Tencent Music Entertainment Group

NYSE:TME

Earnings Call Analysis

Record Profitability and Growth Outlook

The company reached historic profitability with a net profit of RMB 5.2 billion and non-IFRS net profit of RMB 6.2 billion. In 2023, they foresee robust growth in the music industry, focusing on effective monetization, operational efficiency, and expansion into new areas like AIGC technology. The online music business saw a 39% year-over-year growth in revenue from subscriptions, reaching 107 million monthly subscribers. The user profile is concentrated in China's Tier 1-3 cities, predominantly aged 20-30. They are fully integrating long-form audio into their platforms, aiming to bolster its in-car market presence and dubbing 2023 the 'year of transformation' for this segment. There's an expectation of rising gross margins in Q1 2024, after a 5.3% year-over-year increase to 38.3% in Q4 due to rising subscription and advertising revenues, along with efficient content cost management.

Driving Growth and Prosperity in the Music Ecosystem

At the close of 2023, Tencent Music Entertainment Group (TME) has reached pivotal milestones indicative of significant growth and transition within the music industry. Amidst this time of transformation, subscriber numbers soared to the 100 million mark, bolstered by a robust addition of 18.2 million subscribers over the year, a substantial rise from the previous year's 4.3 million. Encouragingly, early into 2024, this trend shows no sign of abating, with the momentum in subscriber growth continuing. Impressively, the fourth quarter saw a faster-than-expected revenue surge in the online music sector, evidenced by a year-over-year increase of over 20% for both paying users and average revenue per paying user (ARPPU), reaching RMB107 million and RMB10.7 million respectively.

Strengthening Content and Expanding Offerings

The expansion of TME's music catalog to over 200 million tracks stands as a testament to its commitment to comprehensive content offerings. Partnerships with industry giants like Universal Music Group ensure access to an extensive and growing catalog, while collaborations with labels like those behind the 'Legend of Phoenix' enrich the music selection further. TME's forays into self-produced and co-produced content have differentiated their offerings and bolstered user popularity, particularly notable in their showcase of 10 songs during the China Media Group 2024 Spring Festival Gala. Live performance businesses flourished, diversifying content-related offerings and engaging users in innovative ways, such as with artist merchandise for K-Pop fans, indicating a robust year-over-year growth in revenue from such merchandise.

Leveraging Technology and Infrastructure for User Experience

In pursuit of an exceptional user experience, TME has introduced upgrades across its platforms, such as a revamped in-car app for Tesla and a 3D music library from Kugou Music designed for closed cabin environments. Underscoring this, both QQ Music and Kugou Music hit record shares of music streams attributed to these improved recommendations in the fourth quarter. Additionally, advancements in AI and generative content (AIGC) applications permeate various aspects of music streaming and creation, personalizing the listening experience and supporting music creation, ultimately driving up user engagement and conversion.

Substantiating Financial Growth and Shareholder Confidence

TME's financial accomplishments for the full year 2023 manifested in total revenues of RMB 27.8 billion, with a robust 39% increase in revenue from online music services driven by growth in music subscription and advertising revenues. Gross margins have seen an appreciable lift to 35.3%, and diluted earnings per ADS have achieved an all-time high. The company's resilience is also evident in their cash balance, which rose to RMB 32.2 billion. Moreover, TME executed a share repurchase program, buying back 25.3 million ADS for a total cash outlay of approximately USD 175 million.

Optimism for Continued Growth and Efficiency Gains

Looking ahead, TME exudes confidence in the music industry's potential and commits to pursuing effective monetization and operational efficiency, while also focusing on high-quality content, original productions and groundbreaking technologies like AIGC. The company's attention is on achieving sustainable growth and delivering commendable returns to shareholders.

Demographic Insights and Long Audio Strategy

Analyzing TME's user base, which exceeds 100 million, we notice a demographic that mirrors China's population structure, with the most active users aged between 20 to 30 years old. Predominantly situated in Tier 2 and Tier 3 cities, these users present a vast potential for growth. Moreover, TME is paying close attention to the integration of long audio within its music platforms like QQ Music and Kugou Music, identifying it as a strategic move to mine and monetize content effectively.

Gross Margin Uptick and Future Expectations

The uptrend in TME's gross margins, which grew to 38.3% in Q4 2023, is attributed to robust music subscription revenue, surging advertising revenue, and the success of ramping up sales of owned content, combined with strategic ROI-focused management of content costs. Looking into 2024, TME anticipates continued gross margin expansion, albeit at a moderated pace compared to the latter quarter of 2023.

