Tencent Music Entertainment Group (TME) 2022 Q3 法說會逐字稿

Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group Third 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.

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. 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, CSO, will offer additional thoughts on our product strategies, operations and business developments. Finally, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions.

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

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

Thank you, Tony. Hello, everyone, and thank you for joining our call today. I would like to begin by acknowledging all of the hard work that went into our successful listing on the Main Board of the Stock Exchange of Hong Kong under stock quote 1698 on September 21. In addition to our primary listing on the New York Stock Exchange, we are truly grateful to our users, employees, partners and investors who have been with us along the way and helped us reach this important milestone. From this vantage point, we plan to further advance our dual engine, content and platform strategy to support original content on our platform, expand our innovative business models work with more partners to tap into the music market's potential and fulfill our social responsibilities, thereby comprehensively promoting to healthy, diverse and sustainable development of Chinese music industry.

Providing differentiated content, particularly by way of original content production is our bread and butter and further explains our already large and diverse content library that appeals to cross-generational audiences. To that end, in the third quarter, we rolled out a voice synthesis technology, Lingyin Engine, to quickly and vividly replicate a singer's voice produced in original songs of any style and language. Utilizing this patented technology, we have developed a synthetic voices in memory of legendary artists such as Teresa Teng, (inaudible) and Anita Mui, (inaudible) and create an AI single line up with the voices of trending stars such as Yang Chaoyue among others.

As of the end of the third quarter, we have launched over 1,000 songs with AI synthetic voices. Notably, the female songs version of today, (foreign language) has become the first song by an AI singer to be streamed over 100 million times across the Internet. Additionally, we pay tribute to Anita Mui by creating an AI voice based on hers for the 2022 film charity song of the New Sunshine Charity Foundation. May you be treated gently by the world (foreign language), which is also the holding music for today's earnings call. It was well received by a wide range of listening -- listeners cohort, showing the broad reach of our social commitment for technology and music.

As the digital music industry trials, music levels paces in news have grown increasingly varied. We feel that the concept album Endless Fairwell (foreign language) by our Indian musicians, Akini Jing was recognized as a monthly pick by PitchBook, our worldwide [authority] in music reviews. In the third quarter, we also produced a number of original singles, which went viral on the Internet and each recording over 100 million streams such as (foreign language). All these achievements demonstrate our ability to expand the influence of our original work by bringing them to both domestic and overseas audiences.

Furthermore, in deep collaboration with the broader Tencent ecosystem, we exported the chemistry between music and popular IPs, including these legends, (foreign language), QQ Speed Mobile, QQ WeChat and Assault Fire (foreign language) along with renowned artists such as (inaudible) to creating entertainment music in the third quarter. Through this stimulating collaborations, as well as both online and offline promotions, we have further rise the popularity of Indian music on our platform.

Next, let's look at the Tencent Musician Platform, leveraging our robust technology to innovate and augment our one-stop service offerings for musicians, in the third quarter, we launched a new feature, TME Artists' Albums [Early Champions], this feature helps musicians release digital albums on all TME platforms at the prices they set with automatically generated sales pages. By the end of the third quarter, 281 of our musicians had utilized this new feature and received the income generated by the albums sold, shortening the relief time and lowering the barrier for them to forge closer connections with their audience.

Second, we continue to launch a broad array of activities and initiatives to support our musicians and help them shine on stage. In the third quarter, we discovered (foreign language), a young high (inaudible) musicians, providing him with comprehensive guidance from song selection to (inaudible) styling and personal expressions, and sign him up for the Sing China (foreign language) show, jump starting his career as a musicians within just 2 months. Once more, in the third quarter, we also recommended a diverse group of our musicians, including (foreign language) to various shows and events hosted by TME and sponsored by Sprite, SAIC Audi and Jingdong among others, demonstrating our commitment to providing substantial promotion and commercial resources for our musicians. These endeavors and empower our musicians to build a full life cycle career while also facilitating their communication and connection with their friends.

