Tencent Music Entertainment (NYSE:TME) Q4 2023 Results Conference Call March 19, 2024 7:00 AM ET

Company Participants

Millicent Tu - Head of Investor Relations
Kar Shun Pang - Executive Chairman
Ross Liang - Chief Executive Officer
Shirley Hu - Chief Financial Officer

Conference Call Participants

Alex Poon - Morgan Stanley
Alicia Yap - Citigroup
Lincoln Kong - Goldman Sachs
Fang Wei - Mizuho
Zhang Lei - Bank of America Merrill Lynch
Xueqing Zhang - CICC
Thomas Chong - Jefferies

Millicent Tu

Good evening, good morning and welcome to Tencent Music Entertainment Group's Fourth Quarter and Full Year 2023 Earnings Conference Call. I'm Millicent Tu, Head of IR at TME. We announced our quarterly financial results today before the U.S. Market opened. An earnings release is now available on our IR website and via Newswire services.

Today, you will hear Mr. Kar Shun Pang, our Executive Chairman; and Mr. Ross Liang, our CEO, who will share an overview of our company's strategies and business updates. And then Ms. Shirley Hu, our CFO, will discuss our financial results before we open the call for questions.

Before we continue, I refer you to our safe harbor statements in our earnings release, which applies to this call as we'll make forward-looking statements. Please note that the Company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS in the Company's earnings release and filings with the SEC.

At this time, all participants are muted. After management's remarks, there will be a Q&A session. And please be advised that today's call is being recorded.

With that, I'm pleased to turn the call over to Kar Shun, Executive Chairman of TME. Kar Shun?

Kar Shun Pang

Thank you, Millicent. Hello, everyone, and thank you for joining our call today.

2023 marked our official transition at TME, as we remained dedicated to driving growth and prosperity across our music ecosystem while compiling the development of the entire music industry. Notably, our subscriber cost supplies with the 100 million milestone in 2023. We added 18.2 million subscribers for the full year, up from 12.3 million in 2022, a compelling testament to our content leadership, platform value, and high quality user experience.

These streams grow consistent growth in music paying users and per user spend, anchoring our subscription revenues accelerating year-over-year growth throughout the year. In particular, in the fourth quarter of 2023, online music record faster than expected revenue growth. Paying users and ARPPU rose by over 20% year-over-year to RMB107 million and RMB10.7 respectively.

These results mitigate the top-line headwinds from the social entertainment business and reasonably contributed to a lift in net profit for the quarter and the full year. Entering 2024, we are also seeing strong momentum in subscriber growth in the first quarter. Such solid performance was driven by our powerful content and platform dual engines.

Now, I'd like to share this aspect of our content development efforts during this robust sustainable growth. First, by leveraging and deepening partnerships with domestic and international record labels. We consistently reinforce our competitive edge with an ever growing selection of copyrighted music.

As a result, by the end of 2023, we had over 200 million music and audio tracks on our platform. In addition, self and co-produced content further differentiated our offerings, increasing our popularity among users. Lastly, our rich foundation of content and relationships with label partners empowered us to capture diverse opportunities across the user industry, amplifying content's value.

Let me walk you through some concrete examples. On content coverage and appeal, we recently renewed our multiyear partnership with Universal Music Group, UMG, to bring users ongoing access to response and growing music catalog as well as a notable sound quality upgrade with music streaming in Dolby Atmos and high definition formats. Taylor Swift's recorded out, we recorded album 1989, Taylor's version. Top the all charts in the first week of its release on our platform in October.

We also capitalized on this success and further promote the fan engagement with a series of customized interactive song guessing contest. In addition, we renew the collaboration with Pickup Records. The record label for renowned that still legend of Phoenix, deepening cooperation across head start song releases, physical albums, and various others artist related services.

We further enhance our content appeal and leadership across Pop, Rock, and Chinese ancient style music genre, allowing us to better attract and retain young users. Next, on differentiated content offerings through in-house and collaborative creation. For mid to long tail music content, we leveraged our wealth of multifaceted resources to enrich our offering and promote its prosperity.

