Tencent Music Entertainment Group

NYSE:TME

Earnings Call Analysis

Tencent Music Reports Strong Q2 Financials with Growth in Online Music Services

Tencent Music Entertainment experienced a robust second quarter in 2024, driven by a 28% year-over-year increase in online music revenues, reaching RMB 5.4 billion. This growth counterbalanced a 43% decline in social entertainment revenues. The company added over 10 million music subscribers in H1 2024, with ARPPU climbing to RMB 10.7. Net profit soared by 33%, hitting RMB 1.8 billion. Monthly music ARPPU rose by 10.3% compared to last year. Operationally, Tencent focused on expanding premium SVIP memberships and improving sound quality to foster user retention. The company's strong advertising performance also contributed to a higher gross margin.

Strong Profit Growth

In Q2 2024, our effective monetization of online music services and operational efficiency management led to robust financial results. IFRS net profit surged by 33% year-over-year to RMB 1.8 billion, while non-IFRS net profit rose by 26% to RMB 2 billion. Despite a 2% year-over-year dip in total revenues to RMB 7.2 billion, due to a decline in social entertainment revenue, our online music revenue grew by 28%, reaching RMB 5.4 billion.

Music Subscriptions at the Forefront

Music subscription revenues experienced substantial growth, hitting RMB 3.7 billion, marking a 29% increase year-over-year and a 3% rise sequentially. The average revenue per paying user (ARPPU) climbed to RMB 10.7 from RMB 9.7 last year. The number of paying users rose by 18% year-over-year to 117 million, with a net addition of 3.5 million paying users in the last quarter alone.

Content and Member Privileges Enhancements

The enrichment of content offerings and enhanced member privileges, such as the introduction of Audio 2.0 on QQ Music and Viper Ultra Sound on Kugou Music, have made our products more attractive. The SVIP membership program continues to be a strategic focus, boosting long-term ARPPU growth.

Advertising and Social Entertainment Revenue

Advertising revenues grew significantly year-over-year, driven by ad-supported features and mid-year shopping festival promotions. Unfortunately, social entertainment services and other revenues saw a notable decrease of 43% year-over-year to RMB 1.7 billion. We continue to monitor market conditions and adjust our offerings accordingly.

Operating Efficiency and Profit Margins

Gross margin for Q2 2024 reached an impressive 42%, a 7.7 percentage point increase year-over-year. This was driven by various factors including the expanded paying user base, improved ARPPU, increased advertising revenues, and the ramping up of our own content production. Operating expenses were RMB 1.1 billion, accounting for 16% of total revenues and showing a decrease from 17.2% in the same period last year.

Guidance and Future Outlook

Looking forward to the second half of 2024, we remain confident in maintaining positive revenue and profit growth. With over 10 million net subscriber additions and an ARPPU increase to RMB 10.7, we expect continued solid growth driven by both subscriber additions and ARPPU expansion. Operationally, we will focus on user retention and increasing ARPPU through initiatives such as our SVIP plan, which offers enhanced sound quality and exclusive content privileges.

Investments and Innovation

To sustain our growth, we are committed to investing in high-quality and original content production, as well as innovative technologies to enhance user engagement. These efforts underpin our strategy to offer a richer, more compelling service to our diverse user base.

Earnings Call Transcript 2024-Q2

[Millicent T., executive]

Good evening, and good morning, and welcome to Tencent Music Entertainment Second Quarter 2024 Earnings Conference Call. I'm Millicent Tu, Head of IR. We announced our quarterly financial results earlier today before the U.S. market opened. The earnings release is now available on our IR website and via PRNewswire services.

During today's call, you will hear from Mr. Cussion Pang, our Executive Chairman; and Mr. [ Ross ] Liang, our CEO, who will share an overview of our company strategies and business updates. Then Ms. Shirley Hu, our CFO, will discuss our financial results before we open the call for questions.

Before we continue, I refer you to the safe harbor statement in our earnings release, which applies to this call as we'll make forward-looking statements. Please note that [ we'll ] discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in our earnings release and filings with the SEC.

All participants on mute at this time. After management's remarks, there will be a Q&A session. I'm pleased to [ be ] [ advised ] that today's call is being recorded.

