Hello Group Inc.
Q2 2021 Earnings Call Transcript

Published: 26 Aug 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Second Quarter 2021 Hello Group Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be 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, Head of Investor Relations. Thank you. Please go ahead, ma'am.

[Ashley Jing:]

Thank you, operator. Good morning and good evening, everyone. Thank you for joining us today for Hello Group's second quarter 2021 earnings conference call. The Company's results were released earlier today and are available on the Company's IR website. On the call today are Mr. Wang Li, CEO of the Company; Mr. Jonathan Zhang, CFO of the Company. They will discuss the Company's business operations and highlights as well as the financials and guidance. They'll both be available to answer your questions during the Q&A session that follows. Before I 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 and 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 statements as a result of new information due to events or otherwise, except as required under law. I will now pass the call to Mr. Wang. I will translate for him. Mr. Wang, please.

[Wang Li:]

Good morning and good evening, everyone. Thank you for joining our conference call today. I'm glad to be delivering a solid quarter with decent financial results and progress on the strategic priorities outlined at the beginning of the year. Now I'll walk you through the specifics of our Q2 results. First of all, a brief overview of financial performance. For the second quarter 2021, total revenue at the group level was RMB3.67 billion, down 5% year-over-year, but up 6% quarter-over-quarter. Adjusted operating income for the quarter was RMB782 million, representing a 21% profit margin. For the core business, total revenue was RMB3.16 billion. The year-over-year decrease rate continued to narrow from 10% in Q1 to 6% in Q2. On a sequential basis, revenue from the core business was up 9%. Excluding content’s net loss, adjusted operating income for the core Momo was RMB823 million or a 26% profit margin. Tantan's total revenue came in RMB514 million for the second quarter, up 1% year-over-year and 10% sequentially. Adjusted net loss from Tantan was RMB44.52 million for the quarter compared to RMB70.79 million for the year ago period. The revenue mix of the group remained healthy with VAS representing 72% of the size of live streaming. Now a deeper dive into the quarter. I'm going to focus on core Momo's operational and business update for now, and move on to Tantan later. First thing first, the growth of the core Momo community. Core Momo had 115.6 million monthly actives for the second quarter 2021, up 4% year-on-year and a slight net add from Q1. The user acquisition environment was not ideal in Q2 due to aggressive channel marketing investment from e-commerce companies in June. We, therefore, lowered the marketing spend for our license to the region, leading to the limited quarterly net add to MAU. During the second quarter, despite the conservative approach at the top of the funnel, our team made good progress within the funnel by improving the basic social experience on the platform. The user transplant reached its peak since the beginning of the pandemic. The number of daily impressions of the nearby people reached an all-time high since the homepage suspension in 2019. The number of daily impression of also hit a new record high. The improvement in engagement metrics show that the fundamentals of core Momo as a social platform continued to be solid. Number of paying users for the quarter was 9.3 million compared to 8.9 million a year ago. The increase in the number of paying users was primarily driven by the growth of mass business on the core. Before I get into the operational and business review, I'd like to reiterate the strategic priorities the team has been pushing against since the beginning of the year. On the core Momo side, the three goals for this year are

[Jonathan Zhang:]

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 second quarter of 2021 was RMB3.67 billion, down 5% year-on-year, up 6% quarter-over-quarter. Non-GAAP net income attributable to Momo was RMB551 million compared to RMB670 million from the same period of 2020 or an 18% decrease year-over-year. Looking into the key revenue items for the quarter. First, on live broadcasting. Total revenue from live broadcasting business for the second quarter 2021 was RMB2.1 billion, down 19% from the same period last year, up 7% from last quarter. Core Momo's live broadcasting revenue totaled 1.88 billion for the second quarter, down 22% from the same period last year, but up 10% from last quarter. The year-over-year decrease caused by the structural reform in late August last year, continued to narrow down from Q1. Tantan's live broadcasting revenue amounted RMB416.5 million, down 14% from previous quarter. The sequential decrease was due to our strategic decision to deemphasize live streaming as a supplementary experience to dating as well as overall decrease in paying users on Tantan platform. Moving on to VAS. Revenue from value-added service reached RMB1.51 billion, up 25% year-on-year, 4% quarter-over-quarter. Revenue from VAS, excluding RMB297 million from Tantan reached RMB1.21 billion in the second quarter of 2021, a 38% increase year-on-year, 6% increase sequentially. The solid performance of Momo's core VAS business was primarily driven by the team's focus on product innovation and operational efforts, as Wang Li mentioned. Let me briefly review the cost and expenses items for the quarter. Our non-GAAP cost of revenue for the second quarter of 2021 was RMB2.05 billion compared to RMB2.01 billion for the same period last year. The non-GAAP cost of revenue as a percentage of total revenue was 55.8%, an increase from 52.1% from Q2 2020. Non-GAAP profit margin -- gross profit margin for the quarter was gross profit margin for the quarter was down 3.7% from a year ago. The decrease was attributed to the following factors

[Cathy Peng:]

Yes. Just a quick reminder, for those who can speak Chinese, can you please ask the question in Chinese first followed by English translation by yourself and also if you can limit the number of questions to two. Operator, ready for questions.

