Q4 2022 Tencent Music Entertainment Group Earnings Call
Advised that todays webinar is being recorded with that I'm pleased to turn the call over to <unk> executive Chairman of TMA cushion.
Thank you Tony Hello, everyone and thank you for joining our call today.
Looking back on <unk>.
Execution of our dual engine content and platform strategy build a solid progress.
<unk> changing macro environment.
Have a keen focus on high quality growth and product innovation.
<unk> is our highly effective cost optimization measures, we led the industry in the rebound of bottom line growth and delivered steady growth in online music subscriptions for the year.
Our diversified suite of monetization tools expanded and make progress during the year such as at Supportable long form audio Sos audio live streaming and our international expansion.
Among many more.
With our confidence in the long term prospects of the company. We had completed the new asphalt our 1 billion share buyback program.
By the board in 2021.
Looking ahead into 2023, as we position ourselves to better capture future growth areas.
We currently expect our quarterly revenues from online music services.
<unk> dose form social entertainment services at some point you've been this year.
Meanwhile, with our relentless focus on executing our growth strategies and operating efficiencies.
We are confident to achieve year over year growth in total revenues and profitability as well as continuous improvement in user quality in quantico industry, while during the filing using industry.
Next I would like to talk about remarkable achievements, we are making many aspects of our business is built upon our insistence on excellence and innovation.
One of the <unk> part of our strategy in 2020, plus the continued improving <unk> content ecosystem.
First we are building extensive collaboration with top artists labels and industry partners, both at home and abroad to bring our users and not the most compelling content and experiences.
We have recently reached an agreement with JD out Joe.
Hey.
To extend our post strategic partnerships and new continue to provide our users with a high quality news it created by J D.
Essentially aided by the extra ordinary we experience on our platform in the fourth quarter.
We deepened our strategic cooperation with leading cost such as being new tanking.
Providing users with songs for May eight with European and other where now the statements.
Our <unk> library in various music verticals also reinforced our reputation as the go to destination for music lovers.
Importantly, we began extensively teaming up with people there.
The industry bellwether in efficient to Coproduce the previous week.
We jointly released the 2022 and new moving parts, which are attractive participation from a record high number of unique visitors.
Most recently, we announced the integration of TNT Uni tranche counting injury Alibaba on Billboard assets only music talk for mainland China.
Using Chinese music to a global audience.
Second as we slowly increase the Bev and diversity of our music library.
Our ability to empower our original content production has significantly improved with new tools launched.
Best in investing in intellect, intelligent tools to support music related content production with technology.
And has delivered promising results.
Elevation setting the trend.
Strategic move in 2020, Q4 still a lineup of virtual performance.
In the fourth quarter, we unveiled our first hydro will virtual pop idol.
These are sheet, who is also the whole new state presented for today's call.
With a record grade automatically generated vocal twins developed by <unk> <unk> <unk> engine <unk>.
<unk>.
Lucy is a highly productive stainless has.
Has created three charter pharma maintained original songs across different styles within just one month of David and has already received a partnership interest for fashion soft or strong performances from a broad array of global banks, including our Coca Cola and KFC.
At the forefront for cutting edge virtual idol build our virtual performance also includes Celgene samba and anchor.
Who we brought to life with original content unique voices and movies and more.
These systems are also increasingly focusing on our Tencent music platform.
Flagging content for spirochete bolt on our platform and in the industry.
By the end of fourth quarter, we have empowered our indie musicians to create more than $2 3 million musical works.
Now, we consistently paid close attention to music ecosystem development in.
In the fourth quarter, we launched a more smart features and tools for indie musicians to a Saturday song competition and beliefs and positive interactions with defense for example in December we unveiled a record used feature.
I'm trying to duck hydro contract passive motion.
Which allows <unk> to upload there in <unk>.
Original albums and earn revenue from listeners who want to show extra gratitude in addition to our themselves.
What's more.
The tech tools, we launched during the quarter enabled our musicians to generally in Iraq and elder Macacos automatically.
So as the <unk> and singing enhancement and songs evaluation.
We should help from a modern horizons and automated music production losses.
We are proud that our end to end services have been instrumental in realizing a year of harvest for the creation of close to 1000 of which on the proper steps.
Leading the streams exceeding $100 million each in 2022.
In the fourth quarter the hit song Kwasny sure.
Dominated trending list on our platform and took the market by far.
<unk> and nearly half a billion of screens.
Analysis was turning to Pi work and four new Quadro uniform way into law, which has been extensively used to effect on new sales and generated over 5 billion social media discussions.
Meanwhile, we deepened our collaboration with Tencent ecosystem and launch with a total of 111 songs in the gaming and animation category in 2022.