As of the year of 2023, over 480,000 Indian musicians had contributed over 3 million songs across multiple genres on Tencent Musician platform. By providing comprehensive music training programs and other support, we effectively adopted their creativity and nurtured their music careers.

To accumulate our music access in different genres, we are partnering collaborations with our strategic partner's artists. For these more mature artists, we push their popularity and their clients' career through increasingly tailored support. For example, this quarter, we assisted Jess Singer, Liu Le, with her EP production and release, greatly rising her profile and strengthening the fan artist relationships.

Our in-house and collaborative content continue to grow from string to string. As a case in point, we had 10 songs showcased during China Media Group 2024 Spring Festival Gala. Our self-produced song she bobbing in the light, was once sent out. Such performances generated massive social buzz, pushing user engagement on our platform and greatly evaluating, quickly evaluating our national influence.

Another notable example is our self-producer hit song, performed by our strategic partner artist, Hailiang Mu, and covered by our popular Chinese crosstalk performer, Yue Yun Peng. This song went viral, totaling over 1 billion streams on our platforms as of March this year.

Last but not least, on maximizing content value through innovation, we scale up our live performance business through diverse events formats in 2023, capitalizing on the resurgence of offline music events. We host a growing number of offline music tools, festivals and live house performances to meet strong demand. In the fourth quarter, we hosted worldwide last demanded DJ's Alan Walker's 6 city electronic music tour in China.

During the tour, we facilitated unique offline merge online services encompassing interactive fan activities, artist merchandise, ticket sales, and performance management, which in turn boosted our industry influence.

In the fourth quarter, we collaborated with high in net entertainment to launch a line of artist merchandise for K-pop fans such as 17 and 18's. Diversifying our offerings of content related roles in various formats. As a result, revenue from artist merchandise record a robust year-over-year growth.

Moving on to our continued commitment to social responsibility. In the fourth quarter, in collaboration with local government agencies, we conduct a series of music events to promote cultural and economic development in ethnic minority regions.

For example, we partnered with Tencent Charity to organize the 2023 Shenzhen-Linzhi Music Festival, leveraging offline music performances to help rejuvenate the rural economy with increased tourism. These initiatives not only brought in music's reach geographically, but also expand its positive impact across the industries, maximize this societal value.

In conclusion, we're excited about the vibrant growth of the music industry for the years to come. Our powerful content and platform dual engines underpinned by online music's relatively Tencent cyclical nature will enable us to capture more multi fenced opportunities in 2024 and beyond.

Now, I would like to turn the call over to Ross for more color on our platform development. Ross, please go ahead.

Ross Liang

Thank you, Kar Shun. Hello, everyone.

Our laser focus on execution resulted in a year of solid music growth and efficiency gains. Our platform's strength, our insight into users and content and our dedication to innovation were crucial in achieving this success, all translating into enhanced music journeys for users.

Now, I would like to elaborate on three areas we prioritize to enhance user's experience.

First, we expanded the user's privileges. This included more industry leading song quality selections, rich song effects, more individualized players, new skins and additional interactive features. For example, we amassed China's largest Dolby Atmos music library, offering users a more immersive listening experience.

Currently, our Dolby Atmos music service is available on mobile, in car, and the PC platforms, enabling a higher quality music experiences across more comprehensive use cases. Furthermore, we hosted a dedicated online Amway premium event for Jay Chou's new singer, Christmas Star, promoting closer fun artist bonding and a deeper sense of community. Millions of viewers sign up for the event within 24 hours of the registration opening. We also launched an AI wise feature for this single to further boost user engagement.

Thanks to these tailored activities and the features. We have recorded a total of over 100 million streams from tens of millions of users.

Second, we deepened connections with users through major upgrades across smart device experiences. QQ Music launched a significant upgrade on mobile and PC in December last year, offering customized user interfaces and music players. As part of Chinese Lunar New Year's offerings, we introduced an annual music reports feature that captures each user's unique music journey.

Tens of millions of QQ Music users joined this annual review activity. This comprehensive report reflects the important personalized mutual bonds that we have built with users on a massive scale. They highlight how and when a user connected with us emotionally from special moments captured, artist favorite, story discovery, and the songs streamed to time spent. We also enhanced in car music entertainment services. For example, we recently upgraded QQ Music in car app for Tesla, bringing users a more intelligent interface with better recommendations.

