Earnings Call Transcript - TME Q2 2022

Operator, Operator

Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group Second Quarter 2022 Earnings Conference Call. Today, you will hear discussions from the management team of Tencent Music Entertainment Group followed by a question-and-answer session. Please be advised that this conference is being recorded today. Now I will turn the conference over to your speaker host today, Mr. Tony Yip. Please go ahead, sir.

Tony Yip, CFO

Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. TME announced its quarterly financial results today after the 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. 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, the CFO, will offer additional thoughts on our product strategies, operations and business development. 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. The company will discuss non-IFRS measures today, which we believe are meaningful metrics for evaluating our performance. Please refer to our earnings release and SEC filings for a reconciliation of these measures to the most comparable IFRS measures. With that, I'm pleased to turn over the call to Cussion, Executive Chairman of TME. Cussion?

Cussion Pang, Executive Chairman

Thank you, Tony. Hello, everyone, and thank you for joining our call today. In June 2022, we celebrated the first anniversary of launching our dual engine content-and-platform strategy. Over the past year, TME has continuously innovated business models and improved our all-in-one music entertainment content and product capabilities to better serve our users and partners. Meanwhile, facing the compact and evolving industry landscape, we continue to explore music's intrinsic commercial and cultural value. As always, we strive to nurture our music ecosystem and foster the sustained, healthy development of China's music industry. On the content side, we steadily unleashed our regional content production capabilities. To that end, we launched a new smart music assistant functionality in May, enabling creators to quickly make decisions through our proprietary PDM predictive model at key stages of the music production process, such as market appeal potential evaluation. Each of our tools facilitates more efficient production of high-quality work, evidenced by dozens of original songs produced and streamed more than 100 million times in the second quarter. Notably, 'Blessing of the Three Lifetimes', a song by Hai Lai A Mu dedicated to his beloved partner, was a blockbuster that we produced, promoted and helped to enlist on the variety show, 'The Treasured Voice'. It dominated major music charts and generated huge social media buzz comprising over 2.5 billion views and 350 million streams in the second quarter. Meanwhile, we continue to refine our original content catalog, focusing on key verticals such as gaming and hip-hop music. In the second quarter, we collaborated with popular game titles, including 'Honor of Kings', 'League of Legends', and 'Peacekeeper Elite', among others, and worked with well-known artists, including Angela Zhang, to produce 15 chart-topping game songs, notably the theme song of the 'Honor of Kings' game character, which has achieved the highest number of first-week streams among all QQ Music game songs released in the first half of 2022. What's more, in the trendy hip-hop genre, we collaborated with the NBA on its 75th anniversary album, the title single 'Time to Shine', performed by Chinese artist Lay Zhang and American pro-basketball star Nick Young, became the first Chinese theme song to appear in the NBA finals. Next, through Tencent Musician Platform, we spared no efforts to cultivate a community of indie musicians while creating a positive social impact. Tencent Musician Platform continues to empower musicians with a wealth of online and offline promotion capabilities and monetization avenues. In the second quarter, we introduced a new service for our musicians to easily mass-distribute musical work globally to over 150 popular platforms such as Spotify and YouTube with a single click, which has already brought 190,000 songs by over 10,000 musicians to overseas audiences as of the end of the second quarter. Kugou also now allows musicians to publish their songs easily on mobile phones and to self-host pay-per-view live events with merchandise sales embedded. For instance, we recently hosted a pay online birthday party for musician Liu Yan with a rich pipeline of additional parties yet to be unveiled. What's more, as a long-term support program for musicians, our Force Stage 2022 program launched with the open mic series in April, which has already produced offline performances by over 70 groups of musicians across 7 cities. Tencent Musician Platform also plays a pivotal role in exploring China's rich, deeply embedded social and cultural values through musical works. Notable examples in the second quarter include: first, 'New Trend in Chinese Ancient Style', an album birthed by up-and-coming and top musicians who gathered to promote Chinese culture; second, 'My Girls', our music creation plan for female musicians designed to promote female independence and self-awareness; third, our French album, 'MOSAIQUE', a joint effort between our musicians, French musicians and the French Embassy, which was showcased on the front page of Apple Music's recommendation list, further enhancing our musicians' international appeal. With our finger on the pulse of our users' practices, we continue to zoom in on both trendy and time-honored music experiences. To further enhance the quality and variety of music on our platform as well as our reputation as the go-to destination for verticals such as classical, DJ and hip-hop, we established strategic cooperative relationships with professional classical art institutions, launched the Kuwo DJ for Everything plan, and built up Kugou's new rap brand, among other initiatives in the second quarter. One remarkable success was the 2022 hit single, achieved nearly 700 million streams by the end of the second quarter on TME's platform. Moving on to TME Live, our comprehensive online and offline performances brand, we presented 132 high-quality live music performances since its debut 2 years ago. In the second quarter, in addition to online live concerts for Roy Wang, among