By the end of the third quarter, we have served a total of 350,000 musicians, which also allowed us to attract more active and vibrant creators to our platform, further pushing the prosperity of our ecosystem. Our content strategy also includes a keen eye towards improving the diversity of collaborations with top music labels and artists, both domestically and internationally. In the third quarter, we team up with YG Entertainment, Faye Wong, (inaudible) Roy Wang, (inaudible) Lay Zhang (inaudible) and others to provide our users with benefits in the 30-day head start period following the release of their new songs. Notably, Jay Chou's digital album, Greatest Works of Art, (foreign language) record sales of close to 7 million copies by the end of the third quarter. Whereas Lay Zhang's latest P West, Taylor Swift new pop album Midnight and BLACKPINK's digital single Pink Venom and Alban Born Pink also achieved a startling sales, reflecting our users pent-up demand for user engagement with artists from home and aboard.

Ongoing cooperation with professional institutions and industry partners also help bolster our reputation as a go-to destination across diverse music verticals, such as gaming, classical and electronic music. In the third quarter, we cooperated with the music label of NCPA (foreign language) among others, to debut the head-start benefits for their releases. We also collaborated with the world's top 100 DJs and over 30 domestic and international electronic music labels to launch Tomorrow Drop (foreign language), helping to bring electronic music into the limelight as the debut platform for international award-winning and global acclaimed electronic music.

Lastly, moving on to TME Live, our comprehensive online merge offline performances brand, which has consistently provided the music entertainment and performance industry toward by exploring innovative interactive formats and monetization avenues. In the third quarter, TME Live hosted 32 online and off-line performances by various A-listed stars, including Han Hong and (foreign language).

At the same time, we unveiled multiple innovations to refresh the user experience. For example, our Wakin Chau's online concept, we pioneered the TME Live moment interactive activity, "Vote Your Encore," (foreign language), marking the first time a live-streaming concert audience was invited to vote on the concert's closing song, creating a customized offline interactive experience for our online users and successfully accumulating close to 15 million unique viewers within the Tencent ecosystem. Going forward, we will incorporate more interactive formats in TME Live movements during the performances.

That concludes the update on our growing content capability. Now I would like to turn the call over to Ross, who will share more about our platform strategies. Ross, please go ahead.

Thank you, Kar Shun. Hello, everyone. Moving on to our platform strategy. We continued to enhance our users' interactive experience by enabling new ways to listen, watch, sing and play on our platform and offering more satisfying experiences that drives their diverse music tastes and the nuanced stories. To meet the users core demands, we zeroed in on providing a nimble user interface, a tech-oriented professional leasing experience. In terms of sound effects, the improvement in this quarter, we became the first music platform domestically to offer an immersive audio experience with Dolby Surround Sound (foreign language) to our Super VIP membership, subscribers and the in-car users, as well as in the music releases on our Tencent mutation platform.

In August, QQ Music also build adaptive song (foreign language), which adapted the sound volume using a particular song based on human auditor perception characteristics to maintain a smart listening experience. To simplify the listening process, QQ Music under Kugou Music launched a lock screen widgets on the iOS 16 system, which are essentially one click shortcut as another pioneering move, we also upgrade our playlist function, which allows users to generate platelets in a single click by importing the songs referenced in type, pictures and weblinks. QQ Music and Goggle Music now support automatic match in playlists with creating song effects under customized web playlist posted to inspire more sharing among users.

To bolster music discovery efficiency, we further optimized our smart recommendation future with an upgraded algorithm in the third quarter. As a result of this refinements QQ Music and Kugou Music's recommendations streaming volume under time spent per user, both registered year-over-year increases. With more as increasing virtualization takes hold, we have been adding more exciting and fun music entertainment scenarios while unlocking abundant monetization opportunities.

In the third quarter, TMELAND our virtual theme park teamed up with Pepsi under its virtual idol group, TEAM PEPSI to host to another immersive virtual 3d live show, enhanced by our 360 degree circular screen and ground screen, the show registered over 4 million times, starting either TMELAND's new built Lighthouse Station, our brand new landmark venue.

In addition we debuted Music Zone, our 2D virtual interactive music community for users to listen, to purchase and play musical instruments and interact with others, at their self decorated virtual homes. We also launched an entertainment feature on QQ Music, (foreign language), which allows users to play with and truly feel the rhythm of selective songs by touching the keypad on the screen following the tempo of the songs. As a pioneer in the application of our innovative listening, watch, sing and play functions. QQ Music has continued to improve its DAUs year-over-year, indicating healthy user engagement with our flagship products.

