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Tencent Music Entertainment Group (TME) Q1 2022 Earnings Call Transcript

TME Earnings Call - Final Transcript

Tencent Music Entertainment Group (NYSE: TME) Q1 2022 earnings call dated May. 16, 2022

Corporate Participants:

Tony Yip — Chief Strategy Officer

Cussion Pang — Executive Chairman

Ross Liang — Chief Executive Officer

Shirley Hu — Chief Financial Officer

Analysts:

Alicia Yap — Analyst

Alex Poon — Morgan Stanley — Analyst

Xueqing Zhang — CICC — Analyst

Eddie Leung — Bank of America Merrill Lynch — Analyst

Wei Xiong — UBS — Analyst

Ronald Keung — Goldman Sachs — Analyst

Thomas Chong — Jefferies — Analyst

Charlene Liu — HSBC — Analyst

Presentation:

Operator

Ladies and gentlemen, good evening, and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group First Quarter 2022 Earnings Conference Call. Today, you will hear discussions from the management team of Tencent Music Entertainment Group followed by a question-and-answer session. Please be advised that this conference is being recorded today.

Now I will turn the conference over to your speaker host today, Mr. Tony Yip. Please go ahead, sir.

Tony Yip — Chief Strategy Officer

Thank you, operator. Hello, everyone, and thank you all for joining us on today’s call. TME announced its quarterly financial results today after the market close. An earnings release is now available on our IR website at ir.tencentmusic.com, as well as via Newswire services.

Today, you’ll hear from Mr. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent updates. Next, Mr. Ross Liang, our CEO, and I, Tony Yip, as CSO, will offer additional thoughts on our product strategies, operations and business developments. Finally, Ms. Shirley Hu, our CFO will address our financial results before we open the call for questions.

Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the IFRS in the company’s earnings release and filings with the SEC, where you are reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure. The other non-IFRS measures are not uniformly defined by all companies including those in the same industry.

With that, I’m pleased to turn over the call to Cussion, Executive Chairman of TME. Cussion?

Cussion Pang — Executive Chairman

Thank you, Tony. Hello, everyone, and thank you for joining our call today. In an era of increasing entertainment choices amended [Phonetic] and evolving market landscape, a sustained comparative advantage is awarded to those who offer users a differentiated experience. With this in mind, in the first quarter of 2022, we continued to build new professional and personal use cases and interactions around our dual engine content and platform strategy, as well as expand our efforts to augment the scale and fortify the quality and competitiveness of our music catalog. Meanwhile, we strove enhance user experience through innovations built on our four pillars of music entertainment, namely, listen, watch, sing and play, driving momentum for our long-term success and promoting the healthy development of the music industry.

First and foremost, we remain committed to energizing original content production, leveraging our technology-driven production capabilities and strength in mobilizing promotional resources. The benefits of our overall content ecosystem are increasingly manifested. With our Xingyao Plan, [Foreign Speech] and Galaxy Plan [Foreign Speech] we empowered original content production, leveraging our technology-driven solution to add value across demo and singer discovery throughout the production, distribution and promotion phases of these original works.

Our high hit rate for original content blockbusters is supported by our middleware platform, which integrates first algorithm-driven screening of lyrics, songs and demos; second, AI voice matching capability built upon a stored library of hundreds and thousands of voices; and third, our targeted promotion system based on real-time data analysis to help artists and songs, who wish to right audience and go viral. Empowered by these advanced technologies, our artists have created quality business as well as trendy ones, serving a wide range of users’ cases.

Notable standouts in the first quarter include Mirage, [Foreign Speech], and Drown [Foreign Speech] two sweeping successes that topped multiple music charts and both achieved peak daily streams in excess of 13 million. Meanwhile, we continue to refine our original content catalog, focusing on key verticals such as gaming, Chinese Ancient Style and pop music. In the first quarter, we collaborated with Tencent Games’ popular titles including PUBG Mobile, [Foreign Speech], Honour of Kings, [Foreign Speech], League of Legends: Wild Rift, [Foreign Speech], and several more to produce original themed music content. These songs by leading artists such as, Hua Chenyu, Chen Linong, Mao Buyi and Huang Zitao have made their way to the top of various music charts and have also been embedded with the sales of ads and game pops further driving our revenues.

What’s more, an inspirational Chinese Ancient Style hit song Flying Snow [Phonetic] became the background music of choice for many official media outlets during the Beijing Winter Olympics, generating tremendous social media buzz of over 2 billion views and catapulting it to the top of TME’s 12 music charts. Moreover, our Tencent Musician platform continues to provide systematic support for musicians, and enabling us to partner with musicians at any stage and in all aspects of their careers to provide a launch pad for more musicians to showcase their talent, passion and music for the broadest possible audience.