[Operator:]

The first question comes from the line of Thomas Chong from Jefferies. Please go ahead.

[Thomas Chong:]

I have two questions. The first question is on Tantan. Can management comment about Tantan's user growth target? And also in the second half, can management share about the Tantan revenue as well as earnings expectation? My second question is on core Momo. Can management share any updates about the user and the monetization trend as we come to the second half. In particular, on the live streaming side, can management share about the outlook as well as the strategies for VAS in the next couple of years? Thank you.

[Wang Li:]

I remember that on our June earnings conference call, I said that we expected Tantan's user base to grow from 20% to 35% by the end of the year, that's against the June number. That expectation remains unchanged. And as you guys can see, since July, we've already gotten on to the right track to achieve that target at a steady pace. On the revenue side, like I said before, the single most important goal for this year for Tantan team is to grow the users and improve product experience. Everything else, anything else should be subservient to that key goal. So we actually haven't set a rigid revenue target for the second half of the year. But I can see two things happening down the path, which should have different sorts of impact on revenue. One is user growth that is obviously going to have a positive effect on revenues. And given that there is a time lag between user growth and the translation into membership revenue, I feel that, that positive impact should be felt in a bigger way in Q4 this year. And the second factor is that starting from Q3, we are already taking -- trying to take a few steps back in terms of how deep we monetize in order to protect user experience. That would involve unwinding some of the extremely short-term oriented measures to drive the paying conversion and that would also involve continuing to deemphasize live streaming in terms of product design, that will be an ongoing process as we move deeper into the year. And actually, for Tantan's monetization, I have some longer-term thoughts that maybe we're sharing here. Number one is we absolutely have no doubt in the long-term monetization potential of Tantan. Based on our understanding of the users -- of our users, Tantan's users actually have stronger willingness as well as ability to pay for the service. That's why I believe that ARPU of Tantan should actually be higher than Momo's. But in terms of monetization approach, we need to break through the single membership model and try to add in the second pillar. And that second pillar, in my opinion, should be the pay-per-use model. And by having that dual-pillar sort of structure, we can take better advantage of the user segmentation. That should be the right kind of monetization approach that fit better into the Asian culture that is also the right kind of monetization approach that could fully unleash Tantan's monetization value. So starting from the second half of the year, we're going to start some product experiments on that front, continuing to explore the non-value-added service that non-membership value-added service is going to be the most important priority that we have on the revenue side in the near future. Now here is Jonathan to talk about the bottom line for Tantan in the second half.

[Jonathan Zhang:]

Yes. As I remember, during the last earnings conference call, I provided an update on the revised outlook the Tantan's bottom line. Actually, that picture remains unchanged, still the same. Let me just repeat it again. Because we are going to focus on Tantan's user growth, particularly during the second half of the year, with a lower revenue target, we're going to continue to invest in the paid marketing channels to acquire new users to help us to achieve our targeted DAU with growth target, as Wang Li just mentioned, 20% to 35% growth annually. So with that, we expect the Tantan's net loss will widen sequentially, particularly starting from Q3 and Q4. The total annual net loss probably will be in the range of RMB350 million to RMB450 million. So that still is our target right now.

[Wang Li:]

For the Momo core business, I think what we are pursuing here is moderate growth on top of a stable and healthy user base. That principle applies to both user growth and revenue growth. For live streaming, I think it's pretty clear that since the beginning of the year, it's already in a state of steady recovery stage, and the future growth of the Company will be primarily driven by the added services and the growth will be coming from several key areas. And the first area of growth is the continuous development of the audio/video social entertainment category. On that front the chat room experience as well as the video matchmaking experience on the core, are still seeing plenty of growth opportunities. The second area of growth is going to be the continuous innovation on the interactive gifts. In the past, we had not focused too much on being inventive on the skins of the virtual gifts themselves because we didn't realize that there could be a lot of revenue potential in doing so. But actually, during the past few quarters, we've been seeing pretty considerable incremental revenue coming from the introduction of new creative interactive gifts. So I think there is going to be a lot of potential that we can in this area. And so I think another key growth of -- another key area of growth will be the continued user growth from the stand-alone new applications that we're working on. The new buckets, as a whole, are going to see pretty decent growth both in terms of users and in terms of revenues. Next year, we're hoping that we could see more of these stand-alone new apps coming into fruition. With regards to the revenue expectation for second half, we had a previous target that we're going to turn that the revenue on the Momo core, it's going to turn Y-o-Y positive in the second half. I think in Q3, we're guiding core Momo's revenue to grow 5% year-over-year. In the fourth quarter, we're looking to further accelerate the Y-o-Y growth rate from that level. More importantly, I think revenue structure wise, we're going to be increasingly leaning toward value-added services, which is much more flattish in terms of structure. I hope that address all of your questions, Thomas. With that, operator, we are ready for next.