ARPPU Growth and Balanced Management

TME has seen its ARPPU rise by 16% year-over-year, complementing a significant increase in paying users. Management credits these achievements to a balanced approach to subscription revenue growth and ARPPU expansion, a strategy they will meticulously continue throughout 2024, monitoring and directing to maintain a harmonic progression between subscriber numbers and per-user revenue.

Earnings Call Transcript 2023-Q4

[Millicent T., executive]

Good evening, good morning, and welcome to Tencent Music Entertainment Group's Fourth Quarter and Full Year 2023 Earnings Conference Call. I'm Millicent [indiscernible], Head of IR at TME. We announced our quarterly financial results today before the U.S. market opened. An earnings release is now available on our IR website and via newswire services. Today, you'll hear Mr. Kar Shun Pang, our Executive Chairman; and Mr. Ross Liang, our CEO, who will share an overview of our company strategies and business updates. And then Mrs. Shirley, our CFO, will discuss our financial results before we open the call for questions. Before we continue, I refer you to our safe harbor statements in our earnings release, which applies to today's call as we make forward-looking statements. Please note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in the company's earnings release and filings with the SEC. At this time, all participants are muted. After management's remarks, there will be a Q&A session. And please be advised that today's call is being recorded. With that, I'm pleased to turn the call over to Kar Shun, Executive Chairman of TME, Kar Shun?

[Kar Shun Pang, executive]

Thank you, Millicent. Hello, everyone, and thank you for joining our call today. 2023 marked our artificial transition at TME. As we remain dedicated to driving growth and prosperity across our music ecosystem, while propelling the development of the entire music industry. Notably, our subscriber [indiscernible] subscribers hit the 100 million milestone in 2023. We added 18.2 million subscribers for the full year, up from 4.3 million in 2022, a compelling testament to our content leadership, platform value and high-quality user experience. These strengths drove consistent growth in music paying users and producer spend, anchoring our subscription avenues, accelerating year-over-year growth throughout the year. In particular, in the fourth quarter of 2023, online music record faster-than-expected revenue growth. Paying users and ARPPU rose by over 20% year-over-year to RMB107 million and RMB10.7 million, respectively. These results mitigate top line headwinds from the social entertainment business and recently contributed to a lift in net profit for the quarter and the full year. Entering 2024, we are also seeing strong momentum in subscriber growth in the first quarter. Such solid performance was driven by our powerful content and platform dual engines. Now I'd like to share these aspects of our content development efforts building this robust sustainable growth. First, by leveraging and deepening partnerships with domestic and international record labels, we consistently reinforced our competitive edge with an ever-growing selection of copyright music. As a result, by the end of 2023, we had over 200 million music and audio tracks on our platform. In addition, self and co-produced content further differentiated our offerings, increasing our popularity among users. Lastly, our rich foundation of content and relationships with label partners and empowered us to capture diverse opportunities across the music industry and refine content value. Let me walk you through some concrete examples. On content coverage and appeal, we recently renewed our multiyear partnership with Universal Music Group, UMG to bring users ongoing access to this fast and growing music catalog as well as a notable [indiscernible] quality upgrade with new streaming in Dolby Atmos at high-definition formats. [indiscernible] we recorded album 1989 [indiscernible] version, topped all trucks in the first week of its release on our platform in October. We also capitalized on the success