Earnings Call Transcript - MOMO Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2021 Hello Group Inc. earnings conference call. 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.

Ashley Jing, IR Representative

Thank you operator. Good morning and good evening everyone. Thank you for joining us today for Hello Group's third quarter 2021 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. Wang Li, CEO of the company and Mr. Jonathan Zhang, CFO of the company. They 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 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, 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 statements as a result of new information due to events or otherwise, except as required under law. I will now pass the call to Mr. Wang. I will translate for him. Mr. Wang, please.

Wang Li, CEO

Good morning and good evening everyone. Thank you for joining our conference call today. Q3 was a good quarter, and I am pleased that we delivered solid financial results while continuing to advance our strategic priorities. Let me walk you through the details. First, a brief overview of our financial performance. For the third quarter of 2021, total revenue at the group level was RMB3.76 billion, almost flat year-over-year and up 2% quarter-over-quarter. Adjusted operating income for the quarter was RMB637 million, reflecting a 17% profit margin. For our core business, total revenue was RMB3.25 billion, a 7% increase from Q3 last year. I am glad to report that for the first time since the pandemic began, the core business has achieved year-over-year growth in revenue. On a sequential basis, revenue from the core business also rose by 3%, with adjusted operating income for Momo reaching RMB750 million, or a 103% profit margin. Following management changes at Tantan in May, the new team shifted its strategic focus from driving paying conversions to lowering the monetization level to enhance user experience and retention. Consequently, Tantan's total revenue was RMB511 million for the quarter, a decline of 30% year-over-year and 1% sequentially. The adjusted net loss for Tantan was RMB120 million for the quarter, compared to RMB66.87 million for the same period last year. The revenue mix of the group remained stable and healthy, with March accounting for 71% of live streaming revenue. Now let's delve deeper into the quarter. I will first discuss core Momo before moving on to Tantan. In terms of key operating metrics, core Momo had 115.5 million monthly active users in Q3 2021, up 2% year-over-year and relatively flat sequentially. The number of paying users for the quarter was 9.3 million, up from 9.0 million a year ago. The paying user count remained stable sequentially, consistent with the trend of monthly active users. September typically sees a decline in top-of-the-funnel activities as students return to school after summer, which is reflected in the flat quarterly user trends. Despite lower top-of-the-funnel additions, our efforts to enhance product engagement continued to yield positive results this quarter. The number of greetings and messages remained high compared to the previous year, and the impressions of nearby users and posts have steadily increased since the pandemic began. These improvements indicate that the fundamentals of core Momo as a social platform are strong and stable. Next, I will outline the progress we have made in the strategic priorities I set at the beginning of the year. For core Momo, our three goals for the year are to further grow the user base with a limited marketing budget while improving return on investment compared to last year, to return the business to a growth trajectory, and to enrich our product portfolio while pushing the boundaries beyond Momo and Tantan. For Tantan, the key goal is to achieve solid user growth by significantly enhancing marketing efficiency and core dating experiences. Now, I will summarize the progress we've made and the challenges that remain on these fronts. First, regarding user growth on the core Momo platform. To adapt to a challenging channel environment, we have been focused on optimizing our user resurrection model to make the reactivation efforts more efficient. The cost of reactivating users is significantly lower than acquiring new users, while their retention rates and paying conversion rates are considerably higher. Improving return on investment from these reactivations is crucial to achieving our first strategic goal this year. I am glad to report that this strategy has yielded positive results so far this year. Based on current trends, I believe we can close the year with a slight increase in overall monthly active users compared to last year while keeping marketing spending relatively flat compared to 2020. Momo, our core brand, has been around for more than a decade. To optimize our user resurrection