Earnings Call Transcript - MOMO Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 for Momo Incorporated Earnings Conference Call. Please note that this conference call is being recorded today. I would now like to hand the conference over to our first speaker for today, Ms. Cathy Peng. Thank you. Please go ahead, ma'am.

Cathy Peng, Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us today for Momo's first quarter 2020 earnings conference call. The company's results were released earlier today and are available on the company website. On the call today from Momo are Mr. Tang Yan, Co-Founder, Chairman, and Chief Executive Officer; Mr. Wang Li, President and Chief Operating Officer; Mr. Wang Yu, Founder and Chief Executive Officer of Tantan; and Mr. Jonathan Zhang, Chief Financial Officer. They will discuss the company's business operations and highlights, as well as the financials and guidance. They will all 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 provisions 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 these 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 statements as a result of new information, future events, or otherwise, except as required under law. I will now pass the call over to Mr. Tang. I will translate for him. Mr. Tang, please.

Yan Tang, Co-Founder, Chairman and CEO

I will now pass the call over to Mr. Tang. I will translate for him. Mr. Tang, please.

Cathy Peng, Investor Relations

Good morning and good evening, everyone. Thank you for joining our conference call today. As you can imagine, Q1 was a challenging quarter for Momo, as well as for many other companies that operate in China amidst the difficulties caused by the COVID-19 outbreak. I am proud that the team has been able to adapt well to the changing environment and navigate through these challenges with solid execution against our strategic goals. Today my team and I will walk you through the key operating and financial results. We are also going to reiterate our priorities for the year and how we are going to approach them in the coming few quarters.

Yan Tang, Co-Founder, Chairman and CEO

I am proud that the team has been able to adapt well to the changing environment and navigate through these challenges with solid execution against our strategic goals. Today my team and I will walk you through the key operating and financial results. We are also going to reiterate our priorities for the year and how we are going to approach them in the coming few quarters.

Cathy Peng, Investor Relations

Firstly, a brief overview of the financial performance. For the first quarter 2020, total revenue was RMB 3.59 billion, down 3.5% year-over-year. Adjusted operating income for the quarter was RMB 801 million, representing a 22.3% profit margin. Excluding Tantan's loss, adjusted operating income for the core Momo was RMB 901.5 million or a 28.1% profit margin.

Yan Tang, Co-Founder, Chairman and CEO

Cathy Peng, Investor Relations

Now, a deeper dive into other aspects of the quarter. First, on operating metrics. The core Momo app had 108 million monthly actives for the first quarter 2020, down 6% year-over-year and representing a 6.5 million net decrease from the previous quarter. As I said on our last earnings call, the COVID-19 outbreak has caused a significant portion of our users to delay their time returning to the big cities for work. It has prolonged and amplified the negative Chinese New Year effect. In addition, the strict social distancing control and associated decline in outdoor activities have also limited the demand for using an open social app to discover new relationships. In response to such a situation, the team has quickly adjusted our strategy by redirecting the traffic from nearby people and one-to-one chatting, which focused mostly on online to offline conversion, toward other social entertainment experiences. We provide broader online companionship to the users. As a result, per user time spent per day continued to rise on a sequential basis, reaching a new record high since the beginning of 2018.

Yan Tang, Co-Founder, Chairman and CEO

The team has quickly adjusted our strategy by redirecting the traffic from nearby people and one-to-one chatting, which focused mostly on online to offline conversion, toward other social entertainment experiences. We provide broader online companionship to the users. As a result, per user time spent per day continued to rise on a sequential basis, reaching a new record high since the beginning of 2018.

Cathy Peng, Investor Relations

Due to the pressure on MAUs, the number of paying users on Momo also saw a net decrease of 700 from Q4, totaling 8.6 million in Q1 2020. Paying users on Tantan saw a 300k quarterly net decrease to 4.2 million in Q1 2020, also primarily due to the weak dating sentiment caused by virus-related disruptions.

Yan Tang, Co-Founder, Chairman and CEO

The number of paying users on Momo decreased by 700 from Q4, bringing the total to 8.6 million in Q1 2020. Tantan experienced a quarterly net decrease of 300,000 paying users, resulting in 4.2 million in Q1 2020, mainly due to the unfavorable dating sentiment caused by disruptions related to the virus.

Cathy Peng, Investor Relations

Active users and other engagement metrics on Momo have been gradually rebounding since March. As we move deeper into executing our product strategies and enhancing our user experience, we plan to step up our marketing efforts from June to drive top-of-the-funnel activity. Based on the current trajectory, we expect to see a full recovery on Momo within the coming few months. Tantan’s traffic has been showing initial signs of recovery since early May, as outdoor activities gradually pick up. We expect recovery to be a progressive process as the dating sentiment comes back on a graduated basis.