and further promoted a fan engagement with a series of customized interactive song-guessing contests. In addition, we renewed the collaboration with [indiscernible] Records, the record label for renowned film, Legend of Phoenix, [indiscernible], deepening cooperation across headstart with song releases, physical albums and various artist-related services. We further enhanced our content appeal and leadership across Pop, Rock and Chinese [indiscernible] music genre, allowing us to better attract and retain them users. Next, on differentiated content offerings through in-house and collaborative creation. For mid- to long-term music content, we leveraged our wealth of multi-facet resources to enrich our offering and promote its prosperity. As of the year of 2023, over 480,000 [indiscernible] musicians had contributed over 3 million songs across multiple [channels] on Tencent musician platform. By providing comprehensive music training programs and other support, we effectively unlocked their creativity and nurtured their music careers. To accumulate our music assets in different genres, we are broadening collaborations with our strategic partners, artists. For these more mature artists, we boosted their popularity and advanced their career through increasingly tailor the support. For example, this quarter, we assisted Jazz singer [indiscernible] with her EP production and release, greatly rising her profile and strengthening the fan-artist relationships. Our in-house and collaborative content continue to grow from strength to strength. As a case in point, we had 10 songs showcased during China Media Group 2024 Spring Festival Gala. Our sale producers song, She, Bathing in the Light [indiscernible] was one standout. Such performance has generated massive shows of us, pushing user engagement on our platform and greatly evaluating -- quickly averaging our national influence. Another notable example is our self-produced hit song, [indiscernible], performed by our strategic partner artist [indiscernible] and covered by a popular Chinese cost top performer [indiscernible]. This song went viral totaling over 1 billion streams on our platforms as of March this year. Last but not least, on maximizing content value through innovation. We scaled up our live performance business through diverse event formats in 2023. Capitalizing on the resurgence of offline music events, we hosted a growing number of off-line user tools, festivals and live house performances to meet strong demand. In the fourth quarter, we hosted worldwide [indiscernible] DJ [indiscernible], 6 city electronic music tour in China. During the tour, we facilitated unique off-line merged online services encompassing interactive fan activities, access to merchandise, ticket sales and performance management, which in turn, boosted our industry influence. In the fourth quarter, we collaborated with high entertainment to launch a line of artist's merchandise for K-Pop fans such as 17s and 18s, diversifying our offerings of content-related behaviorals in various formats. As a result, revenue from artist merchandise recorded robust year-over-year growth. Moving on to our continued commitment to social responsibility. In the fourth quarter, in collaboration with local government agencies, we conducted a series of music events to promote cultural and economic development in ethnic minority regions. For example, we partnered with Tencent Charity to organize the 2023 Shenzhen, E&T Music festival, leveraging off-line music performances to help rejuvenate the rural economy with increased tourism. These initiatives not only brought in music reach geographically, but also expanded its positive impact across the industries, maximized its societal value. In conclusion, we are excited about the rising growth of the music industry for the years to come. Our powerful content and platform dual engines underpinned by online music's relatively [indiscernible] cyclical nature will enable us to capture more multi-faceted opportunities in 2024 and beyond. Now I would like to turn the call over to Ross for more color on our platform development. Ross, please go ahead.

