Earnings Call Transcript - TME Q1 2023

Tony Yip, CSO

Good evening and good morning. Welcome to Tencent Music Entertainment Group's first Quarter 2023 Earnings Webinar. TME announced quarterly financial results today after market close and earnings release is now available on our IR website at ir.tencentmusic.com as well as via newswire services. Today you hear from Mr. Cussion Pang, our Executive Chairman, who will start the call with an overview of our recent updates. Next, Mr. Ross Liang, our CEO, and I, Tony Yip, CSO, will offer additional thoughts on our product strategies, operations and business developments. Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which applies to this call, as we will make forward-looking statements. Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in the company's earnings release and filings with the SEC. At this time, all participants are muted. After management's presentation, there'll be a Q&A session. And please be advised that today's webinar is being recorded. With that, I'm pleased to turn the call over to Cussion, Executive Chairman of TME. Cussion?

Cussion Pang, Executive Chairman

Thank you, Tony. Hello, everyone. And thank you for joining our call today. We are off to a great start in 2023. Our strategic emphasis on quality growth propelled strong growth of our online music revenues in the first quarter. As the revenue size of our online music services has now caught up with social entertainment services for the first time, it signifies that our long-term commitment to developing a sustainable online music business model is bearing fruit. In addition to a healthy increase in our total revenues, our focus on efficiencies optimization also drove robust net product growth. Content is the bread and butter of our businesses. We continue to deepen partnerships with top music labels and artists, so as to enrich our iconic music catalog and vertical content offerings as well as to expand our users' benefit. We established a strategic collaboration with Rock Records, providing users with iconic Chinese songs and original soundtracks of popular TV dramas, such as the works of Chenyue Chang, Emil Chau, Jonathan Lee, Wu Bai and Mayday. We also strengthened our strategic partnership with Li Ronghao 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 seven-day head-start period, our partnership with JJ Lin for his new digital album was well-received among users. The new album also broke his previous sales record in terms of GMV on our platform. On top of that, we also reached collaborations with well-known artists including KUN and Oaeen for head-start benefits on their new song releases in other areas, such as merchandise sales, online and offline performances, and artist-fan interaction events. As for music verticals, to satisfy the increasing demand for rap music among younger audiences, we enriched our rap offerings by adding a number of new songs from heavyweight rappers such as Masiwei. Meanwhile, we reinforced our competitiveness in different genre verticals such as electronic music, gaming, and classical music, among others. In parallel with our efforts to expand our content library, we have facilitated 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 through a rich variety of support programs, stage performances and monetization opportunities. We’re dedicated to amplifying the influence of musicians and their works with this goal in mind. We participated in and promoted artist 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 kept growing sequentially on our platform during the quarter, adding to the vibrance of our ecosystem. For example, we unveiled a new initiative, the Emerging Force Program, to discover musicians with high potential and encourage the production of high-class music. The program offers a wide range of artist services, including traffic support, revenue sharing, and on and offline performance opportunities. By increasing the exposure and popularity of quality songs, along with amplifying artist influence, we enhanced the vitality of the musicians ecosystem on our platform. As of the first quarter, we have assisted 260 up-and-coming musicians in reaching their first million streams and helped multiple artists make their debut performance on stage. Notably, after joining our Emerging Force Program, the folk singer-songwriter Leezi and Slow-mo both saw a surge in their followers and streams. Going forward, we will continue to discover musicians with great potential by bringing together artists, producers, and music programs, particularly in events, rap, and pop music legends. Recently, Tencent Music also launched a customized homepage for musicians. 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. Tencent musician Christy was one of the many success cases that demonstrate our powerful ability to cultivate and promote artists. In the first quarter, we signed her to our Tencent musician platform, elevating her profile and promoting new songs through a variety of internal/external resources. As a result, the number of her followers more than doubled, growing from 50,000 to over 100,000 within just two weeks of her onboarding. With our diverse performance stage and all-around support in music production, we have been dedicated to elevating the influence of Christy and other aspiring indie musicians alike. Furthermore, we teamed up with Billboard China to hold our first original music contest, THE ONE. Our collaborative contest is designed to discover emerging artists with the ability to produce quality original Chinese music, as well as to help expand their global reach. To that end, we invited excellent singer-songwriters and renowned singers in China and abroad, including Greyson Chance, Lenka, MIKA and TIA RAY, 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 standards to provide talented musicians with end-to-end services, ranging from talent evaluation, song list, worldwide promotions, and all the way to customized 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 are also excited to see that we produced a number of blockbuster songs, creating many mega hits in the first quarter. For instance, the song has accumulated streams over 100 million with its melody and lyrics on our singing platform. Not only did this song make its way onto several music charts, but also it garnered additional market exposure via our writing lyrics inspired by its lyrics on short video platforms. Artists in the first quarter included several notable names. Excelling in producing prime original content, we have played an integral role in expanding IP values across the entertainment industry. As a case in point, we have created quite a few musical works for iconic films, games, animations, and other media. In the first quarter, we co-produced a Chinese cover of the film song from Makoto Shinkai's movie Suzume. This song ran in over 100 million streams within only three weeks of its release. It also ran first on the Global Chinese Music Popularity Chart and topped 12 other music charts. As you may notice, this song is also the hold music 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 songs for well-known games and animations that enhance users' gaming and listening experience. Before I conclude, I would also like to highlight the progress of TME Live, our comprehensive online merge-offline performance brand. Amid performance market recovery, we're exploring innovative ways to monetize and interact with users. TME Live is well positioned to capture these market opportunities via our online merge-offline capabilities, allowing us to provide users with superior audio-visual experiences anytime and anywhere. In the first quarter, we hosted a total of 29 online and offline concerts, including online concerts for notable artists, notably KUN and Richie Jen’s e-concert received widespread user acclaim, generating a total of 1.4 billion social media views and attracting almost 70 million unique visitors in the Tencent ecosystem. We also provide fans with the option to purchase custom merchandise while enjoying the shows. TME Live's unique performance formats, coupled with this high profile in the industry and reviews appeal to many well-known advertisers for sponsoring. We also continuously increase our presence in offline performances, particularly as the traffic shows a growing interest in offline activities. In the first quarter, we organized tours in cities such as Shenzhen, Changsha, and Hangzhou for musicians to foster closer and more engaging connections between musicians and their followers. We encourage the online audience to share their thoughts and feelings through online bullet charts during performances. Going forward, we will continue to explore the on and offline integrated performance formats, offering integral artist lineups and an exciting user experience, evaluating our content ecosystem and user engagement to capture incremental monetization opportunities. That concludes the updates 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.

