Earnings Call Transcript - MOMO Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2022 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 event 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, Investor Relations

Thank you, operator. Good morning, and good evening, everyone. Thank you for joining us today for Hello Group's third quarter 2022 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; 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 under 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.

Tang Yan, CEO

Good day, everyone. Thank you for joining our conference call. This is my first earnings call since returning to the CEO position. I'm very happy to communicate with the investor community again. In the third quarter, due to product and operational improvements, we delivered solid financial results and made good progress in our businesses. Now, I'll walk you through the details, starting with a brief overview of our financial performance. For the first quarter of 2022, total revenue was RMB3.23 billion, a decrease of 14% year-over-year but an increase of about 4% quarter-over-quarter. Revenue growth exceeded our expectations as live streaming performed slightly better than anticipated. Adjusted operating income reached RMB605 million, up significantly by 30% sequentially, with a profit margin of 19%. This was primarily due to our effective strategy to optimize costs and improve efficiency, resulting in progress across all business lines. On an ex-Tantan basis, total revenue was RMB2.89 billion, down 11% year-over-year but up 4% sequentially, and adjusted operating income was RMB643 million with a margin of 22%. The year-over-year decrease in total revenue was mainly due to cost pressures on the live streaming business from the pandemic and regulatory issues. However, this decline was partially offset by rapid growth in standalone apps. Tantan's total revenue for the quarter was RMB341 million, down 33% year-over-year but up 3% sequentially. The decline was mainly due to the monetization process we initiated in September last year to enhance user experience and retention, along with the negative effects of COVID and reduced channel investment impacting Tantan's user growth and conversion rates. Adjusted net loss narrowed significantly to RMB38.84 million from RMB119 million in the previous quarter, primarily due to our efforts to optimize our marketing strategy in China since July. Now, I'll go over our strategic priorities during the third quarter. Our objectives for Momo, Tantan, and our new initiatives this year are as follows. For the mobile app, we aim to maintain a stable user base with a limited marketing budget while seeking growth on top of that and ensuring stable cash flow. Despite uncertainties in the consumer and regulatory environments, our team adapted well and executed nearly all of Momo's strategic goals. For Tantan, our initial goal was to achieve solid user growth by enhancing marketing efficiency and the dating experience. However, the deteriorating COVID situation in the first half of the year significantly affected user sentiment and their willingness to pay for value-added services, leading to a notable decline in Tantan's return on investment. Therefore, in the third quarter, we adjusted Tantan's goals to focus on reducing net loss by cutting low-efficiency channel marketing spend and accelerating efforts to develop products and monetization strategies that align with Asian dating culture for profitable growth. Tantan's financial performance this quarter indicated initial success in executing this strategic plan. Regarding new products and businesses, our aim is to continue enriching our product portfolio and push boundaries beyond Momo and Tantan. We made steady progress in this area during the quarter. Next, I'll discuss the advancements we made with our strategic priorities and our future plans. Firstly, regarding Momo app user growth and key operating metrics. Momo had 108.8 million monthly active users this quarter, down 2% sequentially. The negative impact of pandemic control measures pressed the overall open social sentiment throughout Q3, and the situation worsened starting in the middle of the quarter, resulting in the sequential decline in organic traffic retention and users’ propensity to pay. In terms of channel marketing, in order to control cost amid the pandemic, we scaled back investments in channels with low paying conversion and less satisfactory retention, and tilted our limited marketing budget toward channels with high ROI. The number of paying users for the quarter was 8.4 million down from 8.6 million in Q2. The 200,000 sequential decrease was mainly due to the decline in MAUs. Paying conversion remains stable. Thanks to our team's timely adjustments in user acquisition strategy, focusing on high ROI channels and continuous paying experience optimization, this laid a solid foundation for our cash cow business to remain stable. Now, I'll discuss the progress we made regarding ensuring the cash cow business remains stable, although the COVID control measures put pressure on our user base. On an ex-Tantan basis, revenue grew sequentially and profit margins stayed largely stable, thanks to our team's efforts to adjust product and operational strategy in a timely manner. Our team managed to drive gross profit increases along with revenue growth against the challenging external environment with COVID and discretionary spending softness. This demonstrates our strong adaptability and execution skills. Momo’s live streaming revenue was RMB1.5 billion for the third quarter down 21% year-over-year, but up 8% sequentially. The year-over-year decrease was mainly due to COVID and regulatory factors. The sequential growth was mainly attributable to the increase in the number of high-paying users, driven by promoter advanced targeting to high cohort users and designated broadcaster recommendation