strategy, we need to innovate our products quickly. Users are more likely to return and engage when we offer new and improved features. Recently, we made a significant change to the user interface of our "nearby people" feature, implementing a recommendation engine that better highlights a diverse range of female users—those who may have been overlooked in the previous version. This change has resulted in a meaningful increase in responses from female users, which in turn has led to a substantial rise in core interactions, enhancing user retention and engagement. We plan to gradually roll out the new nearby people version to the entire Momo community in Q4, aiming for a positive contribution to overall user growth in the long run. Beyond the core Momo app, we continue to work on enriching our product portfolio and expanding beyond Momo and Tantan. Among our overseas initiatives, Sochio, a voice-based social app aimed at international users, has performed exceptionally well in recent quarters due to ongoing product innovations and operational efforts. Sochio has shown steady improvements in user retention and monetization. In Q3, we increased our marketing efforts to target high-value users, resulting in robust revenue growth driven by expanding user base and average revenue per paying user (ARPPU). The number of paying users increased by 50% since the start of the year, and ARPPU more than doubled over the same period. We believe Sochio has a strong competitive position in the MENA region and plan to keep investing in its marketing as long as it aligns with our return on investment targets. Our goal is to establish a sustainable commercial cycle, enabling rapid growth in both users and revenues without negatively impacting our company's bottom line. In addition to our success overseas, we have made progress with a voice-based social app primarily serving local markets and a video matchmaking application targeting lower-tier markets. There remains significant potential in the video matchmaking category, particularly in lower-tier cities, prompting us to continue investing in these new applications to boost growth in users, revenue, and profit. Now, let me discuss our efforts to bring our cash core business back onto a growth trajectory, starting with live broadcasting. Revenue from Momo's live broadcasting segment stood at RMB1.93 billion for Q3, a 2% decrease year-over-year but an increase of 3% quarter-over-quarter. The year-over-year drop, due to structural reforms implemented in August last year, has narrowed from a decline of 22% in Q2. We have experienced some weakness in daily growth during non-event days since September, which we attribute to macroeconomic pressures and reduced consumer spending. However, several promotional events in September were successful, garnering positive responses from both performers and users. The additional revenue generated from these events helped mitigate the weakness in September, resulting in a strong quarter overall. This soft spending trend during non-event days has persisted into October and November, and we do not anticipate a resolution to these macroeconomic challenges in the near future. Many of our high-paying users are private business owners whose financial health and discretionary spending heavily rely on macroeconomic conditions. In response, we've adjusted our operational strategies to better adapt to the current environment. Rather than implementing aggressive promotional measures for the quarterly tournaments, we broke down a single large event into smaller segments to keep various groups of spenders engaged without overwhelming them. We recognize that macroeconomic conditions may remain a headwind for top spending in the near term. In light of this uncertainty, we plan to continue organizing smaller events in Q4, which may require additional investment in bonus plans for performers and agencies. By reallocating one to two percentage points of gross margin back into the system, we can maintain daily growth at a decent level and support our performers and agencies during challenging economic conditions. It's important to note that unlike the structural changes we've made to payout ratios and incentive programs in previous quarters, the budget for Q4 events is flexible and can be adjusted based on improved sentiment. Now, regarding value-added services (VAS), revenue for VAS excluding Tantan totaled RMB1.26 billion in Q3, showing a 26% year-over-year increase and a 4% quarter-over-quarter rise. Core Momo's VAS revenue grew by 21% from the same period last year, while revenue from a new group of standalone applications surged by 188% year-over-year. For the core Momo app, growth was primarily driven by the introduction of gamified features and operational events in audio and video social entertainment experiences. At the same time, revenues from the new group made a