Now turning to long-form audio, to supplement podcaster ecosystem, we unveiled the (foreign language) putting a one stop audio creation assistant in our podcasters focus. On the back of TME's massive library of copyrighted books, our podcasters can now easily join the studio for auditions and distribute their content. Through all of TME's platforms with a single click. We are managing their podcast programs with access to operations, data, as well as generating income.

In addition, we achieved a breakthrough in Text to Sound TTS technology, facilitating AI audio creation and the [macros], increasing word processing efficiency by 12x and growing the content synthesize speed of our virtual authors by fourfold in the third quarter. As a starting point of deploying the TTS technology, we have launched our virtual authors to provide a differentiated (inaudible) audio content, which has received a wide acclaim from our users.

With that, I'd like to give the floor to Tony to review our business operations. Tony, please go ahead. Thank you, Ross. Hello, everyone. Now let me walk you through our operating results in the third quarter. This quarter, our online music MAUs were 587 million, down year-over-year primarily due to churn of our casual users and mid competition from pan entertainment platforms, as well as cost optimization measures to focus on boosting monetization efficiencies, as a platform of scale. Nevertheless, QQ Music DAUs continue to increase year-over-year, indicating healthy user engagement with our flagship product.

Notably, online music paying users, a cohort representing high-quality users continue to grow at a robust pace and drove paying ratio to a new record, while ARPPU also kept improving sequentially, driven by our expanding content offerings and product enhancements, as well as broadened sales channels and moderated promotions. As a result, our subscription revenue continued to deliver healthy year-over-year and quarter-over-quarter growth.

Our IoT MAUs continued to achieve double-digit growth year-over-year as we enriched and established collaborations and added new ones to our partner, roster, such as BMW and DD. We also broadened our leading auto industry coverage by supporting new EV models, including Li Auto's L9, (inaudible) and BYD's Frigate 07, (foreign language) to improve users' in-car music experience, we launched updates for our in-car apps in the third quarter, featuring a brand-new user interface and upgrades to sound effects and content.

Our online music services revenues achieved a healthy growth in the third quarter, with 19% subscription revenue growth year-over-year. We have been promoting the higher-value Super VIP membership (foreign language), with an elevated experience powered by not only premium sound features, (foreign language) and Dolby Surround sound effects will be trending soon, but also customized content. For instance, at teams in times, TME Live online concert Endless Summer (foreign language) which registered massive social media buzz, totaling over 2 billion mentions. Users with a Super VIP membership were entitled to a variety of privileges such as a Blu-ray playback of the concert at the highest resolution, cash and projection on TV screens leading to a 20% increase in the number of Super VIP membership subscribers. Going forward, we will roll out more privileged content and higher cell quality features to drive its membership conversion and retention.

Meanwhile, we strengthened the artist subscription offering. (foreign language) by onboarding more artists, weather up and coming, well-established or even AI singers, as well as by expanding the scope of benefits in the package to include privileges such as customized live streaming events, online chats and parity access to concerts and Album singings. As of the end of the third quarter, we had launched a cumulative 28 artists debuting their subscriptions.

In addition, in the third quarter, we unveiled merchandise related to 21 artists with a total of over 100 SKUs in the (foreign language), accompanying the launch of Jay Chou's digital album "Greatest Works of Art", we sold 100,000 pieces of his artist-related merchandise, while at the same time, carrying out a series of warmer promotional activities, calling our music lovers to look back on Jay Chou's Classics. As a result, 95 out of 100 of Jay Chou's existing songs made their way back onto TME's popular chart, demonstrating our strong promotion capabilities and our skill in rejuvenating our music library.

Additionally, our advertising business continues to improve sequentially from the second quarter, thanks to our innovative and diverse advertising product offerings, demonstrating solid resilience. For example, we made headway with our ad-based free listening mode, which showed initial success with mutually reinforcing growth in revenue and user engagement. Going forward, we plan to expand the free listening mode user coverage while enhancing engagement and boosting its revenue industry. Moreover, we made further progress in innovative commercial advertising formats on TME Live and TMELAND, securing extensive sponsorships from well-known domestic and international advertisers across e-commerce, food and beverage, auto and banking industries, among others, as we help them raise the value and influence of the brands.

