Earnings Call Transcript - MOMO Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Third 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.

Ashley Jing, IR Manager

Thank you, operator. Good morning, and good evening, everyone. Thank you for joining us today for Hello Group's third 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. Zhang Sichuan, COO 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 event, or otherwise, except as required under law. I'll now pass the call over to our COO, Mr. Zhang Sichuan. Ms. Zhang, please.

Zhang Sichuan, COO

Hello, everyone. Thank you for joining our call. We are pleased to report strong financial results for the third quarter and steady progress on various strategic priorities across all business lines. I will now walk you through the details of our work for the quarter end. Together with Tang Yan and Cathy, take questions in the Q&A session that follows. I will start with a brief overview of our financial performance. Total group revenue was RMB3.04 billion, down 6% year-over-year and 3% sequentially, exceeding our previous guidance. The main reason for the decline in revenue was the softer economy and product adjustments we made to maintain a healthy community ecosystem. Adjusted operating income was RMB681 million, up 30% year-over-year, but down 4% sequentially. Profit margin was 22.4%, up 3.7 percentage points year-over-year and down slightly, 0.2 percentage points quarter-over-quarter. Compared to the same period last year, adjusted operating profit increased significantly despite lower revenue. This improvement was driven by our effective cost optimization and efficiency improvement initiatives, which turned Tantan profitable compared to a year ago as well as supported the stable productivity of Momo's cash cow business. Total revenue from the Tantan app, Momo app, and standalone new app was RMB2.74 billion, down 5% year-over-year and 3% sequentially. Adjusted operating income was RMB675 million, up 4% year-over-year and down slightly by 1% quarter-over-quarter with a margin of 24.6%, up 2.2 percentage points year-over-year and 0.4 percentage points quarter-over-quarter. Profit margin improved despite the decline in revenue, primarily due to our team's solid ability to control costs and expenses. Total revenue from Tantan came in at RMB295 million, down 40% year-over-year and 8% sequentially, mainly due to our reduction in channel investments combined with our anti-spam initiatives, resulting in a drop in our user base. Thanks to improvements in staff and channel marketing efficiency, Tantan achieved an adjusted operating income of RMB27.6 million in the third quarter with a margin of 9%. Adjusted operating loss in Q3 last year was RMB38.3 million and adjusted operating income in the previous quarter was RMB31.9 million. Now I will discuss the progress we made against our strategic priorities and future development plans for Momo, Tantan, and the new endeavors. Starting with the mature Momo app, our goal for Momo is to keep the user and revenue scale stable, continue to optimize the cost structure and maintain the productivity of the cash cow business. To achieve this goal, our team has focused on two aspects, product operation, and cost and expenses. First, we mitigated revenue pressure from the external environment by continuously optimizing product operations and introducing new monetization features. Second, we maintain broadly stable profit margins by improving cash unitization and staff efficiency. The group's better than expected financial performance in Q3 was mainly due to the better than expected financial performance of the Momo app. Now, I will walk you through the details. Firstly, on the product and operational front, our focus on product operations this year has been stabilized as user base and improved monetization efficiencies, while focusing on providing timely social experiences and enriching the content supply. Our product team further integrated user products and consumer products to improve the overall monetization efficiency of the platform. On the channel side, the continuous improvement in user acquisition efficiency provides an effective way to maintain stable user base under the strategy of cost optimization and efficiency improvement. Thanks to lower unit acquisition costs. We acquired 40% more new users on a slightly lower channel investment year-over-year. In Q3, the number of active users declined slightly quarter-over-quarter due to the start of the school year and VAS product adjustments, but the extent of the decline was less than a year ago. On a year-over-year basis, the total user scale was still slightly