algorithms, which effectively enhanced the product experience for the relevant groups. Our operation team controlled revenue-sharing costs by adjusting the event policy and designing gamified features so that gross profit margins stayed relatively stable while revenue increased sequentially, generating growth-accretive revenue growth. Our ecosystem remained healthy and stable as we optimized the recommendation algorithm for different cohorts of users, driving sequential growth in live streaming DAU. On the supply side, the number of high-quality talents grew significantly quarter-over-quarter. Regarding value-added services, revenue excluding Tantan reached RMB1.34 billion in the third quarter, marking a 6% year-over-year increase and a 1% rise sequentially. All the incremental revenue stemmed from our new initiatives. Revenue from the primary Momo app was RMB1.14 billion, down 3% year-over-year and stable sequentially. The new app generated RMB196 million, reflecting a 147% increase year-over-year and an 8% sequential growth. I will provide a comprehensive update about our new initiatives later. For now, we should focus on the Momo app's core business. In the third quarter, VAS within the Momo app faced challenges due to deteriorating COVID conditions and stricter lockdown measures, which significantly reduced user traffic and engagement in location-based services like interest groups and offline events. This was evident in the overall decline in spending on traditional gifts and decreased revenue from membership services due to lower traffic. The revenue drop in traditional location-based social use cases primarily impacted the Momo app's sequential performance. For audio- and video-based social entertainment features, we added new functionalities to encourage payment conversions and sequential revenue growth, which helped stabilize Momo's VAS revenue amidst decreases in traditional virtual gifting. Concerning Tantan, I will begin with user trends and the overall financial outlook in light of the uncertainties stemming from the pandemic and broader economic environment. In the third quarter, management opted for a cost-cutting strategy aimed at tightening Tantan's network by reducing marketing expenses and cutting back on investments in channels and methods with lower returns. This strategy had a noticeable effect on Tantan's annual usage. In the short term, exacerbated by heightened COVID measures in various parts of China since late August, Tantan's monthly active users decreased by 16% quarter-over-quarter to 20.9 million in September. The number of paying users for the quarter was 2 million, down by 200,000 sequentially, mainly driven by the reduction in MAUs. The sequential improvement in paying conversion is attributed to two main factors: better retention rates for paying users compared to non-paying users, and enhancements in our product and algorithm that spurred spending from users more likely to pay. Now, I'll briefly review Tantan's financial performance. Total revenue for the third quarter was RMB341 million, down 33% year-over-year, but up 3% sequentially. Tantan revenue for the quarter came in better than expected. The year-over-year decrease was mainly due to our demonetization strategy to improve user experience since September last year, although the number of paying users decreased sequentially due to the decline in MAUs. The significant improvement in ARPPU driven by live streaming and other high-spending services offset the pressure on MAUs caused by the decline in paying user accounts. For the third quarter, VAS revenue was RMB202 million, down 6% sequentially, mainly due to a decrease in paying user accounts. The proportionally increased ex-VIP sales led to a slight increase in VAS ARPPU. Live streaming revenue for the third quarter was RMB140 million, up 20% sequentially. The sequential growth was mainly attributable to the significant increase in ARPPU driven by supply-side optimization. Now, let's move to the cohorts Tantan has made against its strategic priorities and our future plans. Tantan’s goal for the second half of the year is to reduce spending in low-efficiency channels to narrow net loss. At the same time, we are working hard to improve user retention and drive up ARPU growth through algorithm and product innovation. Once ROI turns positive, we will reinvest the profit into marketing to form a self-sustaining positive cycle. Tantan breakeven depends on two key factors. First, reducing the cost while ensuring the improvement of user acquisition efficiency; second, improving user retention and ARPU through new product experiences. Next, let me explain each of the two in detail. First, regarding reduction in channel investments, in the third quarter, Tantan’s adjusted net loss meaningfully narrowed to RMB38.84 million from RMB119 million in the previous quarter. The better-than-expected net loss reduction was mainly due to our channel strategy to reduce and control marketing cost and improve user acquisition efficiency. Since July, we have gradually cut off channels and methods with low ROI and continued to optimize budget allocation for channel investments and adjusted feeding strategy timely according to market dynamics. In the third quarter, unit user acquisition cost decreased by nearly 30% sequentially and by more than 40% from a year ago. The continuously improved user acquisition strategy drove new user retention to increase both year-over-year and on a sequential basis. Thanks to the adjustment in user acquisition, advertisement material, and targeting strategies for different user groups. The female ratio of new users reached the peak for the year and the average age of new users continued to get younger. The initial results of channel investment reduction have laid a solid foundation for us to further narrow Tantan's net loss to achieve breakeven and enter into a positive business cycle next year. In the fourth