Hello Group Inc. Q2 FY2022 Earnings Call

Thank you, operator. Good morning, and good evening, everyone. Thank you for joining us today for Hello Group's Second Quarter 2022 Earnings Conference Call. The company's results were released earlier and are available on the company's IR website. On the call today are Mr. Wang Li, CEO of the company; and Ms. Peng Hui, CFO of the company, who will discuss the company's business operations and highlights as well as the financials and guidance. They will both be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this call may contain forward-looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and related events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are within the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law. I'll now pass the call to Mr. Wang, I'll translate for him. Mr. Wang.

Good day, everyone. Thank you for joining our conference call today. At the beginning of the year, I outlined the group's strategic priorities and our execution plan for the year. The COVID resurgence in the first half has brought many challenges and uncertainties to the overall market environment and our execution of these goals. However, I'm pleased to see that our team still managed to deliver good results by adjusting our product and operational initiatives in a timely manner to cope with external headwinds. At the same time, we have adopted our execution plan to suit the evolving external environment. Now I'll walk you through the details. I will start with a brief overview of our financial performance. For the second quarter of 2022, total revenue at the group level was RMB 3.11 billion, down 15% year-over-year and a slight 1% decrease quarter-over-quarter. Adjusted operating income was RMB 464 million with a profit margin of 15%. Adjusted operating income was up 1% from the previous quarter, marking the first sequential growth since the pandemic and the market environment started to deteriorate in the second half of 2021. On an ex-Tantan basis, total revenue was RMB 2.78 billion, down 12% year-over-year or a slight 1% decrease quarter-over-quarter. The year-over-year decrease was mainly due to pressure on the live streaming business caused by the pandemic and regulatory factors. Incremental revenue brought to the VAS business by the rapidly growing new apps partially offset the decline in live streaming. Adjusted operating income on an ex-Tantan basis was RMB 583 million with a 21% margin. Tantan's total revenue for the quarter came in at RMB 331 million, down 36% year-over-year and 5% quarter-over-quarter. The year-over-year decrease was due to the demonetization process to improve user experience and retention in the second half of 2021 as well as the negative impact of the COVID resurgence on Tantan's user growth and paying conversion. Tantan's adjusted net loss was RMB 119 million for the quarter compared with RMB 44.5 million a year ago. Now I will discuss the execution of our strategic priorities in the second quarter. At the beginning of the year, I set strategic growth goals for Momo, Tantan, and our new endeavors. For the Momo app, our goal is to maintain a stable user base with a limited marketing budget and seek growth on top of that while ensuring the cash cow business remains stable. Despite uncertainties in the consumer and regulatory environment in the first half, we still achieved Momo's strategic goals, demonstrating our team's strong adaptability and execution skills. Tantan's strategic goal was to deliver solid user growth by improving marketing efficiency and the core dating experience. However, we encountered significant external challenges in meeting Tantan's growth targets. In the first half of the year, the deteriorating COVID situation largely affected users’ dating sentiment and their propensity to pay for VAS, resulting in a significant decline in channel ROI. We therefore decided to temporarily scale back channel investments in late Q2 to narrow Tantan's net loss. This strategy has been effective, as I will explain in more detail later. Considering the ongoing uncertainties around the pandemic and the macro environment, management has decided to adjust Tantan's strategic goals to focus on narrowing the net loss by reducing low-efficiency China marketing expenditure. At the same time, we are accelerating our efforts to develop products and monetization models suitable for the Asian dating culture to improve retention and ARPU. With improvements in retention and ARPU, we can pursue growth backed by a positive business cycle. In other words, we are prioritizing growth with profit instead of growth with costs. I will elaborate on the strategy and our implementation plans in greater detail later. Now let's discuss the progress we made with these strategic priorities and areas for improvement. Firstly, regarding Momo user growth and key operating metrics, Momo had 111.2 million monthly active users for the second quarter of 2022, which remained stable from the previous quarter. The number of paying users was 8.6 million, unchanged from the previous quarter. Overall, despite a 4% year-over-year decline due to the pandemic resurgence in the first half, excluding external factors