Yan Tang, Co-Founder, Chairman and CEO

As we continue to implement our product strategies and improve user experience, we intend to increase our marketing efforts starting in June to boost early user engagement. Given the current trends, we anticipate a complete recovery for Momo in the next few months. Tantan's traffic has begun to show signs of recovery since early May, as outdoor activities resume. We foresee the recovery as a gradual process, aligning with the return of dating interest.

Cathy Peng, Investor Relations

Despite a rough start to the year caused by virus-related factors, we won't let these disruptions get in the way of executing our user growth strategies, which we laid out at the beginning of the year. I'd like to take a few minutes to reiterate here. First, continue to improve the social experience on our platforms so that we can better satisfy user demand we were not able to serve well in the past. Second, penetrate into the lower tier markets more effectively through specific product and marketing approaches. Third, drive content user growth more effectively. Lastly, enrich our product metrics with new applications.

Yan Tang, Co-Founder, Chairman and CEO

Our user growth strategies, which we laid out at the beginning of the year, remain a priority. I want to take a moment to reiterate them. First, we aim to enhance the social experience on our platforms to better meet user demand that we haven't addressed well in the past. Second, we intend to effectively reach lower-tier markets through targeted product and marketing strategies. Third, we will focus on increasing content user growth. Finally, we plan to enhance our product metrics by introducing new applications.

Cathy Peng, Investor Relations

During the past several months, we've been taking solid steps on all those fronts. In Q1, one of our key focuses was to optimize the chat room experience. It was particularly important during the social distancing period because chat rooms enable people to stay connected and have fun together when they are physically isolated. Last year, our VAS team introduced a very popular chat room experience called Lost Planet, which is a moderated dating experience that emulates some of the popular TV reality shows. This year we brought in a couple of other similar moderated shows into the chat room experience. This new initiative turned out to be effective both in terms of driving engagement and in terms of revenue contribution. As a result, although the overall traffic was under pressure in Q1, the time spent in chat rooms ended up growing 20% on a sequential basis.

Yan Tang, Co-Founder, Chairman and CEO

We have a popular chat room experience called Lost Planet, which is a moderated dating experience that emulates some of the popular TV reality shows. This year we introduced a few other similar moderated shows into the chat room experience. This new initiative has proven effective in driving both engagement and revenue contribution. Consequently, despite overall traffic facing pressure in Q1, the time spent in chat rooms grew by 20% sequentially.

Cathy Peng, Investor Relations

In April, we also started an experimental project called Social DNA. Under this project, we assign different tasks to the users that help them better express their personalities, personal images, social preferences, hobbies, or other aspects that they would like other users to know about themselves. These tasks, also known as Social DNA on our platform, are based on our big data analysis of user behavior and profile information, as well as users' own choices. We are then building these tasks into our algorithms which will make more relevant recommendations of people and content accordingly. This project is a pioneering experiment that helps us better understand how people connect and interact effectively in an open environment. It shows our commitment to improving the efficiency in helping our users discover new relationships and build meaningful interactions on mobile.

Yan Tang, Co-Founder, Chairman and CEO

We are analyzing user behavior and profile information, along with users' own choices. We are incorporating these tasks into our algorithms to provide more relevant recommendations for people and content. This project is an innovative experiment that enhances our understanding of how people connect and interact in an open environment. It demonstrates our commitment to improving the efficiency of helping our users discover new relationships and foster meaningful interactions on mobile.

Cathy Peng, Investor Relations

Now, in the second area of focus, penetrating into the lower tier markets through tailor-made products and marketing approaches. In Q1, we launched Momo Lite, which is a standalone version of Momo that is fully connected on the back end to the core but loads much faster and requires much less data consumption than the main application. Although Q1 was relatively slow in development due to resource constraints caused by the stay-at-home order, we have been getting positive data feedback on Momo Lite. With productivity coming back, we are now speeding up on the iterations to enhance user experience. On the main applications, we also have started showing localized versions with tailored content and activities that better appeal to users in lower tier cities. Soon we will be supporting these new product efforts with promotion programs that are also tailor-made for the lower tier market. We believe these initiatives will help us better satisfy the social demand in different geo-regions and thus better seize the growth opportunities there.

Yan Tang, Co-Founder, Chairman and CEO

We are speeding up iterations to enhance user experience. In our main applications, we have begun displaying localized versions with customized content and activities that resonate more with users in lower tier cities. Soon, we will complement these new product efforts with promotional programs specifically designed for the lower tier market. We believe these initiatives will help us meet social demand in various geographical regions and capture growth opportunities more effectively.