In the third quarter, we also continued to explore various business models. First, on the sub-licensing side, our SaaS-based music copyright licensing service has expanded from the live streaming vertical to other use cases that require legitimate music licensing such as short videos, supermarket, ambient music, offline public performance and advertising soundtracks. Second, we launched the industry's first professional data platform, TME Business Intelligence platform, TME (foreign language), with high-frequency data updates, totaling 150x per day. This tool can assist music label, partners in tracking the performance, popularity and listener profiles of their singers and copyrighted songs, equipping music professionals with a deeper understanding of the business value behind the data.

Now let's turn to our social entertainment services. In MAUs and paying -- it's MAUs and paying users declined year-over-year due to macro headwinds. We will continue to innovate our products and explore initiatives such as audio live streaming, international expansion, and virtual interactive product offerings. For WeSing, we continue to provide differentiated tools and content to help our users enjoy the singing experience.

In the third quarter, we implemented an upgrade of privileges and benefits for WeSing VIP users by launching the sound quality enhancement feature in backing tracks, (foreign language), as well as super remix, (foreign language) and smart course (foreign language) sound effects to create an authentic and fun singing experience. What's more, as an important social platform, WeSing caters to diverse real time communication scenarios.

During the third quarter, WeSing launched multi-person singing and chat rooms in both video and audio settings, further driving growth in the penetration rate, and user time spent in these rooms. We also brought our experience in these areas overseas to boost our international business development. For live streaming services, we continue to expand our differentiated content offerings and user experience, benefiting from our streaming format innovations and deeper cooperation with our music content, revenues from audio live streaming rose double digit year-over-year in the third quarter to reach a new high.

What's more? Leveraging our audio live streaming business combined with our know-how in artists incubations, we are providing ample space and support for musicians to grow. For instance, our leading musicians and live streamers (foreign language) started their careers via audio live streaming. With TME support in one-stop musician services, they released songs and earned copyright income with their music, adding another layer to their live streaming revenues. Their songs, The Stars Are Not As Good As You, (foreign language) and Where Did You Go (foreign language) in China became blockbusters during the third quarter and topped multiple TME's music charts.

Last but not least, while pursuing business growth, we have endeavored to fulfill our social responsibilities by creating an innovative model of music empowered charity programs. On 99 giving date (foreign language) we partnered with artists, including (foreign language) and Tencent Charity to launch Hear the Light of Music (foreign language), a philanthropic album and surprised by music (foreign language), a charity concert to raise awareness and funds for environmental protection, as well as young and elderly groups in rural areas.

These events were well attended and garnered coverage from over 100 authoritative media outlets, resulting in huge buzz with over 600 million mentions on social media. In summary, we are actively expanding and making connections through music. Powered by innovation and technology, we are introducing more products and services to China's dynamic music market, elevating the industry as a whole, and reinforcing our business competitive edge and resilience.

With that, I would like to turn the call over to Shirley, our CFO, for a closer review of our financials.

Thank you, Tony. Hello, everyone. Next, I'll discuss our results from a financial perspective. In the third quarter of 2022, our total revenues were RMB 3.4 billion up by 7% sequentially. With the success of our effective cost control and improved operating investments, our profit position continued its growth trajectory since Q4 last year. Average net profit for Q3 2022 was RMB 1.1 billion. Non-IFRS net asset for Q3 2022 was RMB 1.4 billion up by 33% year-over-year base and up by 32% sequentially. In Q3 2022 music subscription revenue grew to RMB 2.2 billion, up by 18% year-over-year, and up by 7% sequentially.

Online music paying users grew to 85.3 million, up by 20% year-over-year, representing a 2.6 million net adds sequentially. Monthly ARPPU in Q3 2022 was RMB 8.8, up from RMB 8.5 in the second quarter of this year. This evidenced our strategy to grow music business healthily and sustainably has shown initial success. Our ongoing efforts to cultivate the users willingness to pay for music and high quality content and surveys will provide optimize the product functionally and improved operations are bearing fruit. We believe increasing willingness to pay for music will drive healthy growth in music subscription surveys in the future.