We have been making resolute efforts to optimize and upgrade Tencent Musician’s platforms or run services for musicians, so that being active on our platform becomes not only a preference but also a habit for creators. For factors, in the first quarter, we launched a brand new behind the scene music production service with an initial group of over 50 industry well-known professionals and more than 100,000 creators, who are well versed in music composition, mixing, recording and more joining the roster to provide our musicians with production support.

Additionally, we have strengthened our platform infrastructure to support musicians with a customized self-service productivity toolkit to analyze data, host concerts and manage their artwork catalog, profile page and photo albums. Taken together, this tool empower musicians to create and promote their work more efficiently and reach a higher audience, ultimately, helping to build a constructive and active musicians ecosystem.

Second, the Tencent Musician platform molded by — motivates musicians with an array of creative scenarios and rich promotion resources, both on and off-line, helping them breakthrough to a larger audience, aided by our platform’s toolkit Liu Shuang [Phonetic] [Foreign Speech] climbed to the top at launch of the trending charts with cumulative social media buzz reaching over 200 million views. Our diverse promotions for the singer and the song include top variety shows like The Treasure Vault, [Foreign Speech] online joint activities with TMELAND and Weixin video content — video accounts.

Offline stages, such as our Tencent Musician Entertainment Awards, TMEA, and fourth stage [Foreign Speech] as well as a handful of offline brands sponsored events, providing additional opportunities for Liu Shuang to sign and unlock his potential. We have established a sustainability and diverse monetization models for musicians, which help them earn a better living while focusing on honing their craft. To this end, we distributed over RMB200 million from our platform to musicians during the past 12 months. Supporting a new generation of indie musicians as they propel the industry forward.

Enriching our content library and building our presence across a multitude of music verticals to reinforce our source of competencies is another focus, which in turn strengthens our platform’s reputation as the go-to destination for enthusiast, and benefits our penetration among high value heavy users. Chinese Ancient Style music remains our stronghold. In the first quarter, we presented in China [Foreign Speech] a variety show that brought together top Chinese musicians and performers from 41 different genres to compose and showcase original music work, thus creatively combine the traditional Chinese cultural elements with trendy styles. The show has received a widespread acclaim and over 300 media accolade for its efforts in actively promoting Chinese cultural heritage.

In addition, during the first quarter, we began to expand our focus to the electronics, classical and anime genres. For example, we strengthen the operations for electronic music by bringing in musicians, labels and institutional partnerships and provide a full range of content including music audio, playlist, video and more. By the end of the first quarter, more than half of the world’s top 100 DJs has settled on QQ Music, which not only enable their in-depth communication with Chinese friends but also promoted the spread of trendy electronic music.

Finally, built upon our commitment to promoting healthy and sustainable industry development, TME seek to create inclusive professional music charts that accurately reflect and evaluate China’s music industry. Our TME chart [Foreign Speech] along with its data-based TME Uni Chart [Foreign Speech] and its expert review-based TME Wave Chart [Foreign Speech] served as a solid music rating infrastructure.

In the first quarter, we received — we released the TME Music Chart Annual Review, which provides a snapshot of the Chinese music landscape in 2021 with ratings and reviews of over 1,800 songs, becoming a bellwether for the latest and hottest in China’s music world and attracting a Weibo social media buzz including over 900 million views upon release. Because we are motivated everyday by the differentiated value we can bring to music lovers, music creators and the music industry as a whole. We are committed to earning each of these participants loyalty and devotion through will empowerment.

With that, I conclude the progress update on our growing content capabilities. Now I would like to turn the call over to Ross, who will share more about our platform strategies. Ross, please go ahead.

Ross Liang — Chief Executive Officer

Thank you, Cussion. Hello, everyone. Moving along to our platform strategy. In the fourth quarter, we continued to invigorate our ecosystem and innovate around the four pillars of our music entertainment experience, listen, watch, sing, and play. Beginning with the smallest details, we continuously published our products to meet the multifaceted needs of diverse cohorts and have strived to create a sense of belongings, making our products an uncompromising must have in our users’ daily lives, which we strive to listen our users call demand. We are providing innovative and the professional product features to elevate users listening experience.

Technology is a so deeply embedded in our core corporate character that it has become part of our DNA. QQ Music was the first in China to launch advanced listening functions, including the digital music enhancement engine which can significantly improve sound quality with one simple click, and the replay again and a gapless playback, which help equalize music volume and deliver us most of the music listening experience between consecutive song plays, particularly compatible with classical music streaming. This new functions have been well received as millions of users incorporate this feature into their daily practice.

We have also optimized our smart recommendation filter and have become more in tune with our users’ tastes as demonstrated by QQ Music’s recommendation penetration rates, reaching a new record high by the end of the first quarter. Along with recommendation streaming, volume and time spend both recorded stronger double digit growth year-over-year. In addition, our upgrade QQ Music popularity index with real time updates on the number of listeners online expanded the music coverage and additional song information has considerable strengthened the user sense of participation with their input directly influenced a song or artist prominence.