beyond the company's control, Momo's fundamentals as a social platform remain stable and healthy, thanks to improvements in channel efficiency and overall retention driven by product initiatives. This provides a solid foundation for our cash cow business. Now I will discuss the priorities of ensuring that our cash cow business remains stable. In the second quarter, although multiple external factors challenged our live streaming business at the beginning of the year, mass revenue growth generated by new apps largely offset the overall pressure on Momo's top line from the decline in live streaming. On an ex-Tantan basis, revenue was RMB 2.78 billion, slightly down 1% quarter-over-quarter. The revenue ratio of VAS to live streaming further increased to 94%. VAS revenue is now very close to the size of live streaming. Momo's live streaming revenue totaled RMB 1.4 billion for the second quarter, down 26% year-over-year and 5% quarter-over-quarter. The year-over-year decrease was mainly due to three factors: First, regulators imposed restrictions on the design of the ranking system and PK competition in May, which negatively impacted spending. Second, the scrutiny on tax compliance negatively affected engagement with talent agencies. Third, we faced content softness due to the COVID resurgence. In response to the changes in the external environment, we focused on optimizing our live streaming ecosystem and driving user engagement by organizing small-scale events. Regarding event-related incentives, we continued to maintain a conservative operational strategy with a minimum budget for bonuses to better control revenue-sharing costs. While revenue decreased sequentially due to regulatory adjustments, Momo's gross profit margin in Q2 held steady quarter-over-quarter, and the overall ecosystem remained healthy and stable. In terms of VAS, revenues from value-added services, excluding Tantan, totaled RMB 1.32 billion for the second quarter, up 9% year-over-year and 5% quarter-over-quarter. VAS revenue from the main Momo app totaled RMB 1.14 billion, flat compared to Q2 last year and up 1% quarter-over-quarter. Revenue from the new apps maintained its rapid growth momentum, achieving full-quarter profitability for the first time. Collectively, revenue from the new apps grew by an accelerating rate of 159% year-over-year to RMB 182 million and up 34% quarter-over-quarter, making it the main contributor to incremental revenue for VAS. Since Q4 last year, the COVID resurgence has continued to suppress users’ social engagement, and established VAS use cases are becoming increasingly monetized, leading to a slowdown in year-over-year growth in core Momo's mass revenue. In Q2, we differentiated various user groups and catered to their specific social preferences. Our product team introduced several innovative features that effectively enhanced interactions among paying and non-paying users, increasing their propensity to pay for VAS and driving a slight increase in mass revenue from the previous quarter despite the impacts of the pandemic and consumption softness. Regarding Tantan, we witnessed challenges with user trends and overall financials. In the early part of Q2, the COVID control measures in numerous regions of China escalated, largely affecting users' dating sentiment and putting pressure on organic traffic. New user retention dropped significantly, and paying conversion was much lower than under normal circumstances, resulting in a substantial decrease in LTV and an extended payback period for channel investments. For ROI considerations, we temporarily adopted a conservative marketing approach to reduce Tantan's net loss during the pandemic by lowering channel investments. The negative impact of the pandemic, combined with reduced channel investment, pressurized Tantan's domestic MAUs. However, due to growth in the overseas market and improvement in domestic users since COVID restrictions eased in June, Tantan's overall MAUs in June declined only 3% from March to 24.8 million. The number of paying users for the quarter was 2.2 million, down by 200,000 sequentially, primarily due to the decrease in MAUs and the decline in paying conversion as the pandemic suppressed users’ willingness to pay in the domestic market. Now I'll briefly review Tantan's financial performance. Total revenue was RMB 331 million, down 36% year-over-year and 5% quarter-over-quarter. The year-over-year decrease was mainly due to our demonetization strategy to enhance user experience since the second half of last year. The sequential decline was largely due to the drop in paying users for the reasons mentioned. The slight sequential increase in ARPPU partially offsets the revenue pressure caused by the decline in paying user count. For the second quarter, VAS revenue was RMB 214 million, down 4% sequentially. FlashChat's drive towards membership subscriptions shifted toward high-end SVIP services, lifting Tantan's overall ARPPU on a sequential basis. Live streaming revenue for the second quarter stood at RMB 116 million, down 7% quarter-over-quarter. Live streaming ARPPU continued to face pressure during the product transition period. Now let's discuss Tantan’s strategic priorities for the