Hello Group Inc.
Q1 2018 Earnings Call Transcript

Published: 29 May 2018

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to First Quarter 2018 Momo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this conference is being recorded today. I would now like to hand the conference over to your first speaker today Ms. Cathy Peng. Thank you. Please go ahead, ma’am.

[Cathy Peng:]

Thank you, operator. Hello everyone and thank for joining us today for Momo’s first quarter 2018 earnings conference call. The company’s results were released earlier today and are available on the company’s IR 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; and Mr. Jonathan Zhang, Chief Financial Officer. Mr. Tang and Mr. Wang will discuss Momo’s business operations and company highlights followed by Mr. Jon who will go through the financials and guidance. They will all be available to answer your questions during the Q&A that follows. Before we begin, I would like to remind you that the 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 the 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 statement 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.

[Tang Yan:]

Good morning and good evening everyone. Thanks for joining our conference call today. Q1 was a good quarter and a great start to the year 2018. Back in March, we outlined the three priorities for us this year

[Wang Li:]

Thanks. Now, let me take you through the key things that we have done as well as the future directions for our major business lines. First of all, on live streaming, although we did see some negative impact from the Lunar year holiday, particularly in the month of February, the robust organic growth momentum gave us a good January and March, so we ended up delivering an extremely strong Q1 growing 75% year-over-year and 13% sequentially to $371.5 million. That strong growth trends came from the fundamental improvement of the content ecosystem driven by our collaborations with the talent agencies. In Q1, we further optimized the agency incentive program that was rolled out in last Q4. The new plan focused on two key areas

[Jonathan Zhang:]

Thanks, Tang Yan and Cathy. Hello, everyone. Thank you for joining our conference call today. We started the year off with a great quarter. Our user base continued to expand, while both top line and bottom line showed robust growth. Total net revenue for the first quarter reached $435.1 million, up 64% year-over-year exceeding the high-end of our revenue guidance by 8%. Despite the negative seasonality from Chinese New Year, we still achieved a 13% sequential growth in revenue due to the strong organic growth momentum from live streaming business. Rapid top line growth cooked with operating leverage enabled us to deliver a 36.7% non-GAAP operating margin. Non-GAAP income attributable to Momo was $142.3 million, up 57% from the same quarter last year. Looking into the key revenue items, in the first quarter 2018, the revenue from live video services reached $371.5 million, up 75% year-over-year. In Q1, we continued our initiative to incentivize the talent agencies, which significantly boosted the improvements of our content ecosystem. At the same time, our operational efforts focused on introduction of new gamifications into showrooms during the non-event days allowing the organic growth momentum of live streaming business to overcome the negative impact from Lunar year holiday, grew at an impressive 13% on a quarter-over-quarter basis. As a result, the number of live streaming paying users for the quarter was 4.4 million, a 7% increase from the same period last year. The quarterly ARPPU was RMB563 before excluding VAT compared with RMB385 from a year ago. Moving on to the VAS and mobile game business, revenue from VAS, which includes membership subscriptions and virtual gifting services together, was $37 million, up 62% from the same period last year. The year-over-year increase was largely driven by the fast growing virtual gifting business and increase in SVIP subscriptions as Wang Li mentioned earlier. As the social behaviors on our platform continue to evolve and the social used cases continue to diversify, one of our key observations is that some social experiences previously put under live streaming business line and VAS business lines are actually converging. For example, the same person who used to chat in the live channels or video services on the live streaming can shift to chat rooms or quick chat experiences, which are under VAS business line and vice-versa, can happen too. As more and more of our users adopt live interactive experiences, we expect the line between what is live streaming and what is not live streaming to get increasingly blurred. Therefore, we