Ross Liang, CEO

Thank you, Cussion. Hello, everyone. Moving on to our platform innovations. In the first quarter, we further refined users' musical consumption experience. We're advancing audio live streaming services. By further exploring large language models, we energized our platform ecosystem with a broader range of AI technology applications that are meeting users' diverse and nuanced music tastes 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 listening scenarios have been well recognized by users. This further bolsters users' stickiness and monetization capabilities. As a result, higher user engagement brought us a year-over-year growth of average daily time spent per active user listening to music on our platform. We have extended our premium sound quality and effects to cover a wider range of scenarios during the quarter. In addition to lowering the auto-mix sound effect, we also introduced customized sound effects for a specific album. This song effect highlights vocal details and instrumental layers creating an air of a live performance. A total of 2.3 million users have used this song effects in 170 million streams. Moreover, we extended our premium sound quality to in-car use cases. For example, our QQ Music's Galaxy Sound Effect maximizes the performance of in-car audio systems by finetuning its song effects to match many mainstream car models. This has further enhanced our users' listening experience. Additionally, we also offer a highly personalized and engaging music experience that caters to users' unique preferences and tastes. For instance, we launched our 3D Music Player Interface and customized playlists with various design templates, where users can choose their favorite styles. Beyond that, we tailored playlists to specific holidays and festivals, such as the Chinese New Year and World Sleep Day, to offer a listening experience for these special occasions and users' current state of mind. Thanks to our ongoing algorithmic upgrades and product optimizations, we are able to constantly advance our recommendation efficiency. This brings us deeper insights into content on a user's behavior, allowing us to create a more personalized listening experience. In the first quarter, QQ Music and the Kugou Music recommendations stream menu, together with the time spent per user, increased 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. In terms of content, we differentiated our audio live streaming content, focusing on music and emotional healing, highlighting our performers' exceptional talent. Meanwhile, our vibrant audio anchor ecosystem also benefits our musician community as it provides them with a platform to showcase their skills and reach a wider audience. We have nurtured rising musicians on our QQ Music live streaming platform. Notable, upon the promotion in one of our audio live streaming programs, a musician's single quickly made it to QQ Music's new song recommendation chart. In the first quarter, the number of performers in audio live streaming continued to rise year-over-year and quarter-over-quarter. In terms of user interactions, we added new social interactive features to our platform. This has created additional user traffic and scenarios, and we are better serving users' entertainment needs as important ice-breaking tools between performers and users. These interactive features also drove year-over-year and quarter-over-quarter increases in daily time spent per user. Going forward, we will keep upgrading and expanding our social interactive offerings to improve user retention and additional commercialization opportunities. Turning to AI-generated content, our aim is to empower us to produce content more efficiently, as well as to create a more engaging user experience. In the first quarter, we launched TME Studio, an AI-enabled smart tool for music production. We also introduced local producer resources. With these tools, musicians can be more efficient in lyric writing, composing music, content analysis, and editing. Such tools also have generated outstanding content by seamlessly binding users' original verses into different songs. On top of that, our first AI music companion hosted a live streaming show of singing and dancing, providing an immersive entertainment experience. Users were also able to interact with the AI-generated virtual gifts and personalized gameplay. Furthermore, in fostering a more customized listening experience, QQ Music pioneered an AI-powered music player. With various AI-generated virtual styles, users can enjoy different music themes. With that, I'd like to give the floor to Tony to reveal our business operations. Tony, please go ahead.