significant contribution to VAS topline in Q3, with overall revenues nearly tripling from the prior year. This growth stemmed primarily from increased user engagement, as we have maintained a conservative approach to monetization. As we see gradual improvements in ROI and a steady uptick in users, we may consider raising the monetization level next year for some of the more established apps. We expect revenue from this new group to continue growing significantly, fueled by improvements in both user numbers and ARPPU next year. Now, let’s move on to Tantan. To start, let's discuss user trends and financial performance. The demographic composition of new users improved in Q3, with females now representing 50% of newly acquired users. However, we fell short of optimizing our marketing strategy, resulting in a relatively high user acquisition cost throughout Q3. As a result, we maintained a cautious approach to marketing spending to ensure decent ROI. User growth in July and August was weaker than anticipated, with MAUs increasing by more than 10% from June. In September, typically a slow season due to students returning to school, user growth fell slightly from August, resulting in an 8% increase compared to June. Tantan's paying user count was 2.9 million at the end of Q3, a decrease from 3.1 million last quarter. This 200,000 net decrease can be attributed to three main factors. First, the increase in the share of new users who are female, who tend to pay less under Tantan's current product structure. Second, the ongoing demonetization process aimed at enhancing user experience; for example, we removed some misleading information from membership subscription pages in July, leading to a notable decline in membership conversion and ARPPU. Additionally, in our September product upgrade, we eliminated various pay walls and tactics that negatively impacted user experience. We also significantly reduced the emphasis on live streaming in our offerings. These product modifications adversely affected paying conversions and ARPPU, but we believe they are crucial for improving Tantan's user experience in the long term. Beyond these factors, the transition toward diversifying experiences away from swiping has put some pressure on paying conversion rates, as most value-added services are still based on the core swiping system. Long-term, we aim to integrate value-added services into new user experiences, a strength our team has built over time. However, as we navigate the balance between diversifying experiences and catching up with new value-added service features, paying conversions may face short-term challenges. Turning to Tantan's financial performance, total revenue for Q3 was RMB511 million, down 30% year-over-year and 1% quarter-over-quarter. VAS revenue declined 7% sequentially to RMB276 million due to decreases in both the paying user count and ARPPU. Conversely, live streaming revenue grew 8% sequentially to RMB235 million, largely driven by improvements in ARPPU. The impact of our September product upgrade on revenue is expected to carry into Q4, suggesting ongoing downward pressure on paying conversions and VAS revenue. We foresee both metrics gradually improving as we transition into next year. Regarding the execution of our primary goal for Tantan this year—user growth—Q3 presented both unforeseen challenges and some encouraging developments. I would like to share key insights with investors to clarify our efforts and remaining tasks to achieve our objectives. I’ll start by addressing the challenges first. One of my main priorities after the management changes in May at Tantan was to assemble a robust team to lead product and user growth initiatives. I anticipated having a fully functioning leadership team by July, but unfortunately, I underestimated how challenging it would be to fill key positions. The new management and execution team was not fully assembled until October, resulting in delays for critical projects in both product and marketing that pushed into Q4. While we had initially planned to roll out significant product adjustments in Q3 and ramp up marketing following Double 11 to drive user growth in Q4, it now appears that most of these product enhancements aimed at significantly uplifting user experience will only be implemented in December and early next year. Furthermore, the resurgence of COVID cases in certain regions of China since October has negatively impacted dating sentiments, making large-scale marketing less effective. For these reasons, we have decided to postpone more aggressive marketing initiatives from Q4 into next year. While assembling our full team took longer than expected, we have made solid headway in advancing our product plans. A key move we've made recently is to remove aggressive measures that pressured users to convert into paying customers, which compromised their