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

[Kar Shun Pang, executive]

Thank you, Millicent. Hello, everyone, and thank you for joining our call today. We are excited to report another solid quarter underpinned by a 28% year-over-year growth in online music services as well as a 26% year-over-year growth increase in adjusted net profit. The outstanding net addition of over 10 million music subscribers in the first half of 2024, coupled with a rise in ARPPU, once again demonstrated our strong ability to bring new brands within China's streaming landscape. We remain optimistic about the music industry's long-term potential and are committed to our mid to long-term goals.

In the meantime, we are consistently adjusting ourselves to better adapt to changing external environment, evolving user mindset and our different business development stage to continuously innovate and achieve sustainable growth at a healthy pace and with the right balance.

Let me now share some recent highlights on our [ expansive ] content ecosystem, which is getting increasingly rewarding. First of all, we continue to expand and reinforce partnerships with artists and record labels to enrich our music library and to bring the best content available to our users. Our long-standing and extensive win-win partnerships with music labels enable us to secure more content-centric [ privileges ] for users, including but not limited to early access to the latest hits.

This quarter, we extended our collaborative licensing agreements with some well-known Chinese bands, such as Sodagreen, [ suda lu ] and a top Korean label, CJ ENM, which represents the highly popular K-pop boy band, ZEROBASEONE. All these contract renewals include a 30-day head start pre-phase of their new songs. Overall, we are pleased to see that such pre-phase has effectively improved membership's conversion and engagement.

Second, we continue to explore more engaging ways for users to enjoy music. During the quarter, we combined the proprietary fan-artist interaction benefits, such as live video calls, digital album releases and it effectively [ increased ] sales. Shenself, [Foreign Language] the new digital album of a popular Chinese singer, Zhou Shen, is a recent success. It features artists [ in the ] in-app declarations and virtual souvenirs and exceeded 1 million copies in sales within 3 months of release, ranking as a top seller year-to-date on our platform.

We have also seen solid digital album sales results from other artists, such as Chinese singer, Lay Zhang, [ Zhang Xin ], and the popular K-pop girl group, aespa.

Third, as the demand for offline live performances continues to surge, we stepped up our efforts to host concerts and music festivals with more value-added services. In July, we host our upgraded flagship annual event, TMEA, Tencent Music Entertainment Awards 2024 in Macau. We [ brought ] in our horizons this [ time ] featuring A listed domestic singers and rising musicians as well as international idols. Notably, over 60 [ household ] names, including Zhou Shen, [ Yuan Yawei ], [indiscernible], [ Zhang Liangying ], and the K-pop girl group, BABYMONSTER, performed at this year event.

TMEA 2024 sparked billions of social media buzz, showcasing our [ elevated ] industry input. We are also bolstering our capabilities to organize large-scale concerts for top [ noted ] singers. For instance, we hosted TIA RAY's landmark concert tour and helped her [ all ] achieve a milestone of over 10,000 attending fans. We are happy to see a significant year-over-year growth in our revenues from offline performances in the second quarter.

This quarter, as a new initiative, we customize the event-themed artist merchandise for Karen Mok, [indiscernible], concerts [ have ] started sales on our platform. We also provide our subscribers with member-only access to the online premier concerts of a popular Chinese band, [indiscernible] as a remarkable benefit.

Fourth, our self-produced content continue to win popularity and boost user conversion. We strategically leveraged our extensive resources [ as ] advantage in TV, [ films ], [ IPs ] and artists to elevate production, promotion and success of our self-produced content. For example, we invited popular artists, [indiscernible] to form the original soundtracks for Tencent [ video ], blockbuster TV series, [ Joy of Life 2 5] and The Tale of Rose, []. This self-produced songs master over 200 million streams in total on our platform within 3 months of [ release ], ranking top 3 on OST charts [ till ] today.

In addition, our self-produced pop songs, Heard of You, [Foreign Language], and Who Am I, [Foreign Language], went viral on short video platform soon after they had featured on the national music variety show, The Treasured Voice Season 5, [Foreign Language], which significantly boosted [streams ] on our platform. Our high-quality original content combined with unique fan-artist interactions [ fulfills ] diverse music [ tastes ] and entertainment needs, bolstering an increasingly dynamic content ecosystem.