The second pillar of our overall multisensory entertainment experience over offering is watch. We are deepening our collaboration with Weixin Video Accounts to create vibrant music scenarios and strengthen music promotion capabilities. In March, Tencent Musician platform carried a large-scale live charity concert during the pandemic, Spring Never Ends, [Foreign Speech]. It was an eight hour uninterrupted mesmerizing performance by 141 groups of well-known artists such as, [Indecipherable] and a roster of our musicians. Supported by Weixin Video Accounts promotion capabilities and our ability to mobilize resources on our platform, the concert attracted a millions of viewers, generating over 30% increase in the number of viewers in participating musicians live streaming rooms on the event day. We are proud to share by the end of the first quarter, daily video views Weixin Video Accounts of musicians on our Tencent Musician platform had exceeded 100 million, representing over 70% increase quarter-over-quarter.

Beyond video, our efforts on the visual front also include the use of the graphics and other formats to enrich streaming content [Indecipherable] Music’s common display function and the streaming realizations are just a few of the many examples launched in the first quarter. In terms of sing, where we are the first in the industry to offer song tune without requiring earbuds year by [Indecipherable] an easy to use function that can substantially improve the sound effects of songs recorded without internal devices. Another new feature that has inspired widespread accolade among users is our cloud-based song mixing [Foreign Speech] which has produced nearly studio quality song mixing in just two minutes after the music work is uploaded to the cloud.

We have embedded to expand music entertainment scenarios adding more fun play elements to the music entertainment experience. We hosted our first virtual earning course on TMELAND, and are planning to organize an additional facial events, such as facial avatar concerts and the customized events on this exciting new virtual music playground in the second quarter.

In addition, we have pioneered dedicated virtual rooms for artists including recently launched rooms for [Foreign Speech] which provides immersive interactive social scenarios, where fans can listen to their idol’s digital album anytime, anywhere. We’re posting song reviews tightening with other fans and the display self inspirations in virtual avatars.

We’re proud to share that through pairing innovations in the four pillars of music entertainment listen, watch, sing and play, QQ Music has achieved solid initial results as demonstrated by its continuous year-over-year MAU growth. Building our complementary components to our music entertainment ecosystem, we continue to grow our long-form audio business with increasingly differentiated content. We are delighted to see mid and long tail podcast focus, flourishing in the TME’s ecosystem and gaining traction, thanks to our large user base.

For example, after participating in TME’s podcast creation center in 2022, podcast host Lao Shi Qi audio work of the The Northern Time Raiders [Foreign Speech] racked up 223 million streams within one months upon its release and shot to the top of TME’s charts, leading to substantially higher financial gains for Lao Shi Qi and the inspiring our growing growth of mid and long tail creators to join our podcast ecosystem.

Secondly, we enhanced our strong content operation with popular IPs, particularly in TV dramas series through audio books, artists participation in the Putong Community, and the more channels. We’re successfully promoting both the audio books and the associated IPs with highlights in the first quarter included the [Foreign Speech]. During the release of these [Indecipherable] dramas, TME’s long-form audio offers of the same title song their streaming value surged.

Going forward, we will leverage our memberships to maximize the monetization potential of long-form audio as we also continue to optimize content ROI and the DAU monetization efficiency to improve its profitability.

As we drive our business progress, we remain dedicated to undertaking our social responsibilities to create a better world and promos creative experience and create a new model of public welfare through music. To celebrate the 15th World Autism Day, we launched an autism charity project, Shape of Music, [Foreign Speech], which presented series of artworks, such as our first public welfare digital [Foreign Speech] single, the brightest star, [Foreign Speech] the music album Symphony of the Galaxy, [Foreign Speech] and the Shape of Music art exhibition allow music to not only be heard but also seen and treasured through the crossover of different content and artforms, online and offline. The entire net income from the projects was donated to autism institutions to advocate for social connections which its audience groups.

With, I would like to give the floor to Tony, to review our business operations. Tony, please go ahead.

Tony Yip — Chief Strategy Officer

Thank you, Ross. Hello, everyone. In terms of operating results in the first quarter, our online music MAUs were $604 million down slightly year-over-year. Despite churn of casual users who opted for other pan entertainment platforms, we are encouraged by the progress we’ve made in our original content production capabilities, music catalog, and innovative product features, which continue to strengthen the engagement of our core user cohort. Our IoT service MAU continue to witness a double digit year-over-year increase in the first quarter, which was primarily attributable to our comprehensive IoT entertainment content, integrating music, singing, live streaming, long-form audio and more.

