Earnings Call Transcript - TME Q2 2023

Tony Yip, CSO

Good evening and good morning. Welcome to Tencent Music Entertainment Group's Second Quarter 2023 Earnings Webinar. TME announced its quarterly financial results today before the U.S. market opens and 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. Ross Liang, our CEO; and I, Tony Yip, as CSO, will offer additional thoughts on our product strategies, operations and business developments. Finally, with Shirley Hu, our CFO, we will address our financial results before we open the call for questions. Before we continue, I refer you to our safe harbor statements in our earnings press release which apply 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 will 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 Kar Shun, Executive Chairman of TME. Kar Shun?

Kar Shun Pang, Executive Chairman

Thanks, Tony. Hello, everyone, and thank you for joining our call today. We're pleased to report a solid second quarter with total revenues increasing by 6% and adjusted net profit increasing by 48% year-over-year. These solid results were once again supported by our online music services and strong momentum that we’ve built over the past 10 years. TME has been dedicated to driving the health and development of China's online music industry. After our long-standing efforts, we are pleased to see users becoming increasingly accustomed to and willing to pay for copyright music, whether for songs they want to listen to or for the premium listening features they enjoy. On this path, we are happy to see that our online licensing paying ratio and monthly ARPPU reached an all-time high of 16.7% and RMB9.7 respectively. Such achievements drove revenues from this business segment in the recorded quarter to exceed that of social entertainment services for the first time in our history. This is a strong testament to our progress in developing a robust online licensing business model and marks a significant step along TME's growth plan. Looking at our social entertainment services, starting from the latter part of the second quarter, we have proactively implemented several service enhancements and risk control measures to provide users with a more music-centric experience, as well as to reinforce controls. One of these measures is expected to put pressure on revenues from our social entertainment services throughout the second half of 2023 and adversely impact our total revenue for this year. We believe they will provide users with an optimized user experience as well as pave the way for the Group's healthier and more resilient development long-term. Moving on to our operational progress on content: as key components bolstering our music ecosystem, our comprehensive content ecosystem sets us apart from other industry players. During the quarter, we continued boosting the vibrancy of our content ecosystem among artists, creators, and labels. On the front of top-tier labels and artists, we strengthened our partnerships with them to expand our industry influence and content appeal. In July, we held the Tencent Music Entertainment Awards 2023, also known as TMEA, in Macau. It was a two-day event consisting of two music ceremonies and two music festivals joined by a prominent lineup of over 80 well-known domestic and overseas musical groups and singers. We were able to successfully organize such a large-scale offline performance of four music events over a single weekend, coupled with exceptional launches of musicians demonstrating our strong industry influence and organizational capabilities with an audience of nearly 40,000 people participating in our two-day event. Our TMEA also inspired social media interaction with over 10 billion views, once again creating a national music sensation. Furthermore, we remain the partner of choice for famous labels and artists across a wide range of content offerings and merchandise. This enables us to provide music labels with rich selections of music content and products, as well as a unique and trendy experience at TMEA. For example, in the second quarter of 2023, we renewed our strategic cooperation with Forward Music, allowing us to offer a wider variety of Chinese pop music to users in China and abroad. In addition, we cooperated with Jackson Yee on the release of his new physical album, Liu Yanfen. Featuring a head-start release with TME, this partnership delivered an outstanding sales record for Liu Yanfeng on our platform. Another highlight was the debut of Chris Lee’s new digital album, which received strong market demand, along with the sales of her album's limited edition merchandise. In addition, we continue to expand our vertical music content to attract a younger audience. For example, our milestone records team, which focuses on hip-hop, added over 440 songs to our hip-hop music library, some of which include 30-day head-start releases. On the front of up-and-coming musicians, we are helping artists rise in visibility within the industry by providing critical technological assistance and integrated resources that support their global music journey. In July, we upgraded Venus, our all-in-one music production and promotion destination, to better help Indian musicians improve their efficiencies in producing, transacting, and promoting songs. The latest iteration integrated our full suite of AITC in Venus, such as AI-enabled music separation, music generation, online rating, and creation of demo songs, significantly improving creators' efficiencies and streamlining the music creation process while elevating their music quality. Venus has attracted a diverse range of creators and labels, recording music transactions valued at over RMB10 million as of the second quarter. Furthermore, we've leveraged our differentiated and comprehensive set of resources and opportunities to further support up-and-coming musicians and foster creativity. For instance, our Tencent Musician platform