others, TME Live was also proud to breathe new life into 2 legendary series of recorded concerts by household name artists Leslie Cheung and Jay Chou, supporting the ultra-high-definition visual and sound restorations enhanced by AI algorithms for selected events. These 2 huge hits went viral and dominated the top trending list, accumulating over 100 million unique viewers within the Tencent ecosystem and social media buzz of 6 billion views. Jay Chou's concert also set a new record in viewership for online concerts in the industry and his artist merchandise, including 2 action figures, sold through our Putao Mall and Tencent channels achieved close to RMB10 million in GMV in the second quarter. TME Live not only serves as an online stage for artists and musicians but also demonstrates our game-changing creativity offline. Through our TME Live in-house live house tour, we are providing participating artists and users with immersive, interactive experiences. Early starter artists held live events in the second quarter, and tickets for some events were sold out in just 2 hours. In summary, what matters most to music lovers, music creators, and the broader music industry are the primary areas where we will continue to invest and drive innovation, showcasing our ambition to support the sustained growth of the music ecosystem in China. That concludes the process 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 strategy. In the second quarter, we continued to innovate on our four pillars of entertainment, namely listen, watch, sing and play, to provide our users with a stage to express their musical tastes and build their sense of identity on TME's platform, which in return deepens the recognition and connection with our products. In terms of listen, in the second quarter, we added a variety of refined product features to provide a more professional music streaming experience. For example, we pioneered the synchronous lyrics display, which shows lyrics on the mobile home screen when streaming songs. We also rolled out a premium song feature supporting real-time song quality enhancement, which is now available with our Super VIP Membership and has been activated by 85% of the subscribers. What's more, to further improve users' music discovery efficiency, in the second quarter, QQ Music launched personalized recommendations on their home page, which suggest songs based on users' favorites, contributing to new highs for QQ Music recommendation penetration. In addition, Kugou rolled out a new search feature, allowing users to easily find different versions and remixes of songs. We also added features such as loop playback of our selected songs section and self-defined music chart preferences, to create a more personalized music streaming experience. As for watch, we shall add another dimension to users' immersive music entertainment experience. Based on our understanding of users' preferences, the music-related video content we'll provide to Weixin Video Accounts is very popular among users on Weixin, ranking among the best in the music category. We also continued to work with Weixin Video Accounts during the second quarter to boost our promotion capabilities, especially for indie musicians. The number of our musicians connected to Weixin Video Accounts continued to grow by double digits quarter-over-quarter. Meanwhile, our products also released new updates to strengthen user experience, including customized dynamic images on personal playlists and focus stations, which provide a video-enhanced listening experience across three scenarios: studying, sleeping aid, and meditation. The third pillar of the music entertainment experience we provide is sing. WeSing launched a major version upgrade in July to expand the experience of singing from work into a multidimensional performance experience. In the second quarter, we rolled out a 3D avatar functionality to serve as a user's identity card in the virtual world and allow them to generate unique content when recording and singing in a dressed-up avatar on stage. Additionally, in the second quarter, we provided innovative singing tools to stimulate users' interest in music creation and participation. WeSing offers industry-leading AI-based voice synthesis technology, allowing users to create custom songs that closely resemble their own voices. Kugou also unveiled its first singer in the voice of Gen Z celebrity Yang Chaoyue, enabling users to customize and synthesize songs with just one click. Driving on the trend of utilization, we also enhanced our play elements by extending our use cases and monetization opportunities across music-based virtual interactions. In the second quarter, TMELAND, our immersive virtual platform, teamed up with Adidas Originals and hosted China's first virtual rap concert, Landing on OZ Future, which attracted over 7 million views, setting a new record in viewership for TMELAND. We also continued to upgrade our VR album rooms, which combine listening to songs with a virtual exhibition hall for artists. A total of 13 stars have had album rooms since launch, including singer and actress Cyndi Wang, and musician Liu Shuang, who joined in the second quarter. As a premier developer of innovative listening, watching, singing, and playing functions, QQ Music has continued to improve its year-over-year metrics, confirming our robust content operations. Our long-form audio offerings serve to round out our music portfolio while simultaneously differentiating our content. Notably, we have been strengthening our brand in sleeping aid content, one of the fastest-growing categories on QQ Music. We have teamed up with professional organizations, music labels, musicians, hotels, and other ecosystem partners to provide diverse, professional sleeping aid content made by AI or real-world celebrities, resulting in sequential growth in user scale, streaming volume, and the time spent in this vertical. In addition, in the second quarter, we continued to enhance our collaborations with Tencent Video to successfully promote popular audiobooks and associated IPs such as the third season of beloved dramas. TME's long-form audio offerings of the same title enjoyed a mass upswing in their streaming volumes. With that, I'd like to give the floor to Tony to review our business operations. Tony, please go ahead.