In the first quarter, we work with Little Genius Smartwatch, [Foreign Speech] and multiple electric vehicle manufacturers such as Nio, Weili and Expand [Phonetic] to provide karaoke functionalities on IoT devices. Due to macro headwinds, our online music revenue decreased year-over-year in the first quarter. However, our fundamentals remain healthy and we successfully sustained our growth momentum in subscriptions. We achieved a net add of 4 million in the first quarter, and a paying user penetration rate of 13.2%. At the same time, user retention remained largely stable.

For the remainder of 2022, we are committed to delivering a healthy balance between paying user growth and ARPPU, which reflects the quality of growth of our online music business. In the first quarter, as the pandemic weighted on our advertising business, we continue to implement innovative, diverse advertising solutions to unlock more ad revenue potential. To fully leverage our large user base, we are testing a free listening mode where users can listen to songs for 30 minutes for free, with every 15 seconds of video rewarded ads that they watch.

In addition, our music promotion service [Foreign Speech] and playlist bonus tasks [Foreign Speech], which allow for accurate targeting of the right audience and increase in streaming volume and popularity of selected songs for a fee, have both achieved early success with strong growth in their daily revenue in streams. We also forged ahead with new business models to enrich user experience and monetization avenues. In the first quarter, we launched our Super VIP membership, [Foreign Speech], which complements the two existing tiers of our subscription plan, and incorporates up to more than 50 privileges, including access to more music and audio content, as well as digital albums for a monthly fee of RMB30.

Additionally, in the first quarter, we continue to explore the tie-ins between celebrity artists with our music pets, digital collectibles and [Foreign Speech]. To captivate more Gen Z users and cultivate a young and trendy cultural community, we further embraced our deep roots in the college campus scene and spared no effort in bringing more and more promising voices to be heard with our campus musician cultivation plan, Vala Campus, [Foreign Speech].

In the first quarter, we are particularly proud of the positive impact we have had on female campus musicians included in the winner of the first prize scholarship of Vale campus and Chinese folk [Indecipherable] musician, Georgina Chen, [Indecipherable], who created the Chinese Ancient Style original work, Mulan, based on the classic heroine. With this song, Georgina bloomed on the CCTV program, Sing My Heart, [Foreign Speech], exemplifying female bravery and spiritual power. We were also instrumental in her collaboration with household names and brands, such as the award-winning lyricist, [Indecipherable] [Foreign Speech], PUBG Mobile, [Foreign Speech] and QQ Speed Mobile, QQ [Foreign Speech], to produce original theme songs, helping her achieve accelerated professional growth and broader recognition.

Now let’s turn to our social entertainment services. Both MAU and paying users were affected during the quarter by seasonality, as well as macro headwinds. Facing the fast challenging landscape, we will continue to improve our competitiveness through ongoing product innovations and new initiatives in social entertainment, such as audio live streaming, international expansion and virtual interactive product offerings.

For WeSing, to achieve our goal of making singing more fun and recording more professional, we provided innovative, easy-to-use features and tools to elevate users’ singing and playing experience, as well as energized the relationship among our users. Our investment in these innovative singing and playing tools in the past few quarters started to pay off, as the adoption rates of and the user time spent in our singing room both improved year-over-year and quarter-over-quarter.

Facing competition for our traditional live streaming services, we will strive to generate more differentiated content and user experience. Firstly, we use — we continue to make progress in vertical content category expansion. Focusing on the [Indecipherable] economy, Kugou Live launched The Goddess Festival event in March, which successfully attracted female users with premium ARPPU to enjoy our audio live streaming routes.

Our audio live streaming business achieved a double digit year-over-year increase in revenues in the first quarter, and will become a key component of our overseas development strategy due to higher monetization efficiency in international markets. We also brought in WeSing’s target user base by adding live streaming educational content, addressing seniors, online learning and sharing needs such as lessons on square dancing, calligraphy and traditional Chinese offers.

Secondly, cross-platform collaboration is another way we can differentiate. For example, our first real-time live singing event, Meet [Indecipherable], [Foreign Speech], co-hosted by QQ Music Live Streaming and WeSing, brought premium karaoke content to live streaming. QQ Music Live Streaming advanced steadily with the number of hosts increasing rapidly and daily active host reaching a record high of 10,000 during the first quarter.

In conclusion, we kicked off 2022 by facing challenges head on, but we remain confident as we execute our dual engine content and platform strategy. We will persist in making our ecosystem, our content, products differentiated and highly specialized, which in turn will help us capture the hearts and minds of hundreds of millions of music lovers, and unlock the massive opportunity in front of us.

With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.

Shirley Hu — Chief Financial Officer

Thank you, Tony. Hello, everyone. Actually, I’ll discuss our results from a financial perspective. Our total revenue for Q1 2022 were RMB6.6 billion, down by 15% year-over-year and by 20.7%, sequentially. In the first quarter of 2022, our IFRS net profit was RMB649 million, and the non-IFRS net profit was RMB939 million, which represented a sequential increase of 8% as a result of our focus on operating statements.

