Hello Group Inc. Q2 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Second Quarter 2023 Hello Group Inc. Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. Please note this conference is being recorded today. I would now like to hand the conference over to your first speaker today Ms. Ashley Jing. Thank you. Please go ahead, ma'am.

Good morning, and good evening, everyone. Thank you for joining us today for Hello Group's second quarter 2023 earnings conference call. The Company's results were released earlier today and are available on the company's IR website. On the call today are Mr. Tang Yan, CEO of the company; Ms. Peng Hui, CFO of the company; and Ms. Peng Hui, CFO of the company. They will discuss the company's business operations and highlights, as well as the financials and guidance. They will 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 relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond 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, and 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 over to our CEO, Mr. Tang Yan. Mr. Tang, please.

Hello, everyone. Thank you for joining our conference call. We delivered solid results in the second quarter with strong financial performance and good progress on execution of various strategic priorities. Before we go into details, I would like to introduce our COO, Ms. Zhang Sichuan, who rejoined the company last year. She will be the one to review our quarterly performance today. With that, I'll turn the call over to her.

Hello, everyone. It is my pleasure to join today's conference call. We celebrated Momo’s 12th anniversary in early August. As a founding team member, it is a great pleasure to see how Momo, over the past 10-plus years, has grown from a single function app to a multi-brand listed company with a presence in several countries and regions. It is a great honor to return to the Hello Group family, and welcome to the next decade of the social era with old and new colleagues. Next, I will walk you through the details of the second quarter. So I will start with a brief overview of our financial performance. For the second quarter of 2023, total group revenue was RMB3.14 billion, up 1% year-over-year and 11% sequentially, exceeding our earlier guidance. In Q2, we delivered the first year-on-year growth since the beginning of the pandemic three years ago, mainly due to the stabilization and recovery of Momo’s cash cow business. Adjusted operating income was RMB709 million, a substantial increase of 53% from Q2 last year and up 37% quarter-over-quarter with a margin of 22.6%, up 8 percentage points year-over-year and 4 percentage points quarter-over-quarter. The significant year-on-year improvement in profitability was mainly due to Tantan working even. The sustainable performance of Momo's cash cow business and our effective cost control initiatives and sequential improvement in profitability was mainly attributable to the increase in Momo's profit. Total revenues from the Momo app and standalone new apps was RMB2.82 billion, up 1% year-over-year and 12% sequentially, and adjusted operating income was RMB777 million, up 60% year-over-year and a significant increase of 34% quarter-over-quarter with a margin of 24%, up 3 percentage points year-over-year and 4 percentage points quarter-over-quarter. We are very pleased to see that our cash cow business has maintained stable and strong productivity after over a decade of operation. Total revenue from Tantan came in at RMB321 million, down 3% year-over-year, up 4% quarter-over-quarter. Tantan delivered its first operating profit at the beginning of this year and managed to improve its profitability in the second quarter. Adjusted operating income for Tantan for the quarter was RMB31.89 million, representing a margin of 10%, compared with adjusted operating loss of RMB119 million in Q2 last year and an adjusted operating income of RMB14.48 million in the previous quarter. Now I will discuss our progress and our strategic priorities in these three business lines: Momo, Tantan, and the new endeavors. Starting with the Momo app, which is at a relatively mature stage. Our goal for Momo this year is to keep the user base stable, continue to optimize cost structure, and maintain the productivity of the cash cow business since the beginning of the year. Our team has made good progress in optimizing product operations, introducing new monetization features and improving cash utilization and staff efficiency. We have seen better-than-expected financial performance and steady recovery in user engagement. Now I'll walk you through the details. Firstly, on the product and operational fronts, since the beginning of the year, our focus on product operation has been stabilizing the user base and improving monetization efficiency. The core of our efforts revolves around providing more timely social interactions and enriching content supply. On the channel front, we have strategically focused on assessing channel ROI, as well as our user lifetime value or LTV, driven by the joint efforts of product and operations. The recovery trend of user retention after the Chinese New Year continued into Q2. Momo's next-day retention rate has returned to its pre-pandemic levels, which is the main reason for the continued growth in user engagement. The number of Momo's paying users increased by 