Tony Yip, CFO

Thank you, Ross. Hello, everyone. In the second quarter, our online music MAU was 593 million, down year-over-year primarily due to reduced marketing spending. However, subscription revenue continued to deliver robust year-over-year and quarter-over-quarter growth, along with paying user growth and a sequential rebound of ARPPU. Meanwhile, we continue to strengthen engagement among our core user cohorts by deploying richer content, innovative product features, and continual new iterations. Our IoT service MAUs continued to achieve double-digit growth year-over-year as we enrich the use cases of our products and establish collaboration with broader groups of partners. For example, we now partner with the top 50 passenger vehicle and top 15 electric vehicle manufacturers by sales, bringing car owners the ultimate in-vehicle music enjoyment through new features such as Dolby Surround Sound and thousands of customized sound effects. In addition, through our partnership with Little Genius Smart Watch, which is mostly used by students, WeSing MAU in the smartwatch segment grew triple digits year-over-year. Despite the macro headwinds that weighed on our online music services revenue in the second quarter, subscriptions maintained their growth trajectory with 18% subscription revenue growth year-over-year. We are also confident we can sustain the ongoing rebound of our ARPPU while continuing to boost paying user growth during the remainder of this year. As a result of macro changes and the resurging COVID-19 outbreak in the second quarter, our advertising revenue softened year-over-year. However, it rebounded quarter-over-quarter, driven by the June 18 e-commerce sales promotions as well as ad sponsorship opportunities arising from TME Live and TMELAND. In addition, we consistently innovated to build a diversified advertising portfolio. Our incentive ad-based free listening mode is making good progress, and during the second quarter, we launched a host of new advertising formats and inventories on music charts, search pages, banners, and playlists, among others. As we have strengthened our advertising monetization with additional avenues, we also successfully attracted well-known brands such as Sprite, Beijing-Hyundai, and Pepsi to sponsor a variety of customized online and offline live events recently, attracting participation by dozens of popular artists and aspiring musicians in these highly engaging events. We continue to deepen our content partnerships to enrich the user experience and explore additional monetization avenues in digital music. First, accompanying the launch of Jay Chou's latest digital album, 'Greatest Works of Art', we tailored diverse activities for his fans such as customized vinyl record player interfaces, sound effects, artist merchandise, and interactions in Jay Chou's virtual room. Copies sold exceeded 6 million by the end of July, marking another digital album blockbuster on our platform. Next, in the second quarter, we entered into strategic partnerships with Time Fengjun Entertainment, the music label of TFBOYS and Teens in Times, Avex China and the talented female artist XIN Liu, among others, where our platform has a head start period on the latest music, customized artist merchandise or unique artist-fan interaction events. Third, we joined hands with YH Entertainment Group, a well-known artist management company, to launch artist subscription packages for its 13 well-known artists such as Meng Meiqi and Justin Huang, providing customized audio and video content for their subscribing fans. We also doubled down on our efforts to build a young and trendy cultural community to expand our Gen Z user base. In the second quarter, our campus musician cultivation plan involved our campus, organized the 'Wish for a Happy Graduation' event, and teamed up with artist Mao Buyi and campus musicians Yang Ge to release the song 'Small World'. These initiatives brought inspiring messages to the first group of graduates born in the 2000s, resonating strongly with the new graduates demographic. What's more, we began to bring offline music festivals back to our audience in the second quarter, such as Kugou's live performance parade, which