[Liang Zhu, executive]

Thank you, Kar Shun. Hello, everyone. Let's now focus on execution resulted in a year of solid music growth and efficiency gains. Our platform's strength [indiscernible] into [indiscernible] and the content and our dedication to innovation were crucial in achieving this success all translating into enhanced music journeys for users. Now I would like to elaborate on 3 areas we prioritized to enhance users' experience. First, we expanded users' privileges. This included more industry-leading song quality selections, reached strong effects, more individualized players, new skins and additional interactive features. For example, we are most China's largest Dolby Atmos music library, offering users a more immersive listening experience. Currently, our Dolby Atmos music service is available on mobile, in-car and the PC platform, enabling a higher quality music experiences across more comprehensive use cases. Furthermore, we hosted our dedicated online MV premium event for [JCOs] new single, Christmas star, promoting closer fine-artist [indiscernible] and deepens our sense of community. Millions of [indiscernible] signed up for the event within 24 hours of the registration opening. We also launched an AI voice feature for this single to further boost user engagement. Thanks to this tailored activities and features, we have recorded a total of over 100 million streams from tens of millions of users. Second, we deepened connections with users through major upgrades across multi-device experiences. QQ Music launched a significant upgrade on mobile and PC in December last year, offering customized user interfaces and music players. As part of Chinese Lunar New Year's offerings, we introduced an annual music report feature that captures each user's unique music journey. Tens of millions of QQ Music users joined this annual review activity. This comprehensive report reflects the important personalized mutual bonds that we have built with users on [indiscernible] scale. They highlight how and when a user connected with us emotionally from facial moments captured at his favorite storage discovery and songs stream to [indiscernible]. We also enhanced in-car music entertainment services. For example, we recently upgraded QQ Music in-car app for Tesla, bringing users a more intelligent interface with better recommendations. Kugou Music, a newly added [indiscernible] 3D music library, [indiscernible] to its in-car offerings, especially optimizing all the performance in a closed cabin environment. Furthermore, we maintained our leadership in smart local coverage and recently renewed partnership with [Li Auto]. Last but not least, our technology infrastructure continued to play a vital role in content promotion, distribution and discovery. More accurate recommendations drove greater content consumption, effectively improving our user conversion and retention. We are pleased to share that in the fourth quarter, both QQ Music and Kugou Music recorded another record high share of music streams from the recommendations. Finally, AI. We continue to expand AIGC applications to enhance user experience and foster artists music creation while improving efficiency. On the product side, we integrated AIGC into music streaming and creation as well as [ seen ] and socializing, creating and increasing intelligence and personalized music experience for users and creators. For example, by enhancing QQ Music, AI enables listening together feature with additional virtual details. It's specializing in different music genres, we have made music discovery faster and more personal life. Furthermore, [ Melancon ] AI compensation to Venus supporting artists music creation using their original [indiscernible] promos or rhythm clips. Lastly, we integrated an AI thing function into Kugou and WeSing. Initial results suggest that the users are increasingly willing to pay for this function as it enables easy creation of song [indiscernible] and the languages. On the operations side, we are using AIGC to make our advertising more efficient and effective, [indiscernible] us to a better target and convert users. We are also leveraging RMs to better promote and distribute new songs. They help us analyze songs, audio characteristics and identify to content that resonates most with users. To sum up, we will continue to leverage technology to achieve more efficiency gains in the future. Our dedication and passion for serving hundreds of millions of music users will further inspire us to deliver more compelling music entertainment experiences seamlessly across a broader range of user cases. With that, I will 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 strong financial results for year 2023 reflected the success in effective monetization for our music services and operational efficient management with accelerating year-over-year growth in subscription revenues throughout the year. Our online music services delivered faster-than-expected revenue growth, which largely mitigated the revenue decline in social antenna service and others. IFRS net profit and non-IFRS net profit was RMB 5.2 billion and RMB 6.2 billion, respectively, up by 36% and 27%, respectively, on a year-over-year basis. In the fourth quarter of 2023, our total revenues were RMB 6.9 billion, down by 7% year-over-year, primarily due to a decline of revenues from social entertainment services and others. Our online music revenues in Q4 2023 increased by 41% to RMB 5 billion on a year-over-year basis. This surge was driven by the strong expansion of our music subscription and the advertising business supplementary by an increase in ad related merchandise sales. Delving deeper into our music subscription performance for Q4. Music subscription revenues reached RMB 3.4 billion, which is a 45% increase year-over-year and a 7% rise sequentially. Our refined operation allowed us to expand our online music paying user base by enhancing monthly ARPPU. The number of online music paying users expanded to 106.7 million, representing a 21% increase year-over-year with quarterly net adds of 3.7 million users. The monthly ARPPU rose to RMB 10.7 million, up by 20% year-over-year and by 4% sequentially, marking the segment's success quarter of growth and taking another record. The continued growth in our paying user base was largely attributable to our enriched content offerings, enhance the member providers such as industry-leading sound of quality selections, which is on the effects, more individualized