Revenues from advertising grew both on a year-over-year basis and sequentially at both online and offline market began to recover from the impact of COVID-19. In addition we have launched a new advertising product, such as (inaudible) model to reinforce the user engagement and improve monetization. We remain confident about the long term growth potentials in advertising business. In addition, with the launch of new digital album, especially the successful launch of digital album for Jay Chou and our promotional capability, we had revenues growth in sales of Digital Albums, both on a year-over-year basis and sequentially.

Social entertainment services and other revenues, were RMB 3.9 billion down by 20% year-over-year, due to the evolving macro environment and intense competition from other platforms to adapt to the changing environment, and to stabilize revenues skill, we have differentiated our content offering by enrich our visual interactive product offerings and engage cross-platform collaboration. Meanwhile, we continue to invest in audio live streaming and expand our international footprint for long-term growth.

Gross margin in Q3 was 32.6%, up by 3% year-over-year and 2.7% sequentially. The increase was primarily due to our effective control and revenue sharing fees and content royalty costs, as well as improved operational cost efficiency. This will all resulted from the implementation of our full spectrum cost control measures this year. The growth in advertising revenues and revenues from sales of digital albums also contributed to the growth in gross margin. We will continue to take measures to manage the costs effectively and improve overall efficiency.

Now moving on to operating expenses, total operating expenses for Q3, 2022 were RMB 1.4 billion, or 19.5% as a percentage of total revenues, down by 1.5% from 21% 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 2% year-over-year. Selling and marketing expenses were RMB 245 million, down by 58% year-over-year. And this is our third quarter with more than 50% cut in selling and marketing expenses. On a year-over-year basis, all of the reduced spending on user acquisition had impact on our MAUs.

Our core music subscription surveys continue its rapid growth trajectory. We're continued to take measures to improve efficiency and closely monitor the ROI of each promotion channel, further utilize external promotion channels and leverage our internal channel to attract users and promote our brand. When evaluating the healthiness of business and assessing ROI, we focus more on measures such as leverage of engagement, user retention rates, et cetera.

General and administrative expenses were RMB 1.2 billion, up by 13% year-over-year. Excluding the impact from approximately RMB 44 million of expenses related to our application for secondary listing G&A would have increased by 9% year-over-year, mainly due to increased investment in research and development. We continue to closely manage employee related expenses by improving high competition.

Our effective tax rate for Q3 2022 was 12.2% compared to 11.5% in the same period of 2021. The increase in effective tax rate was mainly because some of our entities are entitled to different tax benefits in 2021 and 2022. For Q3 2022, our net profit and the net profit attributable to equity holders of the company were RMB 1.1 billion. Non-IFRS net profit and non-IFRS net profit attributable to equity holders of the company were RMB 1.4 billion. Non-IFRS net profit margin was 19.2%.

For the third quarter of 2022, basic and diluted earnings per ADS were RMB 0.67 and RMB 0.66 respectively, up 49% on a year-over-year basis. Non-IFRS basic and diluted earnings per ADS were RMB 0.87 and RMB 0.86 respectively, up 41% on a year-over-year basis. Such results demonstrated our commitment and the initial success of operating expenses improvement, as well as the impact from share repurchase program. We are endeavoring to provide high quality investment returns for our investors and shareholder and remain confident about our financial performance, the development of our business and the overall industry.

As of September 30, 2022, our combined balances of cash, cash equivalents, term deposits, and short term investments were RMB 25.4 billion as compared with RMB 25.8 billion as of the June 30, 2022. Such combined balance was also impacted by the change in exchange rate of RMB to USD at different balance sheet base.

Looking forward, we will continue to grow our core business with innovative and diverse products and services for our users and the invest mindfully in new products and services, including long-form audio and international business to maximize our investment returns and the future growth potential. Meanwhile we will continue our focus on creating investments and adhere to tightened controls on cost and expenses to achieve a healthy financial performance.

This concludes our prepared remarks. Operator, we are ready to open the call for questions.

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

Congrats on very strong results. My question is about our music segment gross margin and net margin in Q3. What -- roughly what levels are those 2 numbers? And going forward how should we think about the pace of these 2 margins expansion considering we have a lot of levers including advertising revenue, music, ARPPU, music content cost, long-form audio cost, et cetera, et cetera.