100,000 to 7.9 million from the previous quarter. The steady growth in paying users has proven that the core value of Momo's social products remains strong with our focus on user acquisition tilted towards high-quality users. Our overall user quality has been gradually improving, which lays a solid foundation for the cash cow business to maintain its productivity. As Tang Yan mentioned last quarter, since Momo is a firm with a history of more than a decade, our current strategic priority is to stabilize user scale, optimize costs, and ensure commercial productivity. We expect this priority to be reflected at the KPI level; our focus has shifted from driving the growth of mobile users to pursuing profitable user growth. MAU, therefore, is no longer the most meaningful operational metric for investors. As a result, we decided to no longer disclose MAU data on a quarterly basis unless there is a significant change in our user base. We believe that investors should focus on the number of paying users when evaluating Momo's overall operational performance. Now let's review the productivity of Momo's cash cow business. In the second quarter, Momo's live streaming revenue was RMB1.44 billion, up 3% year-over-year and 12% sequentially. The revenue growth was mainly due to the significant increase in the number of top-performing users, driven by new operational events and gamified features. Overall, we see growth in high-paying users. In the second quarter, the revenue-sharing ratio of live streaming was lower than the previous quarter, primarily because in Q1 we offered a one-off incentive to broadcasters to resume live shows after the Chinese New Year. As the supply side remains stable, we believe the current revenue-sharing policy is effective enough to incentivize broadcasters. There is no significant structural adjustment needed. In the second quarter, VAS revenue, excluding Tantan, totaled RMB1.33 billion, up 1% year-over-year and 11% sequentially. VAS revenue from the Momo app totaled RMB1.07 billion, up 6% year-over-year and up 10% quarter-over-quarter, while revenue from the standalone app was RMB262 million, up 44% year-over-year and 60% sequentially. The main reason for the year-on-year declines in Momo's revenue is that the number of paying users had yet to recover to the levels of the same period last year. Meanwhile, ARPPU improved significantly from a year ago, partially offsetting the revenue pressure from the decline in paying users. The sequential improvement in Momo's VAS revenue was driven by the increase in both ARPPU and paying user count. Since the beginning of the year, our team has integrated user products with commercial products to improve monetization efficiency. For example, we added access to the chat room experience in several features such as nearby people and posts. This can not only improve our user experience but also increase the penetration of paying features. Similarly, we are optimizing user behavior expansion. The expansion of new entry points combined with optimizing the recommendation algorithm drove steady sequential growth of audio and video-based social entertainment experiences, which enjoy higher ARPPU. So let's review Tantan's performance. Our strategic goal for Tantan is to achieve overall breakeven for the year and develop a product and monetization model that suits Asian dating culture in order to pursue sustainable growth on the back of a favorable business cycle. At the beginning of the year, we achieved the first step of our strategic goal, which is breakeven. However, in terms of user growth, we still need to make further breakthroughs regarding both user acquisition and commercial product strategies. As mentioned last quarter, Tantan's user base gradually recovered after the Chinese New Year. However, entering spring, user activity following the pandemic and the adjustment of the user registration process, Tantan was attacked by large-scale scamming activities, which posed main issues that affected us in the second quarter. To maintain a healthy and stable dating ecosystem, we launched a stringent anti-spam campaign, which resulted in an 11% decrease in MAUs to 17.3 million in June, compared to March. As of the end of Q2, Tantan had 1.1 million paying users, a net decrease of 200,000 from the previous quarter. The decrease was due to the decline in the user base, whereas the paying conversion remained stable sequentially. So now, moving on to Tantan's financials. Total revenue for the second quarter was RMB321 million, down 3% year-over-year and up 4% sequentially. Over the last 18 months, although Tantan's user base and number of paying users declined significantly due to factors such as the pandemic, marketing spend reductions, and NP spend initiatives, the platform experienced a limited decrease in revenue due to the team's efforts to improve ARPU. In the second quarter, live streaming revenue was RMB145 million, up 4% quarter-over-quarter. At the same time, we continue to optimize costs and expenses related to staff and infrastructure, resulting in sequential growth of operating income to RMB31.89 million. Now I would like to share our progress against Tantan's strategic priorities during the quarter. Since the beginning of the year, our team has delivered good results with respect to our strategic priority of achieving breakeven. This is primarily due to