players, new skins and interactive product features such as in-car enticement and interactive features for [indiscernible]. Our advertising revenue also had strong growth year-over-year and sequentially, supported by our diversified product suite and innovating advertising formats. Advertise-supported, advertising delivered a strong performance this quarter as entrance rate improved significantly. Additionally, the new double [alignment] e-commerce sales [indiscernible] generated a higher demand for advertising and contributed to a sequential increase in advertising revenues. Social and channel services and other revenues were RMB 1.9 billion, down by 52% year-over-year. This was mainly due to adjustments in certain live streaming interactive functions and more stringent compliance procedures as we implemented several service enticements and risk control measures in the past couple of quarters. We continue to innovate for social entertainment service and have seen growth in advertising revenues and [indiscernible] membership's revenues this quarter. Our gross margin for Q4 stood at 38.3%, marking an increase of 5.3 percentage points year-over-year and an increase of 2.6 percentage points sequentially, increasing user base together with higher monthly ARPPU growth in advertising revenues as well as ramping up of our own content have enabled us to move to a health margin model. Additionally, we have built win-win relationships with labels and artists and managed the content costs more efficiently using ROI approach. These efforts have collectively resulted in the increase of our gross margin year-over-year. Moving on to operating expenses. In the fourth quarter of 2023, they amounted to RMB 1.3 billion, representing 18.4% of our total revenues compared with 18.3% in the same period of last year. Selling under marketing expenses were RMB 255 million, down by 4% year-over-year. Our marketing strategy is ROI focused, while we allocated budget towards areas with long-term growth prospects. We strategically curtailed expense for promotion channel fees associated with live streaming and increased expenses to promote our own content as our music service continue to grow rapidly, we will continue to spend on channel promotions for these areas. General and administrative expenses were RMB 1 billion, down by 8% year-over-year, primarily driven by lower employee-related expenses, partially because we incurred expenses related to [Lay's] audio acquisition in Q4 2022, but such expenses did not recur in Q4 2023. Our effective tax rate for Q4 2023 was 17.3% compared to 12.2% in the same period of 2022. This increase was primarily attributed to the accrual of withholding tax related to earnings to be limited by our PRC subsidiaries to official entities. For Q4 2023, our net profit and net profit attributable to equity holders of the company were RMB 1.4 billion and RMB 1.3 billion. Non-IFRS net profit and the non-price net profit attributable to equity holders of the company were RMB 1.7 billion and RMB 1.6 billion, respectively. Our diluted earnings or ADS reached a record high this quarter at RMB 0.83, up 15% year-over-year. Non-IFRS diluted earnings per ADS increased to RMB 1, up 10% year-over-year. These results demonstrated our robust financial performance, enhanced operating efficiency and the positive impact from our share repurchase program. As of December 31, 2023, our combined balances of cash, cash equivalents and term deposits were RMB 32.2 billion as compared with RMB 31 billion as of September 2023. This combined balance was also impacted by changes in the exchange rate of the RMB to USD at different balance sheet date. Under the share repurchase program announced in March 2023 as of December 31, 2023, we had repurchased 25.3 million ADS from the open market for a total cash consideration of USD 175 million, of which approximately USD 72 million were repurchased in the fourth quarter. Next, I'll briefly discuss our performance for full year 2023. Total revenues were RMB 27.8 billion, down by 2% year-over-year. Revenues from online music service were RMB 17.3 billion, up by 39% year-over-year. The increase was driven by strong growth in music subscription revenues and revenues from advertising services supplemented by growth in other music services. Our music subscription revenue were RMB 12.1 billion, up by 39% year-over-year, driven by growth in both paid users and monthly ARPPU. Revenues from social entertainment service declined by 34% year-over-year due to adjustments in certain live streaming active functions and more stringent company's procedures as we implemented several service enhancements and risk control measures in the past couple of quarters. Gross margin in 2023 was 35.3%, up by 4.3% in year-over-year due to the reasons discussed earlier. Total operating expenses for 2023 were RMB 5 billion, down by 10% year-over-year. Selling and marketing expenses in 2023 were RMB 0.9 billion, down by [indiscernible], year-over-year, largely due to more efficient of our focused promotional strategies. General and administration expenses were RMB 4.1 billion, down by 7% year-over-year, primarily due to reduced employee-related expenses, including expenses related to [Lay's] audio acquisition and expenses related to the Hong Kong secondary listing incurred in 2022. In 2023 we achieved the highest level of profitability in our company's history. Net profit and net profit attributable to equity holders of the company was RMB 5.2 billion, and RMB 4.9 billion respectively. Non-IFRS net profit and non-IFRS net profit attributable to equity holders of the company was RMB 6.2 billion and RMB 5.9 billion, respectively. Finally, I will conclude with some remarks on our outlook for 2023. We are excited. We are excited about the growth of the music industry and remains dedicated to driving our growth across our music ecosystem. We will continue to focus on effective monetization and operational efficiency while exploring new growth opportunity and expanding our suite of intention tools such as customized artist, merchandise, concerts, extra. Additionally, we will continue to invest in high-quality content and original content production as well as new products and technologies, such as AIGC. We are confident about the long-term health growth of the music industry and our company. We remain focused on providing high-quality investment returns for our shareholders. This concludes our prepared remarks. We are now ready to open the call for questions.