Cathy Peng, Investor Relations

On our last earnings call, I mentioned that due to the presentation of the open social space and the diversity of social preferences, we are adopting a portfolio approach to better serve the social demand of our users. This is also an important strategy for us to penetrate the market more effectively and strengthen our leadership in the open social space. During the past few months, we have made solid progress on that front. For example, Hezi or Heard in English, an audio-based dating application we launched last year, has already scaled to a level where we can start monetizing and reap profits to support its own growth. In addition, we also have a number of other projects branching out to different subsectors within the social and entertainment space. Some of these projects are starting to take shape. We look forward to sharing more information as the year progresses.

Yan Tang, Co-Founder, Chairman and CEO

We have made solid progress on that front. For example, Hezi, an audio-based dating application we launched last year, has already scaled to a level where we can start monetizing and reap profits to support its own growth. In addition, we also have a number of other projects branching out to different subsectors within the social and entertainment space. Some of these projects are starting to take shape. We look forward to sharing more information as the year progresses.

Cathy Peng, Investor Relations

Overall, Q1 2020 has been a tough and yet very fruitful quarter for us. I'm glad that the team has been able to stick to our goals and keep pushing forward on the strategic fronts. Although the macroeconomic environment is probably going to remain a headwind for the coming few months, we are seeing plenty of growth opportunities ahead of us. We will continue to pursue these opportunities and drive value for our shareholders. Thank you for trusting Momo. With that, I'm handing over to Wang Yu for our business review. Wang Li, please.

Li Wang, President and COO

It has been a very fruitful quarter for us. I'm glad that the team has been able to stick to our goals and keep pushing forward on the strategic fronts. Although the macroeconomic environment is likely to remain a challenge for the coming months, we are seeing plenty of growth opportunities ahead of us. We will continue to pursue these opportunities and drive value for our shareholders. Thank you for trusting Momo. With that, I'm handing over to Wang Yu for our business review. Wang Li, please.

Cathy Peng, Investor Relations

Thanks. Now let me take you through the progress we made across our key business lines.

Li Wang, President and COO

The economic environment is likely to remain a challenge for the next few months, but we are identifying numerous growth opportunities. We will keep pursuing these opportunities and creating value for our shareholders. Thank you for your confidence in Momo. I will now pass it on to Wang Yu for our business review. Li Wang? Cathy Peng, Investor Relations, will now take you through the progress we made across our key business lines.

Cathy Peng, Investor Relations

Firstly, on live broadcasting. Total revenue from the live broadcasting business for the first quarter 2020 was RMB 2.33 billion, down 13% from the same period last year. As we mentioned on the last earnings call, the pressure on the live broadcasting business was due to a combination of a number of different factors, among which the two most important are the economic impact of the COVID-19 adversely affecting consumer sentiment, especially among the top paying users, and the pressure around the traffic in connection with the virus outbreak.

Li Wang, President and COO

The live broadcasting business for the first quarter of 2020 was RMB 2.33 billion, a decrease of 13% compared to the same period last year. As we mentioned in the previous earnings call, the challenges facing the live broadcasting business stem from several factors, with the most significant being the economic effects of COVID-19 which negatively impacted consumer sentiment, particularly among high-paying users, and the pressures on traffic related to the virus outbreak.

Cathy Peng, Investor Relations

In view of the challenging environment, the biggest priority as a team is to strengthen the product and operational efforts to mitigate the impact on revenue. After Chinese New Year holiday, the team rolled out a number of new gameplay elements within live broadcasting to improve the paying experience. Many of these are interactive gifts similar to Penguins, which largely focus on improving engagement and spending from the middle cohorts via mini-game contests. In the second quarter, we plan to continue to step up the operational efforts to drive engagement and spending from the middle layers of the spending pyramid. Many of the planned efforts will revolve around building mutual content experiences that appeal to the middle layer and long-tail audience base.

Li Wang, President and COO

We plan to continue enhancing the paying experience. Many of these will be interactive gifts similar to Penguins, which mainly aim to boost engagement and spending from the middle cohorts through mini-game contests. In the second quarter, we will intensify our operational efforts to encourage engagement and spending from the mid tier of the spending pyramid. A lot of our upcoming initiatives will focus on creating shared content experiences that resonate with the middle layer and long-tail audience.

Cathy Peng, Investor Relations

The other factor that we believe is critical for driving middle cohorts and long-tail spending is to have an effective mechanism that discovers and supports new and entry-level performance. This is an area where we see a lot of opportunities for optimization and improvement. It is also a key area of focus for the team in the coming few quarters.