Kugou Music newly added the Viper 3D music library, to its in car offerings, especially optimizing audio performance in a closed cabin environment. Furthermore, we maintained our leadership in smart vocal coverage and recently renewed partnership with Li Auto.

Last but not least, our technology infrastructure continued to play a vital role in content promotion, distribution and discovery. More accurate recommendations drove greater content consumption, effectively improving our user conversion and retention. We are pleased to share that in the fourth quarter, both QQ Music and the Kugou Music recorded another record high share of music streams from recommendations.

Finally, AI. We continue to expand AIGC applications to enhance user experience and foster artist music creation while improving efficiency. On the product side, we integrated AIGC into music streaming and creation as well as seeing and socializing, creating an increasingly intelligent and personalized music experience for users and the creators.

For example, by enhancing QQ Music's AI enabled listening together feature with additional virtual DJs. If specializing in different music genres, we have made music discovery faster and more personalized.

Furthermore, we launched an AI compensation tool in Venus supporting artists' music creation using their original text promos or rhythm clips. Lastly, we integrated our AI streaming function into Kugou and WeSing. Initial results suggest that the user are increasingly willing to pay for this function, as it enables easy creation of sound powers in market sales and the languages.

On the operations side, we are using AIGC to make our advertising more efficient and effective, employing us to a better target and convert users. We are also leveraging our aims to better promote and distribute new songs. They help us analyze songs' audio characteristics and identify the content that resonates most with users.

To sum up, we will continue to leverage technology to achieve more efficiency gains in the future. Our dedication and passion for serving hundreds of millions of music users will further inspire us to deliver more compelling music entertainment experiences seamlessly across a broader range of user cases.

With that, I will turn the call over to Shirley, our CFO for a deep dive into our financials.

Shirley Hu

Thank you, Ross, and greetings to everyone. I will now turn to our financial results.

Our strong financial results for year 2023 reflected success in effective monetization for our music services and operational efficiency management with accelerating year-over-year growth in subscription revenues throughout the year. Our online music services delivered faster than expected revenue growth. We've largely mitigated the revenue decline in social and consumer service and others.

IFRS net profit and the non-IFRS net profit were RMB5.2 billion and RMB6.2 billion respectively, up by 36% and 27% respectively on a year-over-year basis. In the fourth quarter of 2023, our total revenues were RMB6.9 billion, down by 7% year-over-year, primarily due to decline of revenues from social entertainment services and others. Our online mix revenues in Q4 2023 increased by 41% to RMB5 billion on a year-over-year basis.

This surge was driven by the strong expansion of our music subscription and the advertising business supplemented by an increase in art is the related merchandise sales. Delving deeper into our music subscription performance for Q4. Music subscription revenues reached RMB3.4 billion, which is a 45% increase year-over-year and a 7% rise sequentially. Our refined operation allowed us to expand our online musical paying user based while enhancing monthly ARPPU.

The number of online music paying users expanded to 106.7 million, representing a 21% increase year-over-year with a quarterly net adds of 3.7 million users. The monthly ARPPU rose to RMB10.7, up by 20% year-over-year and by 4% sequentially, marking the segment's success quarter of growth and setting another record.

The continued growth in our paying user base was largely attributable to our enriched content offerings, enhance the member privileges such as industry leading sound quality selections, rich sound effects, more individualized players, new schemes and interactive product features such as in car investment and the interactive features for The Dark Plum Sauce, WeSing, Christmas Star.

Our advertising revenue also had a strong growth year-over-year and sequentially, supported by our diversified product suite and innovation advertising formats. Advertising supported, advertising delivered strong performance this quarter as interest rate improved significantly. Additionally, the new [indiscernible] e-commerce sales event generated a higher demand for advertising and contributed to a sequential increase in advertising revenues. Social and entertainment services and other revenues were RMB1.9 billion down by 52% year-over-year.

This was mainly due to adjustments in certain live streaming, interactive functions and the most stringent compliance procedures. As we implemented several service enhancement and the risk control measures in the past couple of quarters. We continue to innovate for social entertainment service and have seen growth in advertising revenues and the VIP membership’s revenues this quarter.