Tony Yip, CSO

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 ARPPU, which comes to 94.4 million and RMB 9.2, respectively. Notably, our online music paying ratio hit a record high of 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 macroenvironment. In particular, we have seen an increasing advertising spend from advertisers in the e-commerce, gaming, travel, 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 Cussion earlier, we cooperated with various brands to create customized brand zones, playlists, and music festivals, helping advertisers increase brand visibility with innovative ad formats. On top of advertising, we also enhanced our ability to monetize through artist merchandise, long-form audio, and music distribution. In terms of artist merchandise, in the first quarter, we worked with well-known artists to introduce collection cards, action figures, T-shirts, and more. As a highlight, sales of the album by notable artist exceeded 1 million copies on our platform within two 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 artist cooperation projects on the way. 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 content adapted from the original work whose streaming volume exceeded 340,000 in the first week after launch. These distinguished content further complemented our music offerings and increased 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 mindshare. For WeSing, based on our multi-person singing room in both video and audio settings, we upgraded our chorus features to support a real-time chorus of 1,000 people, further enriching users' immersive experience. In addition, we released extra interactive features in our singing rooms, such as score competition and red envelope sharing. These features allow the singing room's penetration rate to grow year-over-year for the fifth quarter in a row. In the future, we will leverage these chorus and singing features to explore collaboration across different products on our platform, such as TME Live, artist/fan interaction events and sponsored advertising. In terms of WeSing membership, we expanded VIP privileges to include features such as customizable sound effects, recording interface themes, and name tags, all resulting in year-over-year revenue growth in the first quarter. Meanwhile, WeSing's revenue grew steadily in the overseas market. We will expand its presence further through both organic growth and acquisitions. For live streaming services, although revenue from traditional live streaming remained adversely affected by the macroenvironment, our audio live streaming delivered double-digit year-over-year growth rate in the first quarter. Audio has become a growth engine for our live streaming services as we keep providing differentiated content and interactive features. We also strive to build a growth path for more live streaming performers, further tapping into their potential and strengthening their connection with users, which in turn cultivates users' willingness to consume and pay for content. In the first quarter, Kugou Music rolled out its singing room 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'. We invited over 50 groups of singers and musicians from China and abroad, including notable artists to perform in our program and share the love. Simultaneously, we debuted a caring through music theme song, sung by TME's first hyperreal virtual pop idol. This program's social media views have exceeded 500 million, raising awareness of autism among the public. In conclusion, we started 2023 on a high note with innovations across content and platform. This establishes a clear path for our creative and sustainable development in the coming year and beyond. Our progress in monetization efficiency, cost optimization, commercialization, and user experience has also 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 financial.