[Millicent T., executive]

Thank you, Shirley. [Operator instructions]. If you ask your question in Chinese, please repeat in English. And the first question comes from the line of Alex Poon from Morgan Stanley.

[Chun Poon, analyst]

Congratulations on a very strong quarter. My question is regarding our 2024 and first quarter revenue growth expectation. Can you share some color, particularly about the music segment.

[Kar Shun Pang, executive]

Thank you, Alex, for your questions. And in year 2023, I think our online music business has consistently delivered a very strong performance and our total monthly subscribers have reached 107 million already, which is a new milestone to us. And the total revenue from the music subscriptions has 39% year-over-year growth. The reason behind is basically due to the very efficient execution of TME's content and platform deal engine strategy and the countercyclical nature of the music industry. We believe that the fourth quarter's accelerated growth in the subscription revenue really lay a strong foundation for this year's growth. We are optimistic about the industry's future and believe that our users center of operations and expertise, we will continue to drive the business forward. We are committed to build a popular all-in-one music and audio platform. And from the power point of view, we will use the industry-leading technology and know-how to provide the best user experience for our users. From a content point of view, we will continue to provide the best coverage of songs and also some of the new other formats like live performances of concerts and music festivals, et cetera. So in a nutshell, I think for this year, we are confident that the online music business will maintain a solid growth with subscription services serving as a primary driving force, while continuing to explore the new opportunities in advertising and artist merchandise to grow the business. And as part of our holistic music ecosystem, our social entertainment side, we're focused on better serving the core users and the revenue from this part will be relatively stable to share.

[Millicent T., executive]

And next question coming from Alicia Yap from Citigroup.

[Yik Wah Yap, analyst]

And also congrats on the solid quarter. I have 2 very quick questions. One is just curious if management can elaborate a little bit in terms of the user profile for those that newly converted to the membership, so for the past 12 months. Any color in terms of the geographic location, cities, tiers, age group and the song library that they tend to prefer? Anything you can share would be helpful. And then very quickly on second question is if you can update on any upcoming strategies and expectations for the long-form audio in terms of the user adoption rate and also the revenue trends.

[Liang Zhu, executive]

Thank you very much. Thanks for your question. Actually, our user base is already more than 100 million as I mentioned in the presentation. So the demographic profile of our user base is rate relative to the population demographic structure in China. Well, from the activity of the user, we can see the most active user who -- the largest group of our user is still aged between 20 to 30 years old. And we can also say that our subscription user is also very active among all the user group we have. We're still regarding the user profile and their allocation geographically, I think it is the same as the demographic allocation of China and we may have a more active user in the first tier cities, where majority of our users are still distributed in Tier 2 and Tier 3 cities in China. Well, in our later operations, we're also going to keep an eye and be more focused on the young user groups because they are still the one with the most potential to tap. Well, regarding your question of the long audio, our current strategy is still -- we're going to make the long audio fully integrated with our music platform as QQ Music and Google Music. And here now, we find out the strategy is very effective. But at the same time, we're also going to keep an eye on the long audio and especially how active it is and the monetization capacity of this long audio and we're also going to leverage ROC in order to source the most popular content in the market. We are, at the same time, for the long audio, we are also going to accelerate its penetration into the in-car market because we clearly noticed that indeed, the content like the novels are very popular for the in-car application. We, at the same time, generally speaking that 2023 would be a very important year for the longform audio or we call it 2023 a year of the transformation. The result and performance of the loan audio is also better than our expectation. So based upon our great performance in 2023, we hope that long audio -- the audio can also continue its distribution and commercial efficiency improvement on our music platform.

[Millicent T., executive]

Thank you. The next question comes from the line of Lincoln Kong from Goldman Sachs.

[Lincoln Kong, analyst]

Congrats on numbers from quarter. So my question is on the margins, especially the gross margin side. We have seen in fourth quarter accelerating gross margin expansion on a Q-on-Q basis, more than 100 basis points. Could -- [indiscernible] elaborate in terms of what are the reasons for that? And when we're thinking about 2024, what will be the key drivers for further gross margin expansion in terms of ARPPU growth and operating leverage from content costs or a minimum guarantee or increasing mix of self-produced content? What will be the ceiling or medium-term as targets for our music business gross margin under this context?

[Min Hu, executive]

Yes, gross margin is 38.3% in Q4 increased by 5.3% year-over-year. And the main factors as follows: the first music subscription revenues have significant growth, higher monthly up and paying user base growth, both have a positive impact on our gross margin. And the robust growth of advertising revenues also has the variable impact on gross margin. And the third, we gradually ramped up our sales on the content, which benefit our gross margin. And we can see the piece of our own content is increased regularly in Q4. And fourth, we have been focused on ROC to manage content costs, [indiscernible] and build win-win relationships with labels and artists. Our online music revenues growth ratio was faster than net ratio of content cost. And for gross margin in the Q4 2024, we expect our gross margin will keep increasing compared to the -- compared, the piece will be lower than the Q4 in 2023. But with our revenue from subscription revenue and advertising revenue also expect to have increased revenue. So we think that the gross margin will be keep increasing in Q1 2024.

