72 million were repurchased in the fourth quarter. Next, I will briefly discuss our performance for full year 2023. Total revenues were RMB 27.8 billion, down by 2% year-over-year. Revenues from online music services were RMB 17.3 billion, up by 39% year-over-year.
The increase was driven by strong growth in music subscription revenues and revenues from advertising services, supplemented by growth in other music services. Our music subscription revenue was RMB 12.1 billion, up by 39% year-over-year, driven by growth in both paying users and monthly ARPPU. Revenues from social entertainment services declined by 34% year-over-year due to adjustments in certain live streaming interactive functions and more stringent compliance procedures, as we implemented several service enhancements and risk control measures in the past couple of quarters. Gross margin in 2023 was 35.3%, up by 4.3% year-over-year due to the reasons discussed earlier. Total operating expenses for 2023 were RMB 5 billion, down by 10% year-over-year. Selling and marketing expenses in 2023 were RMB 0.9 billion, down by 20% year-over-year, largely due to more efficient ROI-focused promotional strategies.
General and administrative expenses were RMB 4.1 billion, down by 7% year-over-year, primarily due to reduced employee-related expenses, including expenses related to Lazy Audio acquisition and expenses related to the Hong Kong secondary listing incurred in 2022. In 2023, we achieved the highest level of profitability in our company's history. Net profit and net profit attributable to equity holders of the company was RMB 5.2 billion and RMB 4.9 billion, respectively. Non-IFRS net profit and Non-IFRS net profit attributable to equity holders of the company was RMB 6.2 billion and RMB 5.9 billion, respectively. Finally, I will conclude with some remarks on our outlook for 2023. We are excited. We are excited about the growth of the music industry and the revenues dedicated to driving our growth across our music ecosystem.
We will continue to focus on effective monetization and operational efficiency, while exploring new growth opportunities and expanding our suite of monetization tools, such as customized artist merchandise, concerts, etc. Additionally, we will continue to invest in high-quality contents and original content productions, as well as new products and technologies such as AIGC. We are confident about the long-term healthy growth of the music industry and our company. We remain focused on providing high-quality investment returns for our shareholders. This concludes our prepared remarks. We are now ready to open the call for questions.
Cussion Kar Shun Pang (Executive Chairman)
Thank you, Shirley. 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 Tencent Meeting or the VooV Meeting application, please click the "Raise Hand" button at the bottom left. For the benefit of all participants of today's call, please limit yourself to one question at a time. If you have additional ones, you can re-enter the queue. If you ask your questions in Chinese, please repeat them in English. The first question comes from the line of Alice Poon from Morgan Stanley. Alice, please.
Ross Liang (CEO)
Hi management. Congratulations on a very strong quarter. My question is regarding our 2024 and first quarter revenue growth expectations. Can you share some color, particularly about the music segment? Thank you so much.
Shirley Hu (CFO)
Thank you, Alex, for your questions. In year 2023, I think our online music business has consistently delivered a very strong performance. Our total monthly subscribers have reached 107 million already, which is a new milestone to us. The total revenue from the music subscriptions has 39% year-over-year growth. The reason behind it is basically due to the very efficient execution of TME's content and platform dual-engine strategy and the countercyclical nature of the music industry. We believe that the fourth quarter's accelerated growth in the subscription revenue will lay a strong foundation for this year's growth. We are optimistic about the industry's future and believe that our user-centric operations and expertise will continue to drive the business forward. We are committed to build a popular all-in-one music and audio platform.
From the product point of view, we will use the industry-leading technology and know-how to provide the best user experience for our users. From content point of view, we will continue to provide the best coverage of songs and also some of the new other formats like live performances of concerts and music festivals, etc. So in a nutshell, I think for this year, we are confident that the online music business will maintain a solid growth, with subscription services serving as a primary driving force, while continuing to explore the new opportunities in advertising and artist merchandise to grow the business. As part of our holistic music ecosystem, our social entertainment side will focus on better serving the core users, and the revenue from this part will be relatively stable this year.
Cussion Kar Shun Pang (Executive Chairman)
Thank you. And the next question coming from Alicia Yap from Citigroup. Alicia, please.