second half of the year and how this effort will help us unleash Tantan's long-term product and commercial value. After the management changes last year, we defined that the key to achieving Tantan's long-term strategic goal of user growth is to enhance user retention by improving marketing efficiency and the core dating experience. Through channel optimization and product experimentation over the past year, our team has made preliminary progress in achieving this strategic growth. However, in response to COVID challenges in the second quarter, we opted for a cost control strategy to scale back channel investment and reduce Tantan’s net loss. This initiative delivered favorable results in Q2, without negatively impacting user experience from the decrease in new users. We believe that Tantan is the most committed and effective product for connecting people for romantic purposes and facilitating real-life relationships. Tantan's current user base is still below its potential. Furthermore, regarding dating and offline conversions, we do not see any significant competitors in the China market. Therefore, we are confident in our long-term goal of growing Tantan's user base. Given the uncertainties in the macro environment and the current smartphone penetration, we believe that the consumer Internet growth model in China needs adjustments. For Tantan, it makes more sense to pursue profitable growth through more ROI-efficient marketing approaches than to simply invest money in channels without evaluating unit acquisition costs. Therefore, management has decided to adjust Tantan's strategic priorities for the second half of the year, specifically reducing spending in low-efficiency channels to narrow Tantan's net loss. Concurrently, we are working to improve user retention and drive ARPU growth through algorithms and new non-membership VAS products. Once ROI turns positive, we will reinvest the profits into marketing to create a self-sustaining positive cycle and pursue growth on top of that. With the reduction in the channel budget, we expect Tantan's net loss in the third quarter to significantly narrow on a sequential basis from approximately RMB 120 million in Q2 to around RMB 15 million in Q3. In Q4, we aim to further scale back investment in channels with low ROI. As we do this and with the increase in ARPU, driven by non-membership VAS, excluding year-end specific expenses such as annual bonuses, Tantan's monthly net loss should continue to lessen in Q4, which would lay a solid foundation for reaching breakeven and entering a positive business cycle next year. We expect the cut in channel investments to result in a short-term decrease in user scale within the next two to three quarters. Nevertheless, we anticipate that with increased retention ratios driven by better channel efficiency and new product experiences, the user base will stabilize at around 80% of the current level before entering a growth phase based on positive business cycles. I'd like to address two key points regarding how we will execute the strategy to achieve profitable growth: First, how we plan to cut costs while ensuring improved user application efficiency; and second, how we will enhance user retention and ARPU while reducing channel spending. This is crucial for achieving a positive business cycle. Firstly, let's talk about how to reduce and control marketing costs and improve efficiency. Our attempt to reduce channel investment in late Q2 was primarily focused on channels with low efficiency. Our team enhanced the marketing efficiency of premium channels through algorithms and other technical methods. In Q2, despite the seasonal increase in channel costs, Tantan’s unit acquisition costs decreased by nearly 20% compared to the previous quarter. Simultaneously, new user retention showed a slight uptick, and the average age of new users tended to be younger. The investment reduction experiment in Q2 effectively lowered marketing costs and narrowed the net loss while not adversely impacting the overall dating experience. We will continue to implement our Q2 marketing approach in the second half, starting from channels and methods with the lowest ROI and retention. We will closely monitor the impact of budget adjustments on our ecosystem and user retention to ensure that a decline in new user registration does not cause any negative user experience on our platform while managing user age and revenue ratios within reasonable bounds. Now I will explain how to improve retention and ARPU with new product experiences. In this respect, we have clarified our direction through exploration over the past few quarters, aiming to continue optimizing the product experience for female users and those without qualified photos to enhance retention while exploring effective non-membership VAS paying models to drive ARPU growth and improve user experience. On this front, we have introduced chat rooms to users who are reluctant to share real photos so they can establish initial connections with others through real-time audio experiences. We subsequently encouraged these users to upload photos to reveal their appearances, thereby enhancing the probability of offline conversions. As a commercial product, chat