Tencent Music Entertainment Group (NYSE: TME) Q1 2023 earnings call dated May. 16, 2023
Corporate Participants:
Cheuk Tung Tony Yip — Chief Strategy Officer
Cussion Kar Shun Pang — Executive Chairman
Zhu Liang — Chief Executive Officer, Director
Min Hu — Chief Financial Officer
Analysts:
Alex Poon — Morgan Stanley. — Analyst
Alicia Yap — Citigroup — Analyst
Lei Zhang — Bank of America — Analyst
Wei Xiong — UBS — Analyst
Wei Fang — Mizuho — Analyst
Presentation:
Cheuk Tung Tony Yip — Chief Strategy Officer
Good evening, and good morning. Welcome to the Tencent Music Entertainment Group’s First Quarter 2023 Earnings Webinar. TME announced quarterly financial results today after-market close. An earnings release is now available on our IR website at ir.tencentmusic.com as well as via Newswire services. Today you will hear from Mr. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent updates, next Mr. Mr. Ross Liang, our CEO and I Tony Yip, as CSO, will offer additional thoughts on our product strategies, operations and business developments. Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions.
Before we continue, I refer you to our Safe-Harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements, please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in the Company’s earnings release and filings with the SEC.
At this time, all participants are muted. After management’s presentation, there will be a Q&A session. [Operator Instructions]. And please be advised that today’s webinar 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 Tony. Hello, everyone, and thank you for joining our call today. We are off to a great start in 2023, our strategic emphasis on quality growth propelled strong growth of our online music revenues in the first quarter. So, revenue size of our online music services has now caught[Phonetic] up with social entertainment services for the first time. This signifies that our long-term commitment to developing a sustainable online music business model is bearing fruits.
In addition to a healthy increase in our total revenues, our focus on efficiencies optimization also drove robust net profit growth. Content is the bread-and-butter of our business. We continue to deepen partnerships with pop music labels and others. So as to enrich our iconic music catalog and vertical content offerings, as well as to expand our music experience[Phonetic]. We established with a strategic collaboration with rock records [Indecipherable] Providing users with high quality Chinese Songs and originals sound track of popular TV dramas such as the work of [Indecipherable], Emil Chau, J[Indecipherable] Jonathan Lee, [Indecipherable] Wu Bai and Mayday [Indecipherable]. We also strengthened our strategic partnership with Ronghao Li[Phonetic] and Fenghua Qiushi, who has managed artist including Lu Han and and Black Panthers, [Indecipherable].as well as with HYBE from South Korea with artists such as BTS and SEVENTEEN on its roster.
Additionally, with the feature of the seven day head start period, our partnership with JJ lin for his new digital album was well-received among users. The new album also broken his previous sales record in terms of GMV on our platform. On-top of that we also reached a collaborations with well-known artist including KUN [Indecipherable] and Oaeen, [Indecipherable] for head start benefits on their new songs releases on other areas, such as merchandise sales, onlines and offline performances and artist-fan interactions events. [Indecipherable] verticals to satisfy the increasing demand for rap music among younger audience, we enriched our web offerings by adding a number of new songs from heavy weight rappers such as Masiwei.
Mean while, we enforced our competitiveness in different genre verticals such as electronic music, gaming and classical music among others. In parallel with our efforts to expand our content library, we have facilitated production of high-quality original content, unlocking more of these opportunities in the growing music industry. We have taken it upon ourselves to foster creativity and nurture artist through a rich variety of support programs, stage performances and monetization opportunities. [Indecipherable] amplifying the influence of musicians and their works for physical demand. We participated in and promote artist scope through our Tencent Musician Platform. With all this abundant resources and diverse monetization avenues. As a result, the number of active musicians and singers who with this new songs are growing sequentially on our platform during the quarter, adding to the vibrant of our ecosystem. For example, we unveiled a new initiative, The Emerging Force Program. especially [Indecipherable] to discover musicians with high potential and encourage the production of high class music.
The program offers a wide range of IT services. Including Fan support, revenue sharing and on-and-offline performance opportunities. By increasing the exposure and popularity of quality songs along with amplifying artist influence, we enhance the vitality of the musician’s economy systems on our platform. As of the first quarter, we have assisted 260 up-and-coming musicians in reaching their first million streams and helped multiple artist make their debut performance on stage. Notably, after joining our Emerging Force Program, The folk singing, song writer, [Indecipherable] and Slow-mo, [Indecipherable] both saw assessing their photos and streams.