debuted in Hangzhou in May and the first wave music festival partnered with SAIC Audi in June, encouraging online live streaming and offline interactions between fans and musicians. These events are just the beginning of our return to live performances. We have an exciting lineup of offline experiences planned for the coming quarters. Now let's turn to our social entertainment services. Its MAU sequentially improved, while paying users declined year-over-year due to competition and industry adjustments. We will continue to improve our competitiveness through ongoing product innovations and new initiatives such as audio live streaming and virtual interactive product offerings. For WeSing, we launched its latest version with tools to energize the singing experience while lowering the barrier to participation. For instance, the upgrade includes a one-click voice enhancement feature that customizes voice improvement based on the song's rhythm as well as user's voice, volume, and timbre, producing a more natural effect. Along with other upgrades mentioned earlier, these assets paid off as evidenced by the strong double-digit year-over-year expansion in karaoke room penetration and user time spent in the second quarter, in addition to the year-over-year growth in recordings, penetration, and user time spent. In the second quarter, WeSing also capitalized on the success of the hit song 'Lonely Warrior', which debuted on TME and achieved 4 billion streams across our platform since its launch, with a nationwide cover contest to convey positive cultural power to school students, attracting a broad group of participants online. In response to the competition faced by traditional live streaming services, we continue to expand our content verticals and bring more differentiated content to improve user experience. QQ Music live streaming continued to expand the scale of its audio live streaming content offerings, where expanded content across sleeping aid, studying, and commuting use cases received wide user acclaim. In the second quarter, it also collaborated with Tencent Musician Platform to organize 39 sessions of real-time live singing events, 'Meet, Let's Sing', connecting musicians and their fans and gaining over 10 million viewers. These efforts contributed to double-digit growth in the average daily number of hosts and viewers as well as a year-over-year increase in QQ Music live streaming revenue in the second quarter. We were also successful in exploring overseas markets with audio live streaming activities such as chat rooms, leading to strong revenue growth in overseas markets in the second quarter. We also delved into the virtual idol and animation live streaming verticals favored by the younger generation. WeSing added a new live 3D function, which captures the host's expressions and movements in real-time and allows the host to use an avatar for live streaming and multi-person interactions. Additionally, Kugou's live streaming hosts, together with its self-owned virtual idol, and Tencent Animation and Comics, jointly organized a number of events to recommend popular comic IPs to ACG fans through live streaming, during which participating hosts recorded triple-digit growth in user time spent and the number of viewers in the live streaming rooms. Last but not least, I'd like to close with a word about our social responsibility initiatives. On Children's Day, we worked with Tencent to launch the Little Red Flower Charity Concert, uniting over 30 groups of artists and musicians in a heartwarming live concert for children with special needs. We also partnered with La Mer to host a special public welfare concert for World Oceans Day, launching a welfare song, 'Blue New Life', by Mao Buyi to create environmental awareness around the marine ecosystem. We're proud of these efforts to leverage the emotional power of music to advance our social commitment. To conclude, as our dual engine content-and-platform strategy moves forward, we will continue to use technology to elevate the role of music in people's lives and support the sustained development of the music industry with our strong and growing presence. With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.