quarter, we plan to further reduce marketing spend in the domestic market and continue to optimize our user acquisition strategy so that, excluding specific year-end expenses such as annual bonuses, we can further narrow Tantan's loss from operations. In the meantime, we will continue to improve user retention, new user retention, and the proportion of young users and maintain the female ratio of new users at a satisfactory level. Although we delivered good results in lowering marketing spend in the third quarter to achieve our goal of profitable growth, we need to address another critical factor, which is to increase ARPU. In the past, Tantan took a wrong path in driving ARPU. After the resumption of app store downloads in 2019 and before we initiated the demonetization process in mid-2021, the way to increase paying conversion and ARPU was to make the payroll strategies more and more aggressive. In other words, this was a strategy to build more and higher payout around features deemed to be highly valuable to users, making it impossible for users to fully enjoy Tantan's services without paying. Since membership subscription is limited in differentiating users in different paying capabilities. In order to drive revenue growth, the Tantan team at the time had to heavily focus on increasing paying conversion rather than driving both paying conversion and ARPPU at the same time. That was the fundamental reason why Tantan chose to push the membership subscription ratio higher and higher by increasing the male user ratio and aggressively building payout between 2020 and the first half of 2021. Although doing so, Tantan once came very close to breakeven, but only aggressive payroll strategies via the package users' experience resulted in a number of problems such as the disproportionate gender ratio, continuously deteriorating new users and female users' retention, lower membership renewal rates, and growing customer complaints that ended up hitting a dead end. This taught us that it is not viable to entirely rely on a membership model with limited options to differentiate users. This model won't put Tantan's revenue growth into a scalable and sustainable cycle. Therefore, we have to find a better way to drive ARPU growth, which can only be achieved through greater product and operational innovations. Our solution to improve retention and ARPU is to introduce new products and services. On the user product front, our urgent priority is to explore effective social experiences beyond a swipe-by matching mechanism. For commercial products, we will leverage non-membership paying models that can differentiate users to drive ARPU growth. Over the past few quarters, our team has been dedicated to optimizing product experiences for female users and those without qualified photos to improve the retention of these two specific groups, thereby enhancing overall retention. For example, we introduced female-oriented VAS features to recommend potential matches for high-quality conversations and operate the maturation on the back end of this feature, which drove a sequential increase in female users' time spent, retention, and number of average conversations. Another example I can share with you here is a chat room clearance. Users who feel reluctant to show their real photos can use avatars to chat with others and enjoy a sense of companionship. In the third quarter, we improved the chat room users' engagement by leveraging innovative features and initiating hot topic discussions. In the fourth quarter, the key is on introducing more innovative features in the chat room in order to enhance product penetration and user engagement. We will also be testing different monetization models. The goal is for the chat room to contribute more to ARPU growth and improve monetization efficiency. Overall, in the third quarter, Tantan made good progress in narrowing the net loss by reducing low-efficiency channel marketing spend. Although we haven't made breakthroughs in user experiences and product innovations, we have seen a steady improvement in user engagement. This makes me feel more confident that we will continue to narrow operating loss in the coming quarters and eventually achieve profitable growth. We have enough confidence and patience to keep driving and gradually refining our products and operations. Lastly, I will review the progress we made with our new endeavors. In the third quarter, total revenue for the profit-driven hour-oriented standalone apps was RMB203 million, up 154% year-over-year and 2% sequentially. For the domestic products that are more mature, our strategy this year is to step up the monetization process, improve monetization efficiency, and scale up profits. As for overseas social apps in the expansion stage, our goal is to expand user base and grow profitable revenue by deepening operations in established markets and expanding into new markets. In addition, we will optimize the supply-side ecosystem, lower the revenue sharing ratio, and improve user acquisition efficiency. In the third quarter, the user base of the ROI-oriented products grew steadily, and profit increased significantly from the previous quarter. Such encouraging user and financial performances were mainly attributable to reduction in marketing spend, due to improved free user acquisition efficiency, which in turn drove substantial growth in operating margin. In Q3, revenue generated by apps in overseas markets surpassed that in the domestic market, and overseas apps showed greater growth potential. Going forward, we will continue our current management approach to ROI-oriented products, namely to pursue steady growth and scale up profit contributions. We will launch new social apps and innovate monetization models to meet local users' specific preferences while expanding into new markets. This concludes my remarks today. I will now pass the call over to Cathy for the financial review.