rooms enable users to send photos with decorations or other traditional virtual gifts to designated members, showing friendly gestures and enlivening the atmosphere. We will continue to use virtual gifts as a basic monetization tool and introduce interesting interactive features to chat rooms, improving the experiences of users without qualified photos and boosting retention and paying conversion rates. Based on the data we have seen so far, we expect chat rooms to positively influence driving ARPU and monetization efficiency once we extend availability to a wider range of Tantan users. We believe that the key to achieving a positive business cycle is to enhance ARPU and user retention. Although the previous excessive payroll model effectively drove up ARPU, it had a low ceiling and negatively impacted user experience, making it challenging to improve ARPU and retention simultaneously. The right approach is to drive organic growth of ARPU and retention by introducing new product experiences. Our research over the past year indicated that achieving such new experiences relies on two key factors: continuous algorithm enhancement and innovation in building a product model better suited to Asian culture than the swipe and match mechanism. In the past six months, improvements in algorithms and initial success with the chat room experience have created opportunities for addressing these needs. This will be our focus moving forward. Next, I will review the progress we have made with our new initiatives. As I mentioned in previous calls, we take different approaches to managing ROI-oriented and DAU-oriented new products. In the second quarter, the total revenue of profit-driven ROI-oriented standalone apps was RMB 199 million, up 184% year-over-year and 24% quarter-over-quarter. As the product experience within these apps became more stable, we adopted an operational strategy to reduce costs and enhance efficiency in the second half of last year while stepping up monetization efforts to improve paying conversion and ARPU. With increased revenue scale and branding influence, we have gained leverage to lower the payout ratio, thus improving profitability. Our overseas social app has expanded into new regions, building on established markets. We continue to improve user acquisition efficiency, leading to rapid user base expansion with a flat budget. Revenue growth of the overseas app accelerated this quarter, and it achieved profitability for the full quarter. In Q2, ROI-oriented standalone apps began positively contributing to the group's bottom line. We anticipate these products targeting vertical user groups in each market will pursue steady growth and ensure profitability this year. On the product front, we will continue exploring innovative features suitable for new markets to facilitate long-term growth. In addition to ROI-oriented products, I introduced our new DAU-oriented product Tietie on our last conference call. It is a picture and video-based social app for users to interact with intimate friends and family members by documenting their daily lives in photo and video formats. The app automatically pushes content to the mobile phone homepage of predefined intimate friends on Tietie, allowing users to see authentic life updates of their friends without needing to load the app. This product accurately captures the demand of Gen Z and Gen Alpha to express themselves in a fun way with amusing selfies. These needs cannot be effectively satisfied on traditional social media platforms, where user perceptions are more significant. Thus, Tietie’s organic user base has rapidly grown since launching during the Chinese New Year. Following that, our team intensified marketing efforts in Q2, significantly increasing user scale while keeping unit costs manageable and retaining a high level of engagement. Meanwhile, Tietie's user scale has reached a considerable level, and the growth rate, coupled with overall user scale, signifies an achievement that has been well received in today’s consumer Internet market. This marks our first breakthrough in a DAU-oriented social app after several years of exploration. We believe this success stems from accurately capturing new social preferences among younger generations. In the third quarter, our team will accelerate product iterations to expand features and functionalities while introducing more engaging mechanisms to enhance product experience and retention, encouraging users to share Tietie content across other social media platforms and thereby expanding our branding influence. The initial success of Tietie indicates that while long-term opportunities for social models and experiences largely depend on technological advancements, generational transitions also create new prospects for large DAU products before users shift their screen time from mobile applications. Our long-standing leadership in the social space provides an advantage we can leverage to explore new markets and tap into new opportunities. Going forward, we will boldly and determinedly expand our territory and delve deeper into our vertical markets. This is what I would like to cover today. Now I'll pass the call over to Cathy for the financial review.