strengthens its holistic support system for musicians, which ranges from offering additional exposure through offline performances to launching theme programs that promote creative content production. In the second quarter, our Emerging Force program sent several of its emerging artists to seven offline music events. Our deep involvement across the music value chain enables us to have extensive insights into China's music industry, and we, in turn, hope to give back to the industry by contributing to its advancement. In June of this year, our TME Research Institute released its first consecutive annual edition of the 2022 year-end report of digital music in China. Through in-depth data analysis and multi-faceted interpretation, we provide comprehensive and pioneering insights as well as case studies aimed at promoting a healthier and more sustainable industry. That concludes the overview of our second quarter and the progress we have made across our growing content capabilities. I would now 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, Kar Shun. Hello, everyone. We are excited to have reached an important milestone of 100 million online music paying users in June. This demonstrates our strength as China's leading online music platform and reflects our growing appeal to music lovers. As we see an increase in growth potential materializing from users shifting music consumption mindset, we are continually elevating our music experience to meet users' high standards and their stronger desire for quality. In addition to the progress in our content ecosystem, as Kar Shun shared earlier, we are continuing to optimize user experience on our platform to reinforce the attraction of our lively and passionate music community among music lovers. Alongside the ongoing refinements to our distinctive and immersive listening experience, we are also exploring more innovative and personalized means of entertainment and interaction. In terms of user experience, we optimized premium features and the product experience to attract user engagement and stickiness on our platform. For example, QQ Music upgraded its series of audio enhancements to ensure optimal sound quality and effects, which are now also available in our in-car service. We also launched QQ Music audio certification, holding high industry standards for sound quality across hardware devices such as earphones, speakers, music players, and car audio systems, allowing access to superior sound quality in our users' daily lives. QQ Music also expanded its 3D music player offerings, including players customized for specific music genres, thus bolstering product attractiveness. We've highlighted a more intuitive interface and engaging, unlimited music discovery function in the recent upgrade of QQ Music flagship X. We have also unveiled its Viper 3D feature, providing an immersive live concert-like listening experience to users. Furthermore, we introduced a brand new functionality on QQ Music that enhances users' recording and singing experience, which includes optimized working details and an improved balance between human voices and accompaniment, alongside wider selection of sound effects and recording skins. Coupled with these enhancements, we have also strengthened our ability to recommend music through refined user preference analysis and optimized algorithms, allowing for convenient and individualized music discovery. All of these efforts have contributed to high listener engagement derived from various recommendation scenarios, resulting in a larger portion of the recommendation-related streaming share. In terms of listening scenarios, we expanded our music services to additional use cases, such as various IoT scenarios to serve a larger audience in a more immersive way. Specifically for in-car usage, we improved user experience across sound quality and music recommendation functionalities. For instance, QQ Music launched its in-car service in June this year and forged partnerships with more carmakers like SAIC and Volkswagen, among others. We also expanded operations with more car manufacturers and integrated our in-car offerings into various car models, thereby tapping into a wider user base who can enjoy a seamless, native in-car music listening experience. Alongside the recovery of offline orders driving time of high lines, the use of in-car music services has seen a notable uptick during the Labor Day holiday period and the summer vacations. In terms of user engagement and interaction, we created highly individualized and immersive music entertainment experiences for users through our AI-driven features. We are fulfilling their desires for trending opportunities by keeping pace with major innovations. On the online music side, we started to test AI-enabled listening experiences alongside our AI music technology company to join users' listening journeys, offering a variety of topics including details on music and song or playlist recommendations based on real-time interactions. This new function will offer users a fun and interactive way of discovering music, providing a more personalized and engaging music-listening experience. On the live streaming side, we introduced AI-generated virtual gifts to facilitate more creative interaction between users and anchors. Such virtual gifts can be automatically generated based on a simple text description users provide, promoting a more unique user-performer bonding experience during live streaming. All these efforts, in turn, reinforce our platform traction among users. As we continue to explore opportunities in China's online music arena, our dedication to copyright music will position us to better ride the wave of users' changing music consumption habits, promoting greater possibilities across the music industry and creating long-term value for our shareholders. With that, I'd like to give the floor to Tony to review our business operations. Tony, please go ahead.