A number of our cope with diesel stocks have condos.
This year.
Notably.
Hello <unk>.
Peacemaker cooking.
Cooking was among the finalists for the best original song in the mobile video game category of the 13th Hollywood Music and Media Awards, you should target how reliable timely needed again.
But.
Behind this high quality musical work more up and coming active are finding opportunities in stages to shine in real life and annuity streams on the back of <unk> all around promotional resources.
Sampling in the fourth quarter was a strategic musician partner Dakota base, Christos and hence also the innovative well known producers to launch her first.
Key for Mitchell song Skylake.
<unk> copper <unk> expect NIM will be seen as a chalk helping us build the profile is of high quality sooner.
And understand outbound was the campus musicians tongue in cheek.
Well, especially on the cobalt Billboard December issue with her first single dated July 10, two men and also came in the first place in client lending to same China.
So watson with our culture.
In addition, we collaborated with Coca Cola to create large scale new year, using your bank and promote emerging mutations such as timing T to the world stage will be both global network.
Many newly joiners musicians have grown quickly into rising star power support representing just a few of our success stories among our strong pipeline of emerging talents, we are going to build a thriving music industry.
That concludes my review of our growing content strategy now.
Now I would like to turn the call over to Rob who will share more about our platform update Ross. Please go ahead.
Sunday caution.
Hello, everyone.
Our refined that mission in 2022 to create endless possibilities with music on the packing knowledge 2022 was a year of our continued exploration of <unk> were stable or up.
Efforts to satisfy our users nuanced under diverse I mean, it was like a test us and to provide all around new they called companion shape to our users through each of our fall in the 10 men the pillars based on what <unk> seen in the play.
We have been deploying on the developing breakthrough ITC tools to further in pulp mill related content creation and enhanced production efficiency.
In addition to the <unk> seen in engine right.
Basically <unk>, two development or virtual idols stock such as <unk> mentioned.
Road Asta Mills engine in the fourth quarter.
<unk> enables automatic large scale music podcast production based on manatee and the lyrics.
We have also expanded.
Use cases for our patented <unk> technology.
In June two alongside all popular audio books greater by the synthetic oils offer young target, including the grave robbers chronicles Tom ODT.
While small a height of the new year reservoirs of QQ music's newly launched they are creating car kind of up into the gifts generated automatically.
There is sale pricings I saw a lot of us.
<unk> exclusive material space in the future. We will continue to explore the application of large language models in the field of picker picketers types of video and other content as well as music recommendation and search two meters of Marseille demand for music reality.
Content.
Next one.
The biggest advancement in the year was to harvest, particularly improve our song the quality on the former effects and bringing users a clearer and more weight than anything experience, which.
Which also contributed to the growth of music subscribers.
Subscription as well as they are.
Adding this company privilege to our memberships.
For example, nearly half of our QQ music music tracks now So Paulo Silva of quality Oh, Paul on the or high rise Thunder has also been upgraded to high rise those lives.
Hi rifles in June , which paralyzed the pulp pirates studio qualities for our mass mass resolution of one.
100.
And a 92 kilo fourth.
Plentiful paid.
Second we continue to optimize our preparatory technology for the premiums down the stairs.
Langton female master type <unk> premiums from the songs <unk> shown in our premium on the quality to zero <unk> to enhance stock or clarify.
If pricing is.
But also if suddenly there is the application of this premium sound quality failures Tortilla Army allows online concert Tata Ritchie Sakamoto concert isolate concentrated on building a new benchmark in pharmacology for the domestic streaming industries more users.
And for songs with highest quality.
<unk> music, the number exceeded $5 million on a daily basis totaled nearly $100 million fifth.
We also launched under your hands, a number of filters to allow yourselves to flexibly customized they are listening experience.
<unk> music QQ music, all unveiled a pitch on the Tampa I alteration fascia, <unk> based ratios kind remarks their favorite songs.
<unk>.
Upgraded also contributed to a more personal lives the listening experience leading toward sustained the iOS eight year over year growth in QQ music and <unk>.
Recommendations trading volumes and the time spent per user in the fourth quarter.
Specifically kilkeel millwork recommendation inspired a more let's say in the hydro such.
<unk> continuous increase in the percentage of sales coming from our recommendation.
Another focus in 2000 2022 was totally erase users virtual experiences on our platform, particularly through comprehensive collaboration reservation video outcomes in the Tencent ecosystem.
First through Tammy life, our performance brand that ratio posted 63 online and offline events throughout 2022.
How the Hanford reservation radio accounts to innovate in the active formats and build a new avenues to distribute music and video content.
So for instance.
At Hudson Lee <unk> concert.