We always strive to inspire society and share our love through music. In the second quarter, we jointly launched another Little Red Flower Concert with Tencent Charity, partnering with volunteer artists and teachers to support the local education for children in rural areas through online and offline performances. We amplified [ its ] online reach and social influence this time by deeply collaborating with Weixin Video Accounts to live stream the concerts.

In summary, we record a solid second quarter performance, finishing the first half of the year on a strong note, both operationally and financially. We believe the power of our platform, the value of premium music content and expanding members' privileges will have a snowball effect, leading to a healthy and sustainable growth. Guided by our long-term view, our goal is to lay a strong, solid foundation for future progress and to promote a [ vibrant ] win-win development of the industry.

Now, I would like to turn the call over to Ross for more details on our overall platform development. Ross, please go ahead. Thank you.

[Liang Zhu, executive]

Thank you, Cussion. Hello, everyone. Our focus on user-centric innovation has effectively increased the music subscribers and enhanced retention during this quarter. This reflected our ongoing efforts to advance our products and services, especially the focus on the high-value subscription plan, the Super VIP membership. Our approach to continuously delight users keeps us [ at ] the [ forefront ] of the streaming industry.

A few quarterly highlights to share. First, we further enhanced sound quality and the [ effects ] as part of our premium offerings. For example, QQ Music upgraded its self-developed audio 3D 2.0, [Foreign Language] and the Kugou Music launched the Viper Ultra Sound, [Foreign Language], all featuring ultra-clear sound quality. We also presented users with new ways to enjoy the music, including sound quality for certain [ high end ] [ headphones ] and playlists with best-in-class audio quality. This improvements [ have ] [ led ] to not only higher user adoption, but also increased music consumption.

Second, we meet the users' personalized needs. We have launched a series of benefits, including customized [ players ] and the [ ringtones ] based on well-known IPs and artists. These features resonate with users' desire for self-expression and proved effective in user [ conversion ] and retention.

Third, our premium SVIP membership is gaining more traction, employing a holistic and seamless listening experience across various devices and multiple scenarios. SVIP integrates music with long-form audio and online karaoke services, always superior sound quality. It wins the hearts of our active members with comprehensive online and offline privileges, such as priority access to digital albums and the ticket booking for live music events, including our TMEA. We are pleased with the early progress of SVIP membership adoption and are looking forward to sharing more exciting news down the road.

Next, our more personalized music discovery and optimized listening experiences. A few key [indiscernible] to spotlight. We upgraded our recommendation middleware across our music apps, enabling users to discover songs better [indiscernible] to their testing. During the quarter, nearly 40% of streams were generated from recommendations. With our evolving large audio models, we continue to import more essential music distribution and the discovery of new and long-tail [ content ].

We also elevated our platform's overall experience with AIGC applications. For example, we introduced a data saving, AI-enhanced SQ Lite Mode, [Foreign Language]. We are preserving superior sound quality and Kugou Music virtual DJ features and QQ Music 3D [ avatar ] [ offer ] users a sense of companionship. On the visual side, we refined our streaming UI design to offer a more inviting and [ effortless ] experience.

For example, QQ Music launched [ industry first ] multi-device [ matching ] playback feature and a compact, half-screen music player. Users can now enjoy seamless music streaming when [ searching ] across different devices and applications.

Last but not least, we further expanded our rewards program to include more benefits, such as artist merchandise. Its growing popularity among users has effectively boosted music content consumption and increased user engagement. To sum up, all the above efforts contributed to a high stickiness on our platform, as reflected by both year-over-year and quarter-over-quarter increases in time spent per user in the second quarter.

Moving forward, we are committed to offering more [ competing ] services that better align with needs of diverse music lovers, [ ultimately ] expand our paying user base and increasing user loyalty.

With that, I would like to turn the call over to Shirley, our CFO, for a deep dive into our financials.

[Min Hu, executive]

Thank you, Ross, and greetings to everyone. I will now turn to our financial results. Our effective monetization of online music services and operational [ efficiency ] management continued to drive strong financial results in the second quarter of 2024.

IFRS net profit increased by 33% year-over-year to RMB 1.8 billion, and the non-IFRS net profit rose by 26% to RMB 2 billion. Our total revenues were RMB 7.2 billion, down by 2% year-over-year. Revenues from online music service had strong growth, largely offsetting the decline in revenues from social entrainment and other services.