Li Wang, President and COO

Cathy Peng, Investor Relations

For high-paying users, given that most of them are private business owners whose financial conditions were pressured by the pandemic, we believe that our efforts should focus on keeping them engaged rather than letting them spend more. One of the key issues we had last year was that the top spenders were becoming less enthusiastic about the quarterly tournament events. So this year, we rebranded the tournament experience into a new competition event that we call the producer program. The new program was created as an online version of the offline VIP music tours which were a big success last year. It is called the producer program because we let the top spenders play important roles in the event. The guests would handpick their favorite performers to form their own task force and compete with others as a team. In early April, we had the first season of the producer program; although the overall spending was lower than the prior tournament events due to the negative wealth effect in connection with the pandemic, the level of participation from top spenders improved meaningfully as compared with what we saw in the quarterly tournaments last year. We plan to continue to optimize it and roll out a second season sometime in summer.

Li Wang, President and COO

In early April, we launched the first season of the producer program. Although overall spending was lower than in previous tournament events due to the negative wealth effect from the pandemic, participation from top spenders showed significant improvement compared to the quarterly tournaments last year. We intend to keep optimizing the program and introduce a second season sometime in the summer.

Cathy Peng, Investor Relations

Now coming to VAS. While we will talk about Tantan's business later, I will be focusing on the VAS business for the core. Revenue from VAS on an ex-Tantan basis reached RMB 801 million in the first quarter of 2020, a 31% increase on a year-over-year basis. The decrease in the number of active users and engagement levels had a direct impact on the VAS business. However, compared with live broadcasting, VAS is still under monetized. In addition, because the paying user structure for VAS is long-tail driven, it is much more resilient in a tough macro environment. Therefore, to alleviate the stress on overall revenues in Q1, we pushed the VAS pedal a bit harder to drive revenue growth through operational events and rich paying experiences.

Li Wang, President and COO

The decrease in the number of active users and engagement levels had a direct impact on the VAS business. However, compared to live broadcasting, VAS is still under monetized. Additionally, because the paying user structure for VAS is long-tail driven, it is much more resilient in a challenging macro environment. Therefore, to alleviate the pressure on overall revenues in Q1, we intensified our focus on VAS to drive revenue growth through operational events and enhanced paying experiences.

Cathy Peng, Investor Relations

As Yan Tang mentioned earlier in his remarks, in Q1 we introduced a couple of new moderated experiences in the chat rooms. These experiences are inspired by some of the popular dating reality shows and are moderated by professional hosts in the commercial chat rooms. Our Momo users can not only enjoy the show as an audience, but also participate and become part of the show. We see a lot of potential in expanding this content genre on Momo, because it makes for a fun consumer experience that is compatible with our core user mentality. At the same time, it also bears considerable commercial value based on a proven model. In Q1, the chat room experience shined both in terms of engagement growth and revenue contribution. We expect it to continue to act as a key driver for the VAS business for the rest of the year.

Li Wang, President and COO

We see a lot of potential in expanding this content genre on Momo, as it creates an enjoyable consumer experience that aligns with our core user mentality. Furthermore, it holds significant commercial value based on a proven model. In the first quarter, the chat room experience excelled in both engagement growth and revenue contribution. We anticipate it will remain a key driver for the VAS business for the remainder of the year.

Cathy Peng, Investor Relations

Other than the chat room experience, we are working on several new projects that have the potential to become future revenue drivers. For example, as Tang Yan mentioned, Hertz, or Hz, which is an audio-based dating application, is gaining traction among a younger demographic. We have already started monetizing the application and put the revenue back into marketing to drive a virtuous cycle to grow it into a bigger scale. In addition, Hongyang, or the matchmaking experience, which we began testing last year on the core Momo, is also making good progress. I'm very optimistic that these new projects will bring new revenue growth opportunities down the road.

Li Wang, President and COO

Hertz, an audio-based dating application, is gaining traction among a younger demographic. We have already started monetizing the application and reinvesting the revenue into marketing to foster growth. Additionally, the matchmaking experience we began testing last year on the core Momo is also progressing well. I am very optimistic that these new projects will create opportunities for revenue growth in the future.

Cathy Peng, Investor Relations

Now briefly on other business lines. Mobile marketing revenue declined 29% year-over-year to RMB 57.16 million due to strong macro headwinds, as well as our strategy to underweight this line in terms of resource allocation. Jointly operated game business continues to trend down in Q1 and will likely fluctuate around the current revenue level for the coming few quarters.