Thanks, Wang and Ashley. Hello, everyone. Thank you for joining our conference call today. Now let me briefly take you through the financial review. Total revenue for the second quarter of 2022 was RMB 3.11 billion, down 15% year-on-year and 1% quarter-on-quarter. Non-GAAP net income attributable to the company was RMB 463.5 million compared to RMB 551.0 million from the same period of 2021, representing a 16% decrease year-over-year. Looking into the key revenue line items for the quarter: Firstly, on live broadcasting, total revenue from the live broadcasting business for the second quarter of 2022 was RMB 1.52 billion, down 28% year-over-year and 6% quarter-on-quarter. Core Momo's live broadcasting revenue totaled RMB 1.40 billion for the second quarter, down 26% year-over-year and 5% quarter-on-quarter. The decline was primarily due to pressure from consumption softness and regulatory changes. Tantan’s live broadcasting revenue amounted to RMB 116.4 million, down 46% from Q2 last year and 7% from the previous quarter. This decrease was due to our strategic decision to accentuate live streaming as a supplementary experience to dating. A few months ago, we reformed Tantan’s live streaming business to better facilitate social interactions rather than the traditional entertainment model. Based on the data we've analyzed, this strategy appears to be effective. Therefore, we expect content live streaming to exit the decline phase and stabilize at current levels as we move into the second half of the year. Revenue from value-added services reached RMB 1.54 billion, up 2% year-over-year and 4% quarter-on-quarter. Revenue from value-added services on an ex-Tantan basis amounted to RMB 1.32 billion in the second quarter of 2022, reflecting a 9% year-over-year and 5% sequential increase. Growth in value-added services on an ex-Tantan basis was primarily driven by incremental revenue generated by the fast-growing new applications. Tantan's value-added service revenue was RMB 214.4 million, down 28% from Q2 last year and 4% from the previous quarter. The year-over-year decrease was due to our demonetization strategy aimed at improving user experience and retention in the latter half of 2021, coupled with pressure on Tantan's MAUs and paid conversion as a result of the COVID resurgence. The sequential decrease in Tantan's value-added services largely resulted from this factor. Non-GAAP cost of revenue for the second quarter of 2022 was RMB 1.79 billion, compared to RMB 2.05 billion for the same period last year. Non-GAAP gross margin for the quarter was 42.5%, down 1.7 percentage points from a year ago. The decline was mainly attributable to the higher payout ratio to content providers as we allocated additional funds to assist agencies and broadcasters through these challenging times. Sequentially, non-GAAP gross margin remained stable with a slight uptick. Non-GAAP R&D expenses for the second quarter stood at RMB 214.3 million, down from RMB 232.9 million for the same period last year, representing an 8% year-over-year decrease, owing to ongoing personnel cost optimizations since the year's outset. We concluded the quarter with a total of 1,825 employees, of which 516 were from Tantan, as compared to 2,092 total employees, with 617 from Tantan a year ago. R&D personnel accounted for 61% of total staff, compared to 57% in Q2 last year. Non-GAAP sales and marketing expenses for the second quarter were RMB 600.1 million, down from RMB 619.5 million for the same period last year. As Wang Li mentioned, enhancing marketing efficiency has been one of our company's top operational priorities. Since early in the year, we've been reducing low-efficiency marketing plans across all business lines, which previously yielded negative ROI. For the second quarter, marketing spend for Momo and Tantan decreased by RMB 74 million or 15% from the same timeframe last year. We redirected some of the savings to promote the new application Tietie following its successful debut in Q1. Reallocating resources from low ROI to higher ROI areas will continue to be pivotal for us in the coming quarters. On a sequential basis, non-GAAP sales and marketing expenses increased 4% from RMB 578.0 million in Q1 this year, primarily due to Tietie’s marketing, partially offset by reductions in other low-efficiency marketing channels. Non-GAAP general and administrative expenses were RMB 82.6 million for the second quarter of 2022, up from RMB 78.8 million for the same period last year. Non-GAAP operating income was RMB 464.1 million, a 41% decrease from Q2 2021 but up 1% from the previous quarter. Non-GAAP operating margin for the quarter was 15%, down 6 percentage points from the previous year. Non-GAAP operating expenses as a percentage of total revenue stood at 29%, an increase from 25% in Q2 2021. This rise was mainly due to the negative operating leverage resulting from reduced revenues. Non-GAAP operating expenses decreased by 4% year-on-year, attributing to the cost control measures we've enacted since the year's commencement. We anticipate maintaining cost discipline for the remainder of the year to enhance efficiency while navigating the uncertain macro environment. Now, moving on to below-the-line items: During the second quarter, the company repurchased $161.8 million in aggregate principal amount of our convertible senior notes from certain bondholders for a total repurchase price of approximately $161.6 million. This purchase yielded a gain of RMB 66.3 million. Let’s briefly discuss income tax expenses. The total income tax expense was RMB 146.0 million for the quarter, with an effective tax rate of 24.5%. In Q2, the company accrued withholding income tax of RMB 37.7 million, equivalent to 10% of undistributed profits generated by our WFOE. Without this withholding tax, our estimated non-GAAP effective tax rate was around 18%. Now regarding balance sheet and cash flow, as of June 30, 2022, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits, and restricted cash totaled RMB 13.95 billion, down from RMB 15.71 billion as of December 31, 2021. In Q2, we disbursed an equivalent of RMB 841 million cash dividend to our shareholders and repurchased an equivalent of RMB 1 billion of the company's convertible notes. Excluding a cash payment of RMB 100 million to Chinese tax authorities to repatriate RMB 1 billion from our WFOE in China, net cash provided by operating activities in the second quarter of 2022 was RMB 300 million. Lastly, on business outlook, we estimate our third quarter revenue to range from RMB 3.1 billion to RMB 3.2 billion, reflecting a decline of 17.5% to 14.9% year-over-year, or a decrease of 0.3% to an increase of 2.9% quarter-over-quarter. For Q3 2022, on a sequential basis, we expect total revenue from the core Momo to grow in the low single digits driven by a recovery in the live streaming business, thanks to the product and operational initiatives implemented by the team. Regarding Tantan, we expect revenue to remain flat or see a slight sequential decrease. Tantan's membership revenue is projected to decrease quarter-over-quarter due to the temporary decline in user base as we reduce low-efficiency marketing channels. This decrease will be countered by sequential growth in live streaming driven by our initial success with the strategic shift mentioned earlier. Please be aware that this forecast reflects the company's current and preliminary view on market and operational conditions, which are subject to change.

