Hello Group Inc.
Q4 2021 Earnings Call Transcript

Published: 24 Mar 2022

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Fiscal Year 2021 Hello Group, Inc. Earnings Conference Call. Please note that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Ashley Jing. Please go ahead.

[Ashley Jing:]

Thank you, operator. Good morning, and good evening, everyone. Thank you for joining us today for Hello Group's Fourth Quarter and Fiscal 2021 Earnings Conference Call. The company's results were released earlier today and are available on the company's IR website. On the call today are Mr. Wang Li, CEO of the company; and Mr. Jonathan Zhang, CFO of the company. They will discuss the company's business operations and highlights as well as the financial guidance. They will both be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this call may contain forward-looking statements made under the safe harbor provisions of 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 statements as a result of new information, future events or otherwise, except as required under law. I will now pass the call to Mr. Wang. I will translate for him. Mr. Wang.

[Wang Li:]

Good day, everyone. Thank you for joining our conference call today. 2021 was a busy year for us despite a variety of external challenges. Our team was able to methodically execute our strategic priority set at the beginning of the year and delivered solid results. In my remarks today, I will begin by reviewing the key operational and business results for the fourth quarter and fiscal year 2021, followed by outlining our strategic priorities for FY 2022 and our execution plan. I will start with a brief overview of our financial performance. For the fourth quarter of 2021, total revenue at the group level was CNY 3.67 billion, down 3% year-over-year and 2% quarter-over-quarter. Adjusted operating income for the quarter was CNY 507 million, representing a 14% profit margin. For the core Momo business total revenue was CNY 3.24 billion, up 6% from Q4 last year and flattish from last quarter. Adjusted operating income was CNY 652 million with a 20% margin. Tantan’s total revenue for the quarter came in CNY 437 million, down 41% year-over-year and 14% sequentially. The decrease was due to the demonetization process to improve user experience and retention. Adjusted net loss from Tantan was CNY 130 million for the quarter compared with CNY 8.84 million for the year ago period. For fiscal 2021, total revenue at the group level was CNY 14.6 billion compared with CNY 15 million in 2020. The year-over-year revenue decrease was due to our strategic decision to lower Tantan's monetization level in the second half of the year to improve user experience and retention to drive overall user growth. Excluding Tantan, revenue for the core Momo was slightly down 1% from last year with the second half of 2021 back onto the year-over-year growth track. Adjusted operating income at the group level was CNY 2.59 billion with an 18% margin. Excluding Tantan, operating income for the core Momo was CNY 2.92 billion with a 23% margin. Adjusted net loss for Tantan was RMB 337 million. Now a deeper dive into other aspects of the year. I'm going to focus on the core Momo business and move on to Tantan later. As for the key operating metrics, core Momo had 114.1 million monthly active for Q4 '21, up slightly from a year ago and down slightly from the previous quarter. The sequential decline was due to COVID-19 resurgence and related reform measures in various regions in China for the end of the year. This had a clear negative impact on users' social sentiment. In addition, the peak e-commerce season drove up unit appreciation costs for channel marketing. As a result, we lowered our channel investment for ROI considerations. The number of paying users for the quarter was 8.9 million compared with 9.0 million a year ago. On a sequential basis, paying user accounts decreased 400,000. This was mainly due to the decrease in MAUs. And on top of that, COVID-19 has been a negative impact on paying conversion. Despite external challenges, our product team managed to enhance user engagement by improving the basic social experience on the platform. The number of 2-way interactions grew meaningfully from the year ago period, and the number of greetings and response rate also increased -- continued to trend up. Product organization, together with channel strategy refinement led new user retention to hit a record high since the beginning of the panoramic while the overall retention ratio reached a year high in Q4. This shows that the fundamentals of the core Momo and social platform continued to remain stable. Next, let me walk you through the progress we made with our strategic priorities for the financial year 2021. Firstly, on core Momo's user front, COVID-19-related control measures surprised the overall open social sentiment throughout 2021, especially in the second half of the year. Meanwhile, Tantan traffic became increasingly concentrated on a few platforms, resulting in a more intensive competition for channel resources and driving up unit acquisition cost for new users. Our goal has been to maximize ROI by seeing favorable marketing windows to step up user acquisition efforts. We have been subtly adjusting the allocation of marketing spend for new user acquisition and reactivation of common users. We offset the overall cost pressure caused by the increase in the unit price of new users by shifting resources to reactive dormant users because the retention ratio and paying conversion of dormant users are considerably higher than that of new users, and the unit price is meaningfully lower, thanks to the continued improvement in China ROI and product efforts, we were able to achieve our strategic goal for core Momo users to deliver a moderate increase in MAUs at a slightly lower cost compared to last year. It has proven to be an effective way for us to maintain a stable user base in 2022. On the product side, the core Momo product team made good progress in optimizing core user experience while making continuous product innovation throughout 2021. The introduction of the mini verse experience in the first half of the year allows users to share their relationship stories and express their feelings without releasing the profile information. It played a positive role in enhancing female users' engagement and retention. The revamp of the new by People list in the second