encourage investors to look at paying users from VAS business and live streaming business holistically. The total number of paying users from VAS and live streaming services without double-counting the overlap was 8.1 million for the first quarter 2018, up from 7 million from the same quarter last year and 7.8 million a quarter ago or a 0.3 million quarterly net add. Revenue from mobile game revenue decreased by 43% year-over-year to 6.2 million due to our strategic defocus on jointly operated games. Now on revenue from mobile marketing, the revenue from mobile marketing services was $18.7 million up 5% year-over-year. The increase was driven by brand ad revenue growth. The number of key account customers grew significantly from same period last year as we gained more recognition from the brand marketers. Now, quickly to talk about some highlights on the cost and expenses items for the first quarter 2018. Our cost of revenue on a non-GAAP basis totaled $209.1 million, up 74% from the same quarter last year. This was primarily attributable to the increase in revenue sharing with a live streaming broadcasters and agencies. However on a sequential basis, the organic growth of live streaming services during the non-event days came in extremely strong during Q1. We scaled back the revenue oriented operating efforts around the quarterly competition event. Therefore, cost on bonus or rewards offered to broadcasters during the March tournament, was significantly reduced. As a result, the non-GAAP cost of revenue as a percentage of total net revenue dropped by 3.6%. Non-GAAP sales and marketing expenses for the first quarter was $41.1 million compared to $31.8 million for the same quarter last year. The increase was mainly due to our stepped up efforts in marketing spending to drive user growth. The sequential decrease in sales and marketing expenses was largely due to the seasonality in our marketing spending. Q1 tends to be the lowest season in our marketing activities. We do expect marketing spending to pick up from Q1’s level both in terms of absolute dollar amount and as a percentage of revenue as we head deeper into the year. Non-GAAP R&D expenses for the first quarter was $15 million compared to $7.2 million for the same period last year, representing a 3.4% and 2.7% of total revenue respectively. The increase reflected our strategy to step up our investment efforts in R&D area by recruiting additional R&D talents to support our product innovations. We ended the quarter with 1,303 total employees, up from 985 a year ago, of which 46% and 39% are R&D personnel respectively. Non-GAAP G&A expenses for the first quarter, was $11.2 million compared to $6.4 million for the same quarter last year. The G&A expenses as a percentage of total net revenue remains stable. Non-GAAP operating income was $159.9 million, up 59% year-on-year from $100.6 million. The non-GAAP operating margin for the quarter was 36.7%, 5.8% higher sequentially. However as the year progresses, the investment tend to ramp up in different areas such as marketing and R&D activities. The operating margin will come down from Q1 level and fluctuate on a quarterly basis. We will carefully manage the balance of this investment driving overall business growth and annual profitability targets. Now, turning to balance sheet and cash flow items, as of March 31, 2018, Momo’s cash, cash equivalents and the term deposits totaled $899.4 million compared to $1059.6 million as of December 31, 2017. The decrease was mainly due to the first tranche of payments in connection with the acquisition of Tantan, which was $229.8 million. Net cash provided by operating activities in the first quarter was $129.9 million compared to $95.4 million for the same quarter last year. Now turning to the second quarter 2018 revenue guidance, we estimate our second quarter revenue to come in the range from $470 million to $485 million, which translates into a year-over-year growth from 51% to 55%. As we closed the Tantan acquisition in May 2018, we will consolidate Tantan’s financials from June 2018. Therefore, our Q2 guidance includes around $4.5 million of revenue from Tantan, which represent our current estimate of Tantan’s revenues for the month of June. Please be mindful that this forecast represents the company’s current and preliminary view on the market and operational conditions, which are subject to change. In summary, we are very pleased with the remarkable results achieved in the first quarter 2018. That demonstrated the effectiveness of our strategy and the strong execution capabilities of management team. That concluded the prepared portion of today’s discussion. With that, I would like to turn the call back to Cathy to start the Q&A session.