[Millicent T., executive]

The next question comes from the line of Fang Wei from Mizuho.

[Wei Fang, analyst]

Congrats on the print. I have ARPPU related question. So looking at our music ARPPU trajectory, You guys finished the year with 16% year-over-year growth, and I believe your largest peer also delivered a positive growth. But despite that, I think your paying user growth maintained a very solid expansion, right? So it looks like consumers are happily paying up. So I was just wondering if management can help elaborate on your techniques behind? And is it fair to assume continued momentum into 2024?

[Kar Shun Pang, executive]

Yes. I think for the ARPU, we have adopted a holistic approach to grow the subscription revenue with flexibility in balancing between the [ subscore ] and also the ARPPU view expansion. So I think that we have a strong start on the [ subscore ] in Q1 2024. And partially because of the impact is promotion during the [indiscernible] year. And so marginal ARPPU fluctuation is to be expected but I think for the remaining quarters in 2024 quarter overall, I think the trend should be slightly upwards. So I think that we will monitor and also manage it very wisely to ensure that we have a good balance between the [ subscore ] and also the ARPPU expansion. But you're right that we believe that full number of years of [indiscernible], I think that music levels in China right now do see the value of music and they are willing to pay more in the future.

[Millicent T., executive]

The next question comes from Zhang Lei from Bank of America [indiscernible].

[Lei Zhang, analyst]

Congrats on [indiscernible] quarter. Two questions here. First, I think you have pretty good margin and cash flow trend. So do we consider any shareholder returns in the future? And secondly, it's about the user trend in Q4, we saw slightly long Q of decline. So how should we look at the user trend for 2024?

[Kar Shun Pang, executive]

Okay. I think that for the share buybacks, we have pro-actively doing this in the last -- especially in Q4 for 2023, and we will continue to doing this under the current $500 million share buyback plan that we have, and I think that we have already achieved a really good progress in it. And so maybe Ross talks about.

[Liang Zhu, executive]

Thank you very much. And I'd like to say the same as a trend a few years ago in Q4 and actually, the key reasons because the students going back to school as a school opens, where at the same time, we also see some impact from the short-form begin to our mobile end business. Where from the data analytics, we can say that regarding the lose of the user, actually, especially according to the days of active, the majority of them leaving us are actually those low active users. Still, we maintain our highly active users, and they are quite stable. Well, from the practice, we can also say that in the year of 2023, we further downsized the marketing expenses, and that is the reason we also reduced the China promotion. And this is also another reason and that can respond to your question. At the same time, besides the mobile end, we are also keeping our eyes on some traditional channels and emerging channels, including PC, the in-car channel and IoT channel because regarding the operation, we would like to indeed have the omnichannel user base to be further improved. But at the same time, you can also say that regarding IoT, and we still remain to very steady growth, where for the PC end, including the windows and the MAX system, and we're also going to maintain our stability there, and -- but we're also trying to roll out new versions to continue to explore new opportunities from the P end. At the same time, you can also say that regarding the trend of 2024, at the very beginning of 2024, we will be impacted by the spring festival in China. So during the Spring Festival, people sell them music apps, so that's a reason in Q1 of 2024, you're going to see that MPU seems slightly decreased due to the Spring Festival reason. We are in the following quarters as we are going to have a major version update regarding QQ Music, and we're also going to continue to improve the performance of Google Music. So I do believe compared with 2023, our marketing strategy also going to have an ROI-based improvement. We are also going to pay more attention to the channel project, including the channel new user engagement and the returning of the audio back to our platform. So in the upcoming quarters, we're also going to expect the MPU improvement.

[Kar Shun Pang, executive]

Okay. In response to your first question, besides the share buyback, we are also proactively looking into the dividend possibilities as well. So we'll be working on the detailed plans and then we would like to improve the shareholders' equity benefits in the future.

[Millicent T., executive]

The next question comes from the line of CICC, Xueqing Zhang.

[Xueqing Zhang, analyst]

Also congratulations on the strong quarter. My question about is AIGC. As you mentioned in the prepared remarks, TME has been using AIGC in many aspects. So can the management elaborate a bit more that, how you leverage AI in your business? And how does AI empower products contribute to the subscriber conversion and retention?