Shirley Hu, CFO

Thank you, Tony. Hello, everyone. Next, I'll discuss our results from a financial perspective. In the first quarter of 2023, our total revenue resumed year-over-year growth and reached RMB 7 billion, up by 5% year-over-year. With the success of effective cost control and improved operational efficiencies, 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 11% sequentially, propelled by rapid expansion of both online music paying users and ARPPU. Specifically, monthly ARPPU in Q1 was RMB 9.2, increased by RMB 0.9 from last year and RMB 0.3 from last quarter, recording four consecutive quarters of expansion. Online music paying users grew to 94.4 million, up by 18% year-over-year, representing a 5.9 million net adds sequentially. The strong ARPPU and paying user growth resulted from high-quality content and services, attracting member privileges and more effective promotions. As we extend use cases and service offerings, we are seeing growing demands on our key services and expect more opportunities to monetize these in this area in the future. Therefore, starting from this quarter, we have updated the definition of online music monthly active users and include certain IoT device users in our online music monthly active users. Additionally, revenue from advertising achieved strong growth year-over-year due to strong performance from our ad-based relationship 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 long-term growth potentials in advertising business. Social entertainment services and other revenues were RMB 3.5 billion, down by 13% year-over-year due to evolving macro headwinds and competition from other platforms. To adapt to the changing environment, we are focused on cultivating talented performers and differentiating our content to stabilize the revenue skew of traditional live streaming and making efforts to increase our competitiveness through ongoing product innovation and new initiatives in social entertainment services, such as audio live streaming, real-time interactive periods and international expansion. Gross margin in Q1 was 33.1%, up 5.1 percentage points year-over-year, primarily due to the strong growth of online music revenues, our effective control of content costs, as well as improved operational cost efficiencies. Now moving on to operating expenses. Total operating expenses for Q1 were RMB 1.2 billion or 17.5% as a percentage of total revenues, down by 2.7% from 20.2% as a percentage of total revenues in the same period last year. Selling and marketing expenses were RMB 212 million, down by 36% year-over-year. Overall, the reduced spending on user acquisition had impacted our monthly active users. Our core music subscription service delivered strong growth. We continued to take measures to improve expenses, closely monitored each promotion channel, added new promotion channels, and leveraged our promotional strategies to attract users and promote our products. When elaborating on the healthiness of the business and assessing ROI, we focus more on measures such as the level of engagement, user retention rate, etc. General and administrative expenses were RMB 1 billion, which was relatively stable compared to the same period of 2022. We continue to closely manage employee-related expenses by improving headcount efficiencies and investing in research and development to further empower music-related content creation, enhance production efficiency and improve sound quality and effects. Our effective tax rate for Q1 2023 was 12.2%. For Q1 2023, our net profit and net profit attributable to equity holders of the company were RMB 1.2 billion and RMB 1.1 billion. Non-IFRS net profit and non-IFRS net profit attributable to equity holders of the company were RMB 1.1 billion and RMB 1.4 billion, respectively. Diluted earnings per ADS was RMB 0.73, up 97% on a year-over-year basis. Non-IFRS diluted earnings per ADS was RMB 0.89, up 65% on a year-over-year basis. Such results demonstrate our commitment and the continued success of our operating efficiency improvement, as well as the impact from the share repurchase program which were integral to provide high-quality investment returns for our investors and shareholders. We remain confident about our financial performance, the development of our business and the overall industry. As of March 31 of 2023, our combined balances of cash, cash equivalents and term deposits were RMB 28.5 billion as compared with RMB 27.4 billion as of December 31, 2022. The increase was primarily due to our healthy operating cash inflow of RMB 1.9 billion for the first quarter of 2023. Such combined balance was also impacted by the change in exchange rate of RMB to USD at different balance sheet dates. In conclusion, we started 2023 with strong revenue growth momentum. And the revenue side of our online music services caught up with social entertainment services for the first time. Going forward, we continue to expect balanced growth of both ARPPU and paying users and remain confident in the growth potential of our advertising business. Social entertainment service continued to face evolving macro headwinds and competition from ad platforms, and we will continue to differentiate our content and entertainment from peers and create higher quality content to stabilize revenue in social entertainment services. Meanwhile, we're continuing to invest in new products and services, high-quality content and technologies, especially in areas such as IoT, gaming, singing room, and original content, as well as AI-generated content to build up a solid foundation for our healthy long-term growth. This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Operator, Operator

Operator Instructions. And today's first question comes from Alex Poon from Morgan Stanley.