Shirley Hu, CFO

Thank you, Tony. Hello, everyone. Next, I'll discuss our results from a financial perspective. Our total revenues for Q2 2022 were RMB6.9 billion, down by 14% year-over-year and up by 4% sequentially. In the second quarter of 2022, our IFRS net profit was RMB892 million and non-IFRS net profit was RMB1.07 billion, which represented a sequential increase of 13% as a result of our effective cost control and improved operating efficiency. In Q2 2022, we are more focused on the return of the promotions for subscription service and continued to strengthen content operations. We achieved significant growth in subscription service. Music subscription revenues grew to RMB2.11 billion, up by 18% year-over-year and by 6% sequentially. Online music paying users grew to 82.7 million, up by 25% year-over-year, indicating 2.5 million net adds sequentially as we benefit from expanded sales channels and paying users' loyalty resulting from the ongoing efforts we made to improve users' willingness to pay for music and the high-quality content and services we provide. Monthly ARPPU was RMB8.5, representing a decrease from RMB9 in the same period last year and an increase from RMB8.3 in the fourth quarter of this year. Our strategy to grow our music business in a healthy and sustainable way has started to bear fruit, contributing to the continuous growth in music subscription revenue. Revenues from advertising decreased year-over-year as the advertising business continued to be negatively impacted by the industry adjustment and the outbreak of COVID-19. However, advertising revenues grew sequentially as advertising business began to recover moderately from the impact of COVID-19 since June. The June 18 e-commerce sales promotions also contributed to the sequential increase in advertising revenues. We are proactively expanding added inventories and optimizing and rolling out innovative advertising formats to manage these challenges. We remain confident about long-term growth potential and expect advertising revenues to continue to recover moderately in the second half of 2022. Social entertainment services and other revenues were RMB4 billion, down by 20% year-over-year as we face an evolving macro environment and intense competition from our platform. To adapt to the changing environment and stabilize revenue, we have differentiated our content offerings by enriching our virtual interactive product portfolio and expanding cross-platform collaboration. Meanwhile, we continue to invest in audio live streaming and expand our international business, resulting in growth in revenues from audio live streaming and overseas business year-over-year and sequentially. Gross margin in Q2 2022 was 29.9%, down by 0.5% year-over-year because the decrease in our total revenues outpaced the decrease in our total cost of revenues as some of them remained fixed in nature. Gross margin improved sequentially due to our effective control on content costs, including revenue-sharing fees for live streaming business and improved operational cost expenses. We will continue to take measures to manage costs effectively and improve overall expenses. Now moving on to operating expenses. Total operating expenses for Q2 2022 were RMB1.4 billion or 20.5% as a percentage of total revenues, down by 0.4% from 20.9% as a percentage of total revenues in the same period last year. Excluding the impact from the expenses related to our application for secondary listing, operating expenses as a percentage of total revenues would have decreased by 1% year-over-year. Selling and marketing expenses were RMB303 million, down by 55% year-over-year. During the quarter, we continued to take measures to improve the business, closely monitoring the ROI of each promotion channel, utilizing external promotion channels, and leveraging our internal traffic to attract users and promote our brands. The reduced marketing spend resulted in the loss of some casual users and impacted our music MAUs negatively. However, our music subscription service continued to grow rapidly with sales growth in paying users and the level of user activities. General and administrative expenses were RMB1.1 billion, up by 11% year-over-year. Excluding the impact of approximately RMB44 million from the expected expenses in Q2 related to our application for secondary listing, G&A would have increased by 6% year-over-year. We continue to invest in product enhancements, technology innovations, and more diversified product offerings while closely managing employee-related expenses by improving headcount efficiency. Our effective tax rate for Q2 2022 was 12.2% compared to 11.5% in the same period of 2021. The increase in effective tax rate was mainly due to some of our entities entitled to different tax benefits in 2021 and 2022. For Q2 2022, our net profit was RMB892 million and net profit attributable to equity holders of the company was RMB856 million. Non-IFRS net profit was RMB1.07 billion, and the non-IFRS net profit attributable to equity holders of the company was RMB1.03 billion. Non-IFRS net profit margin was 15.4%. As of June 30, 2022, our combined balances of cash, cash equivalents, term deposits, and short-term investments were RMB25.8 billion compared with RMB25.9 billion as of March 31, 2022. During the three months ended June 30, 2022, net cash generated from operations was RMB1.2 billion, and the cash used in share repurchases was RMB669 million. We also include a net cash outflow of RMB497 million for the acquisition of shares in various subsidiaries and associates. This combined balance was also affected by the change in the exchange rate of RMB to USD due to different balance sheet bases. Looking forward, we will continue to focus on our core business and invest mindfully in new products and services, including long-form audio and international business to maximize our investment returns and future growth potential. Meanwhile, we will continue to implement cost control in areas including revenue-sharing fees for social entertainment business, content royalties, operating costs, headcount-related costs, and the savings in marketing expenses to improve overall operational efficiency. This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Operator, Operator