experience. In the past few years, Tantan has overly prioritized short-term operating and financial metrics, setting up many paywalls and merchandising tactics. User feedback indicated that many felt it was impossible to use Tantan without paying. We recognized this perception needed to change and took significant steps back in Q3 to address it. For instance, in July, we removed some misleading language from membership subscription pages, which had effectively driven new user paying conversions but had also led to substantial customer complaints and subsequent churn. In the September product upgrade, we continued to eliminate paywall features that proved to be user-unfriendly. We replaced the live streaming tab with a new entertainment page that featured a chat room experience, which we found fits more seamlessly within Tantan's dating ecosystem. These changes have resulted in a marked decrease in paying conversions and ARPPU. However, we believe these adjustments are necessary for enhancing user experience in Tantan. In fact, we began to observe a significant increase in our membership renewal rates in subsequent months, along with improvements in daily and weekly retention rates. This data is solid proof that we are heading in the right direction. Improving subscription renewal rates will positively impact paying user counts in the long run, contributing to growth in VAS revenue. Despite the short-term decline, our optimism regarding Tantan's monetization potential remains unchanged. Younger users are increasingly willing to pay for dating services compared to previous generations, and their purchasing power is also on the rise. To fully unlock this monetization potential, we need to evolve beyond the current membership subscription model and gradually incorporate a pay-per-use model. Additionally, we need to develop our value-added services as consumer features diversify beyond the swipe-and-match paradigm. You will see us experimenting with various options along these lines in the coming year. Another critical aspect influencing user experience involves better addressing the needs of female users and those with unverified profiles. Many Asian women tend to be more passive in dating interactions, with around 40% of female users on Tantan rarely swiping, resulting in fewer matches and interactions. This low level of engagement explains why female retention on Tantan is significantly lower than that of male users. Fake users—those reluctant to provide verified profiles—also experience extremely low retention due to their inability to match and interact. Surveys show that many members from these two groups genuinely want to utilize Tantan’s dating services. Currently, 50% of new users are female, and unverified profiles account for about a third of daily registrations. If we can retain these two segments by providing more engaging social experiences tailored to their needs, we can substantially increase Tantan's monthly active users. Over the past few months, our product team has developed a roadmap to tackle the issues mentioned earlier and has conducted various product experiments, some of which have yielded promising results for improving retention among these underserved groups. Our strategy is to systematically implement these tested product adjustments through rapid iterations over the next few months. Additionally, Tantan's international expansion is another area of focus. We have resumed pursuing opportunities outside of the Chinese market since the new management took over. Our goal is straightforward: to become an integral part of people's dating lives in Asia and within the global Asian community. Our initial step is to solidify Tantan's leadership in overseas Chinese communities, using this foothold to penetrate Southeast Asian and MENA markets. In recent months, our team successfully re-entered Indonesia, a key market that previously saw significant engagement under Wang Li's leadership back in 2019. One major challenge encountered in developing markets like Indonesia and India has been difficulty in scaling profit due to the low GDP per capita. Our new team’s response has been to leverage live streaming and, ultimately, non-membership value-added services to capitalize on the stark contrast in income levels and spending power. So far, we have launched live streaming in Indonesia, and marketing ROI has been steadily improving. Notably, Tantan has surpassed Tinder in app downloads and active user base in Indonesia since July. We will continue to adjust marketing investments based on ROI performance to drive user growth while keeping profitability in mind. As we make further advancements, the international market will become an increasingly vital component of our growth strategy. These are the points I wanted to cover during this call. Now, I will pass the call to Mr. Jonathan Zhang for the financial review.