lower, but the gap has narrowed significantly compared to the first half of the year. In quarter three, the number of Momo paying users decreased by 100,000 to 7.8 million from the previous quarter, mainly due to the policy adjustments in VAS membership, which resulted in a decline in the number of VAS paying users. Now let's go through the productivity of our Momo cash cow business. In the third quarter, Momo's live streaming revenue was RMB1.41 billion, down 7% year-over-year and 2% sequentially. The pressure on revenue mainly came from a softer consumer sentiment. Considering the current macroeconomic environment, our team decided to reduce revenue-oriented competition events. Meanwhile, on the product front, we have launched new interactive gamified features that enable us to keep the number of core paying users relatively stable. The launch of interactive gamified features has not only improved the paying user experience of middle and long-tail cohort users, which plays a positive growth in stabilizing livestreaming user engagement, but has also created new revenue streams for long-tail broadcasters in a transitional showroom live streaming business. In the third quarter, the revenue sharing ratio of live streaming decreased slightly quarter-over-quarter, mainly due to the reduction in event-related bonuses. User-oriented operational efforts led to a slight decrease in the proportion of revenue contributed by talent agencies, but engagement of the supply side remains stable. In the third quarter, VAS revenue, excluding Tantan, totaled RMB1.3 billion, down 3% year-over-year and 2% sequentially. VAS revenue from the Momo app totaled RMB1 billion, down 12% year-over-year and 6% quarter-over-quarter. Revenue from the standalone app was RMB295 million. The year-over-year growth accelerated to 51% and revenue was up 30% sequentially. The decrease in Momo VAS revenue was mainly due to our proactive product adjustments to improve the overall ecosystem and the impact of macroeconomy on consumer sentiment. As I mentioned earlier about our user product, in order to improve the monetization efficiency of the Momo app, we have embedded assets to pay experience in, for example, nearby people and some other non-paying features. The income in DAU and the paying ratio of audio and video-based VAS experience, particularly mitigated the pressure on revenue caused by product adjustments and the external environment. The overall VAS revenue sharing ratio decreased slightly quarter-over-quarter, primarily due to the discontinuation of lower gross margin features following our ecosystem adjustments. This shift in the product mix contributes positively to the improvement in VAS gross margin. Now, let's review Tantan's performance. Our strategic goal for Tantan is to achieve overall breakeven from a year-end developed product and monetization models that are suitable for the Asian dating culture in order to pursue sustainable growth on the back of a positive business cycle. Over the past year, Tantan has made solid progress in reducing low-efficiency channel marketing spend to achieve breakeven. It delivered first operating profit at the beginning of this year and maintained profitability in Q3 despite lower revenue. However, we still have a long way to go in achieving our strategic goal of sustainable growth on the back of positive business cycles. The underlying reason is that we have yet to make breakthroughs in the development products and monetization models that are suitable for the Asian dating culture. The ongoing anti-spam campaign started this spring, coupled with the seasonal impact of the new school year put notable pressure on content user base in September. MAU decreased 9% sequentially to 15.7 million. As of the end of Q3, Tantan has 1.4 million paying users despite a decrease in overall user base. The paying user count remained stable sequentially, primarily due to our commercial product team's efforts to improve user paying experience and higher stickiness of the group compared to non-paying users. Total revenue for the third quarter was RMB295 million, down 40% year-over-year and 8% sequentially. The year-over-year decrease was solidly contributed to a reduction in the number of paying users caused by a decline of overall user base. Thanks to improvement in growth products and channels. ARPPU increased by 20% from a year ago, which particularly offset the revenue loss from the decline in paying users. The sequential decrease in revenue was mainly due to significant impact of the softer macroeconomy on the live streaming business. Additionally, the policy adjustments on automatic renewal by the