In the first quarter of 2022, music subscription revenues continued healthy growth with revenues of RMB1.99 billion and a year-over-year growth of 18%, as we benefited from expanding sales channels and paying user [Indecipherable] using high quality content and the services we provide. Online music paying users grew to 80.2 million, up 32% year-over-year, represented 4 million net add sequentially. Most of the app was RMB8.3 this quarter compared to RMB9.3 in the same period last year, as we offer more effective promotions to attract the users.

Taking out the impact from fewer calendar days in Q1, ARPPU maintained stable sequentially, as we book on the quality growth of our overall subscription revenue. Revenues from advertising dropped on year-over-year, and sequentially, as our advertising being continued to be negatively impacted by the investor adjustment and seasonality. Our advertising revenues were also impacted by outbreak of COVID-19 and the lockdown in some major cities. We are proactively expanding the added inventory, optimizing the display and rolling out innovative advertising formats to manage these challenges. While we expect ad growth will continue to be impacted in the short-term due to headwinds from regulation [Indecipherable] and the regional COVID-19 outbreak, we remain confident about the long-term growth potential and expect advertising revenue to start recovering in the second half of 2022.

Sublicensing revenues also dropped on a year-over-year basis and sequentially due to restructuring of agreements with certain music labels. Social entertainment services and other revenues were RMB4 billion, down by 21% year-over-year as we face an evolving macro environment and intense competition from other entertainment platforms. To adapt to the changing environment and to stabilize revenue scale, we have demonstrated our content offerings by enriched our interactive product offerings and enriching cross-platform collaboration. And we are also expanding our international footprint, as discussed earlier.

Gross margin in Q1 was 28%, down by 3.5% year-over-year due to the following factors: first, given the continuous growth in music subscription revenue, our revenue mix shifted with revenues from online music, which generally have a lower gross margin, accounting for a higher percentage of revenue. Second, revenues from audio live streaming, whose gross margin was relatively lower also grew faster and accounted for a higher percentage of revenue. In addition, the decrease of advertising and sublicensing revenues also impacted the margin. Meanwhile, our tight control on content costs with increased ROI requirements, as well as lower revenue sharing ratio for social entertainment business had a favorable impact on gross margin on a sequential basis.

Now moving on to operating expenses. Total operating expenses for Q1 2022 were RMB1.3 billion or 20% as a percentage of total revenue, which was relatively stable comparing with last year. Take out the impact from acquisition of Lazy Audio, operating expenses as a percentage of revenues would have been slightly lower year-over-year. Selling and marketing expenses were RMB330 million, down by 51% year-over-year. During the quarter, we took measures to improve [Indecipherable] closely monitoring the [Indecipherable] of each promotion channel, largely with large external promotion channels and language our internal track [Indecipherable] — to attract users and promote our brand.

General and administrative expenses were RMB1 billion, up by 15% year-over-year, excluding the impact of approximately RMB$44 million [Phonetic] from the acquisition of Lazy Audio, G&A would have increased by 10% year-over-year. The increase was driven by a higher number of employees in R&D as we invested into target investments, technology innovation and a more diversified product offerings. Meanwhile, we have been closely monitoring employee-related expenses and taking actions to improve headcount facing, which starts the balance through this quarter, and resulted in a decrease in GI expenses on a sequential basis.

Our effective tax rate for Q1 2022 was 12.2% compared to 11.5% in the same period of 2021. The increase in effective tax rate was mainly due to some of our entities are entitled to different tax benefits in 2021 and 2022. Our net profit was RMB649 million and net profit attributable to equity holders of the company for Q1 2022 was RMB609 million.

Non-IFRS net profit was RMB939 million, and non-IFRS net profit attributable to equity holders of the company was RMB899 million. Non-IFRS net profit margin was 14.1%. As of March 31, 2022, our combined balances of cash, cash equivalents, term deposits and short-term investments were RMB25.9 billion, representing an increase of RMB1.2 billion from December 31, 2021.

Looking forward, we will continue to focus on our community and invest in [Indecipherable] in new products and services, including platform audio and international [Indecipherable], with a focus on investment returns and future growth potential. Meanwhile, we will continue to effectively control tight country-related costs and selling and marketing expenses to improve the overall operational efficiencies.

This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question will come from Alicia Yap with Citigroup. Please go ahead.

Alicia Yap — Analyst

Hi. Good morning, management. Thanks for taking my questions. I have a question related to how the lockdowns and the COVID has impacted us. So if management can share or elaborate the overall Tencent Music, how it has been, for example, the prolonged lockdown in Shanghai’s impact, any positive impact on the time spend, on the online music stuff or even the social entertainment active user. Specifically, can you also — have you seen any spike in the user demand or time spend for your long-form audios or the podcast? And then any negative impact from the spending willingness and also the spending behavior. Thank you.