In the second quarter of 2024, our online music revenues increased by 28% to RMB 5.4 billion on a year-over-year basis. This increase was driven by the strong expansion of our music subscription revenues supplemented by growth in advertising revenues as well as growth in revenues from offline performances.

Music subscription revenues in the second quarter of 2024 reached RMB 3.7 billion, marking a 29% increase year-over-year and a 3% rise sequentially. Monthly ARPPU was RMB 10.7, up from RMB 9.7 in the same period last year. The number of online [ music ] paying users were 117 million, representing an 18% increase year-over-year with quarterly net adds of 3.5 million paying users. With a large scale of music subscribers, our focus is to manage music subscription revenue growth with the right balance and [ pace ] to achieve growth in both subscribers and monthly ARPPU.

Our enriched content offerings and enhanced member privileges, such as QQ Music introducing Audio [indiscernible][ 2.0 ] and Kugou Music rolling out to Viper Ultra Sound have made our products more attractive and improved user stickiness. And our SVIP membership program is our strategic focus operationally and will lead to ARPPU improvement in the long run.

Advertising revenues also had a strong year-over-year growth, primarily due to the growth in ad-supported advertising. We provided more attractive interactive features to our users, which helped improving [indiscernible] [ reach ] for our ad-supported advertising. Promotions for the 618 [ mid-year ] shopping festival also contributed to increased advertising revenues.

Moreover, our interactive rewards program opened new avenues for commercialization in advertising for our users. Additionally, we continued to innovate and diversify our product offerings and advertising for mass, while [ deepening ] the integration of brand sponsorships with our offline performances.

Social entertainment services and other revenues were RMB 1.7 billion, down by 43% year-over-year. We will continually monitor market conditions, the competitive landscape, regulatory environment and our product features for social entertainment services.

Our gross margin for Q2 reached 42%, marking an increase of 7.7 percentage points year-over-year due to the following factors. First, the expansion in paying user base and improved monthly ARPPU for online music as well as increased advertising revenues had a favorable impact on our gross margin.

Second, we have been focused on ROCE as a key metric to manage our costs.

Third, the ramping up of our own content continued to [ help ] improve our gross margin.

Lastly, we have enhanced monetization of [ recent ] membership and advertising within social entertainment, which positively impact our gross margin. All above factors have collectively enabled us to move to a healthy margin.

Moving on to operating expenses, in the second quarter of 2024, they amounted to RMB 1.1 billion, representing 16% of our total revenues compared with 17.2% in the same period of last year. Selling and marketing expenses were RMB 210 million and remained relatively stable comparing with the same period of last year. We continue to maintain ROI-focused approach for promotion [ expenses ] and will continue to invest in areas such as online music with a long-term growth perspective as well as in content promotions.

General and administrative expenses were RMB 938 million, down by 10% year-over-year, primarily driven by lower employee-related expenses. Our effective tax rate for Q2 was 19.4% compared to 12.2% in the same period of 2023. This increase was primarily attributable to the accrual of withholding tax of RMB 111 million related to the earnings to be remitted by our PRC subsidiaries to offshore entities.

Additionally, changes in [ preferential ] tax risk for certain entities also impact our effective tax rate.

For Q2 2024, our net profit and net profit attributable to equity holders of the company were RMB 1.8 billion and RMB 1.7 billion, respectively. Non-IFRS net profit and non-IFRS net profit attributable to equity holders of the company were RMB 2 billion and RMB 1.9 billion, respectively.

Our diluted earnings per ADS reached a record high this quarter at RMB 1.07, up 30% year-over-year. Non-IFRS diluted earnings per ADS increased to RMB 1.19, up 23% year-over-year. These results underscore our robust financial performance, enhanced operating [ efficiency ] and the beneficial impact of our share repurchase program. As discussed during Q1 2024 earnings call, we declared a new cash dividend for the fiscal year 2023 in May and have made a payment of USD 212 million in June 2024.

As of June 30, 2024, our combined balance of cash, cash equivalents, term deposits and short-term investment were RMB 35 billion as compared with RMB 34.2 billion as of March 31, 2024. This combined balance was also affected by changes in the exchange rate of RMB to USD [ at ] different balance [indiscernible] [ base ].