Our gross margin for Q4 stood at 38.3%, marking an increase of 5.3 percentage points year-over-year and an increase of 2.6 percentage points sequentially. Increasing user base together with higher monthly ARPPU, growth in advertising revenues as well as ramping up of our own content have enabled us to move to a healthier margin model.

Additionally, we have built win, win relationships with labels and artists and managed the content costs more efficiently using ROC approach. These efforts have collectively resulted in the increase of our gross margin year-over-year.

Moving on to operating expenses, in the fourth quarter of 2023, they amounted to RMB1.3 billion representing 18.4% of our total revenues compared with 18.3% in the same period of last year. Selling and marketing expenses were RMB255 million down by 4% year-over-year. Our marketing strategy is ROI focused, where we allocate the budget towards eras with long-term growth prospects.

We strategically curtailed expense for promotion channel fees associated with live streaming and increase expenses to promote our own content. As our music service continue to grow rapidly, we will continue to spend on channel promotions for these areas.

General and administrative expenses were RMB1 billion down by 8% year-over-year, primarily driven by low employee related expenses partially because we incurred expenses related to late audio acquisition in Q4 2022, but such expenses did not recur in Q4 2023.

Our effective tax rate for Q4 2023 was 17.3% compared to 12.2% in the same period of 2022. This increase was primarily attributed to the accrual of withholding tax related to earnings to be remit by our PRC subsidiaries to offshore entities.

For Q4 2023, our net profit and net profit attributable to equity holders of the company were RMB1.4 billion and RMB1.3 billion. Non-IFRS net profit and the non-IFRS net profit attributable to equity holders of the company were RMB1.7 billion and RMB1.6 billion respectively. Our diluted earnings per ADS reached a record high this quarter at RMB0.83, up 15% year-over-year.

Non-IFRS diluted earnings per ADS increased to RMB1, up 10% year-over-year. These results demonstrated our robust financial performance, enhanced operating efficiencies and the positive impact from our share repurchase program. As of December 31, 2023, our combined balances of cash, cash equivalents and the term deposits were RMB32.2 billion as compared with RMB31 billion as of September 30, 2023.

This combined balance was also impacted by changes in the exchange rate of the RMB to USD at a given the balance sheet dates. Under the share repurchase program announced in March 2023, as of December 31, 2023, we had repurchased 25.3 million ADS from the open market for total cash consideration of US$175 million of which approximately US$72 million were repurchased in the fourth quarter.

Next, I'll briefly discuss our performance for full year 2023. Total revenues were RMB27.8 billion, down by 2% year-over-year. Revenues from online music service were RMB17.3 billion, up by 39% year-over-year. The increase was driven by strong growth in music subscription revenues and revenues from advertising services supplemented by growth in other music services.

Our music subscription revenue were RMB12.1 billion, up by 39% year-over-year driven by growth in both paying users and the monthly ARPPU. Revenues from social entertainment service declined by 34% year-over-year due to adjustments in certain live streaming, interactive functions and a more stringent company as a procedures as we implemented several service and asset management and the risk control measures in the past couple of quarters.

Gross margin in 2023 was 35.3%, up by 4.3% year-over-year due to the reasons discussed earlier. Total operating expenses for 2023 were RMB5 billion, down by 10% year-over-year. Selling and marketing expenses in 2023 were RMB0.9 billion, down by 20% percent year-over-year, largely due to more efficiency, I focused the promotional strategies.

General and administrative expenses were RMB4.1 billion down by 7% year-over-year primarily due to reduced employee related expenses including expenses related to Maize Audio acquisition and the expenses related to the Hong Kong secondary listing incurred in 2022.

In 2023, we achieved the highest level of profitability in our company's history. Net profit and the net profit attributable to equity holders of the company was RMB5.2 billion and RMB4.9 billion respectively. Non average net profit attributable to active holders of the company was RMB6.2 billion and RMB5.9 billion respectively.