Tony Yip — Chief Strategy Officer

Sure. In terms of traffic on the music side, as a result of various investments in the innovative features that we have been making over the past several quarters, particularly in QQ Music, we actually did not see any meaningful negative impact from the lockdown. So, as we reported during the early remarks, we actually saw a year-over-year increase in the MAU with QQ Music.

And then with regards to the social entertainment side, specifically with regards to leasing and the online singing components of that product feature, we actually saw a slight increase in the online singing activities as a result of people spending more time with karaoke during their quarantines.

However, with respect to revenues, there was a meaningful impact on the advertising revenue as a result of a large number of our advertising customers being in lockdown situations in major cities. And also, it had an impact on our live streaming revenues, because both the hosts are also affected in terms of the activities and affected the users’ willingness to spend on live streaming.

Alicia Yap — Analyst

Thank you.

Operator

Our next question will come from Alex Poon with Morgan Stanley. Please go ahead.

Alex Poon — Morgan Stanley — Analyst

Good morning. Thanks, management for taking my question. My question is related to our music ARPPU trend. Since beginning of this year, we have started scaling back some of the promotions to balance between the growth of net adds and ARPPU growth. And we are also launching new membership programs which has very high ARPPU. So how should we think about the ARPPU trend from second quarter, third quarter, fourth quarter onwards? Thank you very much. Yeah. Thank you. Well, I think let me kind of spend a minute to talk about the overall subscription revenue growth because that plays hand in hand with the ARPPU trends. In terms of subscription, our overall goal for subscription revenue year-over-year growth for this year is to achieve close to 20% for the full year. And there are two ways to achieve this objective. The previous approach was to focus on subscriber net adds of 3.5 million to 4 million per quarter, which translates to approximately 20% subscriber growth, counting from the end of last year. And then ARPPU, that is on a slight downward trend. The new approach that we’ll be implementing going forward is to have a better balance between subscriber growth and ARPPU. And we’ll work on improving the ARPPU through less promotions and other measures, such as Super VIP that we mentioned. And as a result, we expect the ARPPU to increase going forward with Q1 as a base. For subscriber numbers, because of the better ARPPU growth, we can have lower quarterly net adds less than the 3.5 million to 4 million range that we previously talked about. But overall, still achieved a close to 20% growth in subscription revenue with a more healthy mix of ARPPU improvement and subscriber growth.

Operator

Our next question will come from Xueqing Zhang with CICC. Please go ahead.

Xueqing Zhang — CICC — Analyst

Hi. Good morning, management. Thank you for taking my question. And my question is related to Tencent ecosystem, especially cooperation with WeChat. Since there is [Indecipherable], we see a series of new functions have launched on WeChat. Could management share with us the key directions of cooperation and what functions are particularly helpful? And wondering how does it help with the operational data. Thank you.

Ross Liang — Chief Executive Officer

[Foreign Speech] I’ll just spend a quick minute to do a short-term translation in the interest of time. We continue to deepen our cooperation with WeChat with the overall objective of letting music to become an important part of the social use cases. And as Ross mentioned, there are a number of areas of our corporation. It includes things like in the Weixin profile, you can change the profile based on the music that you’ve been listening on. In the Weixin audio call ringtone, you can now customize using music from QQ Music. During Weixin chat, you can directly share music from QQ Music.

And then also with regards to video account, which we’ve mentioned in the prepared remarks, we continue to see very rapid growth in the operating metrics such as, daily video views. And with respect to live concert, that’s also a key area that we are looking to expand our cooperation in. We have done a number of very successful live concert events such as ones with Leslie Chong, Mayday, etc. And increasingly, these events would have a monetization element such as ad sponsorships and others.

So overall, we provide a very healthy music content vertical to help enrich the video account content ecosystem for Weixin. In return, Weixin provide us with very complementary promotional capability, and we also help them with artist partnership to strengthen that partnership.

Cussion Pang — Executive Chairman

Okay. Besides the content distribution and promotional capabilities that we mentioned that we work together with Weixin, I think there’s one more important point is we are working with them really closely on the program development side. So such as online concerts, we are not just distributing it, but we are also working on the detailed production to ensure a high quality of online music concerts will be delivered to our users. So this is the top priority of the TME team and also the Weixin Video Account team as well.

We have been in the Tencent corporate umbrella for a long time, and we work together peer-to-peer, side-by-side. So I think that we are really working together to create synergies. And we are looking forward to have a lot more, very high quality content will be provided through this platform. Besides video, the top tier artist concerts, we are also working on the long tiers and also some of the really high potential musicians content as well. So a lot more wonderful content can be expected in the future, and we have a lot more to come.