Our first question will come from Alex Poon with Morgan Stanley.

Alex Poon, Analyst

Congrats on a very strong quarter on the profit side. My question is related to gross margin. Gross margin is up about 2 percentage points on a sequential basis in Q2. And despite the social revenue was flat on a Q-on-Q basis, can management explain on each of the segment gross margin trend from Q1 to Q2? And how should we think about the second half?

Shirley Hu, CFO

Okay. About the gross margin, this quarter, we took more measures to control costs and improve operational efficiency. And we have started to see the benefits. Gross margin in Q2 increased by 2% sequentially. The following factors have positively impacted gross margin. First, the revenue-sharing ratio for live streaming has been controlled and continued to decrease sequentially. Second, we increased the requirements for content costs and restructured agreements with some music labels, which positively impacted our gross margin. Third, we optimized technology and operation strategies related to bandwidth and storage capacity, improving the utilization of our services and equipment, which reduced operational costs sequentially. Lastly, subscription revenue growth and advertising revenue recovery also had a positive impact on gross margin. We will continue to focus on increasing efficiencies across all business units and the cost items, and we expect our gross margin to increase in the next quarter.

Operator, Operator

Our next question will come from Lei Zhang with Bank of America.

Lei Zhang, Analyst

Congrats on the solid results. My question is mainly about your music ARPPU. We noticed a sequential increase in music ARPPU, and can you provide more insight into this? How should we view the ARPPU trend going forward? Can you also give us more color on the Super VIP, like adoption rate, user feedback, and its contribution to the ARPPU?

Tony Yip, CFO

Yes. In terms of the ARPPU, we saw a sequential improvement from last quarter's RMB8.3 to this quarter's RMB8.50. This is a result of more effective promotions as well as more discipline in how we manage marketing spending. Our focus, as we mentioned last quarter, is on the quality of subscription revenue growth; our overall target is healthy growth in both paying users and ARPPU. We've been able to achieve that in the second quarter, and we expect this growth trend to continue into the rest of the year.

Operator, Operator

Our next question will come from Alex Yao with JPMorgan.

Alex Yao, Analyst

I have a couple of questions on the music subscription side of the business. Can you share your progress in pushing up the paywall? What percentage of the company is now behind the paywall? What target are you aiming to achieve by the end of the year? Additionally, regarding nonpaying music, the user experience is becoming increasingly limited. What are you trying to do with these users? Are you going to let them go, or do you want to engage them through other strategies and features?