our efforts in both marketing and monetization. Firstly, on the marketing front, in the second quarter, channel competition intensified due to the impact of the e-commerce shopping festival in June, resulting in a quarter-on-quarter increase in unit acquisition costs. Our team tried to limit the increase in unit acquisition costs by adjusting the channel structure and managing the competition during peak times. Thanks to our optimization of our channel strategy and the data feedback system, our new ARPU increased significantly from the previous quarter. The channel ROI remained stable despite the sequential increase in unit acquisition costs. Year-over-year in Q2 2023, unit user acquisition costs increased by almost 50%, and new user ARPPU increased by almost 60%. In the second half of the year, we will continue focusing on improving user acquisition efficiency. Our plan is to continue closely monitoring channel ROI and adjust our channel investments accordingly. Additionally, we will further optimize resource utilization by carefully selecting the KOLs we work with and improving advertising materials. On the monetization front, our commercial product team has delivered good results over the past year by optimizing the existing paying experience and continuously launching new paying features that drive ARPU growth. The Black Gold membership service launched at the end of last year played a positive role in driving ARPU growth. In the second quarter, our product team increased the exposure of the Black Gold privilege service and added a premium privilege package, effectively enhancing ARPU growth. Over the past year, Tantan’s ARPPU has continued to increase significantly as we provide more new paying features that can effectively improve matching efficiency and enhance the user dating experience. Moving forward, we will maintain this path by adding new use cases while increasing the exposure of commercial products, for example, introducing exclusive privileges for female members, providing female users with high-quality matches, and a non-intrusive auction. Meanwhile, we will optimize the matching algorithm for members based on user feedback and improve the process experience for members to drive renewal rates. Overall, in the first half of the year, our team has made good progress in improving user acquisition efficiencies and enhancing ARPU growth. We are happy to see that the decrease in costs and increasing ARPU enabled Tantan to achieve breakeven. However, we acknowledge that we have yet to make any substantial breakthroughs in user growth or significant innovations in commercial products. Such breakthroughs on product innovation are key for Tantan to drive a positive business cycle and achieve sustainable growth. During the second quarter, the outbreak of scamming activities on Tantan created a serious negative impact on the ecosystem. Our product team has to focus its main efforts on the anti-spam campaign. In Q2, we started testing product experiences to improve female user engagement and retention. However, based on our preliminary data feedback, this product requires further iterations. In the second half of the year, our product operations team will continue to optimize the core life and match mechanisms and explore other social experiences to improve user interaction and female user retention. Lastly, in terms of our new endeavors, the goal is to enrich our product portfolio, push the boundaries beyond Momo and Tantan, and deliver long-term growth for the group. In the second quarter, total revenue from the profit-oriented standalone apps, including domestic and overseas social and gaming products, was RMB264 million, up 33% year-over-year and 60% sequentially. Revenue from domestic products was back on a sequential growth track after the Chinese New Year. Revenue growth in overseas social products was temporarily slower at the beginning of the year due to the earthquake impact in Turkey and the devaluation of the Egyptian currency. In the second quarter, consumer sentiment in Turkey recovered. Our team shifted its market focus from Egypt to several affluent Middle Eastern markets. With the compliance efforts of product and channel teams, the number of paying users of overseas social products increased rapidly, which resulted in a significant sequential increase in revenue. Additionally, our team optimized the overall revenue-sharing ratio and revised cost and expense items by fine-tuning operations. Thanks to operating leverage, the net margin improved sequentially. As a result, net income grew much faster than revenue. As we dive deeper into the overseas market, we realize that the Middle East and emerging North Africa markets still have much room for growth. Therefore, in the second quarter, while we increased our investments in assisted products to drive rapid revenue and profit growth, we also tested several new ROI-oriented OEM products in the MENA area. We're trying to replicate our success so far in our overseas expansion to further grow our user base. With our expertise in attracting users through social attributes and monetizing through value-added services, we are hopeful that this new product will contribute sizable revenue and profit to the group in the foreseeable future. This concludes my remarks. Now I will pass the call over to Cathy for the financial review. Cathy, please.

