Hello Group Inc.
Q1 2022 Earnings Call Transcript

Published: 7 Jun 2022

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Hello Group Inc.'s First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded conference is being recorded today. I'd now like to hand the conference over to your first speaker today, Ms. Ashley Jing. 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 First Quarter 2022 Earnings Conference Call. The company's results were released earlier today and 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. We will discuss the company's business operations and highlights as well as the financials and guidance. They will both be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this call may contain forward-looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events and 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'll translate for him. Mr. Wang, please.

[Wang Li:]

[Foreign Language] Good day, everyone. Thank you for joining our conference call today. Q1 was a very challenging quarter for numerous companies in China, and the same applies to us. However, I'm pleased that our team was able to focus on our products and operational initiatives to cope with headwinds from the resurgence of COVID-19 and related challenges, making 2022 off to a good start. In my remarks today, I will begin by reviewing the key operational and business results for the first quarter followed by an update on progress that we've made pertaining to the company's strategic priorities. [Foreign Language] I will start with a brief overview of our financial performance. For the first quarter of 2022, total revenue at the group level was RMB 3.15 billion, down 9% year-over-year and 14% quarter-over-quarter. Adjusted operating income for the quarter was RMB 461 million with a profit margin of 15%. On an ex-Tantan basis, total revenue was RMB 2.8 billion, down 4% from Q1 last year and 14% from last quarter. The year-over-year decrease was mainly due to the negative impact of the macro headwind and COVID on live streaming business. VAS revenue growth partially offset the decline in live streaming. Among them, the new bucket of stand-alone apps was a real outperformance this quarter and this incremental revenue contribution exceeded that of the Momo app value-added services, making it a new growth engine for the VAS business line. Adjusted operating income on an ex-Tantan was RMB 619 million with a 22% margin. Tantan’s total revenue for the quarter came in at RMB 349 million, down 39% year-over-year and 20% quarter-over-quarter. The year-over-year decrease was due to the demonetization process to improve user’s experience and retention in the second half of 2021 as well as COVID negative impact on user dating sentiment and intention to pay for VAS. Adjusted net loss from Tantan was RMB 159 million for the quarter compared with RMB 42.04 million a year ago. [Foreign language] Now I will walk you through the progress we made with our strategic priorities during the first quarter. At the beginning of the year, I set strategic goals for Momo, Tantan and the new endeavours. For the Momo app, our first goal for the year 2022 is to maintain a stable user growth with a limited marketing budget and seek growth on top of that. The second goal for Momo is to ensure the cash cow business remains stable. With respect to Tantan, the strategic goal set at the beginning of the year was to deliver solid user growth by improving marketing efficiency and core dating experience. However, as we entered into Q2, the COVID situation continued to accelerate, which resulted in a significant decline in users dating sentiment and propensity to pay for VAS. Our team has temporarily decided to scale back China investment for ROI considerations. We'll explain this decision in more detail later. For that reason, we have shifted our focus for the next few months from user growth to continuously improve marketing efficiency and enhance core dating experience in order to improve user retention. At the same time, we have lowered Tantan's marketing budget to reduce net loss amidst the escalation period of the COVID lockdown. For new products and businesses, we aim to continue to enrich our product portfolio and push the boundaries beyond Momo and Tantan. [Foreign Language] Firstly, regarding Momo's user growth and key metrics. Momo had 110.9 million monthly actives for the first quarter of 2022, down 3% from the previous quarter. The sequential decrease was due to Chinese New Year seasonality, compounded by continuous escalation of pandemic containment measures in various regions across China. However, the magnitude of the decrease was lower than the 6% seen in Q1 2020 at the beginning of the initial COVID-19 outbreak. Negative seasonality and the COVID resurgence led to a significant decrease in organic user growth. We therefore stepped up our channel marketing efforts to counter this trend. In terms of the channel strategy, our team optimized the data models and ad materials and took advantage of favorable marketing windows during Chinese New Year which significantly improved overall user acquisition efficiency. This, in turn, resulted in an increase in traffic acquired from channels on the back of a slight decrease in total marketing expenses from the previous quarter. On the product side, we upgraded the design of the core nearby features, which improves the efficiency of relationship discovery for male users. At the same time, we continue to refine the mini verse experience launched last year to enhance a sense of companionship and content consumption to meet the needs of female users to express their feelings. The number of paying users for the quarter was 8.6 million. The 300,000 sequential decrease was mainly due to the decrease in MAUs. Paying conversion remained stable, thanks to the success of our product and operational efforts. [Foreign Language] Now I'll discuss progress we made regarding our priority of ensuring the cash cow business remains stable. Despite the negative impact of multiple external factors such as macro headwind and the escalation of COVID, on an ex-Tantan basis, revenue was RMB 2.8 billion, down 3.6% from Q1 last year. Value-added service revenue represented 85% of the size of live streaming, up 21 percentage points quarter-over-quarter. [Foreign Language] Momo's live streaming revenue totaled RMB 1.48 billion for the first quarter, down 13% year-over-year. The decrease was mainly due to 2 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 first quarter of 2022 was RMB 3.15 billion, down 9% year-on-year or 14% quarter-over-quarter. Non-GAAP net income attributable to the company was RMB 398.5 million compared to RMB 633.7 million from the same period last year. As Wang Li has covered the revenue analysis in a great level of details, 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 first quarter of 2022 was RMB 1.82 billion compared to RMB 1.92 billion for the same period last year. Non-GAAP cost of revenue as a percentage of total revenue was 58%, an increase from 55% from Q1 2021. Non-GAAP gross profit margin for the quarter was down by 2.5 percentage points from a year ago. The decrease was mainly attributed to higher payout to the content providers. On a sequential basis, non-GAAP gross profit margin was up 1.8 percentage points compared to Q4 last year. The sequential increase was due to 2 factors