Alex Poon, Analyst

Congratulations on very strong results. My first question is regarding our music subscriber growth business. 5.9 million net adds is a record high number and it's been accelerating from the last two quarters. Can management explain the drivers behind this? And how should we think about the net adds growth outlook for the rest of the year?

Tony Yip, CSO

The subscription revenue, which is very much our focus, as we are seeking a balanced growth between both paying users as well as ARPPU. Subscription revenue grew at a 30% rate on a year-over-year basis, which as you pointed out is an accelerated pace compared to previous quarters. This can be attributed to a number of factors. First, the quality as well as the value of our subscription service continues to improve. It was a long-term effort in the making. And we're providing more and more attractive content and features within that subscription service. Secondly, as a result of our long-term effort and focus, users' willingness to pay for premium features such as sound quality and sound effects continues to increase. Thirdly, we continue to improve the promotion of those high-quality content and product features. Finally, more effective as well as targeted promotional discounts around new subscriptions, as well as better retention programs also helped drive ARPPU higher. And as a result, we continue to expect very strong growth in our subscription revenue looking forward.

Operator, Operator

And our next question comes from Alicia Yap from Citigroup.

Alicia Yap, Analyst

I would like to get some update if management could provide us on how are we thinking about overall growth outlook, especially for online advertising, and also the music subscription, if you can give some color as well on social entertainment as well.

Tony Yip, CSO

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. Additionally, most likely from the second quarter, we expect our quarterly revenue from online music services to exceed social entertainment services to become our primary source of revenues. In terms of online music, we specifically expect subscription revenue to continue to deliver strong growth, driven by both paying users and ARPPU. A combination of advertising, long-form audio, artist merchandise, and IoT services are 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 margins to continue to improve, resulting in net profit growth that is likely stronger than previously expected.

Operator, Operator

And our next question comes from Lei Zhang from Bank of America.

Lei Zhang, Analyst

Congrats on the strong set of results. My question mainly on music gross margin. Can you give us some updates on your music gross margin in the fourth quarter? And how should we see the trend going forward? It seems we have a better outlook on our subscription and the music business for the rest of the year.

Shirley Hu, CFO

About music gross margin, we don't give the very specific detail number of this business. We will talk about the whole gross margin of our business. Gross margin is 33.1% in Q1, increased by 4.1% year-over-year. Now, there are some positive factors as follows. One, there's the strong growth of monthly ARPPU and net adds of new subscriptions. And two, the growth of advertisement revenue. Third, even social entertainment revenue faced downside pressure and the revenue mix change also had negative impacts on our gross margins. The revenue sharing costs of live streaming have been reduced, due to decreased promotional activities and increased operational efficiencies. We focus on good performers and high-quality content. Fourth, we will optimize the content cost model and increase the return on content requirement. We also benefit from the development of our in-house original content production. Fifth, we will optimize the technology and operational strategy related to bandwidth and storage capability and improve the utilization of our services and the equipment. Looking forward, in Q2 2023, we expect the subscription revenue and advertising revenue will continue to experience strong growth. We will continue to increase our operational efficiencies and monitor our costs. We expect our gross margin to increase sequentially in Q2.

Operator, Operator

And our next question comes from Wei Xiong from UBS.

Wei Xiong, Analyst

You guys mentioned just now that you've seen good recovery in offline and also in the performance market. So just wondering if management could elaborate on how we can participate more and potentially benefit from the offline event opportunities? And could these offline events generate meaningful incremental revenues for us and contribute to the better growth of our music segment this year? Or do they have synergies with our online music subscription business.

Ross Liang, CEO

After reopening, the live concerts and music festival market has been really successful and promising so far. Our unique positioning will be both of our online and offline capabilities. We will also be focusing on the quality rather than the quantity of the shows. So we will continue to upgrade and improve our TME Live IP by forging in-depth partnerships with our potential partners in the show's content, co-production, etc. This will definitely bring additional revenues to us and further contribute to the healthy development of TME's content ecosystem in the long run. We're seeing a positive trend in the industry driven by the increasing demand for live entertainment experiences and the willingness of consumers to spend money on tickets and events. However, it’s also worth noting that while the offline performances have been very promising, this is also a low-margin business for the organizers. Keeping this in mind, our approach will continue to be ROI-based with a prudent investment mindset. But we believe it’s going to be an exciting project for us in the long run.