Tony Yip, CSO

Thank you, Ross. Hello, everyone. For online music services, our efforts over the years to cultivate users' copyright awareness are bearing fruit. Paralleling U.S. users' increased willingness to pay for premium music content and optimal listening experiences, we continue to see exciting growth in online music subscriptions. The number of paying users reached a record high of 99.4 million in the second quarter, driven by a combination of operational measures such as refined strategies, opportunities associated with trending topics and special occasions, enhanced subscriber privileges, and more attractive music content. These factors translated into acquiring new paying users, retaining churned subscribers, and improving user retention. In June, we launched a premium package tailored to couples, promoting customized features and privileges within the couple experience. In terms of paying user spending, we witnessed a monthly ARPPU increase for the fifth consecutive quarter, reaching an all-time high of RMB9.7 in the second quarter. The ongoing uptick was primarily due to effective promotional activities, a consistently high user retention rate, and the increased appeal of our subscriber privileges, among other factors. Additionally, we made significant progress in our in-car music services, seeing expanded user base and enhanced monetization, primarily as a result of extensive relationships with more carmakers and its applications in additional car models. Online music services beyond subscriptions also delivered robust growth as we further enhanced monetization. For advertising, our diversified product portfolio and innovative ad formats remain highly attractive to advertisers across different industry verticals. Advertisers from e-commerce, gaming, and travel industries were leading on the advertising spend list. Our ad-supported model continued to outperform our overall advertising services with the penetration steadily improving and revenues significantly increasing. Sponsorship advertising attracted various brand advertisers, as our IP mix provided them with a broad and diverse target audience, such as our campus music contest Nexinga2023, our signature music event, Wavemaker, QQ Music, Danone Music Festival, and Coal Music Festival, which included barbecue-related themes. This portfolio of music IPs attracted sponsorships from brands like Sprite, Toning, JD.com, and more. As for artist merchandise, we also saw exciting performance driven by our strong relationships with well-known artists, which typically gives us a head start in album releases and various merchandise sales. Moving to social entertainment services, as Kar Shun mentioned, starting from the latter part of the second quarter of 2023, we have implemented several service enhancements and risk control measures across our live streaming services to provide users with a more music-centric engagement experience. This involved adjusting certain live streaming functions and adopting more stringent compliance protocols. These measures have led to a weaker-than-expected performance in our social entertainment services during the reported quarter and will bring adverse effects on revenues throughout the remainder of this year. As a result, we expect our total revenues for the Company to experience a low to mid-teens percent decrease year-over-year for the third quarter of 2023 and a low to mid-single-digit percent decrease for the full year 2023 compared with 2022. Nonetheless, we remain confident that we will deliver year-over-year bottom line growth for 2023, driven by the continued strong performance of online music services. We also believe these efforts will lay a more solid foundation for TME's sustainable and resilient development in the long run. Meanwhile, we are also trying out new interactive features such as AIGC-empowered virtual gifts and bullet chat functions in our live streaming services to enhance user interaction experience while increasing our product competitiveness. Additionally, we continue to explore overseas opportunities, leveraging our operational experience in the domestic market; for example, we further enhanced user experience in overseas singing rooms and introduced new localized features to boost engagement, showing satisfactory initial results in both penetration rate and user engagement. Last but not least, TME continues to fulfill its social responsibilities distinctively through a strong commitment to music-based social welfare activities. In the second quarter, we collaborated with Tencent Charity and other public welfare organizations to help hold the Little Red Flower Charity Concert aimed at supporting children. In May, we hosted the first concert to raise public support for children with hearing impairments, helping seven hearing-impaired children replicate their own voices using our AI technology, allowing them to create and perform alongside several musicians. On Children's Day in June, we convened another concert for children in rural areas, giving them a platform to express themselves through music while promoting music education in those communities. These programs not only raised public emotional resonance but also allowed us to explore music possibilities across various areas. Moving forward, we will continue to drive advancement across our content and platform to deliver a differentiated, superior music entertainment experience exclusively available on TME's platform while sharing the benefits of industry development with all other stakeholders along the music value chain. I am so proud of the progress we have made both as a company and as architects of the online music industry's future. Thank you once again for allowing me to be a part of this incredible journey. Now, I would like to turn the call over to Shirley, our CFO, for a closer look at our financials.

