Q1 2023 Tencent Music Entertainment Group Earnings Presentation
Participants
Cheuk Tung Yip; Chief Strategy Officer; Tencent Music Entertainment Group
Kar Shun Pang; Executive Chairman; Tencent Music Entertainment Group
Min Hu; CFO; Tencent Music Entertainment Group
Unidentified Company Representative
Zhu Liang; CEO & Director; Tencent Music Entertainment Group
Alex Poon; Equity Analyst; Morgan Stanley, Research Division
Alicia Yap; MD & Head of Pan-Asia Internet Research; Citigroup Inc., Research Division
Lei Zhang; VP in Equity Research & Research Analyst; BofA Securities, Research Division
Unidentified Analyst
Wei Xiong; Research Analyst; UBS Investment Bank, Research Division
Presentation
Cheuk Tung Yip
Good evening and good morning. Welcome to Tencent Music Entertainment Group's First Quarter 2023 Earnings revenue. TME announced quarterly financial results today after market close. An earnings release is now available on our IR website at ir.tencentmusic.com as well as via Newswire services. Today, you'll hear from Mr. Kar Shun Pang, our Executive Chairman, who will start the call with an overview of our recent updates. Next, Mr. Zhu Liang, our CEO; and I, Tony Yip, as CSO, will offer additional thoughts on our product strategies, operations and business developments. Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in the company's earnings release and filings with the SEC. (Operator Instructions) And please be advised that today's webinar 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
Thank you, Tony. Hello, everyone, and thank you for joining our call today. We are off to a great start in 2023, our strategic emphasis on quality growth, propel strong growth of our online music revenues in the first quarter. As the revenue size of our online music services has now catch up with social entertainment services for the first time, we simplified that our long-term commitment to developing a sustainable online user business model is bearing fruit. In addition to a healthy increase in our total web, our focus on efficiencies, optimization also drove robust net product growth. Content is a bread and butter of our businesses. We continue to different partnerships with top music labels and arts, so as to enrich our economic music catalog and vertical content offerings as well as to expand our usage band. We established a strategic collaboration with Rock Records, (inaudible), providing users with iconic China soft and original contracts of popular TV dramas such as the work of Chenyue Chang, Emil Chau, Jonathan Lee, Wu Bai and Mayday. We also strengthened our strategic partnership with Ronghao Li and Fenghua Qiushi, whose managed artists include Lu Han and Black Panthers, as well as with HYBE from South Korea with artists such as BTS and SEVENTEEN on its roster.
Additionally, with the feature of a 7-day head start period, our partnership with JJ Lin for his new digital album was well received among users. The new album also broke its previous sales record in terms of GMV on our platform. On top of that, we also wish the collaboration with well-known assets, including KUN and Oaeen and all-in leading need for head start benefits on their new sane releases on other areas such as merchandising sales, online and off-line performances and artisan interaction events. As for user verticals, to satisfy for increasing demand for revenues among younger audience, we enriched our web offerings by adding a number of new songs from heavyweights such as Masiwei. Meanwhile, we reinforce our competitiveness in different (inaudible) verticals, such as electronic music, gaming and classical usage among others. In par with our efforts to expand our content lively, we have facilitated the production of high-quality original content, unlocking more opportunities in the growing music industry. We have taken it upon ourselves to foster creativity and nurture artists for which a variety of support programs, stage performances and monetization opportunities with dedication and buying the influence of musicians and their works with this core in mind.
We participate in and promote artists growth through our Tencent Musician platform, which offers abundant resources and diverse monetization avenues. As a result, the number of active musicians and singers who released new songs tap growing sequentially on our platform during the quarter, adding to the right brands of our ecosystem. For example, we have unveiled a new initiative, the "Emerging Force Program," officially "THE ONE" to discover musicians with high potential and encourage the production of high-class music. The program offers a wide range of art services, including truck support, revenue sharing and on- and off-line performance opportunities. By increasing the exposure and popularity of quality songs along with amplifying actors influence, we enhanced the vitality of the musicians economic system on our platform. As of the first quarter, we had assisted 260 up-and-coming musicians enriching their first million streams and help multiple artists make their JV performance on stage.