Finally, I'll conclude with some remarks on our outlook for 2023. We are excited about the growth of the music industry and remain dedicated to driving our growth across our music ecosystem. We will continue to focus on impacting monetization and operational efficiency while exploring new growth opportunities and expanding our pursuit of monetization towards such as customized artists, merchandise, concerts, etc.

Additionally, we will continue to invest in high quality contents and original content productions, as well as new products and technologies such as AIGC. We are confident about the long-term health growth of the music industry and our company. We remain focused on providing high quality investment returns for our shareholders.

This concludes our prepared remarks. We are now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from the line of Alex Poon from Morgan Stanley.

Alex Poon

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

Kar Shun Pang

Thank you, Alex, for your questions. And, in year 2023, I think our online music business has consistently delivered a very strong performance, and our total monthly subscribers have reached, 107 million already, which is a new milestone to us.

And the total revenue from the music subscriptions has, 39% year-over-year growth. The reason behind it basically due to the very efficient execution of TME's content and platform dual engine strategy and the countercyclical nature of the music industry.

We believe that the fourth quarter's accelerated growth in the subscription revenue, really lay a strong foundation for, this year's growth. We are optimistic about the industry's future and believe that our users, central operations and expertise will continue to drive the business forward. We are committed to view a popular all in one music and audio platform.

And from the product point of view, we will use the industry leading technology and knowhow to provide the best user experience for our users. From content point of view, we will continue to provide the best coverage of songs and also some of the new other format like, live performances of concerts and music festival, et cetera.

So, in a nutshell, I think for this year, we are confident that the online music business will maintain a solid growth with subscription services serving as a primary driving force while continuing to explore the new opportunities in advertising and artist merchandise to grow the business. And as part of our holistic user ecosystem, our social entertainment side, we focus on better serving the core users and the revenue from this part will be relatively stable this year.

Operator

And the next question coming from Alicia Yap from Citigroup.

Alicia Yap

I have two very quick questions. One is, just curious if management can elaborate a little bit, in terms of the user profile for those that newly converted to the membership sub, for the past 12 months. Any colors in terms of the geographic location, cities, tiers, age group, and the song library that they tend to prefer. Anything you can share would be helpful.

And then very quickly on second question is, if you can update on any upcoming strategies and expectation for the long form audio, in terms of the user, adoption rate and also the revenue trends.

Ross Liang

Actually, our user base is already more than 100 billion as I mentioned in the presentation. So the demographic profile of our user base is very relative to the population demographic structure in China.

From the activity of the user, we can see the most active user or a largest group of our user is still aged between 80 to 30 years old. And we can also say that our subscription user is also very active among all the user group we have.

We're still regarding the user profile and their allocation geographically. I think it is the same as the demographic allocation of China. And we may have a more active user in the first tier cities where majority of our users are still distributed in Tier 2 and Tier 3 cities in China.

Well, in our later operations, we're also going to keep an eye and be more focused on the young user groups because they are still the one with the most potentials to tap. Well, regarding your question of the long audio, our current strategy is still we're going to make the long audio fully integrated with our music platform as QQ Music and Kugou Music. And until now, we find out the strategy is very effective.

But at the same time, we're also going to keep an eye on the long audio and especially how active it is and the monetization capacity of things at long audio. And we're also going to leverage ROC in order to source the most popular content in the market.

We're at the same time for the long audio, we're also going to accelerate its penetration into the in car market because we clearly notice that indeed the content like the novels are very popular for the in car application.

Well, at the same time, generally speaking, that 2023 would be a very important year for the long form audio or we call it 2023 a year of the transformation. The result and performance of the long audio is also better than our expectation. So based upon our great performance in 2023, we hope that long audio, the audio also continue its distribution and commercial efficiency improvement on our music platform.

Operator

And next question comes from the line of Lincoln Kong from Goldman Sachs.

Lincoln Kong

My question is on the margin, especially the gross margin side. We have seen in fourth quarter, accelerating gross margin expansion on a Q-on-Q basis, more than 200 basis points. Could you elaborate in terms of what are the reasons for that?

And when we're thinking about the 2024, what will be the key drivers for further gross margin expansion in terms of up gross, the operating leverage from, content call assigned minimum guarantee, or increasing mix of our self-produced content. What will be the ceiling or medium-term sort of target for our music business gross margin under this context?