Operator

Our next question will come from Eddie Leung with Bank of America Merrill Lynch. Please go ahead.

Eddie Leung — Bank of America Merrill Lynch — Analyst

Good morning, guys. Thanks for taking my question. Could you talk a little bit about the outlook for your live streaming business for the rest of the year, especially given recent regulations in host taxation problem, as well as protection of minors? Thank you.

Tony Yip — Chief Strategy Officer

Thank you. In terms of the outlook for the full year, in the last earnings call we said that for the full year 2022, we were expecting total revenue year-over-year to decline, to be around mid-single digit. And obviously, that was prior to a number of recent regulatory announcements, such as ones you mentioned, as well as from the very recent impact from the pandemic measures. And without those impacts, obviously, the previous guidance would have continued to apply.

However, following these recent pandemic measures as well as latest regulation, specifically the live streaming one that you talked about which comes into effect in June, we’re likely to see live streaming revenue be impacted for the rest of the year, because the new regulation and the new restrictions around tip ranking as well as around PK, i.e., competition between — performance during live streaming sessions, don’t come into effect until next month. We’re not yet in position to quantify that impact for you at this point. We — because the details will depend on the actual detailed execution and the implementation of those restrictions. And we’ll be working very closely with the regulator to figure out exactly how best to be fully compliant.

And then to offset some of these challenging pressures, obviously, we’ll continue to invest in building new opportunities to mitigate. And these opportunities in social entertainment line mainly around audio live streaming, where some of the restrictions recently announced are less prevalent in audio live streaming. And then secondly, with international expansion within our social entertainment business that we see opportunities in Southeast Asia, Japan as well as the Middle East.

And then lastly, in the longer run, as we continue to build out our metaverse experience through our first pioneering virtual music playground, TMELAND, we’ll continue to host more and more exciting and interactive virtual events to pioneer a new form of social entertainment.

Eddie Leung — Bank of America Merrill Lynch — Analyst

Thank you, Tony.

Operator

Our next question will come from Wei Xiong with UBS. Please go ahead.

Wei Xiong — UBS — Analyst

Hi. Good morning, management. Thank you for taking my questions. My question is on margins. Management mentioned about a few factors that affected our gross margin just now. So just wondering how should we think about the gross margin trending in the next few quarters. And also together with our focus on efficiency improving this year, any areas we see still have potential for further cost savings? And how will that impact the net margin for this year? Thank you.

Shirley Hu — Chief Financial Officer

Okay. Gross margin is 28% in Q1, down by 0.8% sequentially. The main reason is advertising revenue dropped quickly and has higher contribution gross margin. During Q1, there are some positive factors on gross margin. [Indecipherable] revenue sharing ratio of social entertainment [Phonetic] business have been controlled and decreased sequentially.

Second, adapted to new macro environment, we increased the ROC requirement of content across. We restructured the agreement with some music labels and stayed positive trend back, that has a positive impact on our gross margin. And looking forward to 2022, we expect our gross margin will be increased in the next quarter if our social entertainment revenue can be stable. We will focus on increasing business with all business units and cost items.

And for the operating margin cost and expense control to improve operation, this business is one of our top projects this year. We have taken tight control on selling and marketing expenses in Q1, resulting in 51% decrease on a year-over-year basis. We will further monitor our eye of each promotion channel and manage the internal and external resources more effectively to improve the business of selling and market expenses.

And for high account management, we will continue to invest in new products and new buildings, such as long-form audio, international business and the musician program. We will now pay more attention to improve the profitability of business and products such as optimizing organizational alignment and improving the headcount efficiency.

And looking forward to 2022, we expect our adjusted net profit can be increased sequentially, but adjusted net margin can meet or above [Indecipherable] that of 2021, and our music business can breakeven on operational level. That’s all.

Operator

Our next question will come from Robert — Ronald Keung with Goldman Sachs. Please go ahead.

Ronald Keung — Goldman Sachs — Analyst

Thank you. Thank you, management. I want to ask on the pricing side on subscription. Given that the ARPPU has fallen over the past — sequentially over the past few quarters. So with the COVID impact, with the macro impact, yet we do think the competition has been quite rational. So I want to hear about the pricing trend outlook. When will we see a stabilization in ARPPU for subscription? And also any iterations on — iteration on long-term paying subs targets? Thank you.

Tony Yip — Chief Strategy Officer

Yeah. I think as I previously mentioned, the new approach that we’ll be taking with our subscription revenue is to have a better balance between subscriber growth and ARPPU growth. And even though our recorded ARPPU for Q1 saw a slight sequential decline, that was mainly a result of the lower number of days in Q1. If we adjust for that, the ARPPU for Q1 versus Q4 is actually fairly stable. And on the — and using Q1 as a base, we are actively working on improving the ARPPU through, obviously, less price promotion, as well as through other measures such as bundling Super VIPs and other measures as well. And so we’ll be expecting the ARPPU to increase as a trend with Q1 as a base.