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Hi. Thank you. Good evening, management. Thanks for taking my questions, and also congrats on the solid quarter. I have two very quick questions. One is just curious if management can elaborate a little bit in terms of the user profile for those that newly converted to the membership sub for the past 12 months. Any colors in terms of the geographic location, cities, tiers, age group, and the song library that they tend to prefer. Anything you can share would be helpful. And then very quickly on the second question is if you can update on any upcoming strategies and expectations for the long-form audio in terms of the user adoption rate and also the revenue trends. Thank you.
Ross Liang (CEO)
首先，我们因为包月用整个的一个用户群是一个就是上亿规模的用户群，所以我们基本上还是跟整个的人口结构是比较偏类似的。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Thank you very much. Thanks for your question. Actually, our user base is already more than 100 million, as I mentioned in the presentation. So the demographic profile of our user base is very relevant to the population demographic structure in China.
Ross Liang (CEO)
但是我们从实际活跃角度来看，我们仍然是最活跃的群体，就是最大规模的群体仍然聚焦在从18岁到30岁这个年龄段。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
From the activity of the user, we can see the most active user, the largest group of our users, is still aged between 80 to 30 years old.
Ross Liang (CEO)
然后我们目前的整个在包月用户中，他们的活跃的也是包月用户数在整个的包月用户在整个的用户整个的活跃度上也是相对来说是比较高的。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
We can also say that our subscription user is also very active among all the user groups we have.
Ross Liang (CEO)
对，在城市分布上基本上是跟目前的人口结构是比较偏类似的。就是虽然可能在一线城市偏更活跃一些，但是规模比较大的可能还是在还是分布在二线和三线城市。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Regarding the user profile and their allocation geographically, I think it is the same as the demographic allocation of China. We may have more active users in the first-tier cities, where the majority of our users are still distributed in tier two and tier three cities in China.
Ross Liang (CEO)
然后在后面的运营过程中，我们也会重点地去关注年轻用户群体，因为这部分仍然是我们可以非常有潜力的发展的部分。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
In our later operations, we're also going to keep an eye and be more focused on the young user groups because they are still the ones with the most potential to tap.
Ross Liang (CEO)
对于长音频来说，我们整个的目前的这个策略就是跟我们整个的音乐平台，就跟QQ音乐和酷狗音乐平台的紧密结合。这个策略从目前来看是非常行之有效的。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Regarding your question of the long audio, our current strategy is still we're going to make the long audio fully integrated with our music platform as QQ Music and Kugou Music. And till now, we find out the strategy is very effective.
Ross Liang (CEO)
我们更加关注每一个长音频内容的它整体的活跃跟变现的能力，然后基于ROC的这样的方式也去来采购我们市面上的比较热的内容。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
At the same time, we are also going to keep an eye on the long audio and especially how active it is and the monetization capacity of this long audio. We're also going to leverage ROC in order to source the most popular content in the market.
Ross Liang (CEO)
同时，我们也在关注长音频的内容在车载市场上的推进，因为我们也非常清楚在车载市场上，长语小说等内容仍然是非常受欢迎的。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
At the same time, for the long audio, we are also going to accelerate its penetration into the in-car market because we clearly notice that indeed the content like the novels are very popular for the in-car application.
Ross Liang (CEO)
所以总结来看，从2023年应该是长音频业务在TME里面的一个转型的一年，也取得了超出我们预期的结果。基本上，我们可以在23年一个相对比较好的业务发展情况下，在未来能够继续去推进长音频内容在整个音乐平台上的分发和它整个的商业效率。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
At the same time, generally speaking, 2023 would be a very important year for the long-form audio, or we call it 2023, a year of the transformation. The result and performance of the long-form audio is also better than our expectation. Based upon our great performance in 2023, we hope that long-form audio can also continue its distribution and commercial efficiency improvement on our music platform.
Cussion Kar Shun Pang (Executive Chairman)
Thank you. The next question comes from the line of Lincoln Kong from Goldman Sachs.
Ross Liang (CEO)
Thank you, management, for taking my question, and congrats on a very strong quarter. So my question is on the margin, especially the gross margin side. We have seen in fourth quarter accelerating gross margin expansion on a Q-on-Q basis, more than 200 basis points. Could management elaborate in terms of what are the reasons for that? When we're thinking about 2024, what will be the key drivers for further gross margin expansion in terms of upward growth, the operating leverage from content costs or minimum guarantee, or our increasing mix of our self-produced content? What will be the ceiling or medium-term sort of target for our music business gross margin under this context? Thank you.