Going forward, we will continue to discuss our musicians, who have great potential by bringing together top artists, producers and music program, particularly events, rap and pop music legends. Recently QQ[Phonetic] Music also launched our customized homepage for musicians, trying through [Indecipherable], through this page musicians can access data and insights, in term of streaming followers and comments. This will empower better management of song distribution and promotion. In addition, this page also provides up-to-date support resources and policies of our custom. [Indecipherable] musicians [Indecipherable] was one-off the main success cases that demonstrate our hard work [Indecipherable] to contemplate and promote artist.
In the first quarter, we signed the her to our Tencent Musician Platform paraphrasing her profile and promoting new songs for [Indecipherable] internal, external resources. As a result, the number of her followers, more than double, moving form 50,000 to over 100,000 within just two weeks of her onboarding. With our diverse performance stage and all-around support in music production, we have been dedicated to allocating the influence of Christy[Phonetic] and other aspiring musicians alike. Furthermore, we teamed up with Billboard China to hold our first original music contest, “The One”. Our proactive creative context. If you sign with the discover imaging, artist with ability to produce quality original Chinese music, as well as to help expanding their global reach. To that end, we invited excellent song — singer-song writers [Indecipherable] singers in China and abroad, including Greyson Chance, Lenka, MIKA and TIA RAY [Indecipherable]. Among others to inspire contestants to produce original music and assess their performances, through this cooperation, we will leverage [Indecipherable] global resources, influence and higher international centers to provide kind of the musician end-to-end services. Ranging from [Indecipherable] valuation song list, worldwide promotion and all the way to customize their performances.
Upon the solid foundation of our Tencent Musician Platform, we are well-positioned to effectively facilitate production and promotion of original contents. We also exercise — but you see, we are also excited to see that we produce a number of [Indecipherable] songs creating [Indecipherable] in the first quarter, for instance [Indecipherable] No Man’s Land will and [Indecipherable] has accumulated assumes over 100 million, with this the and nearest that we’ve treated on our WeSing platforms. Not only did the song making its way onto several weeks of charts, but also it garnered additional music market exposure, we are writing with [Indecipherable] always inspired by a [Indecipherable] on soft video platforms.
[Indecipherable] in the first-quarter include [Indecipherable] baby I love you, love on fire, [Indecipherable] producing prime original contents. We have played an integral role in expanding IP values across the entertainment industry. As a case in point, we have created quite a few musical works for iconic themes, games, animations and other media. In the first quarter we co-produced Zhou Shen’s Chinese cover of the theme song [Indecipherable] Suzume [Indecipherable]. This song ranked in over 100 million streams within only three weeks of it’s release. It also ranked first on the CMG growth of Chinese music popularity chart. CMG [Indecipherable] other than music charts, as you may notice, this is song is also the hold music for today’s call.
Meanwhile, we continue to cooperate with the broader Tencent ecosystem producing singles for 11 well-known games and four animations in the first quarter. Notable examples including “Praying for the Mountain and Sea” [Indecipherable] for Honour of Kings [Indecipherable] and “Light of Dawn” [Indecipherable] enhance seamlessly gaming and listen experience.
Before I conclude. I would also like to highlight the focus of TME Live. Our comprehensive online versus offline performance brand. Amid performance market recovery, we are exploring innovative ways to monetize and interact with users. TME Live is well-positioned to capture these market opportunities via our online merge offline capabilities, allowing us to provide users with superior audio visual experienced anytime and anywhere. In the first quarter, we host a total of 29 online and offline concerts including online concerts for [Indecipherable] notably KUN’s and RIchie Jen’s e-concerts received widespread user acclaim. Generating a total of 1.4 billion social media views, and attracting almost 70 million unique visitors in the Tencent ecosystem. We also provided fans with the option to purchase custom merchandise while enjoying the shows. TME Live unique performances formats coupled with the high-profile in the industry [Indecipherable] appeal to many well-known advertisers for sponsoring such as PepsiCo, YangYuanQing and JD.com.
We also continuously increased our presence in the offline performance, particularly as the profit shows a global interest for offline activities. In the first quarter we organized tours in cities such as Shenzen, Changsa and Hangzhou for musicians including callouts Coola, Kafe.Hu, Pharaoh, Switch GodLes and the rock and roll band WhitePaper [Indecipherable]. To foster closer and more encouraging — and more engaged in connections between musicians and their borrowers, we are encouraged online audience to share their thoughts and feeling through online [Indecipherable] during performances.