Shirley Hu, CFO

Thank you, Tony. Hello everyone. Next, I'll discuss our results from a financial perspective. In the second quarter of 2023, driven by significant growth in our music subscribers and the advertising business, our total revenues reached RMB1.3 billion, leading to a 6% year-over-year increase. Revenues from online services accounted for 58% of total revenues, surpassing the revenue contribution from social entertainment services for the first time in our history, marking a significant milestone for us. IFRS and non-IFRS profits were RMB1.3 billion and RMB1.6 billion, respectively. The net operating profit margin reached 21.7% this quarter. Music subscription revenues in Q2 reached RMB2.9 billion, up by 37% year-over-year, alongside an 11% expense increase owing to our rapid expansion of online services and the continued increase in monthly ARPPU. Specifically, the number of paying users for online services grew to 99.4 million, a 20% year-over-year increase, reflecting a net gain of 5 million users sequentially. Monthly ARPPU has grown for five consecutive quarters, reaching an all-time high of RMB9.7 this quarter, a 14% year-over-year increase and a 5% sequential increase. Our optimized operational use, appealing member privileges, attractive music content, and disciplined promotional strategies have driven this growth and will continue to ensure the foundation for sustainable growth in our music subscription business. Additionally, revenues from advertising experienced strong year-over-year growth, driven by our ad-based model's robust performance and lower advertising revenues from Q2 2022. The neo 618 E-commerce sales event generated a higher demand for advertising, contributing to a sequential increase in advertising revenues. We continue to explore new products and formats to provide more diversified options for our advertisers and remain confident in the long-term growth potential of our advertising business. Social entertainment services and other revenues were RMB3.0 billion, down by 25% year-over-year. Starting from the latter part of the second quarter of 2023, we implemented multiple adjustments to live streaming functions and certain risk control measures, including more stringent requirements for compliance intending to provide a better music-centric user experience. These measures have negatively impacted our live streaming revenues this quarter, and we expect this negative impact to persist in the second half of 2023, leading to lower-than-expected revenues for the full year 2023. However, we believe these measures are beneficial to our users and will help lay a healthier and more sustainable foundation for our long-term growth. Gross margin in Q2 was 34.3%, up 4.4 percentage points year-over-year, primarily due to several factors: first, online music services have shown strong growth momentum with high-quality subscription revenue driven by continued user growth and ARPPU, along with robust growth in advertising revenues. Second, we are gradually ramping up our own content, positively impacting the margin. Finally, the continuous improvement of operational cost efficiency has also contributed to the increase in gross margin this quarter. Now moving on to operating expenses, total operating expenses for Q2 were RMB1.3 billion or 17.2% as a percentage of total revenues, down by 3.3% from 20.5% as a percentage of total revenues in the same period last year. Sales and marketing expenses amounted to RMB211 million, down by 30% year-over-year as we optimized our promotion strategies, reducing user operation spending and monitoring the ROI of each promotion channel to focus on high-quality paying user growth. Thanks to effective promotional measures, we have seen significant growth in subscription revenues this quarter. General and administrative expenses were RMB1 billion, down by 6% year-over-year. This decrease stemmed from improved headcount expenses. Our effective tax rate for Q2 was 12.2%. For Q2 2023, our net profit and net profit attributable to equity holders of the Company were RMB1.3 billion. Non-IFRS net profit and non-IFRS net profit attributable to equity holders of the Company were RMB1.6 billion and RMB1.5 billion, respectively. Diluted earnings per ADS amounted to RMB0.82, up 55% year-over-year. Non-IFRS diluted earnings per ADS was RMB0.97, up 54% year-over-year. As of June 30, our balance of cash, cash equivalents, and term deposits stood at RMB30.5 billion, compared with RMB28.5 billion as of March 31, 2023. The increase was mainly due to a strong cash flow generated from operations of RMB2.1 billion for the second quarter. This balance was also affected by the change in exchange rates of RMB to USD at different times. In conclusion, our music subscription business has demonstrated a significant growth trajectory propelled by quality growth in both ARPPU and paying users, and we expect this momentum to continue with a clear focus on user experience and monetization. We will continue to invest in new products and services, including high-quality content, differentiated premium packages with appealing advantages, and new technologies like AIGC, while further solidifying our foundation for long-term growth. This concludes our prepared remarks. With that, I'll turn the call back to Kar Shun.