Jonathan Zhang, CFO

Thanks. Hello everyone. Thank you for joining our conference call today. Let me briefly take you through the financial review. Total revenue for the third quarter 2021 was RMB3.76 billion, flattish year-on-year, up 2% quarter-over-quarter and exceeded the high-end of our guidance. Non-GAAP net income attributable to Momo was RMB571.6 million compared to RMB653.8 million for the same period of 2020, or a 13% decrease year-over-year. In the interest of time, I will jump directly to cost and expenses as the revenue line items were just covered by Mr. Wang Li pretty comprehensively. Our non-GAAP cost of revenue for the third quarter of 2021 was RMB2.16 billion compared to RMB2.00 billion for the same period last year. Non-GAAP cost of revenue as a percentage of total revenue was 57.4%, an increase from 53% from the third quarter 2020. Non-GAAP gross profit margin for the quarter was down by 4.4 percentage points from a year ago. The decrease was attributed to the following factors. Number one, higher payout ratio for the core Momo's live broadcasting business on a year-over-year basis. Number two, our wholly-owned subsidiaries, QOOL Media and Momo Pictures produced a variety show and a film, respectively, during Q3. The vast majority of the costs were recognized in Q3, which had over 1% drag to the GP margin. Number three, Tantan accounted for a smaller percentage of the group's total revenue as its gross margin is around 10 percentage points higher than the core Momo. Non-GAAP R&D expenses for the third quarter was RMB231.8 million compared to RMB252.3 million for the same period last year, representing 6.2% and 6.7% of total revenues, respectively. The decrease was mainly due to the decrease in employee salary and social welfare resulting from a reduction in headcount. We ended the quarter with 2,050 total employees, of which 548 are from Tantan. The R&D personnel as a percentage of total employees for the group was 59% compared to 58% in Q3 last year. Non-GAAP sales and marketing expenses for the third quarter was RMB637.1 million or 16.9% of total revenue compared to RMB696 million or 18.5% of total revenue for the same period last year. The year-over-year decrease in sales and marketing expenses, both in terms of RMB amount and in terms of as a percentage of revenue was primarily due to lower user acquisition investment for Tantan, a reflection of our conservative marketing approach at this stage. We believe this is a wise choice before we make further progress in improving user retention and marketing efficiency. Non-GAAP G&A expenses was RMB114.8 million for the third quarter of 2021 compared to RMB105.8 million for the same quarter last year, representing 3.1% and 2.8% of total revenue, respectively. Non-GAAP operating income was RMB637.2 million, a decrease of 14% from Q3 2020, representing 17% non-GAAP operating margin for the quarter, down by 2.6% from the same period last year. Non-GAAP OpEx as a percentage of total revenue was 26.2%, a decrease from 28% from Q3 last year, mainly due to the decrease in selling and marketing expenses as a percentage of total revenue. Now turning to the balance sheet and cash flow items. As of September 30, 2021, Hello Group's cash, cash equivalents, short term deposits, long term deposits, restricted cash and long term restricted cash totaled RMB15.17 billion compared to RMB16.48 billion as of December 31, 2020. In Q3, we repurchased an equivalent of RMB557 million of the company's shares from the open market. The net cash generated by operating activities in the third quarter 2021 was RMB559.9 million. Lastly, on the business outlook. We estimated our fourth quarter revenue to come in the range from RMB3.6 billion to RMB3.75 billion, representing a decrease of 5.1% to 1.2% year-on-year or a decrease of 4.2% to 0.2% quarter-over-quarter. For the fourth quarter 2021, we expect the total revenue for core Momo to maintain a similar level of year-over-year growth momentum as in Q3. Sequential-wise, the revenue on ex-Tantan business should remain flattish or show a slight uptick versus the previous quarter due to the macro weakness impact on spending from users. On Tantan side, as Wang Li mentioned earlier, we expect a big part of the negative revenue impact from September product adjustments to fall into Q4. That would translate into a sequential decrease in Tantan's topline in the mid-teens percentage. Please be mindful that this forecast represents the company's current and preliminary view on the market and operational conditions, which is subject to changes. That concluded our prepared portion of today's discussion. With that, let me turn the call back to Ashley to start the Q&A.

Ashley Jing, IR Representative

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, and also please limit the number of questions to a maximum of two so we could take more people to ask questions. Operator, ready for questions. Thank you.

Operator, Operator

Your first question comes from Thomas Chong of Jefferies. Please go ahead with your question.

Thomas Chong, Analyst

Thanks, management, for addressing my questions. I have two inquiries. First, could management provide insights on Tantan regarding the fourth quarter and the outlook for 2022 concerning user growth, revenue, and profit expectations? Additionally, how should we interpret the trend of paying users and when do we anticipate that number to stabilize? My second question pertains to core Momo. Could management elaborate on how the macroeconomic environment may influence the trends in live streaming and value-added services? Thank you.