Going-forward. We will continue to explore the on-and-offline integrate performance formats. [Indecipherable] at it’s lineups an exciting experience. We evaluate our content ecosystem and user engagement and first capture incremental monetization opportunities. That concludes the update on our growing conveying capabilities.
Now. I would like to turn the call over to Ross, he will share more about our platform strategies. Ross, please go ahead.
Zhu Liang — Chief Executive Officer, Director
Thank you. Cussion. Hello, everyone. Moving on to our platform innovations. In the first quarter, we further refined users music consumption experience, Via are “The One” thing our audio live streaming services. In addition, by further exploring large language models, [Indecipherable] our platform ecosystem with a broader range of AIGC applications. [Indecipherable] meet users’ diverse and a nuanced music tastes in new and exciting ways. On the front of users music consumption experience. [Indecipherable] enhance sound quality and effects combined with our optimized operations in different [Indecipherable] scenarios. [Indecipherable] well-recognized by users. This further buffers users [Indecipherable] on the [Indecipherable] monetization capabilities. [Indecipherable] result [Indecipherable] engagement brought us a year-over-year growth of average daily time spent per daily active user, who listen to the music on our platform. We have extended our premium sound quality and effects to cover a wider range of scenarios drawing the quarter.
In addition to lowering out-of-the auto mix sound effect, we also introduced our customized song effect for Teens in Time [Indecipherable] album [Indecipherable]. This song effect highlights vocal details and instrumental layer creating an air of of a live performance. A total of 2.3 million users have used this song effect in 170 million streams. Moreover, we extended our premium sound quality to in-car audio system. For example, our QQ Music’s Galaxy sound effect [Indecipherable] maximize the performance of in-car audio systems, I see the [Indecipherable] tune is the song effect for managing in-car audio systems of a main stream car models. This further enhance our users listening experience.
In addition, we also offer our highly personalized and engaging music experience that caters to users [Indecipherable] preference and artistic. For instance, [Indecipherable] our 3D music player interface and customize the playlist. This various design [Indecipherable] where users may choose their favorite fan sales. Beyond that, we tailored playlist to a specific holidays and festivals, such as the Chinese New Year and the World Sleep Day [Indecipherable] for are listening experience for this special occasion and user current state of mind. Thanks to our ongoing upgrades and the product optimizations, we are able to constantly advance over accommodation efficiency. This bring us deeper insights into content and users behavioral allowing us to create a more personalized listening experience. In the first quarter, QQ Music and Kugou Music recommendation streaming volume. Together basically times planned per user, increase both year-over-year and quarter-over-quarter taking on promotion of recommended streaming for our new high on our platform.
On the front of audio live-streaming. It has become an important growth driver for us, as we offer are uniquely engagement manual for our users and performers with our differentiated content and interactive features that driver [Indecipherable] enhancing user experience and are attracting more vibrant audio anchors. In terms of content [Indecipherable] our audio live streaming content offering with focus on audio [Indecipherable] of Music, [Indecipherable] and talk shows highlighting our performance exception talent.
Meanwhile, our variant audio anchor ecosystem also benefits our musician community. I think it provides them with a platform to showcase their skills and the reach a wider audience. We have a nurtured rising musicians on our QQ Music live streaming platform, for example, [Indecipherable] the four musicians contributed our total of 110 million songs streams. Notable upon the promotion in one of our audio live-streaming programs, [Indecipherable] single goal quickly made to QQ Music’s new song recommendations chart. In the first quarter, the number of performance in audio live-streaming continue to rise year-over-year and quarter-over-quarter.
In terms of user interactions, we added a new social interactive features to our platform. This helped created additional use traffic under scenarios, and [Indecipherable] serving users entertainment needs. As an important ice breaking tools between performers and users this in the IPO features also drove year-over-year on a quarter-over-quarter increases in daily time spent per user. Going-forward, we will keep upgrading and expanding our social interactive offerings to higher user limitation[Phonetic] and additional commercialization opportunities.