Li Wang, President and COO

Mobile marketing revenue declined 29% year-over-year to RMB 57.16 million due to strong macro headwinds, as well as our strategy to underweight this line in terms of resource allocation. The jointly operated game business continues to trend down in Q1 and will likely fluctuate around the current revenue level for the coming few quarters.

Cathy Peng, Investor Relations

That's the business review of the core Momo. Now let me hand over to Mr. Wang Yu for Tantan’s product and business development. Mr. Wang, please.

Wang Yu, Founder and CEO of Tantan

Thanks. So let me briefly review Tantan’s operational and business development in the past quarter and our next development. First, on user metrics. As many of you know, we had some issues around user retention, which caused a number of daily active users to be under pressure since September last year. Last December, through a series of products and algorithm optimization, we fixed the issue and pushed the attention back to where it was before the download suspension happened. As we stepped up our channel marketing efforts in January, we saw that DAUs grow rapidly during the two weeks period from late January to mid-February. However, since February 10th, as the spread of COVID-19 continued beyond Wuhan and a nationwide lockdown kept getting elevated, we have seen the dating sentiment quickly wane, creating headwinds to new registrations as well as active paying conversion from Tantan. In response to these situations, we scaled back our marketing spending in March due to ROI considerations. The combination of the above-mentioned factors has caused active users to trim down since mid-February, which led to a 300,000 net decrease in the number of paying users to 4.2 million at the end of Q1. With the lockdowns lifted and outdoor activities gradually coming back, we expect to see dating sentiment start to recover gradually as well. However, we also believe this can be a progressive process as most people are still wearing masks outdoors and it can take time for young people in China to completely lower the psychological barrier to meet someone they did not know well for intimate interactions. The other thing worth mentioning is that although the number of active users was under pressure during Q1, the number of active female users and their engagement gradually grew on a sequential basis. This tells us that female users are less focused on online to offline conversions and are more into building deeper level online emotional connections. It confirms our belief that by adding richer online interactive features, we can make content appeal to a broader base of users. Now briefly on revenues. Total revenue for the first quarter was RMB 381.7 million, up 29% year-over-year and a slight uptick from the previous quarter. Although a number of paying users decreased significantly, the ARPPU grew significantly due to the outstanding performance of FlashChat and revenue mix shifting more towards higher ARPPU subscriptions. The grossing to revenue conversion is another factor for the ARPPU increase. Now let me give you an update on the progress we've made against our key strategic priorities. First on product and operations. Our key focus here is to enrich the product experiences in order to drive long-term user retention. In our early days, Tantan started from the metropolitan cities in China and focused on college students and people in the late teens and early 20s. The simple swipe to match experience was effective for this demographic. As Tantan’s user base grew and the demographic broadened, we need more features and experiences to better serve the increasingly diversified social preferences. In November last year, we rolled out the FlashChat experience on Tantan, which allows users to immediately connect with someone for a conversation before they focus too much on profile pictures. The new feature has been well-received, driving an immediate surge in the number of two-way messages. It also opens up new monetization opportunities. As Quick Chat continues to gain traction among users, revenue also ramped up rapidly in Q1, now representing more than 10% of our total revenues. We believe there's still a lot of potential in this experience and we'll continue to optimize and drive growth from it. In Q1, we also accelerated the rollout of the new version, which features Nearby Posts to allow users to share more aspects of their lives as well as make new discoveries based on content. Up to now, the new version has already reached 100% coverage among Tantan users. Like many other social networking products, having a content community is very critical for driving meaningful interactions between users. The introduction of the Nearby Posts is an important step that we've taken to provide Tantan users richer ways to connect beyond our signature swiping experience. We will continue to optimize the new version and enhance the community experience around it. In Q1, we also moved deeper with an internal testing of an important consumer experience, the live video service. We believe this was especially important during the social distancing period as it provides an alternative way to connect virtually and make people feel less isolated. In mid-April, we released more users into the testing group. As the number of users grows, we can now invite more quality broadcasters onto the platform and improve the quality content, which will further drive improvements in user engagement as well as the monetization potential. Now a brief update on monetization efforts. Obviously, the testing of live video is not just an endeavor to improve user experience, but also an effort to unlock the monetization value of the platform. We believe that Tantan users have strong willingness and motivation to pay for value-added services in order to enhance their social experience. However, this huge paying potential needs to be unleashed by a combination of subscription and à la carte features. Live video is a proven monetization mechanism that drives ARPPU growth and, if done carefully and in the right way, can also contribute to user engagement. We intend to continue the testing with extreme prudence and closely monitor the data to ensure we stay on the right track with Tantan's core mission, which is helping users build romantic relationships. Other than live video, we also have several other priorities, including optimizing the Quick Chat experience and existing subscription features, as well as testing various other new revenue features. We will continue to provide updates as the year progresses. Those are the key points I'd like to cover for today. Now let me pass the call over to Mr. Jonathan Zhang for the financial review. Zhang, please.