<unk> installed in the user's caster there are bolt on either our platform ovation video accounts for select the final uncle.
But it also dawned attractive or 23000 paying mirrors to watch them.
And Japanese Paninis PHA cycle model by Malone is solo concert.
Which is the highest number to date among PMT allows them musical instrument procurements.
Second by further applied our song recognition feature to automatically identify the background music videos from vision major accounts and the right users for QQ music to listen.
Saturday, our vision ringtone youll see in our own videos.
First of all by the end of our 2022 or 60 stores in India Utilizations on our Tencent musician platform, how we use the one click release feature to populate their original songs ambition video accounts.
Beyond professional music content during the fourth quarter. They also promote.
Youll see engagement by allowing our racing users to share neurological videos of their own thing on <unk>.
<unk> and Mediacom.
The latest song on vision video accounts, good morning, long waits on long way rapid off nearly 900 million meals acre streams on <unk> platforms in the fourth quarter.
A stronger testament to the vibrancy of our dawn built music ecosystem.
We're sort of argument.
The scene Fisher I'll also being upgraded to create more enjoyable experiences for our carload pay users.
In the fourth quarter.
<unk> are several real time features eliminates a one player model seen master and tongue at Ashford.
Pool player model, Carl kicking Pud Arrow take little longer hardening, and Marty play model, Mike Raab, Chairman Chang Chun Mei to install users with the excitement of similar pilot tenuous singing and competition.
On top of this new entertainment choices during the fourth quarter. We also continued to engage at leasing Youll start with Athene in fact update of this cash Isa vocal in his monetization Tung Chung filter.
Our leasing rate, maybe it may actually users to create a studio quality our cost saves come in.
Marseille Siem environment.
No the flowers, particularly the young ones are getting are attracted by our music music pace, but virtual youll skills cases at Etame land or in Marseille, what shows same park.
Meaning is there a lighthouse drawn to Coca Cola in our campuses virtual parties and celebrate a steeper noon year alongside artists joining the first quarter.
They also released they are listening for either we are essential work on <unk>.
Which brands users outhouse precursor to listen to content and virtual scenarios, such as a combined company.
<unk> dot com under a new year celebration.
Laterally.
To incubate a vibrant young.
Sunday character community.
<unk> upgraded our Coco concept could go and buy an accordion music, but in year two of our music products designed for GSA users.
During the fourth quarter. This appetite include one including more real time interactive features to have as a young generation identify people with shared music tested and I encourage them to actively create share and socialize.
Thanks to the agenda.
Warm receptions and the adoption of their diverse functions.
Two apps both trials triple their <unk>.
Year over year.
With that I'd like to give the floor to Tony to reveal our business operations. Tony. Please go ahead. Thank you Ross Hello, everyone. During the fourth quarter, the searching COVID-19 cases, and churn of our casual users amid competition led to the year over year decline in online music mobile <unk>.
This along with cost optimization measures aimed at boosting monetization efficiency as a platform of scale.
Meanwhile, we continue to strengthen our monetization capabilities with improved operating efficiency and has achieved high quality growth in both subscription and non subscription revenue during the fourth quarter.
Most excitingly, our subscription revenue delivered healthy growth year over year and quarter over quarter.
Reflecting our balanced approach online music paying users a high quality user cohort maintained a strong growth trend and <unk> also continued to improve sequentially for the third consecutive quarter and increased year over year.
The strong paying user and <unk> momentum was driven by our improved operating strategy, leading to optimized content quality more attractive member privileges broadened sales channels and more effective promotions.
Subscribers to our Super VIP membership for yen continued to grow during the fourth quarter as we expanded our offerings to provide premium sound quality and premium mass the tape and added a wealth of privileges such as long form audio digital album and karaoke to the membership package.
On the non subscription side its revenue also improved year over year and quarter over quarter. During the fourth quarter revenues from our advertising business continued to recover quarter over quarter, specifically AD supported mode delivered strong performance during the quarter with sequential growth in its revenues.
Through our music with brands partnership, leading advertisers, including downturn, Coca Cola KFC and J D. Dot com embraced TMZ lives and TMA land as innovative channels for musical format advertising in the fourth quarter, particularly given their appeal to.
Users.
On the merchandising side, we worked with a wide range of a list artists, including Lohan engine tier one car one equal one UN sure Shen <unk> seen this for this quarter to released a physical albums digital albums vinyl records or customer.
Mike Oddest merchandize with headstart benefits.
Moreover, during the fourth quarter, we launched <unk> collection costs, maintaining enhancing Qualcomm a new series of photo cards as collectibles input how more.
We commenced we commenced a rollout with kiko.
GTE, Scott, which became highly sought after among young users demonstrating our end to end content release advantage spanning headstart and benefits <unk> related products and multichannel promotion.