Turning to AIGC [Indecipherable] how important us to empower us to produce content more efficiently as well as to create our increasing engaging user experience. In the first quarter, we launched TME studio [Foreign Speech], an AI enabled smart tool for music production. We also introduced a local producer [Foreign Speech] with this tool musicians can be more efficient in lyric writing, composing music content, analysis and editing. Such tools also have generated outstanding content by [Indecipherable] granting users original versus into different songs.
On-top of that, our first AI music companion Xiaoqin hosted a live-streaming shown for singing and dancing, providing immersive entertainment experience. Users were also able to in the indirect with Xiaoqin’s through AI generated virtual gifts and a personalized game plays.
Furthermore, in fostering a more customized listening experience, QQ Music pioneered an AIGC empowered music player, with various AI generated virtual styles, users can enjoy different things of music players.
With that, I’d like to give the floor to Tony to reveal our business operations. Tony, please go ahead.
Cheuk Tung Tony Yip — Chief Strategy Officer
Thank you Ross. Hello, everyone. During the first quarter we have seen enhanced monetization in our online music services. We booked robust year-over-year growth in online music services revenues, driven by the advancement of both subscription and non-subscription businesses.
On the subscription side, a strong performance was propelled by the growing number of paying users and it’s ARPPU, which comes to 94.4 million and RMB 9.2 respectively. Notably, our online music paying ratio hit a record-high at 15.9%, while our ARPPU expanded sequentially for the fourth consecutive quarter. All these results reflect our refined content operations, user’s higher willingness to pay for premium sound and effect features as well as more effective promotions.
In addition, our IoT service has been growing over the past few quarters. Seeing its increasing importance to our overall business development, we began to include certain IoT devices in the disclosure operating metrics for our online music services starting from the first quarter. On the non-subscription side, it also delivered strong year-over-year growth, advertising revenue grew notably year-over-year, mainly due to lower revenues last year caused by COVID-19 impact. Increasing interest from advertisers in our innovative advertising formats as well as improved macro-environment. In particular, we have seen an increasing advertising spend from advertisers in the e-commerce, gaming, travel and food and beverage industries. Meanwhile, revenue from our ad supported mode also grew well as more users adopted this model.
In addition, to TME live’s advertisers sponsorship mentioned by Cussion earlier, we cooperated with Uni-President [Indecipherable] and Heineken in the first quarter to create customized brand zones, playlists and music festivals helping advertisers increase brand visibility with our innovative ad formats. On top of advertising, we also enhanced our ability to monetize through artist merchandise, long form audio and music distribution. In terms of artist merchandise, in the first quarter we worked with well-known artists, such as [Indecipherable], Lu Han, [Indecipherable] to introduce collection cards action figures T-shirts and more. As a highlight, platform within two days — as a highlight, sales of the album Utopia [Foreign Speech] by Teens in Times exceeded one million copies on our platform, within two days of its release. In the future, we will keep expanding the offerings of artist merchandise of our platform and we also have a number of assets cooperation projects underway.
In terms of long form audio it’s revenues expanded year-over-year as we increased our offerings of popular content in the first quarter. For example, we introduced a new format that combines leading IP and radio drama. During the quarter, we released Reunion; The Sound of the Providence, [Foreign Speech] adapted from the original work of [Foreign Speech], it’s streaming volume exceeded 340,000 in the first week after launch. These distinguished content further complemented our music offerings and increase overall user engagement.
Moving onto our social entertainment services facing a tough market environment, we focus on product innovation to differentiate ourselves and gain user mindshare. For WeSing, based on our multi person singing room in both video and audio settings, we upgraded our chorus features to chorus for all, which can support a real-time chorus of 1,000 people, further enriching users immersive experience.
In addition, we released extra interactive features in our singing rooms, such as school competition and red envelope sharing. These features, allow the singing rooms penetration rate to grow year-over-year for the fifth quarter in a row. In the future, we will leverage these chorus and singing features to explore collaboration across different products on our platform, such as TME Live, Artist-Fan interaction events and sponsored advertising.
In terms of WeSing membership, we expanded VIP privileges to include features such as customizable sound effects recording interface themes and named tax all resulting in year-over-year revenue growth in the first quarter. Meanwhile, revenue — WeSing’s revenues grew steadily in the overseas market, we will expand its presence further through both organic growth and M&A.