Thank you, Sic. 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 2023 came in better than our previous expectations at RMB3.14 billion, up 1% year-over-year and 11% quarter-over-quarter. Non-GAAP net income attributable to the company was RMB632.1 million, up 36% year-over-year and 34% from the previous quarter. Better-than-expected bottom-line performance was attributable to the outperformance of the top line, as well as our continuous cost control efforts, which led to improvement in both Momo and Tantan's profitability. We are proud that after three years of pandemic, we emerged on the other side with a very healthy and solid cash cow business and, at the same time, a stronger capability of managing new business endeavors to drive future growth, while delivering decent profits to the shareholders. Now let me walk you through the details. 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 2023 was RMB1.59 billion, up 5% year-over-year and 11% quarter-over-quarter. Momo app live broadcasting revenue totaled RMB1.44 billion for the quarter, up 3% year-over-year and 12% quarter-over-quarter. The increase was driven by an increase in the number of high-paying users, which in turn drove overall ARPPU growth. Compound live broadcasting revenue amounted to RMB145.2 million, up 25% from Q2 last year and 4% from the previous quarter. Revenue from value-added service for the second quarter of 2023 was RMB1.50 billion, down 2% from Q2 last year, but up 10% sequentially. Revenue from VAS on an ex-compound basis was RMB1.33 billion in the second quarter of 2023, up 1% year-over-year and 11% sequentially. Momo app VAS revenue decreased from a year ago due to a decrease in the paying user count. However, the downward pressure was completely offset by the growth of standalone new applications, which led to a slight year-over-year increase in value-added service revenue on an ex-compound basis. The sequential growth was primarily attributable to the seasonal recovery of Momo app value-added service business, as well as the continuous growth of the new application. Tantan’s value-added service revenue amounted to RMB170.2 million, down 21% from Q2 last year, but up 1% from the previous quarter. The year-on-year decrease was due to the decline in paying users. However, the downward pressure on value-added service revenue was partially offset by the growth in ARPPU driven by commercial product efforts. Now turning to costs and expenses. Non-GAAP cost of revenue for the second quarter of 2023 was RMB1.82 billion, compared to RMB1.79 billion for the same period last year. Non-GAAP gross margin for the quarter was 42.1%, down slightly by 0.4% from the year-ago period, but up 1.1% from the last quarter. The sequential increase was due to the discontinuation of one-off incentives in Q1 provided to live streamers after the Chinese New Year to speed up supply side recovery. Non-GAAP R&D expenses for the second quarter were RMB200.8 million, compared to RMB214.3 million for the same period last year, a 6% decrease year-over-year. The decrease was due to continuous optimization in personnel costs. Non-GAAP R&D expenses as a percentage of revenue were 6.4%, compared with 6.9% in Q2 last year. We ended the quarter with 1,470 total employees, of which 339 are from Tantan, compared to 1,825 total employees, of which 516 from Tantan a year ago. The R&D personnel as a percentage of total employees for the group was 63%, compared with 61% in Q2 last year. Non-GAAP sales and marketing expenses for the second quarter were RMB349.7 million or 11.1% of total revenue, compared to RMB601 million or 19.3% of total revenue for the same period last year. The significant year-over-year decrease both in terms of absolute RMB amount and as a percentage of revenue was primarily attributable to Tantan’s shift in marketing strategy to control costs and focus on channel ROI and to a lesser degree, Momo’s strategy to trim low-efficiency channel marketing spend. Non-GAAP general and administrative expenses were RMB83.2 million for the second quarter of 2023, compared to RMB82.6 million for the same quarter last year. General and administrative expenses as a percentage of total revenue remained stable at 2.7% from the year-ago period. Non-GAAP operating income was RMB708.8 million, a significant increase of 53% from Q2 2022, and up 37% from the previous quarter. Non-GAAP operating margin for the quarter was 22.6%, up 7.7 percentage points from the same period last year and 4.2 percentage points from the previous quarter. Non-GAAP operating expenses as a percentage of total revenue were 20.2%, a decrease from 28.8% in Q2 2022 and down from 23.9% in Q1 this year. Non-GAAP expenses in absolute RMB amount decreased 29.3% year-on-year. This was mainly due to a reduction in sales and marketing expenses and, to a lesser degree, optimization in personnel and infrastructure costs. Now briefly on income tax expenses. Total income tax expense was RMB166.0 million for the quarter with an effective tax rate of 20%. In Q2, the company accrued withholding income tax of RMB48.1 million, which is 10% of undistributed profit generated by our ROFE. Without withholding tax, our estimated non-GAAP effective tax rate was around 14% in the second quarter. Now turning to balance sheet and cash flow items. As of June 30, 2023, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits, short-term investments, and restricted cash totaled RMB11.27 billion, compared to RMB17.40 billion as of December 31, 2022. In Q2, we paid an equivalent of RMB937 million cash dividend to our shareholders. In late June, we prepaid an equivalent of RMB2.26 billion cash to repurchase our convertible senior notes, which was settled in early July. Net cash provided by operating activities in the second quarter of 2023 was RMB828 million. Lastly, on business outlook. Before we give out the numbers, let me spend a few minutes talking about a few things that are expected to impact our top line performance in the near term. For the second quarter of 2023, revenues from Momo segments on an ex-compound basis totaled RMB2.82 billion, up 1.3% year-over-year. This was the first positive quarter for Momo on a year-over-year basis since the beginning of COVID in early 2020. One onehand, we are happy to see that the cash cow business showed remarkable resilience on the back of strong platform fundamentals. On the other hand, we remain cautious about the operating environment we are in. As you can probably feel, macro rebounds are not turning out as promising as we had hoped at the beginning of the year. Especially as we entered Q3, we have a clear sense that spending sentiment is softening. In addition, starting mid-Q3, we have been making product adjustments to ensure our ecosystem stays healthy. Some of these adjustments have a negative impact on the top line performance of Momo's value-added service in the short run. All of these factors are expected to cause revenues for the Momo segment for Q3 to decrease on a sequential basis. For Tantan, in June, we made some product adjustments to comply with the new policy rolled out by MIIT in Q2, which posed a negative impact on the renewal rate of the membership service. This will likely cause Tantan's revenue to see a sequential decrease from Q2 as well. To specify, we estimate the group's third quarter revenue to come in the range from RMB2.9 billion to RMB3.0 billion, representing a decrease of 10.3% to 7.2% year-over-year or a decrease of 7.6% to 4.4% quarter-over-quarter. At the segment level, for Q3 2023 on a sequential basis, we expect Momo revenue to decrease around mid-single digits, and Tantan revenue to decrease in the low teens. Please be mindful that this forecast represents the company's current and preliminary view on the market and operational conditions, which are subject to change. That concludes the prepared portion of today's discussion. With that, let me turn the call back to Ashley to start the Q&A. Ashley, please.