half of the year has also enhanced the users' experience by decentralizing the distribution of traffic. Improving the efficiency of relationship discovery within the core experiences and introducing new features that provide incremental value to previously underserved users, are key wins for the product team to improve retention and ultimately drive users -- steady user growth. In addition to core Momo in 2021, we continue to execute our strategic priorities of enriching product portfolio and pushing the boundaries on Momo and Tantan. One highlight here is Soto, a voice-based social app targeting the minor area. Our team leveraged our rich product experience accumulated in China and combined it with a localized operational approach with user retention and ROI gradually improving, we stepped up our marketing efforts in the second half of the year. As a result, user scale and revenue showed rapid growth. Although Tokyo is still in the early stages of user and monetization, its monthly revenue has already caught up to the level of combined. In the second half of the year, we launched ferritin, a Disney like simulation game, specifically targeting overseas female users. As we stepped up our marketing efforts during the holiday season, revenue grew rapidly in Q4, and ROI continue to improve steadily. In addition to , , the two audio and video-based social apps targeting domestic markets also made impressive progress in 2021. For these 2 relatively mature apps, our strategy was focused on reducing costs and improving efficiency during the second half of the year. As a result, both apps turned profitable within Q4. Next, I'll review the progress that we've made regarding our priority of bringing the cash cow business back on to the growth track. Firstly, with respect to live streaming, core Momo live streaming business revenue totaled CNY 1.95 billion for the first quarter, up 1% year-on-year and flattish sequentially. For fiscal 2021, revenue from live streaming totaled CNY 7.48 billion, down 13% compared with 2020. During last year, we continue to focus on the improvement of the content ecosystem by beefing up the supply end. Revenue entered a sequential growth track after Chinese New Year low seasonality, and this growth momentum was maintained until Q3. The daily gross revenue came down quite a bit in Q4 compared with the summer peak, due to the increasingly challenging macro headwinds starting in September. In order to overcome spending softness, we hosted a series of small-scale promotional events to keep various cohorts of standards and performance well engaged, so that we could keep daily gross revenue at a decent level through relatively mild simulative measures, although the related costs associated with this efficient event put some pressure on gross margin, we believe it was a necessary expense to help our content ecosystem partners with tough economic conditions. Despite the market challenges, the overall content ecosystem continued to show steady improvement. The new incentive program continues to take effect in enabling us to secure the supply of high-growth revenue broadcasters and making us more attractive when recruiting new talents. The amount of high-quality new talents grew 60% compared to the beginning of the year, and the retention and share of revenue contribution increased significantly. Now turning to VAS. Revenue from value-added service, excluding Tantan, totaled CNY 1.24 billion for the fourth quarter, up 16% year-over-year and down 1% sequentially. The sequential decrease was mainly due to the pandemic suppression of users' social sentiment and propensity to pay, resulting in the number of long gifting paying users, particularly in the interest group declining significantly. The number of membership subscriptions also showed a slight sequential decrease. Core Momo VAS revenue was CNY 1.14 billion, up 11% from the same period last year. Revenue from the new bucket of apps totaled CNY 97.84 million, up 142% from Q4 last year, making a more meaningful contribution to our top line. For fiscal 2021, revenue from VAS, excluding Tantan, totaled CNY 4.85 billion, up 29% year-over-year. Core Momo VAS revenue totaled CNY 4.54 billion, up 24% year-over-year. Rapid growth from a high base was mainly driven by the introduction of unified features and operational events into the audio and video social entertainment experiences. For instance, in Q2, we brought in the my experience in the Chatroom where each grassroot talents are concurrently available and users can send virtual gifts to request performances ranging from singing to script writing. In Q3, we introduced or , a unified gift feature in the Chatroom. These features were well received by users across the board. In addition to audio-video social entertainment, the team also introduced innovations into the traditional gifting category. To illustrate this, we may see seasonal gifts available in the increase group at the beginning of the year, where we theoretically reinvented gift ideas that effectively stimulated spending enthusiasm amongst the users. Furthermore, is a good example of how we keep users fresh and engaged through operational events. Now briefly about the new apps. For fiscal 2021, revenue from the new bucket totaled CNY 304 million, almost triple that of last year. driven by both user and ARPU growth. The performance was collectively driven by and the performance of each of these apps were already reviewed in the previous product session. So I'll quickly skip here. Now turning to Tantan. I will start with user trends and overall financials. The COVID resurgence had a clear negative impact on people's spending sentiment, which made large-scale marketing campaign less effective. We, therefore, took a moderate approach in terms of marketing investments. Users’ scale decreased significantly in regions where COVID containment measures were severe. Internally, we focused our efforts on product adjustments aimed at improving user experience through rapid iterations. The steady product improvement led to an upward trend in user scale in regions that were free of pandemic and the control was more relaxed. Tantan had 27 million monthly active users for the fourth quarter up 1% from September and 8% from June are lower than our media expectation. Tantan paying user count came in at 2.5 million at the end of Q4 '21, down from 2.9 million last quarter. The 400,000 net decrease was mainly attributable to 3 factors