Speaker 6
Yes. Gross margin is 38.3% in Q4, increased by 5.3% year-over-year. The main factors are as follows. The first, music subscription revenues have significant growth. Higher MAU and paying user base growth both have a positive impact on our gross margin. The robust growth of advertising revenues also has a favorable impact on gross margin. The third, we gradually ramp up our self-owned content, which benefits our gross margin. We can say the piece of our own content is increasing rapidly in Q4. Fourth, we have been focused on ROC to manage content costs more efficiently and build win-win relationships with labels and artists. Our online music revenues growth ratio was faster than the net ratio of content cost.
For gross margin in Q4 2024, we expect our gross margin will keep increasing compared to this. It will be lower than Q4 2023. With our subscription revenue and advertising revenue, we also expect to have a rapid increase. We think that the gross margin will keep increasing in Q1 2024.
Cussion Kar Shun Pang (Executive Chairman)
Thank you. The next question comes from the line of Wei Fang from Mizuho.
Wei Fang (Director and Senior Equity Research Analyst)
Thank you for taking my questions, and congrats on the print. I have an ARPU-related question. So looking at your music, ARPU trajectory, right, you guys finished the year with 16% year-over-year growth, and I believe your largest peer also delivered a positive growth. But despite that, I think your paying user growth maintained very solid expansion, right? So I was just wondering if management can help elaborate on your techniques behind, and is it fair to assume continued momentum into 2024? Thank you.
Speaker 6
Yeah. I think for the ARPU, we have adopted a holistic approach to grow the subscription revenue with flexibility in balancing between the subs growth and also the ARPU expansion. So I think that we have a strong start on the subs growth in Q1 2024, partially because of the effective promotion during the Chinese New Year. And so marginal ARPU fluctuation is to be expected. But I think for the remaining quarters in 2024, the overall, I think the trend should be slightly upward. So I think that we will monitor and also manage it very wisely to ensure that we have a good balance between the subs growth and also the ARPU expansion.
You're right that we believe that through a number of years of education, I think that all of the music lovers in China right now will see the value of music, and they are willing to pay more in the future.
Cussion Kar Shun Pang (Executive Chairman)
Thank you. So the next question comes from Zhang Lei from Bank of America Merrill Lynch.
Wei Fang (Director and Senior Equity Research Analyst)
Hi, management. Thanks for taking my question and congrats on a solid quarter. Two questions here. First is I think you have a pretty good margin and cash flow trend. So do we consider any shareholder returns in the future? And secondly, it's about the user trend in Q4, which saw slightly Q on Q decline. So how should we look at the user trend for 2024? Thank you.
Speaker 6
Hey, can you go back?
Ross Liang (CEO)
Hey, can you go back?
Speaker 6
Hey, can you go back?
Ross Liang (CEO)
Hey, can you go back?
Speaker 6
No, he said he wanted to say that.
Ross Liang (CEO)
Hey, can you go back?
Speaker 6
No, he said he wanted to say that.
Ross Liang (CEO)
Hey, can you go back?
Speaker 6
No, he said he wanted to say that.
Wei Fang (Director and Senior Equity Research Analyst)
Okay. I think that for the share buybacks, we have proactively been doing this in the last, especially in Q4 for 2023, and we'll continue to be doing this under the currently 500 million share buyback plan that we have. And I think that we have already achieved really good progress in it. And so maybe Ross will talk about the.
Ross Liang (CEO)
对。今年其实 Q4 的环比跟前几年的趋势是一致的，因为有 Q4 本身的一个开学导致的一个下滑。同时，我们也看到移动端本身也是持续地受到短视频的影响，就流量本身也是有自然流失的压力。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Thank you very much. I'd like to say the same as the trend a few years ago in Q4. Actually, the key reason is because the students are going back to school as school opens. Where at the same time, we also see some impact from the short-form video to our mobile end business.
Ross Liang (CEO)
当然，我们其实从分析来看，就是目前的整个的流失，从它的活跃天数来看，我们流失的大头主要还是在于低的活跃天的群体。基本上就是我们高活跃的群体仍然还是比较稳定的发展的。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
From the data analytics, we can say that regarding the loss of the user, actually, especially according to the days of the active, the majority of them leaving us are actually those low-active users. Still, we maintain our highly active users, and they are quite stable.