Notably, after joining our Emerging Force Program, the fork songwriter (inaudible). Both saw a surge in their followers and streams. Going forward, we will continue to discover musicians with great potential by bringing together call artists, producers and user programs, particularly in events, rap and pop music letters. Recently, Tencent Music also launched a customized homepage for musicians, (foreign language). Through this page, musicians can access data and insights in terms of streaming, followers and comments. This can empower better management of song distribution and promotion. In addition, this page also provides up-to-date support resources and policies of our platform. (foreign language) was one of the many success cases that demonstrate our powerful ability to contemplate and promote actors. In the first quarter, we signed her to our Tencent Musician platform, enepating her profile and promoting new songs through a our internal/external resources. As a result, the number of followers more than doubled, growing from 50,000 to over 100,000 within just 2 weeks of her onboarding with our diverse performance stage and all run support in user production. We have been dedicated to elevating the inforce of (inaudible) and other aspiring Indian stations alike.
Furthermore, we team up with Billboard China to hold our first original music content, the one. Our collective context is decided to discover imaging access with the ability to produce quality original Chinese music as well as to help expanding their global reach. To that end, we invited excellent singer/songwriters and renowned the singers in China and the abroad, including great (foreign language), among others, to inspire contestants to produce original music and assess their performances through this cooperation, we will leverage Billboard's global resources, influence and high international centers to provide talent music end-to-end services, ranging from their evaluation, some release, worldwide promotions and all the way to customize the performances. Upon the solid foundation of our Tencent Musician platform, we are well positioned to effectively facilitate the production and promotion of original content. We also excited to see -- we are also excited to see that we produced a number of broader calzones, creating many megahits in the first quarter. For instance, most of No-Man's Land (foreign language) has accumulated streams over $100 million, with a small and nearest we have traded on our 5 Sing platform. Not only did this song make its way on to several music chats, but also in kind of additional music market exposure, we are writing really our fraction store inspired by (inaudible) on short video platforms. Artists in the first quarter included (foreign language).
Excelling and producing prime original content. We have created an integral role in expanding IP values across the entertainment industry. As a case in point, we have created quite a few musical work for iconic films, games, animations and other media. In the first quarter, we coproduced Zhou Shen's Chinese cover of the theme song from Suzume which ranked in over 100 million streams within only 3 weeks of its release. It also ran the first on the CMG Global Chinese Music Popularity chart, (foreign language). As you may notice, this song is also the whole usage for today's earning call. Meanwhile, we continue to cooperate with the broader Tencent ecosystem, producing singles for 11 well-known games and 4 animations in the first quarter. Notable examples including "Praying for the Mountain and the Sea" for Honour of Kings and "Light of Dawn" [(foreign language), which simultaneously enhancing users' gaming and miss experience.
Before I conclude, I would also like to highlight the progress of TME Live. Our comprehensive online merge offline performance brand amid the performance market recovery, we're exploring innovative ways to monetize and interact with users. TME Live is well positioned to capture this market opportunities via our online merchant off-line capabilities, allowing us to provide users with superior audio visual experience anytime and anywhere. In the first quarter, we lost a total of 29 online and offline concepts, including online concerts for (foreign language) concepts received wellsite user can generating a total of 1.4 billion social media views and attracting almost 70 million unique visitors in the Tencent ecosystem. We also provide fans with the option to purchase customer merchandise while enjoying the shoals TME Life unique performance format, coupled with the high profile in the industry and reducers appeal to many well-known advertisers for sponsoring such as PepsiCo, YangYuanQing and JD.com.