For live-streaming services, although revenue from traditional live-streaming remained adversely affected by the macroenvironment. Our audio live-streaming delivered double-digit year-over-year growth rate in the first quarter. Audio has become a growth engine for our live-streaming services as we keep providing differentiated content and interactive features. We also strive to build a growth path for more live-streaming performers, further tapping into their potential whilst strengthening their connection with users, which in-turn cultivates users willingness to consume and pay for content.
In the first quarter Kugou Music rolled-out a singing room feature following QQ Music successful validation delivering year-over-year revenue growth as well. Lastly, we remain committed to fulfilling our social responsibilities through music, for example, TME provided care for people with autism through music for the seventh consecutive year, we launched the carrying program called “If music has a shape” [Foreign Speech]. We invited over 50 groups of singers and musicians from China and abroad, including [Indecipherable] and to perform in a program and share their love.
Simultaneously, we debuted at the carrying through music theme song, Secrets Hidden in Stars [Foreign Speech], sung by Lucy TME’s first hyperreal virtual pop idol. This program’s, social media views have exceeded 500 million, raising awareness of autism among the public.
In conclusion, we started 2023 on a high note with innovations across content and platform. This establishes a clear path for our creative and sustainable development in the coming year and beyond. Our progress in monetization efficiency, cost optimization, commercialization, and user experience has also position us for ongoing business growth. Going-forward, we will continue to explore the intersection of music and technology, pioneering new forms of art and entertainment, while upholding our commitment to society and fostering a healthy more diverse music industry.
With that. I would like to turn the call over to Shirley, Our CFO, for a closer review of our financial.
Min Hu — Chief Financial Officer
Thank you, Tony. Hello everyone. Next, I’ll discuss our results from a financial perspective.
In the first quarter of 2023, our total revenue resumed the year-over-year growth and the reached RMB 7 billion up by 5% year-over-year, with the success of effect on cost-control and improved operations basis, our non-IFRS net profit margin reached 20.9% this quarter. In Q1, music subscription revenue continued its rapid growth and reached RMB 2.6 billion, up by 30% year-over-year and the by 11% sequentially, propelled by rapid expansion of both online music paying users and ARPPU specifically, monthly ARPPU in Q1 was RMB 9.2 increased by RMB 0.9 from last year and RMB 0.3 from last quarter. We are quoting four consecutive quarter of expansion.
Online music paying users grew to RMB94.4 million up by 18% year-over-year representing a RMB5.9 million net adds sequentially, the strong ARPPU and paying user growth resulted from high-quality content and services, attractive member privileges, and more effective promotions. As we extend use cases and the service offerings, we are seeing growing demand on our key services, and expect more opportunities to monetize these in this area in the future. Therefore, starting from this quarter, we have updated the definition of online music MAUs and included certain IoT device users in our online music MAUs.
Additionally, revenue from advertising achieved a strong growth year-over-year due to strong performance from our ad-based relationship model as well as low as lower advertising revenues for comparison in Q1 2022 due to the impact from COVID-19. We are pleased with such results and remain confident about long-term growth potentials in advertising business.
Social entertainment services and other revenues were RMB 3.5 billion, down by 13% year-over-year due to the evolving macro headwinds and the competition from other platforms. To adapt to the changing environment, we are focused on cultivating talented performers and differentiating our contents to stabilize the revenue skew of the traditional live streaming and making efforts in increasing our competitiveness through ongoing product innovation and new initiatives in social entertainment services, such as audio live streaming, real-time interactive periods and international expansion.
Gross margin in Q1 was 33.1%, up 5.1 percentage points year-over-year, primarily due to the strong growth of online music revenues, our effective control of content costs, as well as improved operational cost efficiencies.
Now moving on to operating expenses. Total operating expenses for Q1 were RMB 1.2 billion or 17.5% as a percentage of total revenues, down by 2.7% from 20.2% as a percentage of total revenues in the same period last year. Selling and marketing expenses were RMB 212 million, down by 36% year-over-year. Overall, the reduced spending on user acquisition had impacted on our MAUs. Our core music subscription service delivered strong growth. We continued to take measures to improve expenses, closely monitored our each promotion channel, added nice extra promotion channels, and leverage our internal check to attract the users and promote our products.