[Ashley Jing:]

Just a quick reminder before we take the questions. For those who can speak Chinese, please ask few questions in Chinese first, followed by English translation by yourself. Operator, we're ready for questions, please.

[Operator:]

[Operator Instructions] Our first question comes from the line of Daniel Chen from JPMorgan.

[Unidentified Analyst:]

[Foreign Language] I'll translate for myself. This is [Henry] speaking on behalf of Daniel Chen. I have two questions. The first one is about regulation. Can management share more color on the regulation impacts on your financials and the overall China live streaming industry? The second question is about Tantan user trend. Can management comment about the Tantan user trend this year?

[Wang Li:]

[Foreign Language] With regards to regulations, the opinions on regulating keeping in live streaming and strengthening the protection of minors published in May, we should finalize the requirements on ranking systems as well as PK competition during evening peak hours that stimulate positive high spending behavior among users with relatively clear implementation guidelines and detailed rules. That's blessing for the live streaming industry because it helps to level the playing field and ensure that the industry as a whole develops in a healthy and sustainable manner. In the month since the opinion was issued, our team -- operational adjustments. In the coming weeks, we will follow up with and fine-tune our product plan in line with regulatory requirements. The new product plan officially took effect in early June so its impact on revenues will mainly be reflected in the second half of the year. Our assessment of the revenue impact may not be accurate at the moment because we only have a few days of adjusted operating income from the late May that can be used as for reference. However, according to our estimated -- our estimates are based on such limited data, the impact of the new product plan on the full year of live streaming revenue should be less than 10%, which is within a reasonably manageable range. [Foreign Language] So Tantan's user growth depends on both internal and external factors. As for external factors, as previously mentioned, the new wave of COVID-19 started at the end of last year spread further since in during Q2. Consequently, related control measures continue to intensify, whereby the speed, the scope and extent of the escalation exceeded our expectations back in March. Our data in April showed us the new user growth retention and paying conversion were largely affected in major pandemic regions where prevention and control measures were severe. This is very much consistent with the trend that we saw in early 2020. Considering the decrease in retention and paying conversion which resulted in low ROI, we have decided to reduce Tantan's marketing budget in Q2. We will maintain this practice until the pandemic situation improves. Currently, the pandemic in Beijing and Shanghai has been initially brought under control, but the containment measures are still relatively strict and it will take time for users' social sentiment to recover. However, we remain optimistic about the outlook in the second half. And hopefully, we'll see some substantial improvement by then. Regarding internal factors, user growth is driven by both user acquisition and product offers. We have been making steady progress on those 2 fronts since the beginning of the year. And that's why from a geographical perspective, MAU declined significantly in regions where severe pandemic and a high level of control measures whereas users showed an upward trend in areas that was not affected by the pandemic. We plan to expand continuous efforts in improving retention and lay a solid foundation for steady user growth in the post-pandemic era. I think that answers your question.

[Operator:]

Our next question comes from Thomas Chong from Jefferies.

[Thomas Chong:]

[Foreign Language] My question is really about the overall macro and the consumption environment in China. How should we think about the impact to live streaming and VAS as well as our -- for the full year revenue and the earnings assumptions?

[Jonathan Zhang:]