Kar Shun Pang, Executive Chairman

Thanks, Shirley. Before we enter the Q&A session, I would like to take a few minutes to express our gratitude to Tony. During his tenure, Tony played a key role in our two successful public listings and contributed his professional expertise to advise TME's post-growth development. We really appreciate Tony and his team's excellent work and valuable contributions to the group. Thank you, Tony. Now we are ready for questions. Operator, please.

Operator, Operator

Okay. Our first question today comes from Alex Yao from JPMorgan. Alex, your line is open. Please go ahead.

Alex Yao, Analyst

Thank you, management, for sharing the fundamental developments during the quarter, and Tony, best wishes to your future endeavors. My question is around the revenue outlook given the very different dynamics between the music and social entertainment business. Can you elaborate a bit more on the underlying assumptions of these two segments in the next couple of quarters? Additionally, I have a related follow-up question – if we take a multi-year view, should we consider the nature of this risk management initiative as a permanent loss of certain high-risk revenue streams, so that you have at least four quarters of rebasing period?

Kar Shun Pang, Executive Chairman

Okay. Thanks, Alex, for the questions. I will take the first part regarding the revenue outlook, and maybe Tony can address the second part of your question. This quarter, our online music services generated nearly 60% of our revenue, representing a significant growth from only 30% five years ago. So looking at the revenue contribution from our subscription businesses, it surged from 8% five years ago to 40% this quarter. This progress demonstrates that since our IPO, TME has been continuously expanding and solidifying our core online music business. This is where our long-term development is anchored, which is the exact reason why we are confident in our development path for this year and beyond. Looking ahead to the second quarter of 2023, our online music business is expected to maintain robust growth, bolstered by both paying user growth and ARPPU expansion in the subscription business, as well as continued advertising and merchandise business expansion. This robust growth will drive both our top line and bottom line. Meanwhile, our social entertainment service will likely continue facing some revenue pressure due to adjustments related to certain live streaming functions. Nevertheless, barring any major unexpected events, we anticipate that the impact level of these adjustments will stabilize by the end of Q3. Subsequently, we expect monthly revenue in Q4 to be comparatively stable month-over-month. Therefore, we predict that the total revenue for this year will decline by a low to mid-single digit percentage year-over-year, but we expect full-year profits and profit margins to improve. At the group level, our development strategy is focused on exploring diverse business opportunities in the music arena and discovering long-term growth potentials. As for our social entertainment services, our current goal is to maintain stable business scale. Although social entertainment revenue faces some pressure compared to five years ago, we now have more resources and a growing accumulation of industry insights to strategically plan for the group's long-term development. Therefore, we believe the adjustments made to our live streaming business will position us for the next level of development on more solid footing.

Tony Yip, CSO

Thank you, Kar Shun. That's a fairly comprehensive answer. The only additional bit I would add is that the social entertainment services revenue adjustment occurred in the latter part of Q2, which means that the downward pressure will continue into the second half, which effectively resets the level of social entertainment revenue to a lower level. However, barring any significant unexpected events, we currently do anticipate that the impact level of these adjustments will stabilize by the end of Q3. Therefore, we expect monthly revenue for social entertainment services to stabilize on a month-to-month basis in Q4. Yes, I think that's all I can add.

Operator, Operator

And our next question comes from Lei Zhang from Bank of America Merrill Lynch. Lei, your line is open. Please go ahead.