Ministry of Industry and Information Technology have some impact on VAS membership subscription revenue. However, Tantan's gross margin was up by nearly 4 percentage points year-over-year and 1 percentage point quarter-over-quarter, driven by the greater revenue contribution of the VAS business, which carries a higher gross margin. As I mentioned at the beginning, the decline in users and revenue of Tantan has mainly attributed to our initiatives in cost optimization and efficiency improvement. In terms of improving staff efficiency, we have continued to reduce features and operational activities that cannot provide high-quality user experience and incremental revenue and realigned human resources accordingly. In terms of improving marketing efficiency, we have continued to reduce unit acquisition costs and further cut marketing expenses that cannot generate positive ROI. Although this approach has resulted in a reduction in the number of users and revenue, the cost optimization strategy has brought greater benefit to our bottom line as the market spend that we cut were ROI negative. This is why despite lower revenue, Tantan still achieved adjusted operating income of RMB27.58 million in the third quarter. So now I would like to walk you through the details of Tantan's progress on the channel and product front. Firstly, on the marketing front, the unit acquisition cost of the App Store increased sequentially in the third quarter due to the decline in its own traffic. Our team timely adjusted the proportion of investment across different channels in order to acquire more users while controlling the increase in unit acquisition costs to low-single digits sequentially. On the product and operational front, the biggest achievement in the third quarter is that we managed to maintain spamming activity to a low level significantly, and therefore, the community returned to normal. Our product team emphasized guidance of real person authentication on the swipe and match homepage. The increase in real person authentication rates positively contributes to the improvement of the community ecosystem. In terms of commercial products, on top of the basic monthly membership service, we launched a variety of pay-as-you-go privileges that aims to increase exposure and improve matching efficiency. As a result, our VAS active group continued to grow both on a year-over-year and a sequential basis, largely offsetting the impact of user decline on VAS revenue. However, due to the lack of breakthrough in user products, our user retention unfortunately has not yet been stable or successfully improved. Additionally, the outbreak of spamming activities combined with a softer spending among live streaming users led to a decline in channel ROI. Therefore, our team's execution for the rest of this year has been focusing on further reducing costs and channel investments. Relocating excess access human resources to new endeavors and driving ARPU growth through new product features on the basis of operational efficiency improvement until ROI turns positive. Lastly, in terms of new endeavors, our goal is to enrich our product portfolio push the boundary beyond Momo and Tantan to develop a long-term growth engine. In the third quarter, total revenue of the new app included social and games products was RMB302 million, up 49% year-over-year and 50% sequentially. Among them, VAS MAU revenue of domestic and overseas social products was RMB295 million, up 51% year-over-year and 30% sequentially. For domestic apps, given their relatively mature stage, the operational focus of our team is to control costs and expenses while pushing harder on monetization, so that profit can grow in line with revenue. Now, in terms of our overseas business, thanks to our broader market space. Revenue in the third quarter continued to grow rapidly from a higher base. The introduction of new features together with our paying user-focused acquisition strategy play a pivotal role in driving revenue growth. In Turkey, which accounts for a substantial portion of overseas market revenue, significant currency fluctuations during the quarter impacted revenue and exerted pressure on gross margins. To protect profit, our team reduced channel investments in a timely manner, resulting in continued sequential growth of operating income. At the moment, we have mitigated some of the problems affecting the profitability level of overseas business and are expected that it will deliver better sequential performance in both revenue and profit at the end of the year. So this concludes my remarks. Now I will pass the call over to Cathy for the financial review. Cathy, please.