Peng Hui, CFO

Thank you, Tang Yan 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 third quarter 2022 was RMB3.23 billion, exceeding the high end of our revenue guidance, down 14% year-on-year but up 4% quarter-over-quarter. Non-GAAP net income attributable to the Company was RMB535.8 million compared to RMB571.6 million from the same period of 2021 or a 6% decrease. The year-on-year decrease on the bottom line was significantly narrowed from previous quarters. Looking into the key revenue items for the quarter, firstly on live streaming, total revenue from the live broadcasting business for the third quarter 2022 was RMB1.66 billion down 24% year-over-year but up 9% quarter-over-quarter. Core Momo's live broadcasting revenue totaled RMB1.52 billion for the quarter, down 21% year-over-year but up 8% quarter-over-quarter. The year-over-year decrease was mainly due to the pressure cost by the COVID and the regulatory factors. The sequential growth was mainly attributable to an increase in the number of high-paying users driven by product and operational efforts. Tantan's live broadcasting revenue amounted to RMB139.7 million, down 40% from Q3 last year, but up 20% from the previous quarter. The year-over-year decrease was mainly due to product adjustments to improve user experience in September last year as well as the negative impact of the pandemic resurgence on the channel investment reduction. In the third quarter, our efforts to reform Tantan's live streaming service to make it more geared toward facilitating social interaction started to bear fruit, which, coupled with supply-side optimization, drove a meaningful sequential increase in Tantan's live streaming. Revenue from value-added service was RMB1.54 billion, the same as in Q3 last year and flattish sequentially. Revenue from value-added service on an ex-Tantan basis reached RMB1.34 billion in the third quarter of 2022, a 6% increase year-over-year and a 1% increase sequentially. The growth in value-added service on an ex-Tantan basis was driven by incremental revenue contributed by the standalone new applications. Tantan's value-added service revenue amounted to RMB201.6 million, down 27% from Q3 last year and 6% from the previous quarter. The year-over-year decrease was due to the demonetization process to improve user experience and retention in the latter half of 2021, as well as the pressure on Tantan's MAUs and paying conversion caused by the COVID resurgence and reduction on marketing spend. The sequential decrease in Tantan's value-added service was largely attributable to the latter factor. Non-GAAP cost of revenue for the third quarter of 2022 was RMB1.88 billion compared to RMB2.16 billion for the same period last year. Non-GAAP gross margin for the quarter was 41.7%, down less than 1 percentage point both from a year ago and from the last quarter. The decrease was mainly due to a couple of Tantan-related factors. One, the decrease in Tantan's revenue contribution to the group as Tantan bears a higher gross margin than the Momo app; two, lower gross margins from Tantan's live streaming contributed more to the top-line. With respect to the Momo application, gross margin in the third quarter remained largely stable compared to the same period last year and the previous quarter. Thanks to our team's operational strategy to focus on gross profit and margin instead of just revenues. Non-GAAP R&D expenses for the third quarter were RMB223.4 million, compared to RMB231.8 million for the same period last year or a 4% decrease year-over-year, which was due to the continuous optimization and personnel cost since the beginning of the year. We ended the quarter with 1,750 total employees, of which 479 are from Tantan, compared to 2,050 total employees, of which 548 from Tantan a year ago. The R&D personnel as a percentage of total employees for the group was 62% compared with 59% in Q3 last year. Non-GAAP total marketing expenses for the third quarter were RMB458.6 million, or 14% of total revenue, compared to RMB637.1 million, or 17% of total revenue for the same period last year. The significant