This quarter, our music gross margin from music is keep increasing, and our operating net profits also are growing and increased. And that there are some reasons. First, our increase -- we increased the RMB requirement of content cost and optimized the model of [RCE]. We rejected the agreements with some music labels, tried to switch MT model to revenue sharing model or got more reasonable MT and that have the positive effects and also has a positive impact on our gross margin.

And second, our subscription revenue growth, especially our ARPPU increased continually. So that had positive impact on gross margins. And the third advertising revenues recovery and the digital album revenue increased, also had a positive impact on gross margin. So this quarter, we have very good performance on the gross margin of the music services. And we expect our gross margin with music service can be increased in next quarter, because we expect our advertising revenue and the subscriber revenue can be increased healthily. So we also can continue to control our content cost. So that's the gross margin and net margin also will be increasing two-fold.

Our next question today comes from Lei Zhang with Bank of America Merrill Lynch.

Congrats on a solid quarter. My question's mainly on ARPPU and music subscriber trend. Noticed that we have another Q-on-Q improvements in music ARPPU. So how should we look at ARPPU trend? And I knew that we have like 2 to 3 million music subscribers guidance previously. So you maintain this trend and overall, how should I look at the ARPPU and the music subscriber growth in the following quarters?

I'll answer the first part of the question regarding subscriber growth and then Shirley can chime in about the ARPPU. We're very pleased with our subscriber growth this quarter. We continue to record high teens percentage year-over-year growth rate, in terms of our subscriber growth. And that's a trend that we expect to continue in the near-term, within the 1 year or so, give or take, 1 or 2 quarters. Our near-term goal is to reach the round number 100 million subscriber base. We are now at 80 something million. So that's to us a very achievable target.

And then in the longer run -- and at the moment, our paying ratio is about 15%. And so in the longer run, in a multi-year timeframe, when we benchmark ourselves against other verticals, such as online video verticals in China, we feel that we're confident to be able to achieve a mid-20%s paying ratio in the multi year timeframe.

Shirley, please chime in on the ARPPU side.

Okay, in Q3, mostly ARPPU of music subscriber is RMB8.8, increased from RMB8.5 in Q2, and increased 2 quarter continually. That's because more displaying promotions, more content operations, and optimize the pricing trajectory. In the future, we will continue to focus more on the quality growth of our own subscription revenues. We will reduce the promotion activities, subscriber business and strengthen our content operation products. On the other hand, we will provide a Super VIP service that have higher ARPPU, giving more privacy to our users. So we expect our ARPPU can be increased gradually, while paying users to continue to grow healthily. And we expect in the next quarter, our ARPPU will be increased gradually, yes.

And our next question today comes from Lincoln Khan at Goldman Sachs.

So my question is about the advertising business. I think this quarter, we have a pretty solid increase for the advertising business, and reversed the declining trend in the first half. Could management give us more color in terms of what's been the underlying driver of that? And especially in terms of the new format of ads, including TME Live, how are we thinking, the position for these new format going forward? And if there is any outlook for the fourth quarter in terms of ad strength?

Sure. In terms of advertising revenue, we're very pleased to see that this quarter, we starting to see a positive year-over-year growth, which reversed the negative year-over-year growth trends in the previous quarter. And in particular, in the previous several quarters, splash screen ad represented a majority of our advertising revenue. But we are also pleased to report that splash screen ads now represent less than half of their advertising revenue as the result of our investment in new formats and new advertising innovation products. It's now the second quarter in a row where we are seeing our advertising revenue growth on a Q-on-Q basis. And so looking forward into the next quarter and also into next year, provided that the macro economic conditions continue to improve in the current trend, we are optimistic about the outlook on the advertising business.

A couple of things is driving this growth. Number one, our sponsorship ads continue to grow at a healthy pace as we host and organize an increasing number of events. These events include TME Live events, include other sponsored live events, for example, on TMELAND, as well as others. In addition, our ad supported free listening mode saw strong growth, and now represents approximately 10% of our online music advertising revenue. So all of these are important drivers, together with an improving macroeconomic conditions. That leads us to an optimistic outlook.