Hui Peng, CFO

Thank you, Sichuan. 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 2023 came in better than our previous expectations at RMB3.04 billion, down 6% year-over-year and 3% quarter-over-quarter. Non-GAAP net income attributable to the company was RMB605.9 million, up 13% year-on-year, but down 4% from the previous quarter. Net income significantly outperformed our expectation mainly due to two factors: one, better than expected top line performance; and number two, our continuous cost control efforts resulted in better than expected profitability for both Momo and Tantan. Net income continued to grow on a year-over-year basis despite lower revenue, thanks to our effective cost optimization and efficiency improvement initiatives, which enabled us to maintain the stability of Momo's cash cow business, turned Tantan profitable, and supported the development of new endeavors. Now let me walk you through the details. Looking into the key revenue line items for the quarter. Firstly, on live broadcasting. Total revenue for live broadcasting business for the third quarter of 2023 was RMB1.53 billion, down 8% year-over-year and 4% quarter-over-quarter. The decrease was mainly due to a soft consumer sentiment in the current macro environment. And to a lesser degree, Tantan pivoting away from the live streaming service, which we deem is not the priority for Tantan at this point for the dating business. Momo app live broadcasting revenue totaled RMB1.41 billion for the quarter, down 7% year-over-year and 2% quarter-over-quarter. Tantan's live broadcasting revenue amounted to RMB120.0 million, down 14% from Q3 last year and 17% from the previous quarter. Revenue from value-added service for the third quarter of 2023 was RMB1.47 billion, down 5% from Q3 last year and 2% sequentially. Revenue from value-added service on an ex-Tantan basis was RMB1.30 billion in the third quarter of 2023, down 3% year-over-year and 2% sequentially. The decrease in Momo app value-added service was due to our proactive product adjustments as well as the impact of macroeconomy on consumer sentiment. However, the downward pressure on Momo value-added service revenue was largely offset by the growth of stand-alone new apps. Tantan's value-added service revenue amounted to RMB168.4 million, down 16% from Q3 last year and 1% from the previous quarter. The decrease was due to the decline in paying users, which was in turn an outcome of us scaling back from the low-efficiency marketing spend. However, the downward pressure 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 third quarter of 2023 was RMB1.77 billion compared to RMB1.88 billion for the same period last year. Non-GAAP gross margin for the quarter was 41.8%. Gross margin remained relatively stable compared to the same period last year and the previous quarter. Non-GAAP R&D expenses for the third quarter was RMB186.7 million, compared to RMB223.4 million for the same period last year, or a 16% decrease year-over-year. The decrease was due to the continuous optimization of personnel costs. Non-GAAP R&D expenses as a percentage of revenue was 6.1% compared with 6.9% Q3 last year. We ended the quarter with 1,410 total employees, of which 314 are from Tantan compared to 1,750 total employees of which 479 from Tantan a year ago. The R&D personnel as a percentage of total employees for the group was 64% compared with 62% Q3 last year. Non-GAAP social marketing expenses for the third quarter was RMB368.1 million, or 12.1% of total revenue compared to RMB458.6 million, or 14.2% of the 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 control costs and focus on channel ROI and to a lesser degree, Momo's strategy to trim low-efficiency channel marketing spends. Non-GAAP G&A expenses were RMB76.5 million for the third quarter of 2023 compared to RMB82.6 million for the same quarter last year. G&A expenses as a percentage of total revenue remained largely stable at around 2.5% compared to Q3 last year. Non-GAAP operating income was RMB681.2 million, up 13% from Q3 2022 but down 4% from the previous quarter. Non-GAAP operating margin for the quarter was 22.4%, up 3.7 percentage points from the same period last year, but slightly down 0.2 percentage points from the previous quarter. Non-GAAP operating expenses as a percentage of total revenue was 20.7%, a decrease from 23.6% in Q3 2022, but slightly up from 20.2% in Q2 this year. Non-GAAP expenses in absolute R&D amount decreased 17% year-over-year. This was due to a reduction in sales and marketing expenses and optimization of personnel costs. Now briefly on income tax expenses. Total income tax expenses were RMB158.1 million for the quarter with an effective tax rate of 21%. In Q3, the company accrued withholding income tax of RMB47.9 million, which is 10% of undistributed profit generated by our ROFE. Without recording tax, our estimated non-GAAP effective tax rate was around 15% in the third quarter. Now turning to balance sheet and cash flow items. As of September 30, 2023, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits, short-term investments, and restricted cash totaled RMB13.64 billion compared to RMB13.40 billion as of December 31, 2022. Net cash provided by operating activities in the third quarter 2023 was RMB582.5 million. Lastly, on business outlook. We estimate the group's fourth quarter revenue to come in the range from RMB2.9 billion to RMB3.0 billion, representing a decrease of 7.9% to 6.6% year-on-year or a decrease of 4.7% to 1.4% quarter-over-quarter. At segment level, for Q3 2023 on a sequential basis, we expect Momo revenue to decrease mid to low-single digits. The decrease was primarily due to the pressure on value-added service from the product adjustments we made in mid-Q3, which will have a full quarter impact in Q4, and to a lesser degree, the macro impact on the overall spending sentiment. Considering the external environment, we've decided to cut back on the incentives to the agency driven year-end competition events. Therefore, revenue contribution from year-end competition events will be quite limited. On the Tantan side, we expect revenues to decrease in low-teens, primarily due to us pivoting away from the live streaming business in Tantan and to a lesser extent, the product adjustments we made to comply with the new policy rolled out by MIIT, which will have some negative impact on membership renewal revenue. Please be mindful that this forecast represents the company's current and preliminary view on the market and operational conditions, which are subject to changes. That concluded the prepared portion of today's discussion. With that, let me turn the call back to Ashley to start Q&A. Ashley, please.

Ashley Jing, IR Manager

Thanks. Just a quick reminder before we start taking the questions for both who can speak Chinese, please ask your questions from Chinese first and followed by English translation by yourself. Thank you. And we're ready for questions, operator.

Operator, Operator

Thank you. The first question today comes from Leo Chiang with Deutsche Bank. Please go ahead.