year-over-year decrease both in terms of absolute renminbi amount and as a percentage of revenue was primarily attributable to Tantan's shift in marketing strategy to cut spending on low ROI channels and methods in order to take care of ROI in main COVID and lockdown. With respect to the Momo application, we also trimmed low-efficiency marketing spends and shifted our savings to promote new applications such as Tietie. We will continue to reallocate resources to support growth of those with higher ROI and promising potential. Non-GAAP G&A expenses were RMB82.6 million for the third quarter of 2022 compared to RMB114.8 million for the same quarter last year. The decrease was again the reflection of our continuous efforts to improve cost efficiency, as well as some one-off cost items occurring in the third quarter of 2021. G&A expenses as a percentage of revenue remains stable. Non-GAAP operating income was RMB605.1 million, a decrease of 5% from Q3 2021, but up significantly by 30% from the previous quarter. Non-GAAP operating margin for the third quarter was 19%, up 2 percentage points from the same year last year and 4 percentage points from the previous quarter. Non-GAAP OpEx as a percentage of total revenue was 24%, a decrease from 26% from Q3 2021 and 29% from last quarter. Non-GAAP operating expenses saw a year-on-year and sequential basis decrease of 22% and 15% respectively. The decrease in both absolute renminbi amounts and as a percentage of revenue for OpEx was mainly due to a reduction in total marketing expenses and to a lesser degree, our cost optimization strategy applied to other operating expenses line items since the beginning of the year in response to the macro and pandemic uncertainties. Now brief on the below the line items. During the third quarter, the Company generated RMB40.4 million in other gains, mainly from the repurchase of our convertible senior notes from certain bondholders, which was partially offset by impairment loss on other long-term investments. Now, briefly on income tax expenses, total income tax expenses was RMB156.0 million for the quarter with an effective tax rate of 22%. In Q3, the Company accrued withholding income tax of RMB42.9 million, which is 10% of undistributed profit generated by WFOE. Without withholding tax, our estimated non-GAAP effective tax rate was around 16% in the third quarter. Now turning to balance sheet on cash flow items. As of September 30, 2022, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits, and restricted cash totaled RMB13.02 billion compared to RMB15.71 billion as of December 31, 2021. The decrease was due to a number of cash flow items, including our cash dividend payment of RMB841 million to shareholders, an aggregate payment of RMB2.14 billion for the repurchase of the Company's convertible notes, an aggregated RMB288 million in relation to the share purchase program, and RMB300 million payment to Chinese tax authorities to repatriate cash from our WFOE in China to our offshore entity in the first nine months of 2022. Net cash provided by operating activities in the third quarter of 2022 was RMB445 million compared to RMB560 million in the third quarter of 2021. Lastly, on business outlook, we estimated our fourth quarter revenue to come in the range from RMB3.15 billion to RMB3.25 billion, representing a decrease of 14.3% to 11.5% year-over-year, or a decrease of 2.6% to an increase of 0.5% quarter-over-quarter. For Q4 2022, on a sequential basis, we expect the total revenue for the core Momo to be flattish toward a slight decrease due to the negative impact from the continued COVID control measures. On the Tantan side, we expect revenue to decline low single digits. Tantan’s membership revenue will decrease quarter-over-quarter due to a decline in user base as we further reduce marketing spend on low-efficiency channels. The membership subscription revenue decrease will be partially offset by the growth of live streaming. Please be mindful that this forecast represents the Company's current and preliminary review of the market and operational conditions, which are subject to changes.