Looking forward, we will continue to focus on high-quality growth in our music business, such as expanding SVIP membership as well as operating [ efficiency ] improvement. We will continue to invest in high-quality content, original content production as well as innovative technologies to further improve user engagement and enhance user experience.

This concludes our prepared remarks. We are now ready to take your questions.

[Millicent T., executive]

Thank you, Shirley. [Operator Instructions]. [ For ] the benefit of all participants on today's call, please limit yourself to one question. And then if you have additional one, please re-enter the queue. If you ask questions in Chinese, please, can we ask you to repeat in English.

And the first question comes from the line of Citigroup, Alicia.

[Alicis a Yap, analyst]

I'm going to ask in Chinese first, [ then ] I translate myself. [Foreign Language] So can management share with us past the second half this year, second half '24 outlook for the top line growth, profitability trend and also the online music growth rate? Will the net add or the ARPPU to be the more important growth driver?

[Kar Shun Pang, executive]

Okay. Thank you so much, Alicia, for your questions. And our view and outlook for the year 2024 actually remains unchanged, which means that we are expecting to achieve a healthy and positive revenue and profit growth this year.

For the online music businesses, as mentioned, we have over 10 million net subscriber adds in the first half of 2024, and also the ARPPU has reached RMB 10.7, up from RMB 9.7 in the same quarter last year, which laid a very good foundation for us, and we are confident that our online music growth will continue to be solid, fueled by both of the net adds and also the ARPPU expansion.

So over the past few quarters, our net adds comes in much better than expected primarily due to the accelerated increase of the paid content and also the effective marketing strategies. So [ as ] the pace of the net asset, we will return to a normal level and grow in a steadier pace, we will be more focusing on growing the ARPPU, which [ expected ] to have a faster growth than the net adds.

One of the good news that, we are pleased with seeing that our [ enriched ] privileges and holistic service offerings have started to gain more popularity among our existing users. So our SVIP plan has very good momentum and which gives us confidence on the ARPPU growth in the future. So as a result, in the near term, I think that the net adds in the second half of 2024 will be smaller compared to the first half, but the ARPPU will expand as a more noticeable case moving into the 2025, which help to further improve our margin as well.

In terms of the advertising revenue, I think it's expected to have a good performance in the coming quarters due to the growth in the [ ad-support ] advertising [indiscernible] and also the sponsorships of the offline event, et cetera.

For the social entertainment side, we expect to have continuous challenges from the competition, macro and other factors. But with this contribution to our total revenue becomes much smaller, impact will be largely offset by the solid growth from online music business. So in terms of the profitability, our strategy is to focus on the high-quality growth in providing effective -- and proven to be effective, and we are now expected a slightly better full year net profit than the previous forecasted.

[Millicent T., executive]

And the next question comes from Lincoln Kong from Goldman Sachs.

[Lincoln Kong, analyst]

Congrats on the solid quarter. I just want to follow up in terms of the net adds. In the ARPPU, I think currently you mentioned we will have a more meaningful increase into the second half. So could management just elaborate a bit more on, in what way we would plan to do that in terms of price hike, promotion, reduction or can we elaborate a bit more in terms of the Super VIP progress or other high value-added service here? What kind of the magnitude of the increase we expect ARPPU and would that result in any sort of higher trend of the members because of this increase, [ I mean ], this overall weak backdrop?

[Millicent T., executive]

[Foreign Language].

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Thank you for your question. Yes, indeed, I think the key driver of the future ARPPU growth in H2 of this year truly rest with the SVIP plan we are going to launch. In the SVIP plan, besides providing the content privilege, we also hope that we're going to offer other privilege, providing higher value to our members.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] [ We're ] talking about the key drivers of SVIP business. There are 3 points. The first point is that our existing digital outbound business allows SVIP to enjoy the [ start ] [indiscernible] [ listening ] privilege. This can allow us to engage the high-value customers. If our SVIP customer, they'd like to hear certain music [ head of the start ], that will be a great contribution to the value of the members.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Well, my second point to that, for those high-value customers who SVIPs, they also pursue higher and better sound quality and sound effect. And we can also say that from our actual operational data, they also have a very high adoption rate for the high-quality sound and high-quality sand effect. This is also what we are going to do in the near future, continue to upgrade the sound quality and sound effect.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Well, from the application perspective, in H1 of this year, we launched the Dolby Atmos, and we also launched the Audio 3D 2.0. And in July, we just launched [ ETS ]. All those very [ premiere ] sound quality will help to further contribute the value to our SVIP members.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] But at the same time, regarding the content creation for SVIP, we make sure they can enjoy the long-form audio content in their existing privilege. We provide them the [ premiere ] service. In other ways, they can enjoy the seamless listening experience from device-to-device. In other words, for SVIP on TME platform, they can enjoy the [ mutant ] content, the long-form video and also enjoy the seamless listening experience from device-to-device.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] You can say that for SVIP, the membership fees is around RMB 40 per month and which is actually allow us to have more room to provide better benefits and more experience to the SVIP compared with normal subscribers.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Where at the same time, for our paying users, they are still the majority of our user base. We're going to continue to refine the content and the operation and making sure they're going to have a steady [ growth ] within [indiscernible].