Shirley Hu

Yes. Gross margin is 38.3% in Q4, increased by 5.3% year-over-year. And the main factors as follows.

The first, music subscription revenues have significant growth, higher monthly up and the paying user base growth both have positive impact on our gross margin and the robust growth of advertising revenues also has the favorable impact on gross margin. And the third, we gradually ramp up our self on the content, which benefit our gross margin. And we can see the piece of our own content is increased rapidly in Q4.

And the first we have been focused on ROCE to manage content across more efficiently and build a win-win relationships with labels and artists. Our online music revenues, the gross ratio was faster than that ratio of content cost.

And, for, gross margin, in the Q4 2024, we expect our gross margin will be keep increase and compared the piece will be lower than the Q4 in 2023. But with our revenue from, subsequent revenue and the advertising revenue also expect to have increased revenue. So we think that the gross margin will be increased in Q1 2024.

Operator

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

Fang Wei

I have ARPPU related question. So looking at your music ARPPU trajectory, you guys finished the year, with 16% year-over-year growth, and I believe your largest peer also delivered a positive growth. But despite that, I think you're paying user growth, maintained a very solid expansion, right?

So it looks like consumers are happily paying up. So I was just wondering if management can help elaborate on your techniques behind and is that fair to assume continued momentum into 2024.

Kar Shun Pang

I think for the ARPPU, we have adopted a holistic approach to grow the subscription revenue with flexibility in balancing between the subs growth and also the ARPPU expansion. So, I think that we have a strong start on the subs growth in Q1, 2024 and partially because of the impact of promotion during the transiting year. And so marginal, the ARPPU fluctuation is to be expected. But I think for the remaining policy in 2024 overall, I think the trend should be slightly upward.

So I think that we will monitor and also manage it very wisely to ensuring that we have a good balance between the subs growth and also the ARPPU expansion. But you're right that we believe that, full number of years of educations, I think that of the music lovers in China right now do see the value of music and they are willing to pay more in the future.

Operator

The next question comes from Zhang Lei from Bank of America Merrill Lynch.

Zhang Lei

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

Kar Shun Pang

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

Ross Liang

Thank you very much. And I'd like to say the same as a trend a few years ago in Q4. And, actually, the key reason is because of the students going back to school as a school opens. Well, at the same time, we also see some impact from the short form video to our mobile end business.

We are from the data analytics, we can say that regarding the loss of the user, actually, especially according to the days of the active, the majority of them leaving us are actually those low active users. Still, we maintain our highly active users, and they are quite stable. Where from the practice, we can also say that in the year of 2023, we further downsize the marketing expenses, and that is the reason we also reduced the channel promotion. And this is also another reason, and, that can respond to your question.

Well, at the same time, besides the mobile end, we are also keeping our eye on some traditional channels and emerging channels, including PC end the in car channel, and IoT channel. Because regarding the operation, we would like to indeed have the omnichannel user base to be further improved.

But at the same time, you can also say that regarding IoT and we still remain a very steady growth. We're for the PC end, including the Windows and the Mac system, and we're also going to maintain our stat stability there. But we're also trying to roll out new versions to continue to explore new opportunities on the PC end.

But at the same time, you can also say that regarding the trend of 2024, at the very beginning of 2024, we will be impacted by the spring festival in China. So during the spring festival, people seldom use music apps. So that's the reason in Q1 of 2024, they're going to see that MAU is being slightly decreased due to the spring festival reason.

We are in the following quarters as we are going to have the major, version update regarding QQ Music, and we're also going to continue to improve the performance of Kugou Music. So I do believe, compared with 2023, our marketing strategy also going to have a ROI based improvement.

We're also going to pay more attention to the channel part, including the channel new user engagement and the returning of the old user back to our platform. So in the upcoming quarters, we're also going to expect the MAU improvement.

Kar Shun Pang

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

Operator

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

Xueqing Zhang

Thanks for taking my question and also congratulations on the strong quarter. My question about AIGC. As you mentioned in the prepared remarks, Can we have been using AIGC in many aspects. So can management elaborate a bit more about that? How you leverage AI in your business and how does AI empower products contribute to the subscriber conversion and retention?