We also continuously increased our presence in the offline performance, particularly as the profit shows a growing interest for off-line activities. In the first quarter, we organized tours in cities such as Shenzhen, Changsha and Hangzhou for musicians such as Coola, Kafe.Hu, Pharaoh, Switch GodLes and the rock and roll band WhitePaper to foster closer and more encouraging -- and more engaging connections between musicians and their followers. We are encouraged online audience to share their faults and filling through online policiting performances. Going forward, we will continue to explore the on- and offline integrated performance formats, offering integral artist lineups and exciting news experience. We evaluate our core 10 ecosystem and user engagement and first, capture incremental monetization opportunities. That concludes the update on our growing content capabilities. Now I would like to turn the call over to Ross, who will share more about our platform strategies. Ross, please go ahead.
Zhu Liang
Thank you, Kar Shun. Hello, everyone. Moving on to our platform innovations. In the first quarter, we further refined user's music consumption experience. We are advancing our audio live streaming services. In addition, by further exploring large language models, we address our platform ecosystem with a broader range of IGC applications. I'm meeting users' diverse and nuanced music tester in new and exciting ways. On the front of users' music consumption experience, our efforts to enhance sound quality and effects, combined with our optimized operations in different leasing scenarios have been well recognized by users. This further bolsters users' stickiness on our monetization capabilities. As a result, higher user engagement brought us a year-over-year growth of average daily time spent per daily active user who listening to the music on our platform. We have extended our premium sound quality and the effects to cover a weather range of scenarios during the quarter. In addition to growing the auto mix sound effect may also introduce a customized sound effect for Teens in Times' (TNT) album, (foreign language). This strong effect highlights vocal details on the instrumental layers, creating an area of live performance.
A total of 2.3 million users have used the strong effects in 170 million streams. Moreover, we extended our premium sound quality to in-car use cases. One example is QQ Music's Galaxy Sound Effect which maximizes the performance of in-car audio systems as it confronting its strong effect to match many in-car audio systems of mainstream car models. This can further enhance our users' leasing experience. In addition, we also offer a highly personalized and engaging music experience that caters to users union preference and artists. For instance, we launched our 3D music player interface and customized places with various design templates where users may choose their favorite styles. Beyond that, we tailored playlists to specific holidays and festivals such as the Chinese New Year and the World Sleep Day to offer a listening experience for this special occasion and users current state of man. Thanks to our ongoing algorithm upgrades and product optimization, we are able to constantly advance our recommendation efficiency. This bring us deeper insights into content and user behavior, allowing us to create a more personalized leasing experience.
In the first quarter, QQ Music and Kugou Music recommendation stream value together with its 10th plant per user increased both year-over-year and quarter-over-quarter, taking the proportion of recommended streaming to a new high on our platform. On the front of audio live streaming, it has become an important growth driver for us as we offer a unique engagement venue for our users and performers, with our differentiated content and interactive features that drive its growth may keep enhancing user experience and attracting more vibrant audio anchors. In terms of content, we differentiated our audio live streaming content offering with focus on auto category of music, emotional hearing and talk share, highlighting our performance exception talent. Meanwhile, our vibrant audio anchor ecosystem also benefits our mutation community as it provides them with a platform to showcase their skills and reach a wider audience. (inaudible) rising relations on our QQ Music live streaming platform. For example, (foreign language) the formulations contributed a total of 110 million song streams, notable upon the promotion in one of our audio live streaming programs, (foreign language) quickly made it to Q Music new song recommendation chart.
In the first quarter, the number of performance in audio live streaming continued to rise year-over-year and quarter-over-quarter. In terms of user interactions, we added a new social and tire features to our platform. This has created additional use traffic and scenarios. And we are better serving users' entertainment needs. As important icebreaking tools between performance and users, this in the active features also drove year-over-year and quarter-over-quarter increases in a steady time spend per user. Going forward, we will keep upgrading and expanding our social interactive offerings to higher user rotation and additional commercialization opportunities. Turning to AITC, IMS have import us to produce content more efficient city as well as to create an increasing engaging user experience.