Ross Liang (CEO)
从实际的另外影响来看，就因为23年我们的整个的推广费销售营销费用的一个降低，我们也比较少地减少了在整个的一个渠道上推广。那也是一个我们目前相对MAU比较往下走的一个保持有压力的一个比较重要的因素。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
From the practice, we can also say that in the year of 2023, we further downsized the marketing expenses. That is the reason we also reduced the channel promotion. This is also another reason. That can respond to your question.
Ross Liang (CEO)
我们其实实际上也要关注就是整个的除了移动端的这样的一个我们目前的MAU以外，我们也实际上也更加关注本身除了PC和车载等IoT的渠道上的就一个传统渠道，一个新兴渠道的本身发展。因为我们实际上在运营上，我们可能更加关注全渠道的整个用户的规模。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Where at the same time, besides the mobile end, we are also keeping an eye on some traditional channels and emerging channels, including PC end, the in-car channel, and IoT channel. Because regarding the operation, we would like to indeed have the ARMY channel user base to be further improved.
Ross Liang (CEO)
所以我们当前来说，在IoT这部分的MAU还是保持了比较稳定的增长。那在PC部分，就Windows跟Mac这部分，我们还是保持着基础的稳定。但是我们也在持续地去发布新的版本来去继续探索在PC端的这样的机会。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
At the same time, you can also say that regarding the IoT end, we still remain a very steady growth. For the PC end, including the Windows and the Mac system, we're also going to maintain our stability there. But we're also trying to roll out new versions to continue to explore new opportunities on the PC end.
Ross Liang (CEO)
从2024年的这个趋势来看，因为Q1有春节这个因素的存在，本来这是一个常规的，大家是不会去比较少地去使用音乐APP。所以在Q1的MAU可能还会因为春节的因素会有一个微跌。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Where, at the same time, you can also say that regarding the trend of 2024, at the very beginning of 2024, we were being impacted by the Spring Festival in China. So during the Spring Festival, people seldom used music apps. So that's the reason in Q1 of 2024, you're going to see the MAUs being slightly decreased due to the Spring Festival reason.
Ross Liang (CEO)
当然，在随后是随着我们可能未来几个Q以后的大版本以及Q音乐的大版本以及酷狗本身这块的持续的优化，同时我们的营销策略会相比于23年有一个基于ROI的一个基于ROI本身上的一个营销费用提升。所以我们更加关注渠道这部分的一个拉新和回流。那我们相信可能在随后的季度里面，我们整个的MAU会有一个一定的回升。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
We are in the following quarters as we are going to have the major version update regarding QQ Music, and we're also going to continue to improve the performance of Kugou Music. So I do believe compared with 2023, our marketing strategy is also going to have an ROI-based improvement. We're also going to pay more attention to the channel part, including the channel new user engagement and the returning of the old user back to our platform. So in the upcoming quarters, we're also going to expect the MAU improvement.
Speaker 6
Okay. In response to your first questions, besides the share buyback, we are also proactively looking into the different possibilities as well. We will be working on the detailed plan, and then we would like to improve the shareholders' equity benefits in the future.
Cussion Kar Shun Pang (Executive Chairman)
Thank you, Cussion. The next question comes from the line of CICC. Xueqing, please.
Wei Fang (Director and Senior Equity Research Analyst)
Hey, thank you. Thanks for taking my question, and also congratulations on a strong quarter. My question is about AIGC. As you mentioned in the prepared remarks, TME has been using AIGC in many aspects. So could management elaborate a bit more about that? How do you leverage AI in your business, and how do AI-powered products contribute to the subscriber conversion and retention? Thank you.
Ross Liang (CEO)
对。我们高度重视并且紧密地跟进生成式AI的发展，将大模型融入到推荐整个创作绘图和社交的场景之中。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Thank you very much. We have been closely monitoring the latest development of large language models and integrated it into music recommendations and creations, as well as seeing and socializing.