Moreover, we have strengthened our long form audio content offerings with more audio books based on novel IP and self produced pay children's literature.
So prescribers doubled year over year to surpass 10 million during the fourth quarter.
Driving solid year over year growth of revenues from long form audio subscription.
Our Iot service.
<unk> achieved double digit growth year over year, thanks to our expanded model coverage as well as a diversified content library with Dolby surround sound library, and TMA like content added respectively on selective electric vehicle and smart TV terminals.
Moving on to our social Entertainment services during the fourth quarter as a result of macro headwinds increased competition from other platforms and a surge in Covid cases, social entertainment services, <unk> and paying users declined year over year against this backdrop, we will focus on product innovation and constantly.
<unk>, while exploring fresh ways to fulfill users' social and entertainment needs.
Well, we think it's multi person singing room in both video and audio settings have continued to enrich real time interaction scenarios on the platform, resulting in increased penetration rate and user time spent in these routes and we are planning to rollout the feature to our other plan.
<unk> in the future. Meanwhile, we took the operation experienced from our singing and social products and our proven monetization models to the international market expanding our presence through both organic growth and M&A.
Revenues from our overseas business continue to increase year over year in the fourth quarter.
For live streaming services, although macro environment continue to weight on our revenues from traditional video live streaming we focus on providing differentiated content and entertainment experiences to explore new value generators, specifically, we are fostering a tighter connection between audio.
Streaming and our music platforms.
Following the successful expansion into live streaming by QQ music Kugel music has also started to build up its audio live streaming service, which has a huge growth potential given its massive music user base.
It's more leveraging our expertise in cultivating rising talents, we are creating more room for our indie musicians to grow into promising live streaming performance for instance, in the fourth quarter our self.
Self produced hit songs like puppetry more sheet and echo clean helped their singers grow the number of fans substantially, thereby increasing both copyright revenue and live streaming income.
Another example is a musician Lee why his original song worthless relationship NIM calculation has attracted high streaming volume and landed a spot on many of our music charts. As we are building a bridge between performance and the fan basis revenues from audio live streaming.
Creased by double digits year over year with solid growth in paying users and arpus year over year.
Last but not least during 2022, we continue to fulfill our social responsibilities with an innovative model to translate music emotional expression and influence into social practices.
The spirit of Chinese song <unk>.
Our core cultural project is now in its fourth year.
In the fourth quarter. It launched an initiative for the quality music style and partnered with seniors, who shop and the only thing to promote Chinese traditional culture through the power of digital music in December 2022, many of the musical works.
From the spirit of Chinese some 2020, a public welfare album, We released previously officially entered the first digital collection of the National Archives of publication and culture supporting the preservation and inheritance of Chinese culture.
In conclusion, we exited 2022 with solid performance across our business, where we made significant advancements in content and platform upgrades will find user experience pushed forward with monetization models and optimize costs altogether laying a solid foundation to.
<unk> growth in revenues and profitability into 2023.
As we move forward, we will remain committed to creating endless possibilities with music and technology to blazing new trails in 2023 and in the years to come while contributing to better fulfilling our responsibilities as a key music industry player.
With that I would like to turn the call over to Shirley our CFO for a closer review of our financials.
Thank you.
Next I will discuss our results from a national perspective.
The first quarter <unk>.
And not quarter, evidenced our commitment to cost control and operating efficiency improvements with continuous growth in archive and modify profit for the fourth consecutive quarter.
Q4, net profit was RMB, one 2 billion.
<unk> net profit was RMB, one 5 billion.
<unk>, 71%.
And five 6% sequentially.
Total revenues were RMB eight 4 billion.
Up by <unk>.
8% sequentially.
In Q4 of 2022.
Subscription revenues grew to RMB two.
Paul Feeney.
101 percentage year over year, and five 5% sequentially.
Online music paying users grew to $88 5 million.
Up by 16% <unk>.
This ranking is three two meaning net adds sequentially.
Mark ups in Q4 was RMB eight nine.
On the intermodal volumes sequentially and by RMB Neolocal from Q4 2021.
The strong paying user and apps teu growth will occur.
And by more attractive member collaborators such as include standard quality broadband sales channels more effective promotions.
Optimize the tungsten quantity of high quality services.
Also resulted from our ongoing efforts to profitably to users' willingness to painful Munich and improvement in operating and facings.
Young news from advertising continued to recover and global sequentially as Max starts to recover and we launched new monetization models.
To give our users more options, we launched a Danish aquatic model and providing more inventory, which contributed to our revenue growth.
With increased interest in innovation advertising channels.
Like entertainment and became popular.
Attracting men meeting advertisers on newest format through pricing.