Lei Zhang, Analyst

Thanks for taking my question, and best wishes to Tony on your new journey. I would like to follow up on the social entertainment segment. Can you provide us with some background on the rationale behind this significant adjustment? Additionally, how should we look at the social entertainment segment outlook for the full year? When do we expect the revenue growth to bottom out?

Tony Yip, CSO

Yes, the motivation behind these adjustments is to create a more music-centric live streaming environment for our users. These adjustments include stricter compliance procedures and adjustments to certain live streaming functions. They enable us to better control potential risks that the platform may face in the future so, even though these lead to significant short-term pressure on our revenues, we see these as necessary steps to provide a solid foundation for our platform's healthy development in the long run. In terms of outlook for social entertainment revenues, it effectively resets at a lower level; although the impact of that is likely to stabilize by the end of Q3. As we look at each month in Q4, we expect revenues from social entertainment services to be relatively stable on a month-to-month basis within that quarter.

Operator, Operator

And our next question comes from Alex Poon from Morgan Stanley. Alex, your line is open. Please go ahead.

Alex Poon, Analyst

Best wishes to Tony on your next journey. My first question is, congratulations on reaching the 100 million paying user milestone. Can management share your next targets for your subscription business, specifically one or two goals and the timing of these targets? My follow-up question is regarding our considerations related to share buybacks and dividends, if any.

Tony Yip, CSO

On the subscription side, we continue to expect subscription revenue to grow at a healthy rate driven by several factors. Many of these results are the outcome of years of hard work. From a top-down perspective, we have spent years educating the market and encouraging users to develop a music consumption mindset that supports copyright music. We have also continued refining our operational strategies, enriching user privileges, such as sound quality and additional features. As a result, we are witnessing a gradual shift towards increasing willingness to pay for music services and our exclusive product features. Regarding ARPPU, we will continue optimizing our promotional discounts, gradually reducing them to improve users' perception of value. We also have premium product options at higher price points, including special offerings for couples. As we continue to see rising willingness to pay among our user group, we are confident to grow both the number of paying users and ARPPU at a healthy pace, driving subscription revenue moving forward. Concerning buybacks, we previously announced our buyback strategy. While we have not yet conducted any buybacks, we will actively seek out opportunities to do so, particularly during periods of share price weakness.

Operator, Operator

And our next question comes from Lincoln Kong from Goldman Sachs. Lincoln, your line is open. Please go ahead.

Lincoln Kong, Analyst

All the best to Tony as well. I want to ask about AIGC. I think management emphasized the importance of AIGC to our platform and business model. Could management elaborate on the latest developments of AIGC tools or the large language models we are currently leveraging and how we perceive the overarching impact of AIGC on empowering our business?

Ross Liang, CEO

We'll continue to capitalize on the innovation wave that AIGC brings. While there has been significant focus on large models, our own focus is more on the application layer that primarily serves content and user interaction. On the content side, we are working on providing productivity tools that assist musicians in becoming more efficient in music creation. While it remains uncertain whether we will one day develop a fully automated end-to-end solution, we are monitoring developments and currently beginning to provide synthetic voice creation, enabling users to employ AI to create their own voices for various needs. We are also leveraging AI capabilities to dramatically reduce our R&D time. On the user interaction side, our virtual assistant Xiaoqing, whom we've mentioned previously, guides users on their music journeys by recommending songs, commenting on specific songs, and engaging users directly. In live streaming, we have the capability to instantly create customized virtual gifts based on user-generated text descriptions, allowing for unique gift giving experiences that enhance user-performer bonding. Lastly, we are developing a product called AI-Chat, which is similar to a feature where users can engage in chat with a variety of AI characters.

Operator, Operator

Thank you. Our next question comes from Alicia Yap from Citicorp. Alicia, your line is open. Please go ahead.

Alicia Yap, Analyst

Can you hear me okay?

Tony Yip, CSO

Yes.

Ross Liang, CEO

Yes.

Alicia Yap, Analyst

Okay. Also, all the best to Tony. Can management share what we should expect regarding gross margin in the coming quarters? With online music now contributing higher proportions of revenue and social entertainment continuing to face ongoing pressure, what should we expect for net profit trends for the rest of 2023, both overall and specifically?