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

Thank you. The first question today comes from Thomas Chong with Jefferies. Please go ahead.

Thanks management for taking my question. My question is on core Momo, the first part is about the user recovery trend, as well as the outlook. And the second is regarding the macro, how it is going to impact live streaming and PAS? And the third part is about our second-half core Momo revenue expectation. Thank you.

As I mentioned in my prepared remarks, the strategic priority for the Momo app this year is to keep the user base stable and increase the productivity of the cash cow business. The team's mandate is to devise and execute product and channel strategies aimed at accomplishing this goal. On the product front, we integrated user products with commercial products to continue to introduce new features that facilitate timely social interactions and improve relationship-building. Additionally, users can further enhance the social experience by paying for value-added services. On the back end, we continue to optimize the content recommendation algorithm so we can create a better community atmosphere and deliver more value for female users and those who are seeking emotional companionship. An enhancement in product experience has played a positive role in improving user retention. Therefore, even with a reduction in channel investment versus a year ago, the user base continues to grow steadily after the Chinese New Year trough. Although Momo's user growth and engagement level performed pretty well thus far this year, we will maintain our operational focus on keeping the number of paying users at a healthy and stable level rather than excessively pursuing MAUs, because paying users fundamentally will maintain the high productivity of the cash cow business. In terms of consumer sentiment, we felt that the user social and consumption demand started to pick up after the Chinese New Year based on our better-than-expected user metrics and financial performance in the first half of the year. However, as we enter Q3, Momo's core revenue started to soften compared with the second quarter. There are two reasons for this: One is the weakening of consumer sentiment caused by the overall macro environment. The other is that we took the initiative to make a relatively large round of production adjustments in late August to ensure a healthy ecosystem. Cathy will now address the questions related to revenues.