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] I believe, in next quarter's earnings call, we're going to share with you more data and more strategies within SVIP.

[Operator]

And the next question comes from Alex Poon of Morgan Stanley.

[Chun Poon, analyst]

[Foreign Language] My question is related to Super VIP. How should we think about the penetration as a percentage of total paying user, the trajectory in the coming few years?

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Thanks for the question. And I have to say that for SVIP and because -- as I mentioned in the previous answer, because they ever upgrade the sound quality, the sound effect, along with other drivers, we will be able to maintain a relatively fast growth of the SVIP members. Where at the same time, I have to say, we start SVIP almost from 0. So till now, we see the growth is pretty satisfactory. But I think we still need to give some time until we disclose further information to you.

What I can share with you is that SVIP, the growth is still in line with our expectation. We're [ look ] [ into ] the future, as you just mentioned. Those used to be RMB 8 a month user, has already been converted into Kugou user and QQ Music paying user, and they are now a majority of our user base. This is what we see now. We are looking forward to the next 10 years or in the very long-term, I think maybe SVIP were going to be our future driver of the growth trajectory.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] We hope that we can still maintain a steady and solid growth of SVIP, but we're going to disclose the corresponding data in due time.

[Operator]

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

[Lei Zhang, analyst]

[Foreign Language]. Congrats on the solid quarter. I want to follow up on membership net adds trend, is 3 million [ per ] quarter [ you hold ], I think we entered a steady growth stage, and how to look at our long-term paying user penetration?

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Thanks for your question. And I think Cussion has already shared in his remarks. And when we look into the [ graph ], we hope that in the near future the growth would be much better than what we have on net adds. But to be sure, in H1 of this year, after a few holidays we see the top [ end ] net adds full growth, but in H2 of this year, we're still [indiscernible] a very solid growth.

And from the operational strategy perspective, we still would like to maintain a good growth of [indiscernible], where naturally grow the net adds. But the most important thing we have to keep in mind is always the revenue and the profit. We do hope that the revenue and the profit, as we discussed with all of you, would hit our full year target. If we will be able to do so, then we will be able to continue to grow our subscriber base in a quality approach. Then you can expect what the result might be.

Well, from the operational strategy perspective, I think we have already made it very clear. We would like to maintain a steady good growth of our user base. Besides paying attention to that net adds, we should also pay attention to the user retention because only by having the high-quality growth of the subscriber, we will be able to maintain a very strong retention of our high-quality subscribers. That will help us to further grow our business substantially.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Well, regarding the subscriber penetration rate, we still would like to maintain what we used to promise to the market. And we also have every confidence that we're going to hit our mid and long-term subscriber number. Well, regarding H2 of this year, what we're trying to do is that besides growing our subscriber base, we will also continue to intensify the sales and the promotion strategy, making sure we will be able to engage new customers and then to grow our subscriber base even higher.

And this is also what I mentioned. In the long-term, we are still very confident to hit our subscriber number and hope we will be able to honor our commitment to the market.

[Operator]

The next question comes from Wei Seow from UBS.

[Wei Seow, analyst]

[Foreign Language] My question is about our profitability and margin trend. Just wondering, can management share how should we think about the pace of gross margin expansion in the second half this year and next year? And what's the level of the gross margin level that we might be achieving in the medium-term? For the net margin, how should we think about any further room for cost optimization as well as the net margin trend going forward?