In the first quarter, we launched a TME studio (foreign language) and AI enabled smart tool for music production. We also introduced the Vocal Producer feature pulled by our (inaudible) business tools, relations can be more efficient in writing, composing music content analysis and editing. Such tools also have generated outstanding content by seamless branding users original losses into different sands. On top of that, our first AI music companion Xiaoqin hosted a live streaming show we are seeing Xiaoqin providing an immersive entertainment experience. Users were also able to interact with Xiaoqin through AI-generated virtual games and personalized gameplay. Furthermore, in fostering a more customized leasing experience, QQ Music pioneered and AIGC import music player with various AI-generated mutual styles users can enjoy different themes of music players. With that, I'd like to give the floor to Tony to review our business operations. Tony, please go ahead.
Cheuk Tung Yip
Thank you, Ross. Hello, everyone. During the first quarter, we have seen enhanced monetization in our online music services. We booked robust year-over-year growth in online music services revenues driven by the advancement of both subscription and non-subscription businesses. On the subscription side, a strong performance was propelled by the growing number of paying users and its ARPU, which comes to $94.4 million and RMB 92%, respectively. Notably, our online music paying ratio hit a record high at 15.9%, while our ARPPU expanded sequentially for the fourth consecutive quarter. All these results reflect our refined content operations, users higher willingness to pay for premium sound and effect features as well as more effective promotions. In addition, our IoT service has been growing over the past few quarters, seeing its increasing importance to our overall business development, we began to include certain IoT devices in the disclosure of operating metrics for our online music services starting from the first quarter. On the non-subscription side, it also delivered strong year-over-year growth. Advertising revenue grew notably year-over-year, mainly due to lower revenues last year caused by COVID-19 impact, increasing interest from advertisers in our innovative advertising formats as well as improved macro environment.
In particular, we have seen an increasing advertising spend from advertisers in the e-commerce, gaming, travel and food and beverage industries. Meanwhile, revenue from our ad-supported mode also grew well as more users adopted this model. In addition, to TME Live's advertiser sponsorship mentioned by Kr Shan earlier. We corporated with Uni-President, (inaudible) and Heineken in the first quarter to create customized brand zones, playlists and music festivals, helping advertisers increase brand visibility with our innovative ad formats. On top of advertising, we also enhanced our ability to monetize through artist merchandise, long for module and music distribution. In terms of artist merchandise in the first quarter, we worked with well-known artists such Allen Ren, Lu Han and Justin Huang to introduce collection cards, action figures, T-shirts and more. As a highlight, platform within 2 days -- as a highlight, sales of the Album Utopia, (foreign language) by Teens in Times' exceeded 1 million copies on our platform within 2 days of its release.
In the future, we will keep expanding the offerings of artist merchandise on our platform, and we also have a number of artists corporation projects underway. In terms of long-form audio, its revenues expanded year-over-year as we increased our offerings of popular content in the first quarter. For example, we introduced a new format that combines leading IP and radio drama. During the quarter, we released Reunion, the Sound of the Providence, (foreign language), adapted from the original work of (foreign language). Its streaming volume exceeded 340,000 in the first week after launch. These distinguished content further complemented our music offerings and increase overall user engagement. Moving on to our social entertainment services. Facing a tough market environment, we focus on product innovation to differentiate ourselves and gain user mind share. For WeSing, based on our multi-person singing room in both video and audio settings, we upgraded our Corus features to course for all, which can support a real-time course of 1,000 people, further enriching users' immersive experience.