Tony Yip, CFO

Well, first of all, we continue to be on track with our subscription package as we have more discussions with our label partners to add more content into the premium package. That progress is going well, and we expect there to be more content partners added to the paywall in the second half of the year. Regarding the balance between free user experience and paid user experience, we previously mentioned the incentive ad-based free listening mode. We are seeing very good progress with that free listening mode. We believe it's a good way to strike a balance because we know that, similar to any online entertainment platform, there will always be a portion of users with a very low probability of converting to subscribers. Thus, we need to find a way to monetize them. The incentive ad-based free listening mode is a good way for us to do so. Currently, close to 10% of our advertising revenue is generated by this free incentive ad method, and that's growing well. We continue to expect this to serve as the balancing factor to provide a good free user experience.

Operator, Operator

Our next question will come from Alicia Yap with Citi.

Alicia Yap, Analyst

I have a question related to advertising. Can management share with us the sentiment among advertisers? Which industry verticals have recovered strongly, and which are still weak? When can we expect ad revenue to reaccelerate growth on a year-over-year basis?

Tony Yip, CFO

Yes. Obviously, in the first half, due to industry adjustments on splash ads and pandemic measures, advertising revenue was quite weak. However, we are starting to see a moderate recovery in advertising demand as the pandemic improves along with the macroeconomic situation. Coupled with our ongoing efforts to expand our advertising format as well as inventories, we expect to see recovery in advertising revenue in the second half. In terms of verticals, this quarter we see decent demand recovery, particularly from e-commerce, especially given the June season, as well as the consumer staples category, specifically food and beverages and the automobile industry.

Operator, Operator

Our next question will come from Xueqing Zhang with CICC.

Xueqing Zhang, Analyst

My question is related to TME Live. We saw some other short video platforms launch online live performances during the summer. How do we position TME Live, and how do we view the competitive landscape? What's the strategy and monetization plan for this business?

Cussion Pang, Executive Chairman

For TME Live, we have a very good plan not just for top-tier artists, but we are also growing the long tail and various verticals. We have strong cooperation with Weixin Video Accounts, enhancing our distribution capabilities for live projects. We mentioned some top-tier artists like Jay Chou and Leslie Cheung trying to release traditional and very popular classical concerts, which have generated significant interest from users. We also leverage technology to improve the overall video and audio quality to ensure a better user experience. We continue to introduce artists and interactive capabilities to our TME Live program. So, we have strong confidence in the success of TME Live, especially with our ongoing online and offline collaborations for concerts, laying the foundation for exciting future programs.

Operator, Operator

Our next question will come from Wei Xiong with UBS.

Wei Xiong, Analyst

Congrats on the earnings this quarter. My question is around the online music subscription or paying user addition. We see that this quarter, the net paying user addition was a little bit lower than the previous run rate as a result of our focus on quality growth. Will that impact paying user retention?

Tony Yip, CFO

Yes. As we mentioned before, our overall goal for the subscription revenue for online music is to see healthy growth in both subscription revenue and not to lean overly on just either the subscribers or the ARPPU. We want a healthy growth in both metrics because we think the whole industry will benefit from focusing more on the quality of service as opposed to just price. We believe there's a lot of value in the music subscription service that we offer. Our continuous effort to cultivate users' willingness to pay for the subscription continues to yield good results. By maintaining a balanced approach, we lay a stronger foundation for long-term growth, which we continue to see as having strong potential. Additionally, we are highly focused on expanding the privileges and services that we offer within the subscription plan. As we mentioned this quarter, we talked about the Super VIP offer, which at RMB30 a month—double the price of a regular premium subscription—provides access to numerous digital albums and a superior music experience, which has been adopted by over 80% of those subscribing to the Super VIP. This, combined with our disciplined approach to cost control and promotional spending, helps improve ARPPU.

Operator, Operator

We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Mr. Tony Yip, for closing remarks.

Tony Yip, CFO

Okay. Thank you very much for joining our second quarter earnings call. If you have further questions, please feel free to contact the Investor Relations team. This concludes today's call. We look forward to speaking with you all again next quarter. Thank you, and goodbye.

Cussion Pang, Executive Chairman

Thank you so much. Goodbye.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.