Xiaosong Zhang, CFO

Thanks. Hello, everyone. Thank you for joining our conference call today. Now let me briefly take you through the financial review. Total revenue for the first quarter 2020 was RMB 3.59 billion, down 3.5% year-on-year or 23% quarter-on-quarter, exceeding the high end of our revenue guidance. Non-GAAP net income attributable to Momo was RMB 736.3 million compared to RMB 910.3 million from the same period of 2019, representing a 19% decrease year-over-year. Let me jump into the review of cost and expenses items as revenue line items have been covered comprehensively by Wang Li and Wang Yu earlier. Our non-GAAP cost of revenue for the first quarter of 2020 was RMB 1.85 billion, the same as Q1 last year. Non-GAAP cost of revenue as a percentage of total revenue was 51.5%, an increase from 49.7% from Q1 2019, and non-GAAP gross profit margin for Q1 2020 was down 1.8% year-on-year. The decrease was partially attributable to a higher payout, which was primarily due to a higher revenue contribution from agency representative broadcasters. Secondly, certain fixed nature cost items such as headcounts and depreciation on fixed assets negatively impacted the gross margin as total revenue declined, representing a higher percentage of total net revenue. Non-GAAP R&D expenses for the first quarter were RMB 217 million compared to RMB 207.4 million for the same period last year, representing 6% and 5.6% of total revenue respectively. The increase in R&D expenses was mainly due to headcount increases during the year. On a sequential basis, the non-GAAP R&D expenses decreased from RMB 244.3 million in Q4 last year due to year-end bonuses incurred. We ended the quarter with 2,344 total employees, of which 725 are from Tantan. The R&D personnel as a percentage of total employees for the group was 56% compared to 54% from last year. The non-GAAP sales and marketing expenses for the first quarter were RMB 645.3 million or 18% of total net revenue, compared to RMB 567.5 million or 15.2% of total revenue for the same period last year. The year-on-year increase in sales and marketing expenses was mainly due to higher marketing spending from Tantan and, to a lesser extent, for Momo as well. On a sequential basis, sales and marketing expenses decreased due to less marketing spending from Tantan in response to the COVID-19 outbreak. Non-GAAP G&A expenses were RMB 105.5 million for the first quarter 2020 compared to RMB 92.9 million for the same quarter last year, representing 2.9% and 2.5% of total net revenue respectively. Non-GAAP operating income was RMB 801 million, a decrease of 21% from Q1 2019, representing a 22.3% non-GAAP operating margin for the quarter, down 5 percentage points from the same period last year. Now briefly on effective tax rates. Starting from the beginning of 2020, one of our major profit-making subsidiaries' preferential income tax rate changed from 12.5% to 15%. As a result, our consolidated non-GAAP effective tax rate was around 19% for the first quarter, up 3 percentage points from the same period last year. Now turning to balance sheet and cash flow items. As of March 31, 2020, Momo’s cash, cash equivalents, and short-term deposits totaled RMB 15.47 billion, compared to RMB 14.93 billion as of December 31, 2019. Net cash provided by operating activities during the first quarter was RMB 543.5 million. Lastly, for the second quarter of 2020 revenue guidance, we estimate our second quarter revenue to range from RMB 3.8 billion to RMB 3.9 billion, representing a decrease of 8.5% to 6.1% year-on-year and an increase of 5.7% to 8.5% quarter-on-quarter. Please be mindful that the forecast represents the company's current and preliminary view on the market and operational conditions, which are subject to change. The other thing worth mentioning here is that up to this moment, Momo has made special cash dividends for the past two consecutive years to replenish our U.S. dollar funding consumed. The company will repatriate RMB 2.2 billion in total from our China entity to our offshore entity before the second quarter end. In accordance with the respective taxation laws in China, the company will pay 10% or RMB 220 million in withholding tax to Chinese tax authorities. The withholding tax payments will be recorded as income tax expenses for the company in the second quarter of 2020. That concluded our prepared portion of today's discussion. With that, let me turn the call back to Cathy to start Q&A. Cathy, please.

Cathy Peng, Investor Relations

Just a quick reminder for those who can speak Chinese, please ask the questions in Chinese first, followed by English translation by yourself and also please try to limit the number of questions to either 1 or 2 so that more people get to ask questions. Operator, we are ready for questions.

Operator, Operator

Thank you. The first question comes from the line of Thomas Chong of Jefferies. Please ask your question.