Ross Liang (CEO)
对。因为与其他的可能公司不同，我们还是更加关注在应用层上如何去拓展大模型的使用的场景。所以主要的这个应用场景，我们现在目前是分了三个层面。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Because somewhat different from other companies, we're going to be more focused on the large language model application use case. So regarding the application use case, actually, I have three parts to share with you.
Ross Liang (CEO)
第一方面，我们还希望通过大模型去提升产品的有趣性跟比较新奇的体验。我们最近也是在新版本中升级了我们的一起听的这个功能。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
First of all, we would like to leverage the large language model to make our product more appealing and more attractive, to provide the user a brand new experience. That is the reason in our latest version, we also updated Listen Together functionality.
Ross Liang (CEO)
对。让用户可以在Q音乐里面去找到一些虚拟的形象，和它更加快捷地找到通过这个虚拟形象能够非常快捷地给它推荐符合当下情绪跟心情的歌曲，并且一起来消费。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
The user in our QQ Music will be able to draw and profile their avatars. Through this avatar, they will also be able to find the recommended music that really fits into their mood and emotions. Then they are going to consume more content.
Ross Liang (CEO)
对。就在另外一个产品里面，我们在Q音乐的宠物这个产品里面，我们也通过去增强我们的大模型的聊天能力，让用户可以跟他的宠物进行非常有趣的聊天，让他们来增强我们宠物的这样陪伴感。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
While at the same time, another product is actually the SmallPet in QQ Music. We're also going to leverage the large language model to improve the conversation and the dialogue between the user and the pet, so they are going to have some very interesting chats to continue to improve the sense of the companion to our users.
Ross Liang (CEO)
第二部分是提升这个内容的创作效率。我们给音乐人去提供不同的比较高能够提升他效率的一个创作工具。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
The second point I'm going to talk about is how we can leverage the large language model to improve the creation efficiency to the content. We do provide effective tools for music creation to the creators.
Ross Liang (CEO)
最近在《启明星》里面的歌曲的整个分离功能，就是基本上可以把人声跟歌曲整个作曲直接分离，现在也受到了音乐人的欢迎。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Where we can say that recently, we have already enabled the separation function in the Venus functions. So generally speaking, it can directly separate the vocals from the entire composition of the song, which is very popular among musicians.
Ross Liang (CEO)
我们目前在全民K歌、酷狗和《启明星》上都推出了使用自己的音色来AI做歌的能力，让用户可以制作出多种语言不同曲风的作品。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
In addition, we also launched the AI-based composition functionalities through WeSing and Venus, as well as Kugou. In other words, that user can actually create their own preferred songs or the compositions according to their preferred style.
Ross Liang (CEO)
而且这个我们也发现其实它具备了非常好的一个商业的前景，就是用户其实是愿意为自己做的这个歌AI所做的歌曲来付出自己的一些成本的。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Where, at the same time, through those functions and enablement, we also find a very promising commercial prospects because users, they are actually willing to pay some of their money for those songs that have been produced with AI-enabled tools.
Ross Liang (CEO)
在广告获客上，我们也通过AIGC去生成不同的推广素材，然后我们也发现通过这样的投放素材使我们本身的转化效率有一个比较好的提升。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Where regarding the customer acquisition, we can also leverage AIGC to generate different promotional materials. We find out after allocating those materials to the market, it can also help to boost the conversion rate.
Ross Liang (CEO)
我们也还发现通过使用大模型能够让我们在站内的音乐推广上能够得到更好，比以前来说有一个更高比例的一个数据的一个提升。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
While at the same time, we also find out after applying the large language model, we will also have very good growth regarding the music recommendations within the app, a huge improvement compared with before.
Ross Liang (CEO)
所以我们相信说AIGC和生成式AI这个整体的对我们本身的产品应该还有比较好的一个推进作用。我们也会密切地跟踪本身在包括Suno这些整个的行业里面最新的这样技术的发展，然后能尽快地在我们的产品中应用过去。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Generally speaking, we do believe AIGC is benefiting our industry and helps to further improve the performance of our product. We're also going to keep an eye on the latest development, including Suno and other latest technology, and making sure they could also be adopted by our product as soon as possible.
Cussion Kar Shun Pang (Executive Chairman)
Thank you. The next question comes from Thomas Chong from Jefferies.