Operator, Operator

And our next question comes from an unidentified participant from CICC.

Unidentified Participant, Analyst

Congratulations on strong performance. My question is about profit guidance. How does the management view the challenge of OpEx and net profit in 2023 and in the long term? Is it possible to share some guidance?

Shirley Hu, CFO

I previously guided on gross margin. So, I will talk about the operational expenses. In 2023, we will continue to focus on improving our efficiencies. Q1 selling and promotion expenses, operating on a low cost level, were down by 36% year-over-year. Overall, the reduced spending on user acquisition had impacted our MAUs. Our core music subscription service had strong channel growth. For headcount management, we will continue to invest in product enhancements, our technology innovations, new products, and new business, such as IoT, in-house content productions. Meanwhile, we will pay more attention to improve the profitability of our business and products. In Q1, the adjusted net profit margin was 20.9%, an increase on a year-over-year basis and sequentially. Looking forward to Q2, we expect our selling and promotion expenses and general administrative expenses to remain stable compared to Q1. With the growth of our revenue, we expect the adjusted net profit and adjusted net margin to all increase.

Operator, Operator

And our next question comes from Wei Fang from Mizuho.

Wei Fang, Analyst

Firstly, can you help update us on your super VIP membership program in terms of adoption? And secondly, I was just curious, how's your IoT monthly fee compared to your average mobile monthly fee?

Tony Yip, CSO

First of all, we continue to add more and more attractive member privileges behind our super VIP package. While we're not ready to disclose specific numbers, we are pleased to see the continued growth in the number of subscribers under the SVIP membership. In terms of the IoT services, we are seeing a very good growth trajectory, primarily in the in-car space. We continue to penetrate more car models. For example, recently we penetrated into several notable Mercedes models. In those models, we are offering subscription services and, very often, you do see those offered at full price, as opposed to the discounted price. Increasingly, you will be seeing separate price plans between the IoT services and the mobile device subscription.

Operator, Operator

And our next question comes from Yiwen Zhang from China Renaissance.

Yiwen Zhang, Analyst

My question is regarding the cooperation with Tencent; we see some really successful cooperation regarding the TME Live. How should we deepen such cooperation? Do we expect we should expand the cooperation to more areas?

Tony Yip, CSO

The WeChat music feature is actually powered by QQ Music, to a large extent. Our objective is to extend the QQ Music service onto WeChat to provide WeChat users with a high-quality music experience. This cooperation enables us to help music creators tap into the significantly broader reach offered by WeChat. To promote this service, WeChat users can enjoy our service for free for a limited time until June 30. From July 1 onwards, to access certain premium content and features, users will need to become a paying subscriber. We believe this cooperation will generate incremental revenues for TME as it will allow us to attract new subscribers in the long run. Given the significantly broader reach of WeChat compared to TME, we are delighted to be able to work closely with WeChat on this cooperation to bring our music service to more users, and we no doubt will continue to deepen cooperation with WeChat as we go.

Operator, Operator

We'll take our last question today from Lei Zhang from Bank of America.

Lei Zhang, Analyst

Can you give us some updates on a very hot topic recently on AI-generated content and how we can use this technology? Do we see this could help us to, say, in general, have some cost control, obviously on OpEx? Any updates or any feedback on AI-generated content topic?

Ross Liang, CEO

We'll continue to deepen our research into the applications based on large language models. One example of that is we'll be looking to develop a chatbot where users can chat about the kind of music they like to listen to and discover new content. We'll be cooperating closely with Tencent to develop applications based on their large language models as well as to work with open-source large language models to develop other applications related to image creation. Similar to Google's music large language models, we will look to provide tools to help musicians significantly reduce the barriers to music creation and lower the costs while improving the efficiency in helping them with song creation and lyric writing. In areas of social entertainment, we'll look to create virtual items that can ultimately be used in live streaming use cases.

Operator, Operator

We're now approaching the end of the conference call. I will now turn the call over to our host, Mr. Tony Yip, for closing remarks.

Tony Yip, CSO

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.