[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 fourth quarter of 2021 was CNY 3.6 billion, down 3% year-on-year or 2% quarter-over-quarter. Non-GAAP net income attributable to Hello Group was CNY 280.9 million compared to CNY 836.4 million from the same period of 2020 or a 66% decrease year-over-year. During the fourth quarter, the company accrued CNY 407.4 million withholding tax on undistributed earnings generated in 2021 by our wholly owned foreign enterprise due to our plan to continue to repatriate profit from the OFI to support our capital allocation demand, including, not limited to, returning cash to our shareholders and overseas business investments, et cetera. Excluding this special item, non-GAAP net income for the quarter would have been CNY 488.3 million. As Wang Li has covered revenue analysis in a great level of detail in the interest of time, I will skip it. and dive directly into the cost and expenses items for the quarter. Our non-GAAP cost of revenue for the fourth quarter of 2021 was CNY 2.19 billion compared to CNY 2.02 billion for the same period last year. The non-GAAP cost of revenue as a percentage of total revenue was 59.6%, an increase from 53.2% from the Q4 2020 non-GAAP gross profit margin for the quarter was down by 6.3 percentage points from a year ago. The decrease was attributed to the following factors

[Ashley Jing:]

Thanks, Jon. Just a quick reminder before we take in the questions. For those Chinese, please ask your questions in Chinese first, by English translation. And also, please leave it in the number of questions to maximum 2. Thank you. Operator, we are ready for questions.

[Operator:]

Our first question comes from Thomas Chong with Jefferies.

[Thomas Chong:]

I have 2 questions. The first question is about core Momo. Can management share about the 2022 user growth expectations and the revenue trend for VAS and live streaming together with the full year profitability profile? And the second question is about, can management comment about the user trend, revenue as well as the earnings profile?

[WangLi:]