Ross Liang

We have been closely monitored the latest development of large language models and integrated it into music recommendations and creations as well as singing and socializing. Because somewhat different from other companies, we're going to be more focused on the large language model application use case. So regarding the application use case, actually, I have third parts to share with you.

First of all, we would like to leverage the large language model to make our product more appealing and more attractive to provide the user the brand new experience. So that is the reason in our latest version, we also updated listen together functionality.

So the user in our QQ Music, they will be able to draw and profile their Abadas. And through this Abada, they will also be able to find the recommended music that really fit into their mood and emotions, and then they're going to consume more content.

Well, at the same time, another product is actually the small patch in QQ Music, and we're also going to leverage a large language model to improve the conversation and the dialogue between the user and the pet so that I'm going to have some very interesting chats to continue to improve the sense of the companion to our users.

The second point I'm going to talk about is how we can leverage large language model to improve the creation efficiency to the content. We do provide effective tools for music creation to the creators. Well, you can see that recently, we have already enabled the separation function in the Venice functions. So generally speaking, it can directly separate the vocals from the entire composition of the song, which is very popular among musicians.

In addition, we also launched the AI based compensation functionalities through WeSing and business as well as Google. In other words, that user can actually create their own preferred sounds or the compositions according to their preferred style.

Well, at the same time, through those function and enablement, we also find a very promising commercial prospects because user, they are actually willing to pay some of their money for those songs that has been produced with AI enabled tools.

Well, regarding the customer acquisition, we can also leverage AIGC to generate a different promotional materials. We find out after allocating those materials to the market, it can also help to boost the conversion rate. Well, at the same time, we also find out after applying large language model, we will also have a very good grasp regarding the music recommendations within the app, a huge improvement compared with before.

So generally speaking, we do believe AIGC is benefiting our industry and help to further improve the performance of our product. We're also going to keep an eye on the latest development, including solar and other latest technology and making sure they could also be adopted by our product as soon as possible.

Operator

And the next question comes from Thomas Chong from Jefferies.

Thomas Chong

I have a question, regarding music NetEase. Given the solid performance that we are seeing in Q4, 3.7 billion, we thought, is better than the street expectation. How should we think about, the NetEase trend coming into, Q1 2024? And over the long one, how should we think about our music subs number?

Shirley Hu

Well, you can say that, because we provided a high quality product to the market and after years of education to the user and now they are happy to pay for the service and product and the user is becoming more mature. And I think we are now stepping into the season of harvest.

In the year of 2024, we're going to keep an eye on ROC and also trying to further improve end of our product and also with more marketing strategy. And we do hope those high potential customers can get access to our high quality service and product, and our very well established content library and platform will retain those users with us. So this is indeed the strategy we have for this year.

In H1 of 2023, after the reopening of the pandemic, because the travel has been allowed and the offline musical event has been restored, which create a very enabling external environment for our business.

Along with our very strong operational capacity and a very robust execution, we will be able to accumulate many paying users based upon the enabling turnover environment and the faster conversion rate. So in the year of 2023, actually, the net aided value for our subscription user reached 182 million and which lay a very solid foundation for us to further expand the user base in the near future.

Regarding the year of 2024, we're going to finance the NetEase and other and we have every confidence we will be able to maintain the online music business and the subscription revenue at a very healthy level. Regarding the year of 2024, right after we enter into the year of 2024, benefited from our product innovation and use of privilege expansion along with our very robust execution strategy, and we offer the high quality experience to their users.

Along with our operational and promoting events during the Chinese Spring Festival, we say the performance is better than what we expected. It also lay a very solid foundation for the healthy development of our business in 2024.

Kar Shun Pang

Well, in the near future, we're also going to keep an eye on the operation and the development of the super users, or should I call the high operating users. Those users are the key. We're going to also further expand their experience in other channels, including in car experience and the Kiwi users.

We do hope by operating them and well manage them, it can also help us to overly improve the RF for the music business. But more importantly, I should also say that what we're going to prioritize is to make sure we have a steady and robust growth for subscription revenue.

Operator

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

Kar Shun Pang

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