Leo Chiang, Analyst

Hi management. Thanks for taking my question and congratulations on the strong results. My question is on Tantan side, can management share the outlook of Tantan's user scale and financial outlook in 2024? Thank you.

Yan Tang, CEO

So as Sichuan mentioned earlier, Tantan's biggest progress this year was to achieve breakeven at the operational level and our effective cost optimization and efficiency improvement initiatives. This is the result of the joint efforts of several teams that delivered, among others, product-driven ARPPU growth and continuous improvement in channel ROI and staff allocation efficiency. On the product front, on top of the basic pay monthly membership subscription service, we launched a variety of pay-as-you-go privileges such as accelerated matching, which increased exposure and improved matching efficiency, thereby driving VAS ARPPU growth. So on the channel front, our team-controlled unit acquisition costs well, at the same time has been trying to test paying features-oriented marketing materials with a limited budget to explore new ways to improve our ARPU and channel ROI. Due to the outbreak of spamming activities this year, our product team had to devote a large part of their efforts to anti-spam and maintaining a healthy ecosystem. In this case, we have reallocated excess R&D staff to support the development and operation of new endeavors to improve the overall staff utilization efficiency. Although the community ecosystem currently has returned to normal, the decline in ARPPU due to weak live streaming revenue has led to a temporary reduction in the overall channel ROI. Therefore, we cut investment in channels with negative ROI. The reduction in marketing expenses put some pressure on the recovery of the user scale. But we believe that compared with the approach of pursuing user growth regardless of costs, being able to improve user retention and VAS revenue on top of breakeven is a healthier and more sustainable business model. Therefore, our product and channel strategies in 2024 will carry on with this current approach. In terms of revenue-related questions, I'll leave it to Cathy.

Hui Peng, CFO

I've been very optimistic about Tantan. And I continue to be so despite all the arduous journey that Tantan has been through since 2019. The reason for my optimism is quite simple. Chinese users have genuine demand for dating applications to help them discover romantic relationships, which they can bring to their real life. And that demand is currently underserved. Although Tantan is not doing as good a job as we expected to, it's still undoubtedly the biggest, most effective and also the most relentless player in serving that demand in the China market today. As long as that is still the case, we believe the revenue and profit potential remains there for us to cultivate. That's why I remain very optimistic about Tantan's long-term potential in revenue and profit. It's just a matter of continuing to stick to that goal and finding the right formula for the Asian user in the dating space. As far as next year is concerned, there are several things I can share at this point. First of all, we are going to refocus on the dating aspect of the applications, meaning that we're going to continue to pivot away from some of the peripheral features, such as the live streaming showroom business. Live streaming currently brings in a little bit less than RMB1 million per day in terms of daily grossing. So as we continue to downsize that service, I think top line could be pressured. However, as live streaming, there's 20%-something gross margin and consumes a lot of operational human resources, downsizing live streaming would have minimal or even positive impact on the bottom line. However, the fact that Tantan has built a pretty sizable customer base for the live streaming show business shows that its users, Tantan's users actually have sufficient spending power to support a much higher ARPU. The biggest priority for next year for the team is to build the right product and services to unleash that ARPU potential. And unlike live streaming, the new products and services that we're going to build should contribute positively to the dating aspect of the application of the Tantan platform. If we are successful in doing so, that could push ROI from negative to positive and a positive growth cycle will start to form on Tantan. Currently, we are working on several new features in the pipeline to be launched next year. We'll see whether any of them works as the year progresses. Meanwhile, of course, we are going to continue to optimize the key cost items such as personnel and marketing. One thing we know for sure is that cost efficiency will continue to improve. So although we cannot pin down a revenue target now for next year, we are very optimistic that profitability is going to continue to see improvement in 2024. So these are the things that I could share for Tantan's financial outlook next year. I'm handing back to Ashley for more questions.

Ashley Jing, IR Manager

Operator, next question, please.

Operator, Operator

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

Xueqing Zhang, Analyst

Thanks, management for taking my questions. Congratulations on the strong quarter. My question is about our new apps. Could the management share more latest updates on the new apps? And do we have any revenue and profit guidance of new apps in 2024? Thank you.