Now briefly on the revenue outlook for Momo. As you can see, we had a pretty good first half of the year due to the post-COVID recovery, as well as the fact that the team has been doing a good job on the product and operational side. However, as Sic mentioned, moving deeper into the year and based on monitoring daily grossing, as well as some of our anecdotal conversations with our VIPs, we feel that consumer sentiment is obviously weakening, possibly due to the macro not turning out to be as promising as hoped at the beginning of the year. The other factor to consider is that we've been making some product adjustments on the value-added service side to ensure that Momo's social ecosystem stays healthy. These adjustments involve the temporary suspension of some products and services we previously offered on the Momo platform. Such suspensions are expected to have partial impacts in Q3 and full impact from Q4 onwards, because the adjustments and suspension took place towards late August. Due to these two factors, both at the macro level and the product front, our previous view that the second half of the year is likely to see continuous improvement from the first half now seems a little too optimistic. As noted in our guidance, Q3 is projected to show a sequential decline in the mid-single digits while Q4 is still a little far out for clarity, as much depends on how macro conditions eventually play out. One final point regarding Q4; we usually see a very strong season due to year-end competition, but the full quarter impact of product adjustments could slightly inhibit some of the incremental revenue from those competitions. It’s also possible that the October long holiday this year could have a bigger negative impact as more people could be traveling and less likely to engage with our social entertainment services. Thus, we choose to stay on the conservative side for the whole second half of the year.

Yes. Operator, next question, please.

The next question comes from Raphael Chen with BOCI Research. Please go ahead.

Thanks management for taking my question. My question is regarding our new apps. Firstly, could the management share some latest updates? Also, could we have some insight on whether the company had other new apps or products this year? Lastly, do we have any revenue guidance for new apps in the second half of this year or 2024? Thank you.

In terms of new endeavors, our domestic apps, which launched relatively early, have now entered a mature stage regarding product format and user scale. Our team's current focus is on continuously exploring monetization opportunities, optimizing cost structures, and promoting steady growth of profit scale. As for the overseas business with the greatest and most promising potential, although user and revenue growth temporarily slowed at the beginning of the year due to external factors, the overseas business's operational and financial metrics resumed satisfactory growth trends thanks to timely adjustments made by our team to shift market focus. While digging deeper into mature markets and exploring revenue expansion opportunities in new markets, we also optimized the revenue-sharing policies favorably impacting our gross profit margin as we built on our brand power and industry influence. That is why if you look at the social profit growth rate, it went much faster than its revenue growth rate. We've recently established an overseas business unit and have launched several new products abroad. Our goal here is to further develop existing products while effectively replicating our successful overseas experience in new vertical markets. We will begin making channel investments once user metrics reach satisfactory levels. We started trial marketing in selected regions, but our focus this year will be on optimizing product formats according to user feedback, rather than large-scale user acquisition and monetization. However, as all new products in the Middle East are ROI-oriented, we have strict requirements for their financial return on investment and operational performance. We hope these apps can make substantial contributions to our top line next year.

To clarify further, the revenues from the new applications are currently reported within the value-added service line under Momo segments. For example, in the second quarter of 2023, value-added service revenue on an ex-compound basis was around RMB1.3 billion, with roughly 20% of that coming from new applications. As SoulChill gains momentum this year, we anticipate that this 20% new piece within the value-added service line could grow about 50% year-over-year. Additionally, this top line growth is accompanied by margin improvement, so the bottom line grows even faster than the top line. Regarding next year's outlook, projections in late August this year may be premature, but I expect SoulChill will continue to grow at a decent pace, mainly driven by new product launches and the introduction of new regions. Other potential growth drivers for new applications include those launched this year, as previously noted. We hope next year some of these new endeavors will start contributing positively to the top line.

The next question comes from Xueqing Zhang from CICC. Please go ahead.