In addition, we released extra interactive features in our singing rooms such as score competition and red envelope sharing. These features allow the singing rooms penetration rate to grow year-over-year for the fifth quarter in a row. In the future, we will leverage these cores and singing features to explore collaboration across different products on our platform, such as TME Live, Asian interaction events and sponsored advertising. In terms of leasing membership, we expanded VIP privileges to include features such as customizable sound effects, recording interface themes and name tax, all resulting in year-over-year revenue growth in the first quarter. Meanwhile, WeSing revenue grew steadily in the overseas market. We will expand its presence further through both organic growth and M&A. For live streaming services, although revenue from traditional live streaming remained adversely affected by the macro environment, our audio live streaming delivered double-digit year-over-year growth rate in the first quarter. Holding has become a growth engine for our live streaming services as we keep providing differentiated content and interactive features.
We also strive to build a growth path for more live streaming performers further tapping into their potential while strengthening their connection with users, which in turn cultivate users' willingness to consume and pay for content. In the first quarter, Kugou Music rolled out its singing feature following QQ Music's successful validation delivering year-over-year revenue growth as well. Lastly, we remain committed to fulfilling our social responsibilities through music. For example, TME provided care for people with autism through music for the seventh consecutive year. We launched a caring program called "If Music Has a Shape", Rugou Music in Shizhong. We invited over 50 groups of seniors and musicians from China and abroad, including Joker Xue, Sean Xiao and TIA RAY, and to perform in our program and share love. Simultaneously, we debuted the carrying through music theme song secrets hitting in the stars (foreign language) sung by LUCY, TME's first hyper-real virtual pop item. This program's social media views have exceeded $500 million, raising awareness of autism among the public. In conclusion, we started 2023 on high notes with innovations across content and platform. This establishes a clear path for our creative and sustainable development in the coming year and beyond. Our progress in monetization efficiency, cost optimization, commercialization and user experience has also positioned us for ongoing business growth. Going forward, we'll continue to explore the intersection of music and technology, pioneering new forms of art and entertainment while upholding our commitment to society and fostering a healthy, more diverse music industry. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.
Min Hu
Thank you, Tony. Hello, everyone. I'll discuss our results from a financial perspective. In the fourth quarter of 2022, our total revenue resumed year-over-year growth and reached RMB7 billion, up by 5% year-over-year. With the success of effective cost control and improved operational bases, our non-IFRS net profit margin reached 20.9% this quarter. In Q1, music subscription revenue continued its rapid growth and reached RMB 2.6 billion, up by 30% year-over-year and by 1% sequentially, propelled by a rapid expansion of both online music paying users and ARPPU. Specifically, most ARPPU in Q1 was RMB9.2 increased by RMB09 from last year and RMB03 from last quarter, recording 4 consecutive quarter of expansion. Online me-to pay users grew to $94.4 million, up by 18% year-over-year, representing of $5.9 million net adds sequentially. The strong ARPPU and paying user growth resulted from high-quality content and services, attractive member privileges and more effective promotions.
As we expand use cases and service offerings, we are seeing growing demands on IoT services and expect more opportunities to monetize this in this area in the future. Therefore, starting from this quarter, we have updated the definition of online music MAUs and includes certain (inaudible) users in our online music MAUs. Additionally, revenue from advertising achieved strong growth year-over-year due to strong performance from our ad-based listening model as well as lower advertising revenues for comparison in Q1 2022 due to the impact from COVID-19. We are pleased with such results and remain confident about the long-term growth potentials in advertising business. Social entertainment service and other revenues were RMB3.5 billion, down by 13% year-over-year due to the evolving macro headwinds and competition from other platforms to adapt to the changing environment, we focus on cultivating talent performance and differentiating our content to stabilize the revenue skew of the traditional live streaming and making efforts and increase our competitiveness through ongoing product innovation and the new initiatives in social entertainment services such as audio lab streaming, real-time interactive periods and international expansion.