Yan Tang, CEO

Starting from 2019, our incubator launched several revenue and profit-oriented standalone apps, targeting vertical social segments and overseas markets. These apps have begun to gradually contribute to the group financials. In 2022, for example, another revenue pressure brought by the pandemic, we pushed a little bit harder on the monetization efforts for these new stand-alone apps in order to keep the group levels of VAS revenue stable. As a result, revenue from these new endeavors in 2022 increased around 1.5 times compared with the previous year. The incremental revenue not only offset the decline in VAS revenue from Momo and Tantan but also drove a slight increase in our group's VAS revenue despite several unfavorable external factors. Our team did a good job in controlling our expenses while driving users and revenue growth. So we could enjoy operating leverage and achieve sustained profitability for the three small apps last year. Our goal for the new endeavors this year has been to continue to grow our revenue and profit. On the product front, we launched new paying features to increase paying ratio and ARPPU. In the first nine months of the year, the contribution of these new endeavors to the group's top line increased to high single digits from mid-single digits last year. We expect this contribution to be in the double digits next year. Our team adjusted various expenses based on revenue growth and channel ROI to ensure profit will grow together with our revenue. Since new endeavors collectively achieved breakeven at the beginning of last year, the profit has continued to improve steadily. In the overseas business, which is growing revenue and profit faster and has greater growth potential, we plan to replicate these apps, some gamified features that have proven to be beneficial to user experience and monetization in our domestic products and further drive revenue growth by increasing ARPU. On the channel front, we will continue to focus on high-quality users with paying potential in the affluent market and improve the retention of high-paying users through monetization innovation. We will slightly lower the revenue sharing ratio to improve gross margin based on stable supply. Profit from the new endeavors is expected to grow much faster than revenue this year. Currently, there are some new apps that are being tested and have not yet generated meaningful revenues. We expect them to further support revenue growth once this product format is stabilized. For the specific revenue and profit guidance, I will leave it to Cathy.

Hui Peng, CFO

Sure. That was already a pretty thorough description of our strategy to the new apps and the achievements we've made under those strategies. For financial outlook, as you understand, it's a little bit too early to talk about the numbers now in December. But there are a couple of things we see happening next year, which I can share to help you understand how the new apps are going to contribute to the P&L in 2024. First of all, social, which is the social app that we won in the Middle East and North Africa area is going to continue to grow pretty rapidly next year. The driver will come from three directions. One is the continuous penetration into the existing markets by beefing up local operations and providing better customer service and so on. Compared with our peers, we believe we still have potential in driving further user and ARPU growth in those markets. The second direction of growth is that as Sichuan and Tang Yan mentioned just now, we are now mainly providing the peer-to-peer social entertainment on social, and we expect to launch new features and services such as live streaming. That obviously can help us increase the share and ARPU as well. And thirdly, we are also looking at some other markets that we might be able to penetrate in. But as competition is already pretty intensive elsewhere in the GCC region, especially in the Gulf countries, this third strategy will be more of an uphill battle, but we'll see how it plays out. Overall, for social and also the other two smaller apps in China should continue to grow quite rapidly next year. This year, these three apps grew about 15% year-over-year and are on track to bring in somewhere between RMB1.1 billion to RMB1.2 billion in the top line and more than RMB100 million at bottom line. Next year, the top line could slow down a little bit. The growth could slow down a little bit, but profit growth should be quite impressive as the operating leverage manifests itself. That's my answer to the financial outlook for the new business. Back to Ashley for the questions.

Ashley Jing, IR Manager

In the interest of time, let's just take one last question. Operator, we're ready.

Operator, Operator

The next question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong, Analyst

Thanks management for taking my questions. My first question is about core Momo. Can management comment on the 2024 product strategies as well as the revenue outlook? And my second question is about shareholders' return. Can management comment about the thoughts on share repurchase and dividends?

Yan Tang, CEO

Our goal for the mature Momo app for now and for the next few years is to keep the user and revenue scale stable and continue to optimize the cost structure and maintain the productivity of this cash cow business. Therefore, our execution plans for our products, user products, commercial products, and channel efforts are all focused on this strategic goal. For example, this year, our user product team added a navigation bar for flash chat on the homepage to direct users to matching-based real-time voice or text chatting experiences. Our commercial product teams embedded paying features such as live streaming or chatroom into these experiences. This design not only highlights the timely social value of the Momo app but also increases the penetration rate of paying features and the monetization potential of the platform. Our user acquisition team has fine-tuned its focus on paying users and has strengthened cooperation with the commercial product team to better accommodate users from the channels. The resulting ARPU growth has supported the continued improvement in channel ROI, enabling us to maintain a stable user scale and solid social fundamentals with a continuously decreasing marketing budget, which plays a positive role in improving Momo's overall profit. In 2024, we will continue to execute the strategy for the Momo product and channels. In terms of financials, I'll leave it to Cathy.