Thomas Chong, Analyst

Thank you to management for taking my questions. My question has two parts. First, I would like to know about the Q2 revenue guidance and the outlook for the second half of the year. Can management provide insights into the trends of the core Momo live streaming and content business for the upcoming quarters? My second question pertains to Tantan. Since you have begun testing the live streaming services, could management share the lessons learned from this testing? How might this impact the dating ecosystem? Additionally, what key performance indicators should we anticipate for live streaming revenue this year? Thank you.

Yan Tang, Co-Founder, Chairman and CEO

Can management share more about the trends in the core Momo live streaming and content business for the coming quarters? Additionally, regarding Tantan, since you have begun testing live streaming services, what lessons have you learned from the testing? How might this impact the dating ecosystem? Lastly, what key performance indicators should we anticipate for the live streaming revenue this year? Thank you.

Cathy Peng, Investor Relations

For the first part of the question on the Q2 guidance, the company’s Q2 is based on some of the recent trajectory that we have been seeing and also management's assumption for the coming couple of months. We can see it in several components. Firstly, for live broadcasting, based on some of the trends we've seen so far into the second quarter, we believe that the macro condition, especially the economic condition of the private business owners, are going to continue to be a headwind for consumer sentiment, particularly among the higher paying cohorts. The other factor that we put into the assumptions for the Q2 guidance is the suspension of live broadcasting service during the national mourning day. That is also going to pressure the overall revenue by a couple of percentage points. So, the year-over-year decrease in the second quarter for live broadcasting for Momo is going to be a little bit higher than what we saw in Q1. But on a sequential basis, live broadcasting is still going to see a pretty nice rebound from the first quarter. For VAS, I think because of the recovery of traffic, the pressure around the revenue is going to ease. At the same time, the team also has a plan to scale back on some of the very ARPPU-oriented operational efforts. But overall, we expect the year-over-year growth rate for VAS to maintain the same level as we saw in Q1. Now, for Tantan, our expectation is that we're going to see some acceleration. The year-over-year growth rate is going to see some acceleration from Q1 levels, and the main driving factors will be the recovery of users, as well as contributions from new revenue projects.

Yan Tang, Co-Founder, Chairman and CEO

The team plans to reduce some of the efforts focused on average revenue per user. However, we anticipate that the year-over-year growth rate for value-added services will remain consistent with what we experienced in Q1. For Tantan, we expect to see an acceleration in the year-over-year growth rate compared to Q1, driven mainly by the recovery of users and contributions from new revenue projects.

Cathy Peng, Investor Relations

With regards to the revenue outlook for the second half of the year, truly we believe that uncertainty at a macro level is probably going to linger for some time, but we are still pretty optimistic about the revenue outlook in the second half. Here are some driving factors that we're looking at. Firstly, for live broadcasting, we will continue to roll out product and operational efforts. We believe that these efforts will take effect on a progressive basis. For VAS, it's not as deeply monetized, so we do see plenty of headroom for growth. At the same time, it is also going to be much more resilient in a tough macro environment. Based on where we are with the chat room experience and the number of new projects that we're currently running under VAS, we think that VAS revenue is going to continue to grow very rapidly as we head into the second half of the year. And thirdly, on Tantan, we are already seeing a recovery trend in Tantan users, and as we said, the new revenue engine is becoming more effective. Based on the very initial testing data, we can see that there is indeed huge monetization potential in Tantan's user base, and such potential will start to get released in the second half of the year in a graduated and methodical manner. So, based on these driving factors, we are quite confident that the revenues in the second half of the year are going to see meaningful growth from the first half.

Wang Yu, Founder and CEO of Tantan

Okay. So regarding the live video test results, the test results have been very encouraging so far. Several things are worth sharing here. What matters most to us in the testing is that we don't want to see any new monetization features adversely affecting the dating ecosystem metrics. We've been testing live video for several months now, and it’s clear that it does not have any negative impacts on dating. In fact, I'm happy to see several important dating metrics we follow turning up and recently reaching historical highs. For example, the amount of two-way messages for users, not only per user but the total amount of two messages is at its historical peak right now. The number of matches and the amount of matched users is also increasing. So if we do it the right way, it's possible that live video can be positive for dating. Second, after we release more users into the testing group, the different operating and revenue metrics around live video services started to ramp up very rapidly. These metrics include the paying ratio, ARPPU, and time spent, etc. The trajectories that we are seeing confirm our belief that Tantan’s user base has huge paying potential. What's more encouraging is that the current paying structure is extremely long-tail driven, which reflects the attributes of Tantan users. With regards to the revenue outlook, we're still at the testing phase and therefore I do not want to be too prescriptive about the annual numbers. However, based on the current trends, we believe it can be a meaningful driver in the second half.