Gross margin in Q1 was 33.1%, up 5.1 percentage points year-over-year, primarily due to strong growth of online music revenues, our effective control of content costs as well as improved operational cost businesses. Now moving on to operating expenses. Total operating expenses for Q1 were RMB1.2 billion or 70.5% as a percentage of total revenues, down by 2.7% from 2.2% as a percentage of total revenues in the same period last year. Selling and market expenses were RMB212 million, down by 36% year-over-year, or reduced spending on user acquisition has impacted on our MAUs. Our core music subscription service delivered strong growth. We continue to take measures to improve bases, closely monitor the ROI each promotion channel, better utilize external promoting channels and leverage our internal track to attract users and promote our brands. When elaborating the healthiness of business and assessing ROI, we focused more on matters such as level of engagement, user retention rate extra. General and administrative expenses were RMB 1 billion, which was relatively stable comparing to the same period of 2022. We continue to manage employee-related expenses by improving account efficient and invest in research and development to further empower muted content creation, enhance production efficiency and improve sound quality and effects.
Our effective tax rate for Q1 2023 was 12.2%. For Q1 2023, our net profit and net profit attributable to equity holders of the company for RMB 1.2 billion and RMB 1.1 billion, respectively. Non-IFRS net profit and non net profit attributable to equity holders of the company were RMB 1.5 billion and RMB 1.4 billion, respectively. Diluted earnings per ADS was RMB 0.73, up 97% on a year-over-year basis. (inaudible) diluted early support ADS was RMB 1.89, up 65% on a year-over-year basis. Such results demonstrate our commitment and the continued success of our operating business in full as well as the impact from share repurchase program. We are interval to provide high-quality returns for our investors and shareholders and we remain confident about our financial performance, the development of our business and the overall industry. As of March 31, 2023, our combined balances of cash, cash equivalents and term deposits were RMB 28.5 billion as compared with Samb7.2billion as of December 31, 2022. The increase was primarily due to our healthy operating cash inflow of RMB 1.9 million for the first quarter of 2023. Such combined balance was also elected by the change in exchange rate of RMB to USD at different balance sheet dates.
In conclusion, we started 2023 with strong revenue growth momentum and the revenue side of our online music services caught up with social entailment services for the first time. Going forward, we continue to expect balanced growth of both ARRPU and paying users and we remain confident in the growth potential of our advertising business. Social entertainment service continued to face evolving macro headwinds and competition from other platforms, and we will continue to differentiate our content and entertainment experience and a more high-quality content to read stabilizes, revenue scale for social entertainment services. Meanwhile, we continue to invest in new products and services, high-quality content and technologies, especially in areas such as IoT, game, saving room and original content and AGC to build up a solid combination for our healthy once growth. This concludes our prepared remarks. Operator, we are ready to open the floor for questions.
Question and Answer Session
Operator
(Operator Instructions) And today's first question comes from Alex Poon from Morgan Stanley.
Alex Poon
Thank you, management congratulations on very strong results. My question -- my first question is regarding our subscriber -- music subscriber growth business, $5.9 million net adds is a record high number. And it's been accelerating from the last 2 quarters. Can management explain the drivers behind this? And how should we think about the net adds growth outlook for the rest of the year?
Cheuk Tung Yip
The subscription revenue, which is very much our focus as we have -- are seeking for balanced growth between both paying user as well as ARRPU. Subscription revenue grew at a 30% rate on a year-over-year basis, which, as you pointed out, is an accelerated pace compared to previous quarters. This can be attributed to a number of factors. First, the quality as well as the value of our subscription service continues to improve. It was a long-term effort in the making, and we're providing more and more attractive content and features within that subscription service. Secondly, as a result of our long-term effort and focus, users willingness to pay for premium features such as sound quality as well as sell effects continue to increase. Thirdly, we continue to improve the promotion of those high-quality content and product features. And finally, more effective as well as targeted promotional discounts around new subs as well as better retention programs also helped drive ARRPU higher. And as a result, we continue to expect a very strong growth in our…
Operator
Thank you. And our next question comes from Alicia Yap from Citigroup.
Alicia Yap
I would like to get some update if management could provide us. How are we thinking about overall growth outlook, especially for online advertising and also the music of Xiaoqin? If you can give some color as well on the social entertainment as well.