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] You can say the gross margin and the net margin of the company continued to grow for the past 9 quarters consecutively. So overall speaking, we're still very confident we're going to have a good performance on the GP margin and net margin.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Regarding the growth of the GP margin, on one side, from the revenue perspective, you continue to see the subscription business and the advertising business, the revenue continued to grow. But at the same time, in the near future, if our SVIP program could be well executed, it's also going to be another positive contribution to our GP margin.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Another point is that from the cost perspective, we continue to be committed in the music industry, and we made a heavy investment in the industry. We also maintain very close cooperation with the copyright holder, where you can say that those substantial investments were yield with very fruitful results. And we also did the [ ROCE ] management over the copyright and IT, continue to improve the utilization rate and efficacy.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] [ A third point in ] that, the contribution from our self-produced content continue to grow, which will also positively benefit our GP margin.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] [ A fourth ] point, even if we see a slight decrease on the social business, but still [ are raising ] advertisement as well as the -- not -- the membership number continue to grow, which will also benefit the overall GP margin.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] We are specifically talking about the operational cost. If we take a look at the sales expense, you can say that for the past few quarters, we will be quite self-disciplined and well-managed with the sales expenses, which also show very good result.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] At the same time, we foresee for the market expenses for the year and the total contribution from the market expenses to the revenue would maintain the same as what we saw last year.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] But specifically, if we take a look at the G&A expenses, if you take a look at the H1 performance of this year, you can say still we registered a small decline compared with last year.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] We will continue to improve our operational efficiency and the expenses management efficiency. In other words, for this year, we believe the G&A expenses ratio to the total revenue would be lower than what we saw last year.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] So overall speaking, we believe, no matter for the GP margin or the net margin, we're going to have a good improvement compared with what we saw last year.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] But at the same time, the net profit and the net profit margin, the growth would be better than the GP margin.

[Min Hu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] In the longer run, as our online music business continue to grow steadily and positively, we also have every confidence to the future growth of the GP margin and the net [ margin ].

[Millicent T., executive]

And the last question comes from Thomas Chong from Jefferies.

[Thomas Chong, analyst]

My question is about macro headwinds. Given that we have been seeing macro uncertainties these days, how should we think about the impact to our different business segments, subscription, advertising and social entertainment?

And my second question is about competition. Are we actually seeing any changes in the competitive landscape? [Foreign Language]

[Kar Shun Pang, executive]

I'll take the first question regarding the macroenvironment. Thanks -- speaking, the downturn in the macroenvironment definitely will bring some challenges to different aspects of the business. But I think that for the TME's online music business is -- frankly speaking, is really value for the money, so which is -- frankly speaking is a really relatively low cost entertainment that is very affordable to all users. So you can see that of the subscription business for us, the online music what -- do not have very much impact by the macroenvironment.

In terms of the advertising, we are also doing a great job in the 2 quarters. Even though some of the advertisers may have some impact in spending on their advertising dollars, but we are seeing that we are still doing a good job, especially in some of the sectors that is related to, for example, tourists and also [ event ] related to some of our offline concerts sponsorships. So I think that the advertising besides the sponsorships, we're also doing some of the new formats of advertising as well, so which can help us to further grow our advertising business in a very good momentum.

So I think that the overall macroenvironment do not have such a big impact to TME. And still, we have very confidence for the long-term at healthy goal of our business.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Respond to your second question regarding the online music, especially the competition landscape. I think everyone has been clear. We still have the players, or those players [ will ] usually [ stay ] in this market.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] Well, regarding the competition, you can see that for this year, it marks our eighth anniversary of starting the business. So our focus is still to do our right business -- to do the business right. We are still going to follow our strategy of having the content and the platform at the same time.

[Liang Zhu, executive]

[Foreign Language].

[Millicent T., executive]

[Interpreted] So we firmly believe, as long as we continue to improve our content and improve our competition capacity, where at the same time to further refine and optimize the user experience, we're still going to keep our position in this market.

[Millicent T., executive]

Okay. Since there are no further questions in the queue, I would like to wrap up the call. Thank you, everyone, for joining us today. And if you have any further questions, please feel free to reach our IR team. And this concludes today's call. And thank you very much again, and look forward to speaking to you next quarter. Thank you, and goodbye.

[Kar Shun Pang, executive]

Thank you. Goodbye.

[Liang Zhu, executive]

Thank you.