Ashley Jing, Investor Relations

That concluded our prepared portion of today's discussion. With that, let me turn the call over to Ashley to start Q&A. 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. Operator, we're ready for questions, please.

Operator, Operator

Today's first question comes from Thomas Chong from Jefferies. Please go ahead.

Thomas Chong, Analyst

As Tang Yan returns as CEO, should we expect any changes to the group’s overall strategies?

Tang Yan, CEO

Thank you for your question. I wasn’t directly involved in the daily management of the Company over the last two years. However, as Executive Chairman of the Board, I closely monitored the overall operations and financial performance of the group. I contributed to setting strategic priorities and making decisions on major issues. Thus, our strategy will largely remain the same, with a focus on Momo, Tantan, and our new initiatives. If there are any differences in my approach to execution compared to the past, it would be that we will intensify our efforts on new products and businesses with better resource allocation and execution. Let me explain these three aspects. First, our Momo app is our largest product in terms of user base and has the most developed commercial experience in our brand portfolio. Currently, Momo aims to maintain a steady user base and profit contribution while seeking growth, especially amidst the uncertainties presented by the pandemic and the macroeconomic environment. The primary goal for the Momo app is to consistently generate a solid level of net profit and cash flow. Achieving this requires our team to enhance cost control and capital efficiency while excelling in product operations. We believe that by improving product and operational efficiency, maintaining stable profits is a realistic goal for Momo, even in the current challenging external environment. Secondly, Tantan, as the second biggest brand of the Group, in terms of connecting people for romantic purposes, we are seeing very clear growth potential for Tantan, both in China and in overseas markets. Especially in the Asian markets, we do not see any other products that can do a better job than us in meeting users' dating needs. However, COVID control measures in the past few quarters went beyond our expectation at the beginning of the year. We therefore decided to control costs and reduce low-efficiency marketing spend. Tantan's user scale declined somewhat as we expected, and based on Tantan's user retention and financial performance in recent months, I am very confident that we will drive Tantan into a positive business cycle and achieve our strategic goal of profitable growth through product innovation. And thirdly, with respect to new products and businesses, our team has made encouraging progress over the past two years. Our ROI-oriented products maintained strong growth momentum on top of profitability. Our goal is to develop a few more apps like this in the next three to five years so that collectively, they can make more contributions to the Group's bottom line. Additionally, this year, we have also made an initial breakthrough in non-ROI-oriented products. At the beginning of the year, we captured the opportunity for the younger generation and launched our first large DAU product, Tietie, for Gen Z and Gen Alpha, which has reached a considerable level within a short period of time. This demonstrates our ability to discover new markets and seize new opportunities in the social photo space, creating a competitive advantage in the process. Recently, we have made some adjustments to the organizational structure to clarify the functional positioning of each product. At the same time, we want to better reach R&D and channel marketing capabilities so that we can apply the successful experiences we have accumulated to support the development of new products. I personally will directly lead our new endeavors team to explore and open new growth paths for the Group.

Ashley Jing, Investor Relations

I think that's it for the questions, maybe let's move on to the next question. Operator?

Operator, Operator

Absolutely. Our next question today comes from Leo Chiang with Deutsche Bank. Please go ahead.

Leo Chiang, Analyst

Thank you, management, for taking my question. I have two questions about Tantan. First, has Tantan reached its lowest point? What is the sales and marketing strategy for 2023, and what can we expect regarding the monthly active user trend this year? My second question is about the revenue outlook for 2023 and the key measures in place to achieve breakeven. Thank you.

Tang Yan, CEO

Before we began our cost reduction and marketing efficiency strategy, we anticipated that Tantan’s reduced channel investment would result in approximately a 20% decline in monthly active users, give or take 5%, depending on the pandemic control measures in place. The fall in MAUs during the third quarter was greater than we had predicted due to a more severe COVID resurgence than we anticipated in August. Given the current circumstances, we foresee Tantan’s MAUs leveling off at around 18 million to 19 million, although this figure may vary because of pandemic uncertainties. Looking ahead to 2023, Tantan’s user trends will be influenced by how the pandemic unfolds and our marketing approach. We will focus Tantan’s channel investment on return on investment. This means we will gradually increase our marketing budget based on favorable ROI. There are two key factors to consider: the recovery of offline social interactions as China relaxes its COVID restrictions, which should help user retention and paying conversions; and improvements in product experience, which should enhance retention and average revenue per user. If either of these factors leads to a positive ROI for Tantan or allows us to generate profit from our expenditures, we will boost our marketing investment and aim for growth within a self-sustaining positive cycle.