Cheuk Tung Yip
Overall, we continue to expect that 2023 to be a year of positive growth for both top line revenue as well as bottom line net profit. In addition, most likely from the second quarter, we expect our quarterly revenue from online music services to exceed social entertainment services to become a primary source of revenues. In terms of online music, specifically, we expect subscription revenue to continue to deliver quality strong growth, driven by both paying users and ARPPU. In addition, a combination of advertising, long-form audio, artist merchandise and IoT services are all expected to contribute to the growth meaningfully. In terms of social entertainment, while traditional video live streaming will continue to face competitive pressure, our audio live streaming and international business can partially compensate. Combining all of that with our continued focus on cost management to improve efficiency, we expect net profit margin to continue to improve, resulting in net profit growth that are likely stronger than previously expected.
Operator
Thank you. And our next question comes from Lei Zhang from Bank of America.
Lei Zhang
Congrats on the strong set of results. My question mainly on the music gross margin. Can you give us some update on your music gross margin in the fourth quarter? And how should we see the trend going forward since we have a better outlook on our (inaudible) music business for the rest of the year.
Min Hu
About music gross margin, we don't give very specific detailed number on this business. We will talk about the gross margin of our whole business. Gross margin is 33.1% in Q1 increased by 4.1% year-over-year. Now there are some positive factors as follows: one, the strong growth of monthly ARPPU and net adds of new subscriptions and two, the growth of advertisement revenue. And the third, even social entertainment revenue faced a downside pressure and the revenue mix change also had the negative impact on our gross margin. The revenue showing cost of leverage streaming has been controlled, we decreased in effect promotion activities and increased operational effect in business. We focus on good performance and high-quality contracts. And fourth, we optimize the content cost model of ROC and increase the ROC requirements. We also benefited from the development of our in-house original content production. And fifth, we optimized the technology and operational strategy related to bandwidth and storage capacity and improve the utilization of our service and equipment. And looking forward in Q2 2023, we expect subscription revenue and advertisement revenue will continue to be strong growth, and we will continue to increase our operational business and monitor our cost. We expect our gross margin will increase sequentially in Q2.
Operator
Thank you. And our next question comes from Wei Xiong from UBS
Wei Xiong
You guys mentioned just now that you've seen good recovery in off-line and also in the performance market. So just wondering if management could elaborate on how we can participate more and potentially benefit from the offline event opportunities? And could these offline events generate meaningful incremental revenues for us and contribute to the better growth of online music segment this year? Or do they have synergies with our online music subscription business?
Cheuk Tung Yip
Okay. Sure. Thank you for your questions. And yes, after we're opening the live concerts and music festival market is being successful and portion to file. Our unique positioning will be both of our online and off-line capabilities. And we will be also focusing on the quality olein the quantity of the shows. So we will continue to upgrade and also improve our TME-life IP by more in-depth partnership with our potential partners, and we show content, coproduction, et cetera. And also, we will definitely bring additional revenue to us. And also you further contribute to the healthy development of the TME content wise in the long run. There's also we're seeing that positive trend in the industry, driven by the increasing demand for life entertainment experience and also the willingness of consumers to spend money on takers and events. But however, it's also worth looking at, although the off-line performances have been very forward so far, but this is also a low-margin business for the organized. So with this in mind, our approach will continue to be ROI basis with a prudent investment margin. But we will continue to think that this is going to be exciting for the for us in the long.
Operator
Thank you. And our next question comes from Shane Jo from CICC.
Unidentified Analyst
Congratulations on strong performance. My question is about profit guidance. How does the management view the change of OpEx and net profit in 2023 and in the long term? Is it possible to share some guidance?