Thanks, Thomas and this is Jonathan. Let me try to address your question. First of all, in terms of revenues, let me begin with the live streaming business. In contrast to regulation, the macro uncertainties and spending softness has brought more severe challenges to the live streaming business. And this situation has become clearer in Q2 than in Q1. Our Q2 guidance implies that Momo app live streaming business will see a year-on-year decline of high 20 percentage points. Since the visibility of the macro environment in the second half is quite low at this moment, to be conservative, I suggest investors to use Q2 as a baseline to think about or to predict the situation in the second half of the year. Strategically, we take active measures to enhance user experience and ensure stability of the supply side content ecosystem in the context of a year-over-year decline in revenue. Based on the situation in Q1, we are quite confident that in this regard. In that way, our live streaming business can recover as soon as the macro environment improves. With respect to the VAS business, although VAS has discretionary consumption, is also being affected by the macro environment and the pandemic, it is more resilient to economic cycles compared with live streaming. In addition, with the rapid growth of new apps, we expect the VAS revenue on ex-Tantan business can still achieve double-digit growth target set at the beginning of the year. Tantan has been more severely affected by pandemic-related lockdowns in the first half of the year than we expected at the beginning of the year. Cooked with the demonetization process in the second half of 2021, the year-on-year increase in VAS revenue in the first half of the year will be relatively big, at somewhere between a high 20% to 30% range. Once the pandemic subsides, the revenue will resume its growth track as dating sentiment comes back and user numbers start to uptick. However, we have to wait for the situation to improve before making specific estimates. Tantan's live streaming business is no longer our strategic focus. We will transform it into something that fits better with its social atmosphere. Lastly, I'd like to place emphasis on one crucial point in terms of revenue structure. With the continuous sequential growth of VAS business at the group level, VAS revenue will reach or even exceed the scale of live streaming in the second half of the year. This is a stable and more resilient revenue structure which will make future development of the whole group's more balanced. It is also a safer revenue structure for our shareholders. With respect to the gross margin, the biggest factor causing the margin fluctuation is our live streaming revenue-sharing ratio. The revenue sharing ratio in Q1 was 2 percentage points lower than that in Q4 last year as we didn't host large-scale competition events which led to a decrease in bonus-related revenue sharing cost. On a year-over-year basis, the revenue sharing ratio was up 2% as a result of our smaller scale events we hosted helped agencies to navigate through the challenging environment. As we continue to invest in this kind of event throughout the year, the overall impact of the revenue sharing ratio of live streaming on gross margin will be around 2% for the whole year. However, due to the continuous increase in revenue contribution from VAS, which bears a relatively higher margin from the gross profit on the bill, the shift in revenue mix is conducive to improve in gross margin. Therefore, for 2022, at the group level, the gross profit margin decline should be between 1% to 2%. On the cost and expense side, we have been optimizing Momo's costs and expenses. The marketing expenses for Momo app will remain stable compared with last year. However, given the development of new apps, especially for [indiscernible], which is currently showing strong growth momentum with outstanding performance in various indicators, including unit acquisition costs, user retention and engagement, we will step up our marketing efforts in the coming quarters and its MAU will continue to deliver rapid growth. Although the marketing expenses of new apps have increased, thanks to cost optimization of Momo app, we expect that our operating margin and ex-Tantan basis will still be around high teens percent to 20%. For Tantan, we expect its net loss to be between RMB 500 million to RMB 600 million.

[Ashley Jing:]

Okay. Maybe in the interest of time, let's just take one last question, operator. Next one, please.

[Operator:]

Our last question comes from Leo Chiang from Deutsche Bank.

[Leo Chiang:]

[Foreign Language] My question is about the new adds in Tantan overseas. As these 2 new business gradually become our new growth drivers, can management share with us the longer-term potential of these 2 initiatives and the difference of user spending behaviors between the new initiative and our elder business?

[Wang Li:]

[Foreign Language] Thank you for your questions. We have different methodologies and expectations when managing ROI-oriented and DAU-oriented apps. For ROI-oriented apps, which include [indiscernible], Sochio and [indiscernible], strategically, these apps focus on profitable growth and scaling back from nonprofitable users and revenue growth. We plan to achieve this goal by improving ARPU, reducing user acquisition cost and the revenue sharing ratio. Total revenues from the bucket of new apps was slightly over RMB 300 million last year. And this year, revenue is expected to be somewhere between RMB 700 million to RMB 800 million, while the net loss continues to narrow and the profitable trend as a whole is starting to emerge. For DAU-oriented apps, [indiscernible], our main goal this year is to deliver rapid product and user growth with no revenue planned for now. And for Tantan overseas business, our main goal is to improve our ARPPU in developing regions by leveraging our non-subscription monetization model while reducing user appreciation costs in order to pursue profitable growth. Our first pilot was Indonesia market. And so over the past 6 months period of time, user scale in Indonesian market grew 27% and the ARPPU doubled with revenue growth 2.5x. So basically, in order to ensure profit and avoid multifront operations with limited resources, we started to reduce investment in loss-making markets with low ROI, such as Japan and South Korea. And although revenue from these markets declined accordingly, the revenue from the overseas market as a whole will still grow. And at the same time, profitability has also improved substantially. Our strategy is to initially replicate the Indonesia model in Asia and then focus our resources to develop appearance in other regions.

[Ashley Jing:]

I think this is going to be the end of the conference. So thank you guys for participating, and we will see you next quarter. Back to you operator.

[Operator:]

Thank you. So with that, we conclude our conference for today. Thank you for participating. You may now disconnect.