[Liang Zhu, executive]

Thank you very much. We have been closely monitoring the latest development of low language models and integrated it into music recommendations and creations as well as seeing and socializing. Because somewhat different from other companies, we're going to be more focused on the large language model application use case. So regarding application use case, actually, I have 3 parts to share with you. Well, first of all, we would like to leverage the large language model to make our product more appealing and more attractive to provide the user a brand new experience. So that is the reason in our latest version. We also updated listen together functionality. So the user in our QQ Music, they will be able to choose and profile their Avatars.And through this Avatar, they will also be able to find the recommended music that really fit into their mood and emotions and then they are going to consume more content. Well at the same time, another product is actually the small pack in QQ Music, and we're also going to leverage a large language model to improve the conversation and the dialogue between the user and the pets. So they are going to have some very interesting chats to continue to improve the things of the companion to our users. The second point I'm going to talk about is how we can leverage large language model to improve the creation efficiency to the content. We do provide effective tools for music creation to the creators. Well, we can say that recently, we have already enabled the separation function in the [ vanes ] functions. So generally speaking, it can directly separate the vocals from the entire composition of the sound, which is very popular among musicians. In addition, we have also launched the AI-based composition functionalities through [indiscernible], Avatars as well as [ cool go ]. In other words, that a user can actually create their own preferred sounds or the compositions according to their preferred style. Well at the same time, through those functions and enablement, we also find a very promising commercial process because users, they are actually willing to pay some of their money for those sounds that has been produced with AI-enabled tools. Well, regarding the customer acquisition, we can also leverage AIGC to generate different promotional materials. We find out after allocating those materials to the market, it has also helped to boost the conversion rates. Well, at the same time, we also find out after applying large language model, we also have a very good growth regarding the music recommendations within the [ crowd ], a huge improvement compared with before. So generally speaking, we do believe AIGC is benefiting our industry and help to further improve the performance of our product. We're also going to keep an eye on the latest development, including Sonar and other latest technology and making sure they could also be adopted by our product as soon as possible.

[Millicent T., executive]

And the next question comes from Thomas Chong from Jefferies.

[Thomas Chong, analyst]

Congratulations on a very solid set of results. I have a question regarding our Music [ connectors ]. Given the solid performance that we are seeing in Q4, $3.7 million report is better than the street expectation. How should we think about the net add trend coming into Q1 and 2024? And over the long run, how should we think about our music subs number?

[Unknown Executive]

Thanks for your question. Well, you can say that because we provide a high-quality product to the market and after years of education to the user and now they are happy to pay for the service and product and the user is becoming more mature. And I think we are now stepping into the season of profit. In year 2024, we're going to keep our eye on RMC and also trying to further improve our product and also with more marketing strategy. And we do hope those high potential customers can get access to our high-quality service and product and our very well-extended content library and platform will retain those users with us. So this is indeed the strategy we have for this year. In H1 of 2023 after the reopening of the pandemic because the travel has been allowed and the off-line music event has been restored, which creates a very enabling external environment for our business, along with our very strong operational capacity and very robust execution, we will be able to accumulate many paying users based upon enabling external environment and fast conversion rate. So in the year of 2023, actually, the net added value for our subscription user reached 182 million and which lay a very solid foundation for us to further expand the user base in the near future. Well, regarding the year 2024, we're going to finance the net age and over, and we have every confidence we will be able to maintain the online music business and the subscription revenue at a very healthy level. Regarding the year of 2024, but as we entered into the year of 2024 benefited from our product innovation and user privilege expansion, along with our very robust execution strategy, and we offer a high-quality experience to their users along with our operational and promoting events during the Chinese Spring Festival, we see the performance is better than what we expected. It also laid a very solid foundation for the healthy development of our business in 2024.

[Liang Zhu, executive]

Well, in the near future, we're also going to keep an eye on the operation and the development of the super users who should I call the high-operating users. Those users are the key. We're going to also further expand their experience in other channels, including in car experience and TV users. We do have -- by operating them and well manage them, it can also help us to overall improve the power for the music business. But more importantly, I should also say that what we're going to prioritize is to make sure we have a steady and robust growth for subscription revenue.

[Millicent T., executive]

Thank you. We're approaching the end of the conference call. I will now turn over to Kar Shun for closing remarks.

[Kar Shun Pang, executive]

Okay. Thank you, everyone, for joining us today. If you have any further questions, please feel free to contact TME's Investor Relations Team. This concludes today's call, and the company looks forward to speaking with you again next quarter. Thank you so much, and goodbye.