Wang Li, CEO

Let me translate here. Due to the delay in our product and marketing plans, our previous target of over 20% user growth now appears too ambitious. In Q4, we have maintained marketing spending similar to that of Q3. Considering the impacts of our e-commerce peak season and the resurgence of the pandemic, it seems December's monthly active users may remain flat compared to Q3. Although user growth fell short of our initial expectations, I am pleased with our product roadmap and the results of our product experiments. I am confident that our actions will effectively address current user experience and retention challenges. We have begun implementing various product adjustments through rapid iterations. Our marketing plan for next year will depend on these efforts' outcomes. Alongside channel marketing, we will also increase our investment in branding next year to enhance Tantan's brand equity. We will provide the user growth target for 2022 in Q1 next year based on our progress in improving product and marketing efficiency. Regarding revenue and paying users, we anticipate that the monetization impact on value-added services will reach its lowest point in Q4, and both metrics should improve next year. The factors driving this include overall user growth and the expansion of Flash Chat and chat room experiences, which we believe will enhance Tantan's dating ecosystem and foster a high level of synergy in social interactions. We expect good growth next year in terms of daily active user penetration and revenue from both features. Additionally, introducing new value-added service features will support growth in paying users and revenue. As for live streaming, since it is not our current operational focus, it may decline further next year. Live streaming revenue is closely linked to the macroeconomic environment, particularly the financial conditions of private business owners, making the market context a significant factor in determining next year's revenue. However, we do not believe investors need to be overly concerned. We have successfully navigated multiple rounds of macroeconomic fluctuations since 2018, and our team is experienced and well-equipped to handle challenging external conditions. Furthermore, the supply side of the Momo live streaming ecosystem has remained stable since we adjusted the payout ratio at the start of the year. The fundamentals of core Momo as a social platform are strong, with notable synergy between live streaming and other social features. Live streaming is crucial for high-paying users to build social capital. While we did experience consumption bubbles in our live streaming business in 2018 and 2019, we believe that by proactively addressing those issues in 2020, the enduring aspects of the business will continue to grow steadily as a high average revenue per paying user social case. Overall, we see good opportunities for sustained growth next year, driven by ongoing product innovation and optimization on core Momo, as well as rapid growth from new standalone apps, particularly in international markets which now show strong growth momentum.

Ashley Jing, IR Representative

So I guess that's the question for Thomas. Operator, let's take another question. Thank you.

Operator, Operator

Your next question comes from the line of Daniel Chen of JPMorgan. Please ask your question.

Daniel Chen, Analyst

My question is about our non-Momo and Tantan apps. In addition to Momo and Tantan, we have several new apps like Hertz, TuiTui, Sochio, and others. Can management provide insights on the user growth expectations and the modernization plans for these new apps?

Wang Li, CEO

For the ROI-focused new applications, our primary emphasis has been on increasing the number of paying users. Currently, the count of new app paying users represents about 5% of the core Momo user base. Notably, this paying user count rose by approximately 40% in October compared to the start of the year. We have not yet included the new app paying users in the quarterly figures for paying users reported by the company. We anticipate that ROI-oriented apps like Hudl, Sochio, and others will make significant contributions to value-added services next year. In addition to the successful apps we’ve already launched, we have several more in development that we intend to introduce next year. Over the next three to five years, our aim is to have around ten apps that are not only profitable but also leaders in their respective niche markets within the social sector.

Ashley Jing, IR Representative

Operator, let's maybe take one more question.

Operator, Operator

Your last question comes from the line of Tian Hou of TH Capital. Please ask your question.

Tian Hou, Analyst

Momo has been in the market for over a decade, and the customers from that time have aged. How can Momo continue to adapt and stay relevant for the younger generation to meet their needs and maintain its leadership position in the market? That's my question. Thank you.

Wang Li, CEO

Let me translate here. A similar question was addressed a few quarters ago. Momo and Tantan hold a distinct advantage in the open social space. Momo primarily focuses on online companionship through various social use cases, while Tantan's main strength is connecting young people for romantic purposes and transitioning online relationships into offline ones. We consider dating to be a fundamental human need throughout history. Compared to previous generations, like Momo users from a decade ago, the younger generation is more open to online dating products. In relation to Tantan's core value of connecting people for romantic reasons and converting those relationships offline, we do not see any comparable products in the Chinese market that warrant our attention. Tantan stands out as the largest, most dedicated, and most effective platform in the dating sector. So, Tian, I believe that answers your question.

Tian Hou, Analyst

That's good. That was very clear. Thank you. Yes.

Ashley Jing, IR Representative

So maybe in the interest of time, this will be the end of the call today. And thank you very much for your interest in Hello Group and look forward to talking to you guys next quarter. Rachel, we are ready to close. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.