Millicent Tu (Head of Investor Relations)
Hi. Good evening. Thanks, management, for taking my questions, and congratulations on a very solid set of results. I have a question regarding our music and NetEase. Given the solid performance that we are seeing in Q4, 3.7 million records is better than the street expectation. How should we think about the NetEase trend coming into Q1 and 2024? And over the long run, how should we think about our music subs number? Thank you.
Shirley Hu (CFO)
好的。由于我们多年的市场教育，那么用户对我们的高品质音乐的付费习惯日益成熟。我们开始进入了收货期。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
Thank you very much. Thanks for your question. Where you can say that because we provided a high-quality product to the market and after years of education to the user, and now they are happy to pay for the service and product, and the user is becoming more mature. I think we are now stepping into the season of harvest.
Shirley Hu (CFO)
24年我们会以ROC为前提，那么适度地加上一些推广的情况，那么让更多的高潜用户能够接触和使用我们的高质服务，然后用我们完善的内容库和平台能够将他们留下来。这个是我们目前来讲在net adds上的一些做法。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
In the year of 2024, we're going to keep an eye on ROC and also trying to further improve our product and also with more marketing strategy. We do hope those high-potential customers can get access to our high-quality service and product, and our very well-established content library and platform will retain those users with us. This is indeed the strategy we have for this year.
Shirley Hu (CFO)
23年上半年在疫情放开之后，我们由于通行和线上音乐类活动的复苏，为我们创造了非常好的外部环境。那加上我们的运营的提升和有力的执行力，让我们比我们的预期很快地转化积累了大量的付费用户。那么我们全年的会员金额量是远超22年的，那么达到了1820万，为我们后续的扩大会员的盘子奠定了一个非常好的基础。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
In H1 of 2023, after the reopening of the pandemic, because the travel has been allowed and the offline musical event has been restored, which creates a very enabling external environment for our business. Along with our very strong operational capacity and very robust execution, we will be able to accumulate many paying users based upon the enabling external environment and the fast conversion rate. So in the year of 2023, actually, the net added value for our subscription user reached 182 million, and which laid a very solid foundation for us to further expand the user base in the near future.
Shirley Hu (CFO)
那么到24年，我们将会平衡net addst和ARPPU值之间的发展。那么我们有信心把在线音乐和包月收入增速维持在一个非常健康的水平。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
With regard to the year 2024, we're going to balance MAU and ARPPU, and we have every confidence we will be able to maintain the online music business and the subscription revenue at a very healthy level.
Shirley Hu (CFO)
2024年开年以来，我们受益于我们的产品创新和服务权益的扩大等运营策略带来的好的一些体验。那么我们加上配合了我们春节的一些运营推广活动，我们也看到了高于预期的一些效果。那么为24年的健康发展奠定了坚实的基础。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
regard to the year of 2024, right after we entered into the year of 2024, benefited from our product innovation and user privilege expansion, along with our very robust execution strategy, and we offer the high-quality experience to the users. Along with our operational and promotional events during the Chinese Spring Festival, we see the performance is better than what we expected. It also laid a very solid foundation for the healthy development of our business in 2024.
Ross Liang (CEO)
对。我们还会后面就更加关注我们超级会员，就高ARPPU值的这些会员的发展。在24年主要是超级会员以及在其他渠道，包括车载部分和TV部分的这部分会员的运营，也希望通过这些方式能够去整体提升我们的音乐ARP。但最重要的我们想强调的是，其实我们还是更优先的是保证我们整个包月收入的更加稳健的增长。
Alicia Yap (Managing Director and the Head of Pan-Asia Internet Research)
In the near future, we're also going to keep an eye on the operation and development of the super users, or should I call the high ARPPU value users. Those users are the key. We're going to also further expand their experience in other channels, including in-car experience and TV users. We do hope by operating them and well-managing them, it can also help us to overall improve the ARPPU for the music business. But more importantly, I should also say that what we're going to prioritize is to make sure we have a steady and robust growth for subscription revenue.
Cussion Kar Shun Pang (Executive Chairman)
Thank you. We're approaching the end of the conference call and now turn over to Cussion for closing remarks.
Speaker 6
Okay. Thank you, everyone, for joining us today. If you have any further questions, please feel free to contact TME's Investor Relations team. This concludes today's call, and the company looks forward to speaking with you again next quarter. Thank you so much, and goodbye.