When elaborating the healthiness of business and assessing ROI, we focus more on measures such as level of engagement, user retention rate, etc. General and administrative expenses were RMB 1 billion, which was relatively stable compared to the same period of 2022. We continue to closely manage employee related expenses by improving headcount efficiencies and invest in research and development to further empower music-related content creation, enhance production efficiency and improve sound quality and effects. Our effective tax rate for Q1 2023 was 12.2%. For Q1 2023, our net profit and net profit attributable to equity holders of the company were RMB 1.2 billion and RMB 1.1 billion respectively. Non-IFRS net profit and non-IFRS net profit attributable to equity holders of the company were RMB 1.1 billion and RMB 1.4 billion, respectively.
Diluted earnings per ADS was RMB 0.73, up 97% on a year-over-year basis. Non-IFRS diluted earnings per ADS was RMB 0.89, up 65% on a year-over-year basis. Such results demonstrate our commitment and the continued success of our operating efficiency improvement, as well as the impact from share repurchase program were integral to provide high quality investment returns for our investors and shareholders. And we remain confident about our financial performance, the development of our business and the overall industry.
As of March 31 of 2023, our combined balances of cash, cash equivalents and term deposits were RMB 28.5 billion as compared with RMB 27.4 billion as of December 31, 2022. The increase was primarily due to our healthy operating cash inflow of RMB 1.9 billion for the first quarter of 2023. Such combined balance was also impacted by the change in exchange rate of RMB to USD at different balance sheet debts.
In conclusion, we started 2023 with strong revenue growth momentum. And the revenue side of our online music services caught up with social entertainment services for the first time. Going forward, we continue to expect balanced the growth of both ARPPU and paying users and remain confident in the growth of potential of our advertising business. Social entertainment service continued to face evolving macro headwinds and competition from ad platforms and we will continue to differentiate our content and entertainment from peers and create a more high quality content which aide us stabilized revenues skew for social entertainment services.
Meanwhile, we’re continuing to invest in new products and services, high quality components and technologies, especially in areas such as IoT, gaming, singing room and original content, and the AIGC to build up a solid foundation for our healthy long-term growth.
This concludes our prepared remarks. Operator, we are ready to open the call for questions.
Questions and Answers:
Operator
Hello, everyone. [Operator Instructions]. And today’s first question comes from Alex Poon from Morgan Stanley. For the benefit of all participants on today’s call please limit yourself to one question and if you have additional questions, you can re-enter the queue,if you ask your questions in Chinese, please repeat that in English. And today’s first question comes from Alex Poon from Morgan Stanley. Alex open, please go ahead.
Alex Poon — Morgan Stanley. — Analyst
Thank you management for taking my question and congratulation on very strong results. My question — my first question is regarding our subscriber — music subscriber growth business, 5.9 million net-adds is our record-high number and it’s been accelerating from the last two quarters, can management explain the drivers behind this and how should we think about the net-adds growth outlook for rest of the year. Thank you very much.
Cheuk Tung Tony Yip — Chief Strategy Officer
The subscription revenue, which is very much our focus, as we are seeking for a balanced growth between both paying user as well as ARPPU, subscription revenue grew at a 30% rate on a year-over-year basis, which as you pointed out is an accelerated pace compared to previous quarters. This can be attributed to a number of factors.
First, the quality as well as the value of our subscription service continues to improve. It was a long term effort in the making. And we’re providing more and more attractive content and features within that subscription service.
Secondly, as a result of our long-term effort and focus, users’ willingness to pay for premium features such as sound quality, as well as sound effects continue to increase.
Thirdly, we continue to improve the promotion of those high quality content and product features.
And finally, more effective as well as targeted promotional discounts around new subs, as well as better retention programs also helped drive our ARPPU higher, and as a result, we continue to expect a very strong growth in our subscription revenue looking forward.
Operator
Thank you. And our next question comes from Alicia Yap from Citigroup. Alicia, your line is open. Please go ahead.
Alicia Yap — Citigroup — Analyst
Hi, thank you. Thanks for taking my questions. Good evening, management. I would like to get some update if management could provide us on how are we thinking about overall growth outlook, especially for our online advertising and also the music subscription, if you can give some color as well on the social entertainment as well? Thank you.
Cheuk Tung Tony Yip — Chief Strategy Officer
Overall, we continue to expect that 2023 to be a year of positive growth for both top-line revenue as well as bottom-line net profit. In addition, most likely from the second quarter, we expect our quarterly revenue from online music services to exceed social entertainment services to become a primary source of revenues.