Cathy Peng, Investor Relations

Operator. Yeah, ready for next.

Operator, Operator

Thank you. The next question is from the line of Tian Hou of T.H. Capital. Please go ahead.

Tian Hou, Analyst

The revenue outlook is still in the testing phase, so I don't want to set specific annual targets just yet. However, given the current trends, we believe it could become a significant contributor in the second half.

Yan Tang, Co-Founder, Chairman and CEO

We're currently in the testing phase regarding the revenue outlook, so I prefer not to provide specific annual figures. However, based on current trends, we believe it will be a significant contributor in the second half.

Cathy Peng, Investor Relations

Thank you. Let me translate the first question on Momo Lite first. So far we haven't run any large scale promotional campaigns around the Lite version. By this point, it has already built up a pretty sizable user base. However, as compared with the main version, the overall user base on the Momo Lite version is still relatively small. Our plan is that starting from the third quarter, we are going to step up marketing efforts around Momo Lite. Our expectation is that starting from the second half of the year, Momo Lite will start to make some meaningful contribution to the overall user base of the core application. With regards to the monetization potential, at this point the Lite version only has membership and live broadcasting, but based on the live broadcasting data, the willingness to pay and the paying potential on Lite is not weaker than that of users on the main version. However, at this point, there are just not as many core paying experiences on the Lite as there are on the main application due to the team still focusing on improving user experience and building up scale. I think we are going to start to open up more monetization opportunities at a pace that we deem fit. So that’s for the Lite version. Regarding the second question on the e-commerce related live broadcasting, as management of the company, we have observed rising trends and popularity in e-commerce related live broadcasting on some of the major e-commerce platforms. This is indeed one of the areas that we have been closely monitoring, and we are also studying and exploring some of the potential opportunities that we can potentially seize. But at this point, we are not at the stage to share any deeper information publicly yet, maybe later. So that's the answer to both questions. Operator, I think we're ready to take one last person and then ready to close given time.

Operator, Operator

Yes. We have the next – last question from the line of Daniel Chen, JPMorgan. Please ask your question.

Daniel Chen, Analyst

We have been closely monitoring the situation and are exploring potential opportunities. However, we are not yet ready to share more detailed information publicly, possibly in the future. That addresses both questions. Operator, I believe we can take one final question before we conclude. We have Daniel Chen from JPMorgan on the line. Please go ahead with your question.

Yan Tang, Co-Founder, Chairman and CEO

We are examining various opportunities that we could take advantage of, but we aren't ready to share more detailed information publicly at this time. That's the response to both inquiries. I believe we're prepared to take one final question before we wrap up.

Wang Yu, Founder and CEO of Tantan

So regarding competition and competitors, like you mentioned, Soul and Yidui are probably the biggest ones other than Momo and Tantan at the moment. But as far as we know, they are focused on very different areas. While we are committed to helping users build romantic relationships. As I mentioned earlier, enriching our services and features is very critical in our user growth strategy. We will definitely be considering any more features in order to strengthen our product offering. Thanks.

Xiaosong Zhang, CFO

This is Jonathan. Let me address your margin questions. Let me answer that in two aspects. For core Momo, as Tang Yan mentioned, based on the sequential revenue growth, we are confident that we're going to achieve the revenue sequential growth for our annual target. At the same time, we're going to maintain discipline in managing our costs and expenses to help us to achieve the annual non-GAAP operating margin of around 30%, as I discussed in the last earnings conference call. So that's still our target. Our operating gross margin will be relatively stable. The only variable factor is the payout. We do see a couple of percentage pressures based on the higher percentage of revenue contributed by agencies down the road. We had allocated a certain budget for promotional events, and we are going to manage our selling and marketing expenses on a rolling basis. The rest of the operating expenses, R&D, and G&A are relatively fixed in nature. As the revenue continues to grow, we will see some operating leverage. So that's for Momo. For Tantan, we do see potential for faster growth on Tantan’s revenue; however, we believe at this stage Tantan’s priority is still focusing on achieving user base recovery and accelerating user base growth. They will reinvest some of the additional profits generated by the new revenue driver into selling and marketing to support that initiative. The rest will help to further accelerate recovery in net loss, so for the full year, the net loss on Tantan will decrease sequentially on a quarterly basis.

Cathy Peng, Investor Relations

Great. Operator, we're ready to close. Thank you. Ladies and gentlemen, that concludes the conference for today, and thank you for participating. You all disconnect.