[Operator:]

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

[Tian Hou:]

I noticed that recently the Company's name has been changed from Momo to Hello Group. I would like to know more about the thinking behind the change, and also if company can share any strategic thinking behind the name change? That's number one. Number two is Momo has been in the marketplace for long time. So what is the new growth driver the management think can be in the next several years to drive companies to drive Momo growth? Thank you.

[Wang Li:]

Name change from Momo to Hello Group is a reflection of our multi-application product portfolio approach. Momo as a company is already 10 years old, and we've developed from a single function application to a company that has Momo and Tantan to pretty big social platforms. At the same time, revolving around the social and entertainment services, we've also incubated a few other stand-alone applications. So if you view the Momo application as the first growth engine, the Company, and Tantan is the second, and the new stuff that we're working on are going to be the third engine. The growth of the Company in the coming decade will be driven by these three different engines in a way. So going back to the reason why we need this new name. I think we need this new company name as a carrier for the Company's strategy to continue to diversify into new products and services. More specifically, I think in the coming three years, the biggest and also the most definitive growth opportunity is definitely going to be Tantan. Other than Momo and Tantan, now within our product portfolio, we also have some other newer brands such as Things like these applications on an individual basis may not, like you said, has the potential to grow up to be something as big as Tantan, ubiquitous as Tantan is, but collectively, they can still make sizable contribution to the bottom line of the Company. We're hoping that in the coming three to five years, we could incubate more of such applications in order to cover a broader range of people on the user spectrum. Lastly, I wanted to take this opportunity to share some of the longer-term thinking that I have on the strategic side. I think that in the social and entertainment space, the coming decade will inevitably be seeing the emergence of new ubiquitous platforms or products that can build huge DAU base. Such kind of opportunity could either be driven technological advances or it could be driven by the behavioral changes in user behavior. For example, we are now seeing some pretty big stuff happening in AR, VR, smart devices space. The technological advances in this space will inevitably bring phenomenal changes in terms of how people socialize in the future. And this is the kind of change that opportunity that we need to make sure we stay vigilant about and get prepared for. So that when time comes, we have the capability of seizing these opportunities to grow to be something bigger. Our team has proven capabilities of product innovation in the social space. And our vision and decisiveness to seize the right kind of investment opportunity to grow the business is also proven by time. At the same time, the Company is also sitting on huge cash balance and a very strong operating cash flow. So I think investors can rest assure that we will continue to push very hard into new areas and growth opportunities, either via our self-development or through investment opportunities. This is the area where we have full confidence as well as enough tenacity to carry through.

[Cathy Peng:]

Operator, I think we have time for one last question, if there are so other people in the queue.

[Operator:]

Certainly, the next question comes from the line of Daniel Chen from JPMorgan. Please go ahead.

[Daniel Chen:]

My question is on the regulatory environment of live streaming industry in China. So we have been seeing that since last year. There has been several new regulations on the large main industry. So the latest one is the July 1, targeting the online live streaming agencies, so I want to know how should we look at the regulatory environment for the live streaming inventory the future and what's the implication to our live streaming revenue trend?

[Wang Li:]

Thank you for your question. I think as the -- as China's mobile Internet space becomes increasingly important, it's inevitable that the policymakers and regulators are going to take it more and more seriously to make sure that the industry develops in an orderly and regulated fashion. That's in a sense of a very good thing for us because it's leveling the playing field. And it's also going to make sure that the whole space move forward in a healthy environment. So as always, we are going to be cooperating with various regulatory bodies to make sure that we stay in full compliance. More specifically with regards to the policy changes you mentioned in the live streaming space, as a matter of fact, that's something that we've been closely monitoring since the beginning of last year, since the beginning of 2020. And you guys can see during the second half of last year, we've actually made very, very important and significant structural reform to make sure that we -- to make sure that our company stays healthy and to reduce the reliance on the top spenders. And since the beginning of the year, such structural reform has already been showing a positive effect to our ecosystem as well as our business. We believe that it is going to help our live streaming business to continue to develop in a healthy and steady way in the new policy environment.

[Cathy Peng:]

Operator, I think that concludes our conference call today. We are ready to close. Thanks, everyone, for joining our conference call today. We'll see you next quarter.

[Operator:]

Thank you. That concludes the conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.