We remain confident about the long term growth potential accounting, England.
So as you and Ken Minnesota, and other revenues were RMB six 9 billion.
<unk> by 18% year on year due to bank evoking macro headwinds competition from other platforms and a surge in COVID-19 cases in the first quarters of 2022.
So adapt to the changing environment and into stabilized revenue scale, well continue to differentiate our content offerings.
Our Alicia Inc, axiom product offerings and across platform collaboration.
Gross margin in Q4 was 33% up by four 2% year over year and by 4% sequentially. The.
The increase was.
Primarily due to improvement of monthly Arpus for me ask some questions.
Growth of paying users.
Revenue sharing fees for lung screening for Macy's and improved operating cost efficiencies.
Now moving onto operating expenses.
Operating expenses.
Well on the $1 4 billion or 18 point as a percent of total revenues.
By five 6% from 29% of total revenues in the same period last year.
Selling and marketing expenses were RMB $266 million.
By six 5% year over again, and this is our first quarter with more than 15% of cost.
<unk> paintings.
Year over year basis.
Or are they reduce expanding our user application had impacted our <unk>.
Our core music subscription services continued its debit and enhanced growth trajectory.
We continued to closely monitor.
<unk> of each promotion cannot pattern.
Recognize extending our promotional channels and an average of internet traffic to attract users and promote our brands.
Yes.
Administrative expenses were RMB, one 1 billion up by 6% year over year.
The increase was mainly due to increased investment in research and the American medical areas such as international range.
I'm from audio AD supported model X China.
Our effective tax rate for Q4 was <unk>, 2% compared to 11, 5% in <unk> 2021.
The increase in effective tax rate was mainly because some of our entities.
Right.
Blended tax benefits in time tomorrow.
In 2021 and 22.
Well, we have all our net profit and net profit attributable to active holders of the company.
One 2 billion.
<unk> net profit and non.
Perfect.
Sure.
Sure.
Richard.
Hi.
And the one five binney and one postini respectively.
<unk> net profit.
Yeah.
91%.
Our basic and diluted earnings per <unk> continued to grow in the fourth quarter of 2022.
Basic and diluted earnings per ads were RMB naval appointments demonstrate and <unk> respectively.
121% and 125% on a year over.
Perfect.
Basic and diluted earnings per ads was <unk> 92, and RMB <unk>.
Nine one respectively.
At 8% and 82% our year over year basis.
Such a result demonstrates our initial success operating efficiency improvements as well as the impact from share repurchase program.
As of December 31st 2022, our combined balances of cash cash equivalents time deposits and short term investments were RMB 21, 4 billion as compared with RMB 25, 4 billion as of September 32009.
Two things.
The increase was due to our house operating cash flow of RMB, two 1 billion for the first quarter of 2022.
Such combined balance was also affected by the change in exchange rate of RMB to USD at <unk> balance sheet.
Next I'll briefly discuss our performance for full year 2022.
Total revenues were RMB 28 appointments SAPIEN, Inc.
9% year over year <unk>.
<unk> net profit was RMB save eight Feeney now net propane was RMB four 9 billion up by 13 percentage year over year.
Revenues from online game services.
By obtaining up by 9% year over year to reach music subscription.
<unk> was the largest contributor our music subscription business grew rapidly sort of out of the year with Aneel revenues of RMB, eight 7 billion and a 19% and newer growth rate.
Revenues from search and 10 managed services declined by 10, 3% of gambling yet.
The changing macro headwinds increased the competition and the impact related to COVID-19.
Gross margin in 2022 was such a one percentage occupied and 9% year over year increase was primarily due to our effective control of content cost including revenue sharing fees.
For live streaming services and improved operating cost efficiencies.
Total operating expenses for 2022.
<unk>, five 6 billion down by 70% year over year.
Particularly selling and marketing expenses in 2022 decreased.
57% from 2021 isolated use efficient to use exploration costs and promotional activity during.
During the year.
Net profit and net profit attributable to equity holders of the company was RMB six 8 billion and RMB six 7 billion respectively.
Non office network based and non asset base.
Page attributable to equity holders of the company was RMB $4 19, and RMB four understatement Feeney respectively.
Finally, I'll close with some comments on our outlook for 2020 straight.
Built upon a SaaS of effective cost and expense controls and operational efficiency improvement in 2022, where we will focus on monetization expansion and revenue growth in 2023, while keeping cost and efficiency management.
Our core online music services, particularly music subscriptions continue to be our key growth driver paying user and monthly.
Package continues to grow.
Meanwhile, we continue to expand our suite of monetization to us such as AD supported model.
FX customers rise to assets and much of that.
<unk>.