Shirley Hu, CFO

Sure. First, regarding gross margin, it was 34.3% in Q2, up year-over-year due to several factors. First, online music services displayed strong momentum with high-quality subscription revenue driven by growing user base and ARPPU. Second, robust advertising revenue growth. Third, the gradual increase in our self-owned content continues to positively impact margins. Fourth, we are optimizing our content cost models. Finally, reduction in long-form audio content costs compared year-over-year. The overall enhancements in technology and operational strategies related to bandwidth and storage have improved our overall service efficiency. We expect continued growth in both subscription and advertising revenue. As for our operating expenses, we're focused on improving our operational efficiency. Over recent quarters, our ROI-oriented marketing strategies have proven successful, with a downward trend in sales and marketing expenses year-over-year. We anticipate continued year-over-year reduction in selling and marketing expenses while enhancing our profitability. Regarding the impact of social entertainment, despite the anticipated decline in revenue during Q3, we expect sequential improvement in gross margins, projecting that gross margins for 2023 will exceed those of 2022. For overall adjusted net profit, we expect stability year-over-year, with adjusted net profit margins also on the rise. We forecast adjusted net profit and margin growth during the second half of 2023.

Operator, Operator

And our last question today comes from Thomas Chong from Jefferies. Thomas, your line is open. Please go ahead.

Thomas Chong, Analyst

Thanks, management, for taking my questions, and all the best to Tony. May I ask a question regarding our content strategies? Given the solid results we achieved in original content, can management comment about the strategies going forward?

Ross Liang, CEO

Thank you, Thomas, for your question. As a leading music platform in China, we will prioritize discovering and cultivating talented musicians while encouraging them to create more music. We are also focused on assisting them in promoting their work on our platform. We are delighted to witness the continuous increase in the proportion of original content on our platform as well. Our investments and collaborations are increasingly fruitful, and our original content growth is contributing to margin expansion as well. Leveraging our comprehensive resources and technological capabilities, we provide holistic support to all artists. Our Tencent Musician platform offers offline performance opportunities and exposure, while proactive initiatives encourage innovative content production. It also provides various commercial opportunities, including royalties, digital album sales, and support in overseas distribution. All these support systems are solid means of guidance for the artists' growth. Additionally, we collaborate with well-known domestic and international IPs to attract broader audiences and expand TME's industry influence. For instance, we have jointly created theme songs in partnership with Tencent's popular gaming IPs and have collaborated on projects with other trending themes. In terms of online production and promotions, our internal resources, paired with external collaborations within the Tencent ecosystem, allow us to reach massive user bases through promotion efforts across platforms. Lastly, we help our talents by facilitating music distribution to international markets through our TME music house service, promoting Chinese original music globally.

Operator, Operator

Thank you. We will take our last question today from Xueqing Zhang from CICC. Xueqing, your line is open. Please go ahead.

Xueqing Zhang, Analyst

Thanks, management, for taking my question, and best wishes to Tony. Just a quick question regarding IoT. Do you have any insight on service progress, such as monetization and revenue contribution?

Ross Liang, CEO

Our current main focus in IoT is in-car services, especially smart cars, which we believe represent a significant market opportunity, primarily domestically, but also globally to some extent. Music serves as a prime entertainment application within smart cars, and through partnerships with automotive brands, we are well positioned to benefit. Our deep cooperation with a wider array of automakers and the launch of QQ Music's 2.0 version specifically for in-car services has led to rapid growth in both our in-car music users and revenues. During the recent May holiday, we observed a notable increase in consumer activity and time spent in cars, resulting in a significant uptick in music consumption and spending. Therefore, we are very optimistic that IoT — specifically in-car services — will create good opportunities for our subscription and revenue streams going forward.

Operator, Operator

We are 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

Well, here is to close our call for today. I just want to extend my personal thank you to all of the senior management team at TME as well as the Company and the Board for the trust in me throughout the years. It's been an incredible journey, and I'm incredibly proud of everything we've achieved together over the past five years.

Ross Liang, CEO

Thank you, Tony.

Kar Shun Pang, Executive Chairman

Thank you. Take care.