Just a quick reminder before we take the questions. For those who can speak Chinese, please ask your questions in Chinese first, followed by English translation by yourself. Thank you. Operator, we're ready for questions, please.

My first question is on Tantan. Can management comment about the user trend in the second half as well as related revenue and bottom line? And my second question is about the development of our new apps as well as our overseas strategies?

On the last conference call, I mentioned that Tantan's user growth depends on two factors. One is an internal factor, which is the enhancement of user experience and the improvement of channel efficiency driven by product efforts. The second factor is related to external reasons, namely the extent of COVID control policy and the resulting impact on users’ offline dating sentiment. As for internal factors, our most significant progress after last year's management changes was determining that the key to enhancing user experience and improving channel efficiency is to increase retention of female users and those without qualified photos. We have identified initial solutions through algorithm improvements and new product features. We will continue making steady progress in this area; I am quite confident about this aspect. In terms of external factors, the ongoing resurgence of COVID in various regions in China and related control measures have posed significant challenges. Additionally, uncertainties in the broader macro environment persist. Consequently, we've decided to adopt a strategy to reduce marketing investment, control costs, and improve efficiency. Our plan involves eliminating spending in low-efficiency channels while enhancing retention of female users and those without qualified photos and driving ARPU growth through the new chat room experience in order to make Tantan channel ROI positive as quickly as possible, so that we can prioritize profit growth based on a positive business cycle. Based on the current data regarding the reduction of channel investment and the chat room experience, we believe we are on track to achieve this goal next year. I will leave it to Cathy for the financial outlook.

Sure. Let me provide further insights into the top line and bottom line for Tantan. Firstly, on revenues, it appears that the zero COVID policy will be in effect for a while. Recently, we are seeing new rounds of tightening lockdowns in some major cities due to a resurgence in confirmed cases. As you know, Tantan's user base is concentrated in these wealthier urban centers in China. This will undoubtedly negatively impact dating sentiment and paying conversion, putting continued pressure on marketing ROI. As Wang Li mentioned earlier, prioritizing growth with profit over cost-driven growth, we are prepared to cut marketing expenses to safeguard ROI and the bottom line. As we scale back low-efficiency channel marketing in the second half of the year, we expect user numbers to trend down, possibly around 20% from the June levels, plus or minus 5%, implying a bounce point around that level. The variance will heavily depend on how the COVID situation evolves over the next months. Subscription revenue should decrease as the user count declines, likely with a time lag because of deferrals, but it should eventually synchronize in magnitude with user declines. However, we foresee a counteracting factor for Tantan: as the year progresses, we expect the ramp-up of non-subscription revenues to materialize, partially offsetting the decrease in subscription income due to cost cuts. In summary, Tantan's revenue will trend downward a little in the second half compared to the first half, but it will only represent a slight decline before recovering. Another point I want to reinforce is that despite the minor sacrifice in top-line growth due to the reduction of low-efficiency marketing channels in the coming months, the bottom line should see significant improvements starting in Q2 for Tantan. As mentioned in the earlier part of Wang Li's remarks, we expect non-GAAP net loss for Tantan to narrow to within RMB 50 million in Q3, and in Q4, excluding year-end specific expenses such as double pay and bonuses, we also anticipate a reduction in Tantan's monthly net loss. This represents a comprehensive financial outlook for Tantan for the second half of the year. Given the current state of the zero COVID policy and ongoing macro uncertainties, we believe it is prudent for Tantan to potentially sacrifice some short-term top-line growth to establish a positive business cycle for future profitable growth.