Hui Peng, CFO

Okay. After this earnings call, our focus will shift to preparing the financial plan for the coming year. Until that plan is finalized, it's difficult for me to provide a detailed outlook. However, as we near the year's end, there are several trends we can discuss that may help you understand how various line items could perform next year. Many investors are aware that Momo has been in operation for over 12 years. This longevity brings both strengths and weaknesses in monetization. The main drawback is that we are already quite mature in user penetration and have maximized ARPU, making the business more sensitive to macroeconomic and regulatory changes. Looking ahead, we see macro factors and regulation as the two most significant influences on Momo’s performance, either positively or negatively. Regarding the macroeconomic outlook, I believe everyone has their own assessments, and I don't have any advantage over investors in this regard. On the regulatory side, we have been very cautious to ensure compliance, which is why our performance over recent quarters has been noticeably more stable compared to most competitors in the social entertainment sector. I expect this trend will continue next year. Given the current environment, we need to prioritize profitable user and revenue growth rather than pursuing top-line growth indiscriminately. Over the past few quarters, we’ve reduced our involvement in user and revenue initiatives that offered minimal or even negative margins. For instance, in this year’s year-end competition event, we further decreased the incentives for agency-led promotional events, as these contests are not particularly beneficial for developing a healthy social ecosystem and present regulatory risks. Although these agency-driven activities could lead to a temporary spike in revenue, they often harm our margins and can even result in losses. Therefore, in Q4, you can expect a significant reduction in incremental revenue from the year-end competition. However, since our promotional costs and expenditures have also decreased significantly, the impact on profits is limited. Consequently, we anticipate a mid- to high-single-digit percentage year-over-year revenue decline for core Momo in Q4, though the bottom line for the core may see a high single-digit year-over-year improvement. This focus on profitability will remain a priority next year. Now, I'd like to highlight some advantages of having a 12-year-old application. Over these years, Momo has cultivated strong brand loyalty as a popular platform for people seeking to connect, make new friends, and engage in meaningful interactions. This loyalty allowed Momo to weather the challenges of the past three years during the pandemic and emerge with solid fundamentals and impressive resilience. Looking ahead, I believe Momo will continue to benefit from this stable and loyal user base, which means we can sustain user and revenue volumes while optimizing our personnel and user acquisition costs. This brings us to the topic of profitability for our core business. Next year, we expect gross margins to remain stable, similar to this year. Regarding operating expenses, as mentioned, we have a strong opportunity to further reduce OpEx through ongoing efforts to enhance cost efficiency. Taking all these factors into account, I am quite optimistic about our ability to maintain product activity in our core business. A question came up regarding cash usage, specifically how the company allocates its cash and capital resources. I’ve noted before that we have three main priorities for capital allocation. First, we aim to reinvest in the business for organic growth. Second, if we identify good strategic investment opportunities that would enable us to grow beyond our organic capabilities, we’ll pursue those, preferring cash over stock deals. Third, if we have excess cash, as we have in past cases, we plan to return that excess to shareholders through cash dividends or share repurchases. Our ongoing repurchase plan of $200 million has seen us buy back nearly $90 million worth of shares so far, leaving us with $110 million remaining. We will continue to seize the opportunity presented by our undervalued share price to utilize our excess cash for enhancing shareholder value. Regarding dividends, we have issued special dividends for five consecutive years since 2019, demonstrating our commitment to sharing the benefits of our success with shareholders. Unless we encounter opportunities to reinvest our cash for organic growth or engage in strategic investments, we intend to continue returning cash to shareholders via dividends. That concludes this conference call. I’ll hand it back to Ashley for closing remarks.

Ashley Jing, IR Manager

Thank you all for your time. And I think that's it for the quarter. We will see you next year. Thank you. Bye.

Operator, Operator

Thank you for participating in today's conference. You may now disconnect.