Yes, we will continue to work with WeChat video accounts team to continue to provide high-quality offline and online TME Live event for users. As what Tony mentioned that it will help us to bring more and more advertising sponsorship. But at the same time, it will help us to continue to attract more partners to join hands with us. In the third quarter, we have already successfully launched that 30, over 30 events of TME Live. So we are expecting that after the pandemic of the COVID, I think that the overall situation will be continuing improving. It will continue to drive the advertising sponsorship for us as well.

And our next question today comes from Alicia Yap with Citigroup.

Congrats on solid results. I have a questions related to the social entertainment business. So assuming if the economy rebounds and reopens in the next few months or next couple quarters, should we actually expect to see the positive impacts to the social entertainment business? Or will this business continue to weight on competitive pressure? So any color that you could share would be helpful.

Due to the impact of challenging macro environment and increased competition from other pan entertainment platforms, the social entertainment revenues recorded a negative year-over-year growth this quarter as well as the previous few quarters. We continue to expect a pressure and challenges in that area. However, we will continue to innovate more products and explore new initiatives such as audio live streaming, and virtual interactive product offerings. Within audio live streaming segments, within the social entertainment revenues, that has recorded a very healthy mid-double digit type year-over-year growth rate. And we're very, very pleased with that. And that can help us offset some of the challenges in the traditional live streaming segment. In addition, we continue to expand in overseas market, both organically, as well as through suitable M&A opportunities, such as the Japanese leading karaoke app Pokekara acquisition that we made, which continued to contribute a positive growth both organically and through M&A in our international business.

And our next question today comes from Xueqing Zhang with CICC.

Congratulations to a strong quarter. So my question is related to long-form audio business. You talked about later -- this related quarters. So just wondering, management could share more color about long-form audio business with us, such as, what's the country it's live and what's the main target KPI for this business? And how should we expect the future investment and the profit?

Thank you, long-form audio has proven itself to be an effective complement to our powerful portfolio of music apps, as it continues to convert more and more music users into long-form audio users, and drive higher user engagement and activeness as a result. We continue to expand and differentiate long-form audio content through licensed content, as well as self-produced content.

We also provide users and content creators with useful tools to build an active podcast and UGC content ecosystem. We'll gradually improve its monetization through monthly subscription and focus on ROI for content investment. Our overall target is for the long-form audio business to break-even at a gross margin level by the end of next year.

And our next question today comes from Wei Xiong with UBS.

Congratulations on a good quarter. I want to follow-up on the margin side. So we have made a great deal of effort this year to improve our overall operating efficiency. So just want to understand our, maybe cost planning for next year, especially around headcount and also marketing strategy, and how much more room we can further improve our net margins for next year?

Yes, we expect the gross margin and net profit margin can be increased in the next year. And you want to know how room to -- we can get in the next year. We think we will continue to control the sales and marketing expense. And we don't give a goal to net expense. We just monitor the ROI, and we increase the ROI in the next year. So we think we also have some room to get more performance on the sales and the expenses. And for the second part, we think we 1 -- on the 1 hand, we needed to invest more new products and the fund the growth potentials. So we will continue invest to this path.

And the other hand, we will look through the high count efficiency. And for the older products, and for the last products, we also needed to plan and to make pretty [even]. So we think this part we can have some improved efficiency. So I believe with the revenue of music service can be increased healthily and the social entertainment revenues can be stable or some little decrease, the gross margin and the net profit margin can be increased in the next year.

Yes, and just to supplement to what Shirley has said, this quarter marks the second consecutive quarter of revenue growth Q-on-Q, but the third consecutive quarter of our net profit growth Q-on-Q. And so there's a very clear trend through cost optimization and efficiency programs of improving profitability. And so even though this year, for the full year this year as a whole revenue -- we saw revenue decline on a year-over-year basis. Our goal looking forward into next year is to be able to achieve positive revenue growth next year, and as a result, positive growth for profitability as well.

Yes, I think a really strong financial result of this quarter has demonstrating us have been doing a really good job in improving our operational efficiencies. It is also demonstrating that we have tried many, many ways, not just cutting for example the marketing or channel costs, we are also trying to make our team to be more lean than before. And it also help us to improve the overall efficiencies as well. In the future, we will continue to try to have a good control on our content costs as well. So we'll try to talk to all of our partners, and try to change our revenue sharing model, from the minimum guarantee model to the revenue sharing model, which will help us further to improve our efficiencies. So these are all of the plans that we are enhanced, and we are continuing doing it for almost a year now. So we will continue seeing a continued improvement for the future.