In terms of online music, specifically, we expect subscription revenue to continue to deliver quality strong growth, driven by both paying users and ARPPU. In addition, combination of advertising, long form audio, artist merchandise and IoT services are all expected to contribute to the growth meaningfully. In terms of social entertainment, while traditional video live streaming will continue to face competitive pressure, our audio live streaming and international business can partially compensate. Combining all of that, with our continued focus on cost management to improve efficiency, we expect net profit margin to continue to improve, resulting in net profit growth that are likely stronger than previously expected.
Operator
Thank you. And our next question comes from Lei Zhang from Bank of America. Lei. Your line is open. Please go ahead.
Lei Zhang — Bank of America — Analyst
Hi, management. Thanks for taking my question and congrats on the strong set of results. My question mainly on music gross margin. Can you give us some updates on your music gross margin in the fourth quarter? And how should we see the change going forward? It seems we have a better outlook on our sub and the music business for the rest of year. Thank you.
Min Hu — Chief Financial Officer
About music gross margin, we don’t give the very specific detail number of this business. We will talk about the whole gross margin of our business. Gross margin is 33.1% in Q1, increased by 4.1%, year-over-year. Now, there are some positive factors as follows;
One, there’s the strong growth of monthly ARPPU and net adds of new subscriptions.
And two, the growth of advertisement revenue.
And the third, even social entertainment revenue faced downside pressure and the revenue mix change also had the negative impact on our gross margins. The revenue sharing costs of live streaming [Indecipherable] promotion activities and increase operational efficiencies. We focus on good performers and high quality content.
And the fourth, we will optimize the content cost model of ROC and increase the ROC requirement. We also benefit from the development of our inhouse original content production.
And the fifth, we will optimize the technology and operational strategy related to bandwidth and storage capability and improve the utilization of our service and the equipment. And looking forward, in Q2 in 2023, we expect the subscription revenue and advertising revenue will continue to be strong growth. And we will continue to increase our operational efficiencies and monitor our costs. We expect our gross margin will increase sequentially in Q2.
Operator
Thank you. And our next question comes from Wei Xiong from UBS, Wei, your line is open. Please go ahead.
Wei Xiong — UBS — Analyst
Hey, good evening management. Thank you for taking my questions. You guys mentioned just now that you’ve seen good recovery in offline and also in the performance market. So just wondering if management could elaborate on how we can participate more and potentially benefit from the offline event opportunities? And could these offline events generate meaningful incremental revenues for us and contribute to the better growth of our music segment this year? Or do they have synergies with our online music subscription business? Thank you.
Zhu Liang — Chief Executive Officer, Director
Okay. Sure. Thank you for your questions. And yes, after reopening, the live concerts and music festival market has been really successful [Indecipherable]. Our unique positioning will be both of our online and offline capabilities. And we will be also focusing on the quality rather than the quantity of the shows. So we will continue to upgrade and also improve our TME Live IP by more in depth partnership with our potential partners in the show’s content, co-production, etc. And also, we will definitely bring additional revenues to us. And also, it will further contribute to the healthy development of TME’s content ecosystem in the long run.
Also we’re seeing the positive trend in industry driven by the increasing demand for live entertainment experience and also the willingness of consumer to spend money on tickets and events. But, however, it’s also worth noting that, although the offline performances have been very [Indecipherable] so far, but this is also a low margin business for the organizers. So with this in mind, our approach will continue to be ROI based, with a prudent investment mindset. But we will continue to think that it’s going to be an exciting project for us in the long run.
Operator
Thank you. And our next question comes from Shen[Phonetic] Zhao from CICC. Shen[Phonetic] Your line is open. Please go ahead.
Unidentified Participant — — Analyst
Thanks management for taking my question and congratulations on strong performance. My question is about profit guidance. How does the management view the change of OpEx and net profit in 2023 and in the long-term? Is it possible to share some guidance? Thanks.
Min Hu — Chief Financial Officer
On last question, I guided on gross margin. So, I will talk about the operational expenses. And in 2023, we will continue to focus on improving our efficiencies. Q1 selling and promotion expenses, operating on low cost level, down by 36% year-over-year. Overall, the reduced spending [Indecipherable] operation had impacted our MAUs. Our core music subscription service [Indecipherable] growth. And for the headcount management, we will continue to invest in product enhancements, our technology innovations, new products and new business, such as IoT [Indecipherable] program inhouse content productions. And meanwhile, we will pay more attention to improve the profitability of business and the products.