Peng Hui, CFO

I've heard two questions. One is how we're going to reach the breakeven point, and the other thing is about the revenue outlook for 2023. Maybe I'll answer the breakeven question first. As you can see, from Tantan segment reporting in Q3, by cutting down on the low-efficiency channels, we've already narrowed the net loss from close to RMB120 million in Q3 to within RMB40 million in Q3. From there, I guess several things need to happen before we ultimately reach the breakeven point. One is that COVID has to come completely off people's minds as a deterrent that keeps young people away from dating and, more generally, from meeting someone that you just got to know on the internet at real-life occasions. Right now, we are indeed seeing a pretty substantial relaxation on COVID containment measures and lockdowns. But sentiment-wise, I think it's still going to take some time for the dating sentiment to fully come back. The second is that we need to continue, as Tang Yan said, to make progress on the product side, including both consumer experience and monetization features in order to drive retention and ARPU. These are the key operational targets for the team next year. With regards to the financial outlook, I hate to say this, but as you can imagine, it's still a little bit too early to give any reliable guidance into 2023. But here are some things I can point toward, which hopefully can give you some color about how to think about 2023. I'll generally put them into two buckets. One is external factors and the other one is internal factors. With respect to external factors, of course, as I said, COVID is the biggest swing factor here, which unfortunately we do not have much control over. However long it may take for the dating sentiment to ultimately come back, eventually, we are going to come completely out of it, and the social sentiment is going to come back. Thus, what we need to focus on right now is internally what we can do to better capture the growth opportunities post-COVID when the sentiment does come back. On that front, we are looking at several drivers that we need to work on. One is new product launches that may drive ARPU growth. For example, the chat room and some other social entertainment services that we're working on. A lot of these will be structured as non-subscription revenues, which will be more effective in driving top-line growth than subscription revenues. The second internal driver is, of course, MAU growth. COVID aside, we do expect the MAU to bottom out after Chinese New Year, especially as the COVID fear gradually tails out, and as MAUs gradually come back, top-line is going to recover as well. So, these are a few things that I can share at this point in time to help you build the Tantan model next year.

Ashley Jing, Investor Relations

Next question please.

Operator, Operator

Thank you. Our next question comes from Daniel Chen at JP Morgan. Please go ahead.

Henry Wibowo, Analyst

Okay. Thanks to management for taking a question. This is Henry speaking on behalf of Daniel Chen. I have two questions. First, could you update us on the progress of new apps and the overseas business, as well as your revenue expectations for the next year? The second question is about TieTie. What is the current status of TieTie, and can management provide more details on the marketing and monetization strategies? Thank you.

Tang Yan, CEO

We have increased our focus and investment in our overseas businesses since last year. With our product and operational experiences, we can tap into a larger group of users and greater revenue opportunities in international markets. In the realm of social products and overseas expansion, we hold a clear competitive advantage over standalone local apps or large platforms that lack experience in the social arena. We intend to pursue marketing strategies that are focused on return on investment and will explore the most appropriate models for local markets one at a time, avoiding excessive spending on marketing solely to drive user growth. Our overseas business is structured into three segments: Tantan, standalone social apps, and standalone gaming apps. This year, revenue from our overseas business represented a mid-single-digit percentage of our total revenue. For the first three quarters, revenue from the overseas business grew by a high double-digit percentage compared to the same period last year, and we achieved a small profit. Our plan is to reinvest the profit from each product in established markets into the promotion of that product in new markets. Especially with many developing countries that share a lot of commonalities, we will try to explore opportunities across the North. Tietie delivered rapid user growth its launch after Chinese New Year this year. We stepped up our marketing efforts to support its strong growth momentum in the second quarter, and it now has become a social app with a sizable user scale. The current focus of our team is to encourage users to invite more of their friends to join Tietie and increase their time spent on the app together. So we will take a relatively conservative approach to marketing investment before we achieve these two targets. As for now, we have no plans for Tietie to expand overseas, but we will not rule out this possibility when it gets into a more mature stage.

Ashley Jing, Investor Relations

Next question please.

Operator, Operator

Thank you. And our next question comes from Raphael Chen with BOCI. Please go ahead.

Raphael Chen, Analyst

Thank you for taking my question. I would like to ask about core Momo. How can we retain users of the core Momo app while implementing a disciplined cost control strategy? Additionally, could management provide any insights on the revenue outlook for live streaming and value-added services of core Momo for next year? Thank you.

Tang Yan, CEO

As a well-established brand with over ten years of experience in the mobile internet sector, it is challenging for Momo to keep a consistent user base. This requires collaborative efforts in both product development and marketing strategies. We must enhance the social experience for our current users while also searching for new social experiences to attract new users. Regarding marketing, given the external pressures affecting social engagement, we plan to allocate our limited marketing budget towards users who demonstrate a clear demand and a greater willingness to pay for our services, thereby increasing overall user application efficiency. Now, I'll turn it over to Peng Hui for the revenue outlook question.