(Operator Instructions) Our next question comes from Thomas Chong at Jefferies.

Congratulations on a solid set of results. My question is about the competitive landscape. How should we think about the competition with the short-form video and other incumbents in coming years? And my second question is about -- on the margin side, given our cost control measures, the focus on ROI? Can you comment about the online music margin, ex-long-form audio? How is the trend going forward?

On the competition side, I'll start and other management team can complement. I think we've mentioned in the past that with regards to short-form video platforms, it's a combination of both cooperation and competition. We obviously leverage, the short video platforms as a marketing tool to help promote our music, as well as to help promote some of our brand activities. And that has been proven to be quite successful.

But on the other hand, there has also been news about a potential entry into the music market by the likes of (inaudible). Although having said that, I think we observe that the progress being made in the music entry front, we continue to monitor the scale of the users in the music platform by doing continue to be small and there continues to be a wide gap between the content offering by their service compared to our service. So obviously, we're watching the competitive dynamics extremely carefully and extremely closely. And we stand ready to react. But at the moment it's something that to pay attention to, as opposed to, something to react to.

On the margin side, I think we've talked about this earlier, the music margin continue to improve as a result of a number of factors, as Shirley mentioned, the healthy subjects subscription revenue growth, driven by a combination of both ARPPU increase, as well as subscriber growth and not just subscriber growth, the continued solid increase in advertising, as well as good a cost control on our content cost side, all leads to healthy and sustainable improvements in music margin. And then on the long-form audio side, the negative margin there continue to improve as well, as we expect to break-even on the gross margin basis for long-form audio by the end of next year. So overall, both of that combined to see an improving music margin.

Our next question today comes from Liu Charlene with HSBC.

Hello, I'm [Catherine] on behalf of Charlene Liu from HSBC. So first I wanted to ask on the long-form video side. My question is regarding the (inaudible).

Sorry, can you repeat. Your line is not very clear. What was question regards to?

I'm sorry. So I'm asking on behalf of Charlene Liu from HSBC. So my question is regarding to the potential impact from the open business next year, our long-form business (inaudible).

Sorry, the impact from what?

The open business [revenue] in next year.

Sorry, can you repeat the impact from what?

Sorry, sorry. Apologies for the technical issue. My question was regarding to the overall impact of the revenues in next year.

Sorry, I don't understand your question.

Could you please repeat your question?

(inaudible)

Yes, sorry, I think we can move on. Next question, please.

And our next question today comes from (inaudible) with T.H. Capital.

And my question is about the cooperation between TMELAND and WeSing Video. How is the collaboration progressing now and what else will be explored in the long-term cooperation to have more sustainable users and getting more commercial value?

Yes, we continue to deepen our cooperation with WeSing, specifically, the video account to enhance music focus, collaboration, and promotional capabilities of both music and live events. This is an important means for us to enrich the music video based content on both our platform, as well as on the WeSing platform, as well as to leverage WeSing to expand our promotional channels for artists, especially for musicians.

QQ Music and Kugou Music, both have official video accounts on WeSing, and they constantly evaluate users preferences through refined operations, and the recommended music content is very popular among users, ranking among the best in the music category within WeSing video accounts. And WeSing video account serve as an important channel for music lovers to discover music, after which user often come back to the TME platform to continue to explore and enjoy the music they love.

As for concerts, TME Live and WeSing Video account have co-hosted many live performances, such as concerts by (inaudible) most recently. In the future, will cooperate more closely to present even more and better shows to users and to explore more innovative and expanded monetization avenues.

(foreign language)

Yes, what's he's saying that, obviously our cooperation with Tencent in particular on the live related shows are set on a project by project basis. We each have a pipeline of projects. And for each project, we discuss timeline, as well as the revenue sharing arrangements.

Thank you. And ladies and gentlemen, we are now approaching the end of the conference call. I will now turn the call over your speaker host today, Mr. Tony Yip for closing remarks.

Great. Thank you, everyone. Thanks for joining us today. If you have any further questions, please feel free to contact the investors relations team. This concludes today's call and we look forward to speaking to you again next quarter. Thank you and goodbye.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.