Min Hu
Last question, I guided on the gross margin. So I will talk about the operational expenses. And in 2023, we will continue to focus on improving on our expenses. Q1, seeing and promotion expenses operating on low cost level down by 36% year-over-year. Also, the reduced spending on user creation has impacted our MAUs. Our core music subscription service delivers general growth. And for the headcount management, we will continue to invest in product investments, technology innovations, new products and new business such as LTE, overseas business and relation program in house content productions. And meanwhile, we will pay more attention to improve the profitability of business and the products. And Q1, the adjusted net profit margin is 20.9%, an increase on a year-over-year basis and sequentially. And looking forward to Q2, we expect our siting and promotion business and the page will be stable and compare net in Q1. And with the growth of our revenue, we expect the adjusted net profit and adjusted net margin will be increased.
Operator
Thank you. And our next question comes from Wei Fong from Mizuho.
Unidentified Analyst
Firstly, can you help update us on your super VIP membership program in terms of adoption? And secondly, I was just curious how your IoT monthly fee compared to your average mobile monthly fleet?
Cheuk Tung Yip
Well, first of all, we continue to add more and more attractive member privileges behind our Super VIP package. While we didn't -- we're not ready to disclose specific numbers, we are pleasing to see the continued growth in the number of subscribers under the VIP membership. In terms of the IoT services, we are seeing very good growth trajectory, primarily in the in-car space. We continue to penetrate more and more car models. For example, recently, we penetrated into several notable Mercedes models. And in those models, we are offering subscription services. And very often, you do see those offered at a full price point at the full price as opposed to the discount price. And increasingly, we'll be separating the price plan between the IoT services as well as the mobile device. So you have to actually pay separate fee in order to access for IoT subscription in addition to being able to access the subscription for mobile device.
Operator
Thank you. And our next question comes from the line of (inaudible).
Unidentified Analyst
So my question regarding the cooperation with Tencent. We see some very successful cooperation regarding the (inaudible). So how should we deepen such cooperation? Do we expect we should expand the cooperation to more areas?
Cheuk Tung Yip
The WeChat music feature is actually powered by QQ Music use to a large extent. Our objective is to extend the QQ Music service on to WeChat to provide WeChat users with high-quality music experience. And this corporation enabled us to help music creators tap into the significantly broader reach that are offered by WeChat. And as a way to promote the service, WeChat users can enjoy our service for free for a limited time between now and June 30. From July 1 onwards, to access certain premium content and features, users will be required to become a paying subscriber. We believe this corporation will generate incremental revenues for TME as it will allow us to attract incremental subscribers in the long run. And given the significantly broader reach of WeChat vis-a-vis TME, we are delighted to be able to work very closely with WeChat on this corporation to bring our music service to more users. And with no doubt, we'll continue to deepen the cooperation with WeChat as we go.
Operator
Okay. Now we will take our last question today from Lei Zhang from Bank America.
Lei Zhang
Can you give us some update on the very hot topic recently on AIGC and how we can use this technology? And do we see this could help us to say in general, have some cost control or say, OpEx any updates or any feedback on AIGC...
Unidentified Company Representative
(foreign language)
Cheuk Tung Yip
We'll continue to deepen our research into the applications that are based on LLMs. One example of that is we'll be looking to develop a chatbot where users can chapter the chatbot about the kind of music they like to listen to and to discover new content -- we'll be incorporating closely with Tencent to develop application based on their LLM as well as to work with open source LMs to develop other applications such as those around image creation. Similar to Google's music LM, we will look to provide tools to help physician significantly reduce the barrier to music creation and lower the cost then to improve the efficiency to help them with some creation as well as lyrics writing. And then finally, in the areas of social entertainment will look to create virtual items that will ultimately be used in live streaming type use cases.
Operator
I am now approaching the end of the conference call. I will now turn the call over to our host, Mr. Toni Ye for closing remarks.
Cheuk Tung Yip
Thank you, everyone, for joining us today. If you have further questions, please feel free to contact TME's IR team. This concludes today's call, and we look forward to speaking to you again next quarter. Thank you.