And we talked about the subscriber as well, because of our goal to achieve overall close to 20% of subscription revenue for the full year, and with the rising ARPPU, we can have a slightly lower quarterly net adds less than the 3.5 million to 4 million range that we previously talked about. But still, we should be able to achieve close to 20% target of subscription revenue growth for the full year.

Cussion Pang — Executive Chairman

Yeah. I think we are encouraged by the strong growth of our online music subscription business and especially under the macro headwinds. And also, we are achieving a pretty good — the subscription rate is over 30% right now. I think that we will continue to pull in more high quality content into the subscription plan, which help us because we really learned that a lot of users really express the value of music content so that they are willing to pay for it.

In terms of the ARPPU, we can also drive it by, for example, launching out some of the new VIP plans with new privileges to our users, which has a higher price tag than the regular one that we have. We can also have many different ways to drive the monetization. For example, we can also work with different business partners to work on the new channels for production — for promotion as well.

So that, I think, that overall, the online music subscription business for TME is we are still developing in a really healthy manner.

Ronald Keung — Goldman Sachs — Analyst

Wonderful. Thank you, management.

Operator

Our next question will come from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong — Jefferies — Analyst

Hi. Good morning. Thanks management for taking my questions. Given the amount of cash that we have at the end of Q1, and when we look into our strategies going forward, how should we think about the priority in terms of cash usage? Are we going to do some more M&A in international market, share buyback or considering dividends? And may I also ask about the progress on the Hong Kong listing by way of introduction? Thank you.

Tony Yip — Chief Strategy Officer

Yep. Thank you. In terms of our cash utilization, obviously, I think we would be very disciplined and prudent with our cash management. We have announced that we’ll continue and we intend to fully complete our share repurchase program by the end of this year. As of the latest date just shortly before the earnings release, we have already spent over RMB670 million on share buyback since March last year. And as a percentage of our current market cap, that’s a very sizable amount. And at this stage, we have no intention to declare a dividend. With respect to M&A, we will continue to be prudent and assess strategic opportunities, both overseas, as well as domestically in areas that are complementary to our core music, as well as social entertainment businesses.

And in terms of the Hong Kong listing, last quarter, we talked about that we have already started in pursuing the Hong Kong secondary listing. We are currently in an active execution phase, and we will strive to move things forward in an expedited manner and obtain the necessary regulatory approvals in due course. And to the extent there are major developments, we will be making the appropriate announcement at that time.

Thomas Chong — Jefferies — Analyst

Thank you.

Operator

Our next question will come from Charlene Liu with HSBC. Please go ahead.

Charlene Liu — HSBC — Analyst

Hi. Thank you for the opportunity. I wanted to ask about new ads monetization model. I think in the last quarter you mentioned a freemium mode, which allows users to unlock user — to unlock music subscription services by watching ads. Can you share with us the progress on this in terms of user penetration and feedback from ads clients more generally? And do you have any long-term target in revenue from this mode? Thank you very much.

Tony Yip — Chief Strategy Officer

Yep. Sure. Advertising overall saw some impact as a result of obviously recent regulation around the splash screen ads, as well as the pandemic measures, specifically a large number of our large advertisers are actually based in major cities. And as a result, obviously, I think the advertising revenue has been affected, and we’ve seen a decline on a year-over-year basis in the first quarter.

However, if we look at the sort of subcategories within our advertising revenues, we are seeing positive momentum in selected new ad formats. An example of that is the video incentive ad that you mentioned and that we talked about previously. We continue to increase the penetration rate of new ad products, the video incentive ad specifically, which is gaining very positive momentum. And the revenue of this new format is growing sequentially despite the difficult overall ad environment. It’s now a sort of low single digit percent of our advertising revenue at the moment, but we would expect it to grow and to become a much more meaningful portion over time.

In the long run, despite the short-term challenges, we do expect a lot of potential in the advertising business, and we expect a recovery into the second half. We do see certain sectors that are stronger than others. For example, the FMCG kind of traditional consumer staple products continue to perform well, as well as online games as people spend more time on online games during quarantine. And conversely, areas such as cosmetics, so electronics and e-commerce, in general, saw a bit of a weakness in the advertising verticals.

Charlene Liu — HSBC — Analyst

Very helpful. Thank you.

Operator

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

Tony Yip — Chief Strategy Officer

Yep. Thank you, everyone, for joining us today. If you have further questions, feel free — please feel free to contact our Investor Relations team. And this concludes the call today. We look forward to speaking with you again next quarter. Thank you and bye for now.

Cussion Pang — Executive Chairman

Thank you.

Shirley Hu — Chief Financial Officer

Thank you. Bye.

Operator

[Operator Closing Remarks]

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