Peng Hui, CFO

Okay. Again, with the uncertainties on the macro front and the COVID fronts, it's hard to be very prescriptive at this point, and too far into the year 2023. But here are some things that I can share with the limited visibility that we have at this point, which hopefully could help you guys build out a preliminary outlook for next year. For live streaming, as you guys can see, Q3 turned out to be better than what we originally thought, both in terms of top-line and gross profit. We were able to see both top-line growth and a stable gross margin. However, as the macro remains quite uncertain at this point in time, at least for the coming six months, we'd rather stay on the conservative side regarding the revenue and profit growth outlook for live streaming. Value-added service, I would say, is not completely immune from the macro uncertainty and in comparison with live streaming, is actually more susceptible to COVID and the weak social sentiment as a result of it. For Momo's value-added service, if COVID lingers and takes longer for the dating sentiment to fully come back, we'll try to keep the value-added service revenue line stable as we did pretty successfully for the past few quarters. It has not been an easy task because the one-on-one and some of the interest group activities are seeing pretty significant impacts. What we have been doing and will continue to do, I guess next year, is to pull the levers that we have in social entertainment experiences to make it up. For the value-added service from the bucket of new applications, especially overseas apps, the picture is much brighter. I think this year, value-added service from the new applications so far has been growing at triple digits on a year-over-year basis. And despite the fact that it's now already at a pretty sizeable revenue size, the pace of growth is not really slowing down much from the year 2021. We expect the value-added service from the new bucket of applications to continue to grow at a pretty rapid pace in 2023. Although, at this point, it's hard to pin it down to a specific number. The other thing worth mentioning is that although these new applications are in a fast-growing phase, we are focused on profitable growth, meaning growth across all three important lines including users, revenues, and profits. So, hopefully, these answers your questions about the outlook for revenue and value-added service for the Momo segment next year.

Ashley Jing, Investor Relations

I think we perhaps have time for one last question, right? So, operator, do we have any more questions on the line?

Operator, Operator

We do. We have one more question. And our final question today comes from Xueqing Zhang with CITC.

Xueqing Zhang, Analyst

Thank you, management, for addressing my question. Regarding management's comments in the prepared remarks, reducing costs and enhancing efficiency is a key strategy for the second half of 2022. Can management provide more details on the cost-conscious strategy and the overall margin changes in the first quarter of 2023?

Peng Hui, CFO

Thank you. Okay. I'm going to take this one last margin question. I hope we can end the call before markets open. The three biggest cost items that we have are: number one, payouts to the broadcasters, performers, and moderators in the value-added service line; the second and third are our marketing expenses and payroll. I guess I'll take them one by one. For payout, as you can see, Q3 versus Q2 this year has been largely stable. The dip in gross margin was really caused by the mix shift between different business line items. In Q4, we do expect payout to go up a couple of percentage points due to the year-end promotional events, but that should be Q4 specific. It happens every year and will bounce back early next year when the year-end gala is gone. Overall, for next year, at this point in time, my view is that payout is likely to remain largely stable because, A, based on what we are currently seeing out there in the market, no one is aggressively boosting the supply side by pulling off the payout ratio, and B, internally we do not see it as an effective strategy to grow revenues by sacrificing margins. So, that's my view on payouts. Gross margin-wise, it may fluctuate a little bit around the current level due to the mix shift one way or another. Moving down to payroll and marketing. This year, we have done a pretty good job in controlling these two cost items. I guess in Q4, because we have the year-end bonus, the double pay, etc., payroll might increase a little bit. But overall, we have an overall downward trend in payroll and marketing due to the cost optimization. We are going to continue to apply the same strategy next year and investors can expect tighter control and more focus on cost efficiency for payroll and marketing. The other thing worth mentioning as far as cost control and the overall strategy to increase efficiency is concerned is that in terms of the allocation of resources internally, we won't treat every business line equally. What that means is that we are going to lean more towards new businesses with higher ROI. In the second half of this year, we have been reallocating engineering resources and marketing dollars from Momo to new applications. I'm happy to see that, while the overall payroll and marketing expenses went down, we did not under-invest in the new applications, and they have been growing pretty well and that will continue to be the case next year. I guess these are the answers to the margin question. And with that, I'm coming back to Ashley for the closing remark.

Ashley Jing, Investor Relations

Well, we are very much out of time. So thank you very much for participating in today's call, and we will see you next quarter.

Operator, Operator

Thank you. That does conclude our conference for today, and thank you for participating. You may now disconnect your lines and have a wonderful day.