And expect them to become important revenue contributors in 2023.
But in terms of services with challenges from competition and a changing macro headwinds we expect to face please us and keeping them and we are still and will continue to Max audio lapsing and expand our international footprint for long term growth.
Probably more we will keep investing in.
High quality content, and our internal content, but accurate as.
As well as new products and technologies, such as Aig's team.
We are confident about the long term growth of our company and that the overall music industry and the medical cost and providing high quality management and integrate cash for our shareholders.
This concludes our prepared remarks, operator, we are ready to open the call for questions.
And the other one is we are the only by phone. Please press <unk> to ask a question and that pathway and it yourself.
Starting the call from a person meeting of bulk meeting application. Please flip to the right hand bottom at the bottom left.
The benefit of all participants on today's call. Please limit yourself to only one question and if you have additional questions you kind of enter the queue.
If you ask a question in Chinese please step it in English and today's first question comes from Alicia Yapp from Citigroup.
Your line is open please make yourself and go ahead.
Hi, Thank you good evening management, Thanks for taking my questions and also complex on the body.
Hum.
Clothing 2022.
Thanks, Jim.
Atlanta.
I think I'll.
I'll also comment.
The 2023, Oh no sorry.
Management can be.
Right.
Yeah.
Hum.
Overall, what I got.
Staffing at the online music revenue growth.
Any change on your own.
So slap a well or any.
Yeah.
And so far that's for sure.
Robin.
Finding trial in 2020.
Thank you.
Thank you for your question so overall.
We currently expect that 2023 will be a year of positive growth for both topline revenues of around mid single digit percentage as well as our bottom line net profit of around low teens percentage.
In addition, we expect quarterly revenue from our online music services to exceed that of social entertainment services to become a primary source of revenue.
At some point within this year.
This is driven by growth at both China is pro growth policies at the macro level as well as our continued investments to strengthen our operations in the in terms of online music, we suspect subscription revenue to continue to deliver healthy growth of over 20% year over year driven by both.
Growth in paying users as well as arpus.
In addition.
Advertising long audio Iot services are all expected to contribute meaningfully to the growth in terms of social entertainment, while traditional video live streaming continue to face a competitive pressure our audio live streaming and international businesses can partially compensate.
By delivering healthy growth net net that means social entertainment is expected to see amount of rate of decline compared to last year.
Combining all of the above with our continued focus on cost management to improve efficiency.
We currently expect net margins to also improve into 2023.
Thank you. Our next question comes from Alan.
Alex Scott Morgan Stanley Alex Your line is open please go.
You'll have.
Congrats management on very strong results.
My question is related to gross margin.
Trend in 2023.
Maybe even longer.
In 'twenty, two because we have new say growing faster than social segment, and we are still able to achieve gross margin expansion.
How sustainable is this in 'twenty three maybe even 24.
Music segment for now the gross margin is still lower than the social segment.
Yes, it continues to grow faster than social so how will outgrowth margin profile change over the next one to two years.
Thanks very much.
Okay, I will talk about the gross margin our gross margin is 33% interest rate increased fivefold.
The 2% year over year and increased by <unk> four.
4% sequentially.
Yeah.
Sure.
Positive factors on our gross margin foster the increase of net Ed Murphy.
Of note suppressing ended growth Atlanta subscriber revenues, such as digital album Hockey's originated a merchandise noncom audio revenue.
<unk> had a positive impact on our gross margin.
And second.
Great.
Patients promotion activity and increase the content the quality of performance domination in ratio of black screaming haven't been controllers and the decrease on a year over year pace.
And third we increased our seat requirement of content costs and optimize the model of our CE way distracted.
With some newspapers tragic sleek and modern tool revenue sharing model or got more renewable energy and we have that positive feedback.
In the fourth.
Martha to technology and operations.
And Mr storage capability.
The improved utilization of our service and equipment, our operational costs decreased on a year.
Yes over here based on a sequentially.
While the decrease of search engine in revenue and a change in revenue mix in social Entertainment revenue has a negative impact on gross margin.
Looking forward, it's kind of funny story.
All of this.
Positive factors will be continued ended the negative factors that also can also be continue we will continue to expand their suite of monetization to us such as a decent pocket <unk> artist nation much impact.
And then they ship it.
The linked back our online music revenue will keep payoffs growth.
So.
We will continue to forecast two folks kind of increase your facings of all business units and tightened our caution comes control in 2020 say sell the effect to our gross margin will be increased.
Year over year basis in 2020.
Thank you.
Our next question translation from Goldman Sachs. Your line is one place among ourselves and go ahead.
Hi, Thank you management.
Okay. Congrats on the good results.
My question is on the advertising business.
How do we see so far let's say year to date.