Thanks management for taking my questions. My question regards Tantan. First, could management share about the current initiatives? Lastly, what’s your outlook for Tantan’s revenue and profitability in the second half of this year? Thank you.

Tantan has made good progress in improving channel ROI and ARPU over the past year, achieving breakeven ahead of schedule at the beginning of the year. Our next goal is to drive significant growth in ARPU and retention in order to create a positive business cycle and deliver sustainable growth. However, it's not that easy, as it requires us to make more substantial progress in both user acquisition and commercial product development. Although we haven't yet found a breakthrough point for this, we have enough patience and confidence to continue exploring products to enhance Tantan's effectiveness as a dating app and create more value for shareholders. For financial queries, I'll pass it to Cathy.

Okay. Before I discuss the financial outlook for Tantan, I'd like to add a quick point concerning user acquisition. A major part of Tantan's team's efforts for the remainder of the year will focus on cleaning up spammers and implementing a more comprehensive system to prevent these bad actors from affecting the platform. This is crucial for us to maintain the right user experience for a dating platform. Additionally, the team is accelerating new product experimentation while focusing on testing what we believe is worth pursuing, without being overly concerned about short-term fluctuations in user count. Thus, it's challenging for me to provide a definitive number for Tantan's MAU in the coming months. Q3 may be a period where the team allows greater room for experimentation. I suggest deferring the user target question until next quarter. By then, we should have enough visibility to provide a near-term user target. Regarding the financial outlook for the remainder of Tantan's revenue, we predict a sequential decrease in Q3, ranging from high-single-digit to low-teens. This reflects the macro impact on live streaming, in addition to the product adjustments made per MIIT's directives, which impact Tantan's membership renewal rates negatively. While we anticipate some downward pressure on the top line in the second half, how Tantan's revenue trends, particularly in Q4, will largely depend on the team's success in boosting ARPU. As for Tantan's profitability, there are still optimization opportunities regarding personnel and marketing costs. Depending on the pace of these optimizations, the profitability for the second half should stay around breakeven levels or slightly better. I'll hand it back to Ashley.

Operator?

Please go ahead.

Thanks, management, for taking my questions. My question is about profit margins. On the gross profit side, is there room for reducing live streaming revenue shares? On the OP side, is there potential for further narrowing OpEx? Lastly, could you give us an idea of the productive scale of the investment for the new app and overseas business expansion? Thank you.

I heard several elements in your question. Firstly, on gross margin and overall payout structure, as mentioned in prior earnings calls, we currently see the supply side of the live streaming ecosystem at a stable state. While there remains competition for high-quality performers, the market is much more stable compared to two years ago when bigger platforms aggressively competed for top performers. With that in mind, we believe the overall payout structure we offer on the Momo platform should remain stable. I do not think it’s feasible to lower payouts to agencies or broadcasters, especially since while we hear stories in the press about certain broadcasters earning substantial amounts, these typically represent outliers. The average income for broadcasters is considerably lower. To incentivize them, we should maintain a fair payout ratio. Regarding the gross margin outlook for this year, it’s likely to stay similar to last year; it may fluctuate slightly based on revenue mix but should remain stable overall. Concerning operating margins, in Q2, the ex-Tantan part operating margin on an adjusted basis went back to 24%, 25% on a non-GAAP basis. As we move into the second half of the year, while we might see some pressure on the top line, we are diligently working on optimizing personnel and marketing costs while still achieving decent room for improvement. We believe that we will exit 2023 with a non-GAAP operating margin safely above 20%. This addresses the overall bottom line outlook for Tantan. Additionally, regarding expenditures for overseas expansion, as mentioned earlier, the new initiatives in the Middle East and North Africa are ROI-oriented. This year, our focus will be on refining the product, enhancing user experience, and building the necessary infrastructure to grow the business. When the timing is right, we’ll invest in marketing to build the initial user base. Overall, I anticipate these new applications will involve RMB20 million to RMB30 million in total expenditures this year, and we expect revenue generation from these apps to commence next year. SoulChill is already in a stage where it’s generating bottom line profit faster than revenue growth, so there's no concern about negative impacts on overall profitability. That's my comprehensive response regarding margins.

I think that's it for today. Thank you all for participating, and we'll see you next quarter.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may now disconnect.