So Thomas to answer your question on the core Momo part, our user growth target for the core Momo in 2022 remains the same as last year, which is to remain a stable user base with a flattish marketing budget and try to seek user growth on top of that. And as far as the current channel marketing environment is concerned, to achieve this goal, we need to continue to optimize our strategy for reactivating government users and expanding marketing channels. However, MAU in Q1 may experience a decline due to the impact of the pandemic and the negative seasonality. In terms of revenue outlook, there are a few factors that need to be taken into consideration. First of all, is the macro economy. Our Q1 guidance reflects the severe challenges to our live streaming business from the macro headwinds. And besides changes in the external environment have had quite an impact on the engagement of agencies. So if the macro and other external conditions ease in the second half, the live streaming business may very well improve; otherwise, the downward pressure will continue. To address this, we will try to make more efforts on the product and operational side to enhance user experience and ensure stable content supply. And in terms of value-added service, -- the macro environment and pandemic have had a negative impact on the common value-added service. But compared with live streaming business, VAS is a lot more resilient to the economic cycles. So in particular, as the new bucket of a long app is taking off, so we will moderate the ramp up monetization efforts this year to drive overall user growth of VAS. We expect value-added service to grow as a whole in the double digit in 2022. As for the revenue structure, Revenue contribution from value-added service will continue to increase, while the proportion of live streaming will further decrease. At the group level, we expect streaming revenue contribution to drop from 60% at the end of last year to around 50% at the end of this year. Given the net income in Q1 will be quite low due to negative seasonality in revenue, here, I would like to provide a bit more color about profitability this year. In response to current pressure on revenue from market uncertainty, management has a strong focus on optimizing operating expenses. We expect OpEx to reduce significantly this year, although there are some uncertainties on the revenue front, we expect profit to rebound after Q1. And excluding Tantan, the annual profit margin for the core Momo is expected to remain above 20%, which is about the same as last year. I think Tantan's user growth in the upcoming year will depend on both external and internal factors. The external factors include when the pandemic and the related control measures will ease. In Q1, the COVID-19 resurgence has been quite serious, and the related control measures were very strict. As a result, active user base decreased significantly in areas where COVId resurgence was severe. However, the steady product and marketing improvement led to an upward trend in user scale in regions where coping containment measures were relatively relaxed. On the whole, we need to wait until the pandemic situation becomes clearer before we can make a more realistic estimate of the user growth. The Internal factors come from progress on the product side and the pace of our marketing efforts. Last year, the target we set at which how fast we should push forward the product and operational plans was a little bit too aggressive. Yet user growth has bottomed out and returned to a growth track. As for now, we are making steady progress in various product iterations and channel marketing optimization. We expect to see a steady upward trend in MAUs when the pandemic subsides. Our target is to deliver a steady CAGR growth of 20% for MAUs over the next 3 years. On the revenue front, we expect VAS revenue to be in the crop in Q1, mainly due to the pandemic impact and revenue deferral. However, VAS revenue should gradually pick up after Q1, mainly due to the following factors. First one is the steady recovery of MAUs after the pandemic ease out. Second factor is that we should benefit from a stable paying conversion. We're done with our demonetization initiatives and paying per version is back on a steady growth track in Q1. Here, I will share some recent developments to give you more insight on the situation. Although COVID resurgence led to a sequential decrease in MAUs in the first couple of months of the year, and thanks to the improvement in paying conversion, the number of paying users in February remained pretty much stable compared to last December. And the third driving factor for revenue growth is the contribution of new value-added service products. For example, FlashChat, Taproom and some other new membership-based paying features are very much likely to bring in incremental revenue and steady growth in overseas market will also make incremental contribution to the top line. Although, we expect VAS revenue to be on a sequential upward trend after the trough in Q1, total VAS revenue for the year 2022 will still be lower than last year due to our substantial demonetization strategy in the second half of '21. As for live streaming, since it's not Tantan's current business focus, we expect its revenue to further decline significantly in Q1. We will shift our strategic focus to multiplay live video, which fits better with the overall social atmosphere on Tantan. In terms of cost and expenses, according to our annual budget, we will make measures to optimize -- we'll take measures to optimize cost controls across various areas, including labor costs and expenses for IDC and CDN. However, since we will start to invest in Tantan's brand building as planned this year, marketing expenses will go up depending on the effectiveness of the campaigns. We will control the annual net loss to be somewhere around CNY 500 million. Revenue in the first half of the year will be relatively low. So net loss will widen from Q4 level. However, we expect the net loss to narrow as revenue growth in the second half.

[Ashley Jing:]

So I think I hope we've answered your question, Thomas. I think in the interest of time, we are getting quite close to market open. So maybe we're just going to wrap up here for today's call. And thank you all for participating to our Q4 earnings conference call, and we'll see you next quarter.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.