Probably shouldn't get my recovery for us and Oh.
<unk> supports.
Motto.
So in terms of the new format as our creative AD inventory.
How do we think about <unk>.
Especially how to better monetize our.
Hi.
Whatsoever.
Sure.
Thank you for your question.
We continue to see a recovery in the advertising revenues, especially following the reopening post COVID-19.
The splash screen AD continue to recover at a healthy pace.
In addition to that AD supported mode advertising continue to ramp up and currently account.
For roughly about mid teens percentage of the advertising revenue.
And then thirdly in terms of sponsorship advertising.
While during the fourth quarter is temporarily weakened due to COVID-19.
We do expect with the reopening there to be many more like events.
And as a result advertising.
Sponsorship and advertising opportunities. So all in all we do expect this year to be a strong recovery year and a year of positive growth for that business and then in terms of verticals in.
In the fourth quarter, we given the e-commerce seasonality, we did saw and.
A.
Meaningful increase in the E Commerce vertical and then in addition to that.
Internet services in general.
Food and beverages consumer electronics as well as local services also verticals, where we saw continued demand from advertisers.
And our next question comes from Malaysia from Bank of America Securities Late John Your line is open thanks, Amit yourself as still a half.
Hi, Matt It's Matt Thanks for taking my question Congrats on a solid do we adopt.
My question is mainly regarding yourself, the marketing and the investment the planting a ton page one tastes to a thing. So we have a pretty good cost control ask yourself can you give us more color about any type of two eight thank you.
Okay.
Okay.
About the selling and promotion expenses.
We have taken tight controls on savings and marketing expenses in Q4 continuously and that means I can't loss at <unk>, 5% decrease on a year, where FX and rebalanced.
We balanced our menus.
And the monetization when you're evaluating the Ah.
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We offer them wanting to our eye of each promotional channel and managing the internal and external resources to more effectively improve efficiency outstanding and the marketing expenses in the future in 2023, I think I left promotion expenses will be operated as a very low level.
And we'll be continuing to place on year over year basis further cutting degree will be.
Limited compared to no spring 2022, and in the 2023 we will.
And lastly in the content the promotion so that will be.
The new annual rate for our upgrading our amendments yet.
Yes.
Thank you and our next question comes our way Sean from UBS.
Your line is open please EMEA seldom go Aha.
Hi, Good evening management and thank you for taking my question I wanted to get some of your thoughts around Aig's.
As management mentioned, we are exploring possibilities and leveraging technology in that area. So how do we assess <unk> strategic positioning around aig's.
What are some of the potential benefits and business opportunities that we plan to pursue this year and what could be the potential investments or cost implications related that thank you.
Yeah.
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We've always invested in AI.
In particular recently with a focus in LLM lost language models.
That will lead to more applications.
We will continue to leverage partnerships with Tencent.
Examples of our applications would include recommendation as well as play lists in a more conversational setting.
Other examples would include music posters greeting cards since synthetic voice all of which are already currently being applied to our platform.
Into 2023, we'll invest in our own R&D in AUM.
To drive music related conversational applications.
Also to help musicians dramatically reduce the barrier to their creativity and overall that should result in more creativity and high quality content, which is good for the overall industry.
Thank you and so on that question, Hi, crush sand shifting Chang from CIBC checking. Your line is open please them yourself and all I have.
Hey, Thanks for taking my question and just a follow up.
Cool.
<unk> been east or not.
To snatch them to grab milk side continue to improve okay.
How does management think about what's in them.
In the first quarter.
<unk> mentioned in the prepared remarks, it might be driven by optimized compound teach more attractive member privileges.
All our sales channels and.
Pete promotions folks Cherokee basketball cost initially.
Yes.
For the short answer is yes, we do expect the <unk> to continue to improve driven.
Driven by all the things that we mentioned so a combination of continued improvement in the quality of our membership offering.
<unk> and the comprehensiveness of the privileges in our membership.
More broadened sale channels.
Which include internal kind of within platform channels as well as external outside of our platform channels.
As well as more effective promotions.
And by more effective promotions, obviously that would lead to a higher ROI when we do engage in promotions, which are helpful to keep them.
Thank you.
Our next question comes from Thomas Chong from Jefferies. Thomas Your line is all of them based on their desktop Angola Hot Hi, Good evening. Thank you managed to burn off all taking my questions and congratulation on the small bits that result my.
My question is about the competitive landscape.
I'm doing that.
In terms of the sales and marketing spending and our margin improvement.
Yeah, the competitive landscape are more stabilized and that's matched up right from the short form video.
Second question is about <unk>.
And music services are so popular social entertainment.
Some point for this year I just wanted to get some color with regard to that.