And Q1, the adjusted net profit margin is 20.9%, an increase on a year-over-year basis and sequentially. And looking forward to Q2, we expect our selling and promotion expenses and the G&A will be stable compared net of — in Q1. And with the growth of our revenue, we expect the adjusted net profit and adjusted net margin all will be increased.
Operator
Thank you. And our next question comes from Wei Fang from Mizuho. Wei, your line is open. Please go ahead.
Wei Fang — Mizuho — Analyst
Thank you for taking my question, management. Firstly, can you help update us on your Super VIP Membership Program.in terms of adoption? And secondly, I was just curious, how’s your IoT monthly fee compared to your average mobile monthly fee? Thank you.
Cheuk Tung Tony Yip — Chief Strategy Officer
First of all, we continue to add more and more attractive member privileges behind our super VIP package, while — although we’re not ready to disclose specific numbers, we are pleasing to see the continued growth in the number of subscribers under the VIP membership.
In terms of the IoT services, we are seeing very good growth trajectory, primarily in the in-car space. We continue to penetrate more and more car models. For example, recently we penetrated into several notable Mercedes models. And in those models, we are offering subscription services. And very often, we do see those offered at a full price point — at the full price as opposed to the discount price. And increasingly, you will be separating the price plan between the IoT services as well as the mobile device. So, you have to actually pay a separate fee in order to access for IoT subscription, in addition to being able to access the subscription for mobile device.
Operator
Thank you. And our next question comes [Indecipherable]. your line is open. Please go ahead.
Unidentified Participant — — Analyst
Hey, good evening management. Thanks for taking my questions. So my question is regarding the cooperation with Tencent with some very successful cooperation regarding the TME Live, so how should we deepen such cooperation? Do we expect we should expand the cooperation to more areas? Thank you.
Cheuk Tung Tony Yip — Chief Strategy Officer
We had music feature, is actually powered by QQ Music, to a large extent. Our objective is to extend the QQ Music service onto WeChat to provide WeChat users with high quality music experience. And this cooperation enable us to help music creators tap into the significantly broader reach that are offered by WeChat. And as a way to promote this service, WeChat users can enjoy our service for free for a limited time between now and June 30. From July 1 onwards, to access certain premium content and features, users will be required to become a paying subscriber. We believe this cooperation will generate incremental revenues for TME as it will allow us to attract incremental subscribers in the long run. And given the significantly broader reach of WeChat vis-a-vis TME, we are delighted to be able to work very closely with WeChat on this cooperation to bring our music service to more users and with no doubt we will continue to deepen cooperation with WeChat as we go.
Operator
Okay, now we will take our last question today from Lei Zhang from Bank of America. Lei, your line is open. Please go ahead.
Lei Zhang — Bank of America — Analyst
Hi, management. Thanks for taking my follow up question. Can you give us some updates on a very hot topic recently on our AIGC and how we can use this technology? And do we see this could help us to say, in general, how some cost control. obviously, OpEx? Any updates or any feedback on AIGC topic? Thank you very much.
Cussion Kar Shun Pang — Executive Chairman
[Foreign Speech]
Cheuk Tung Tony Yip — Chief Strategy Officer
We’ll continue to deepen our research into the applications that are based on LLMs. One example of that is we’ll be looking to develop a chatbot where users can chat to the chatbot about the kind of music they like to listen to and to discover new content. We’ll be cooperating closely with Tencent to develop application based on their LLMs as well as to work with open source LLMs to develop other applications such as those around image creation. Similar to Google’s music LLMs, we will look to provide tools to help musician significantly reduce the barrier to music creation and lower the cost and to improve the efficiency, to help them with song creation, as well as lyric writing. And then finally, in the areas of social entertainment, we’ll look to create virtual items that will ultimately be used in live streaming type use cases
Operator
I’m now approaching the end of the conference call. I will now turn the call over to our host, Mr. Tony Yip, for closing remarks.
Cheuk Tung Tony Yip — Chief Strategy Officer
Thank you everyone for joining us today. If you have further questions, please feel free to contact TME’s IR team. This concludes today’s call and we look forward to speaking to you again next quarter. Thank you.
Zhu Liang — Chief Executive Officer, Director
Thank you.
Cussion Kar Shun Pang — Executive Chairman
Thank you.
Min Hu — Chief Financial Officer
[Foreign Speech]