I've comprehensively covered the new business in my prepared remarks. I would like to briefly elaborate on Tantan's overseas development. Since we entered the overseas market about a year ago, we have adopted an ROI-oriented management approach and strived for profitable growth, overcoming the challenges of previous growth without profit or vice versa. Our execution plan consists of three components. First, we aim to replicate our original live streaming and non-membership VAS monetization model to significantly enhance ARPU and ROI in the Indonesian market. Currently, our team is working on replicating this business model in other markets. Second, we are focusing on reducing costs and improving efficiency, specifically by scaling back channel investments in markets such as Japan and South Korea where ROI is low and reallocating our limited budget to regions with higher profit potential. Third, we aim to reduce the payout ratio to enhance profitability in markets with substantial revenue scales. We believe investors will witness a clear growth trajectory for Tantan's overseas business in the second half of the year, supported by a positive business cycle. I hope that answers your question, Thomas.

Operator, we're ready for the next question.

This is Henry speaking on behalf of Daniel. My question is regarding core Momo; can management share more insights on the second half revenue expectations for live streaming or VAS?

Certainly. Let’s discuss both revenue lines separately, as their dynamics differ considerably. For Momo's live streaming business, we're seeing better tracking in June and August than anticipated three months ago, which is now reflected in our guidance for Q3. Initially, we anticipated a downtick in Q3 compared to Q2, but we now expect a slight increase sequentially for Momo live streaming. At this time, we cannot definitively state that we have exited the uncertainty phase for live streaming. However, based on current macro and regulatory observations, we have reasons to stay cautiously optimistic regarding live streaming stability for the rest of the year. Regarding value-added services on an ex-Tantan basis, as previously articulated, we are also optimizing marketing costs so that the new applications can achieve higher-quality growth, which means growth with improved profit margins. This could involve cutting marketing expenditure for new applications if the ROI from certain channels does not meet our expectations. Furthermore, the ongoing zero COVID policy and continued outbreaks in various regions are weighing heavily on social sentiment, which may continue to limit the growth pace of value-added services on the main application as well. Previously, we communicated our expectation for VAS on an ex-Tantan basis to grow in double digits on a year-over-year basis. However, given these aforementioned factors—both the optimization of marketing costs for new applications and COVID lingering into Q4—we're adjusting this prior double-digit growth target to the high single-digit range. Overall, I believe that value-added services will continue to serve as a healthy growth engine for Momo in the latter half of the year. That covers the dynamics for Momo live streaming and value-added services.

My question pertains to core Momo's margin trends in the second half of the year. What should we expect for core Momo's gross margin and operating margin, given the ongoing cost control initiative?

Certainly. Reviewing core Momo's financials, I will go through costs and expenses at the company level while providing some insights on Momo. Gross margin-wise, as noted in today's announcements, we have managed to maintain a relatively stable trend during the first half of the year regarding the non-GAAP gross margin line. Looking ahead, core Momo should continue this stability in Q3 as the content supply system remains robust. However, I lack full visibility into Q4, but it is conceivable that Q4 could see a slight dip, linked to year-end promotional events. Nonetheless, this deviation should be a one-time occurrence since we conduct such events every Q4. Regarding Tantan, gross margins are likely to decrease in the second half compared to first half levels as subscription revenues trend down and revenues from non-subscription services begin to ramp up. Regarding operating expenses, we have been optimizing key line items such as marketing, personnel, and infrastructure, and will continue doing so as we look toward Q4 and next year. The most significant cost-saving opportunities in OpEx during the second half are expected to arise from Tantan as we gradually eliminate low-efficiency channels. It's important to note that cutting marketing expenses does not necessitate sacrificing future growth opportunities; rather, we are strategically moving away from low ROI marketing plans and reallocating savings to generate higher yields. For instance, we have significantly increased marketing expenditures for Tietie in Q2, which we will sustain provided retention remains strong for this fast-growing application. Overall, we anticipate marked decreases in marketing expenditures in the latter half of the year. In summary, while it's impossible to be particularly specific regarding bottom-line figures for the second half, I believe that we are still on track to deliver a non-GAAP operating margin exceeding 20% on an ex-Tantan basis for 2022. For Tantan, as we optimize for growth with profits, we expect net losses to decrease to under RMB 100 million in the latter half of the year. I trust that answered your question.

I think this will conclude the Q&A session. Thank you for joining us today, and we will see you next quarter. Ready to close. Thank you, operator.

This concludes our conference for today. Thank you for participating. You may now disconnect.