Long time no.
How should we think about online book, so, but there's no contribution in the long time. Thank you.
I'll tackle the second part first about the revenue mix.
As we mentioned.
We do expect the music online music services revenue to surpass social entertainment.
And so clearly what that would mean over the long run we expect that to continue in the long run so.
We do expect the online music services to be the primary revenue source going forward.
As opposed to being a one off.
In fact within online music services.
Obviously in the fourth quarter, you have seen that.
Music subscription grow Ah just north of 20% and then non subscription revenue grow at a faster pace than that.
Primarily due to a low base.
In 2021, and then looking into 2023.
We obviously think that.
The the effects will be slightly different.
Music subscription would grow at over 20% on a year over year basis.
I mentioned.
And then non subscription revenue.
We will see pockets of growth in the areas of advertising.
Growing very well long audio Iot services.
But somewhat offset by volatility.
Volatility in digital album.
Soft licensing.
Thank you.
Next question.
Also with the unique platform in continental strategy of TMT, Kevin is now starting to have some on the taxation for the content productions, causing licensing advertising sponsorship with our licensed brands as well and also as we mentioned that we started to have some efficacy data merchandising weapons, which can help us too.
For further ecommerce opportunities those who will also help us to some new revenue streams in the future.
Okay. Thank you and our next question from Shelley <unk> from HSBC showing your line is open please <unk> yourself and I'll hop.
Thank you so much I have two questions first.
First can you share your expectations for subscriber subscriber.
Subscriber growth or eight music and how should we think about impacts from resumption of online entertainment first as willingness to pay as macro recovers post to be opening that's the first question.
Separately on gross profit margin I think management has mentioned that it still has room to improve further.
What could be a midterm target for a G. P N and and also I think kind of a subset to that question is how it investment and two L. M impact us from a P&L standpoint. Thank you so much.
I'll take the first part on the subscriber growth and perhaps Shirley can add a bit of comments around gross margin.
<unk>.
Our subscriber growth has been following a secular trend.
So irrespective of Covid.
Covid irrespective of reopening we continue to see a secular trend behind the subscriber growth.
Our focus is much more on subscription revenue as a whole.
<unk> is driven by both paying user growth as well as arpus.
And Barry you mentioned offline in more offline activities.
I think bear in mind that that also benefit us in the form of advertising monetization as Katherine mentioned because we.
We organized.
<unk> number of offline music events, and we generate a meaningful amount of salt sponsorship advertising revenue as a result.
During the fourth quarter.
That part of the business actually saw some temporary impact because of Covid.
Now with the reopening and with more offline activities, we actually expect there to be a positive impact to the sponsorship advertising revenue as a result.
So that would help.
Access the second growth driver to our online music.
Revenue in addition to subscription.
And.
That's on a gross margin of one music lately you can have.
At the same gross margin brita about came to the.
Spotify and Oh, Oh, a gross margin of our company. We believe in 2023 module will be increased and higher than <unk> in the 2022 and then in the long term of course much of our talking about B C.
Five percentage.
I've mentioned that in our IPO.
Thank you and we will take our last question today from checking John from TICC shifting your line is open please <unk> yourself and it's all I have thanks.
Thanks Burton.
And one more question on labels College cooperation.
And today, we announced that Xiaomi richa governmental HGV RMB mimetic, so can management give us more color on this is Shane I'll lay bullshit collaboration and how does it affect our gross margin. Thank you.
Yeah, Tenuously prefer the Congress for many Missouri, both in assets domestically and also internationally.
We anticipate that the IP rate in your trial F&B CEO to drive the healthy development of the Chinese industry. So currently we provide the most comprehensive clinical accuracy and also the best top bench of music content for users in China.
Under in the continuing in a long term relationship we will continue to work with the news of late both in content Co productions and also with our leading news.
With our leading technologies that can help us to do with the promotions of the music in a better manner.
Besides we are also focusing on some of the live event.
The Chinese market is now we opened we are seeing that there is a lot of life and then opportunity to come out so far here in July .
<unk> doing extremely good quality music shows and last year most of them are online, but this year, we were going to have more offline events.
Partners with our limited labels tonnage and we are expecting that we can have.
More so like the top tier artists concerts.
Music festivals and also some life housing benefit as well. So I think that we have demonstrated a really good long term partnership with most of the music labels over the road and we are as a trustworthy and also the people to partner with them. So we haven't.
It took a more in depth cooperation the coming in the future.
Thank you.
Okay.
I will now turn over the call to our host Mr. Tony <unk> for closing remarks.
Well. Thank you everyone for joining us today. If you do have further questions. Please feel free to contact our IR team. This concludes today's call. Thank you and talk to you next time.