[Cathy Peng:]

Right. Before the Q&A, just as always a quick reminder, for the Chinese speakers, please ask the questions in Chinese first, followed by English translation by yourself and also please limit the number of questions to two at maximum per person to give other people opportunities to ask questions. Operator, we are ready for questions. Please take in the analyst.

[Operator:]

Thank you, Cathy. [Operator Instructions] We have the first question from the line of Thomas Chong from Credit Suisse. Please ask your question.

[Thomas Chong:]

Thanks management for taking my questions. I have two questions. The first question is about the live game and other short video have been rising very rapidly recently. What’s our take about the impact to Momo if there is any? And my second question is excluding Tantan, how should we think about the trend in terms of MAU and paying users in 2018? Thank you.

[Tang Yan:]

Let me translate first. So it has indeed been rising at an incredible pace during the past 15 months. However, we really haven’t seen any negative impact on our operating data. If you look at the operating metrics during the past few months on our top line, they have been showing some very positive trends, including the user growth, per user time spent, retention, number of interactions and obviously the revenue has been growing very robustly as well. I think the reason why we haven’t seen any negative impact from [indiscernible] was mainly because we have very different positioning in the sense that the core type of user demands that we are trying to serve are very different and that leads to huge difference in the way we design our products and the way the users are using our products. So although on the phase of it, there could seem to be some overlap in some of those use cases, there won’t be direct competition between exactly the same kind of product offerings. For example, what a user is primarily looking for on Momo is to find someone new to interact with. So, even if you are talking about constant consumption in use cases such as live video and short video, these type of functionality needs to be deeply integrated with other social features such as user profile page, news feeds, interest groups and instant messaging in order to serve the users demand to build new connections and to find other people to interact with. However, if you look at the situation for a lot of those live streaming and short video pure-plays, the core user demand that they are trying to serve is constant consumption itself. The way they design their products is therefore not centered around, helping people to build new relationships or helping them to interact with other people. Instead, it is centered around encouraging the users to consume more and more and more content. Those two purposes in a lot of occasions contradict with each other as far as product design is concerned. So, that’s the reason why we really haven’t seen an as-complete and comprehensive set of social infrastructure in either [indiscernible]. So what a user is primarily looking for from a platform is to build new relationships to interact with other people, then that user is more likely to choose between Momo and Tantan instead of between us and the short video platform. So, if you are talking about a short video platform that has been quickly rising in time spent, then that short video platform is more likely to have higher level of competitive pressure on other type of short video platforms or to a broader sense to other content consumption platforms. The negative impact that it’s going to have on a platform like Momo is going to be extremely limited, because we serve different demand and design our products in a completely different way. In the past, if you look at bigger players such as Weibo or Weixin, Kuaishou, in the past, they have all pushing very hard in the area of live streaming or short video or both and they have all been growing pretty well, but during the time that they have been growing pretty well, we actually have never seen any substantial negative impact on our platform. I think the reason for that goes back to the difference in the product positioning. So the first question is on MAU target, MAU growth trends, we believe that this year Momo is going to see pretty positive trends in user world and basically, it is the function of several different factors, number one is the retention of the Momo platform. Since October last year, the retention has been showing a bigger trend with a slight uptick. In the year 2018, our plan is to continue to expand the social use cases through product efforts and content improvement in order to drive the retention ratio, especially mid to longer term retention ratio as we step up our investment in research and development and speed up the pace of product innovations and upgrades. We are confident that we will be able to reach that goal. And secondly, in terms of the top of the funnel additions, your user acquisition this year compared with last year we are going to be taking more result-driven kind of marketing approaches. For example, on paid channel marketing other than new registrations were also going to be focused on resurrecting the domain users by leveraging some of its new use cases that we introduced to the platform. In Q1, we actually did a pretty good job on that front. Resurrected users as compared with complete new registrations, the per user activation cost is lower while the retention ratio is higher and obviously we are sitting on a huge amount of domain users. So this year, we think that we will have a lot of opportunities on that front. And the other thing is that we are also looking at user acquisition opportunities by leveraging Momo’s video content. For example, we are considering working some of the well-known variety show IPs and other third-party partners both to elevate the brand equity and to drive the new registrations. So if you consider all these variables in the equation, all of these give us a pretty good level of optimism about the quarterly net adds, about the opportunity to drive a healthy quarterly net adds to MAUs in the year 2018, Thomas, is there a second question on paying user or not or that’s all. Is there a question on paying users?

[Thomas Chong:]

Yes. Hi, Cathy. I had a question on the paying users, ex-Tantan, how is the trend in 2018? Thank you.

[Tang Yan:]

So, the second question is on paying users?

[Thomas Chong:]

Yes.

[Tang Yan:]

On Tantan?

[Thomas Chong:]

On Tantan yes.

[Tang Yan:]

Tantan officially rolled out its membership subscription business in January 2018 and since then it’s number of subscribers have been growing at a very impressive pace, much faster than the pace that we saw when Momo and other similar companies first rolled out these type of services. We believe that speaks to the very strong demand coming from Tantan users to improve their changes of matching through purchasing of value-added services. And we do think that Tantan at this stage is at a very early stage in terms of monetization. And if you look at the roadmap of other similar companies, they have actually achieved acceleration in the number of subscriber growth and monetization growth. Up to this point, Tantan has done none of these yet and therefore even within the membership subscription area, we do think that Tantan still has a lot of potential to further grow its number of subscribers and monetization. In addition, as Tantan continues to grow its user base and reach its social features, we do think that Tantan will have lot of opportunities to monetize beyond the membership subscription business as well in the area of diversifying into other business lines obviously Momo has a lot of expertise and resources that Tantan can leverage down the road and therefore we have high level of confidence in the future growth trends about Tantan paying user as well. Operator, next?

[Operator:]

Thank you. The next question comes from the line of Alex Poon from Morgan Stanley. Please ask your question.

[Alex Poon:]

My first question is about Tantan, which is very successful in U.S., the Tinder version and I want to ask about future strategy and potential of this business in the next 2 to 3 years, you mentioned about revenue is above $4 million to $5 million in June if I analyze, it’s about $50 million to $60 million a year. How should we expect the revenue and margin in the next 2 to 3 years also some MAU and paying ratio forecast? And my second question is about investments, your balance sheet is very strong, operating cash flow is very strong, can you share with us what would be your future focus of the investments whether it’s R&D or M&A etcetera? Thank you very much.

[Tang Yan:]

So maybe your second question first, I think the focus for the management team at this point is still to drive the organic growth in user base and business. But of course, in the general area of social and entertainment space, there are targeted companies that can help us expand along the industry value chain or help us to diversify our product lines or brand portfolios. Of course, we are going to consider to go through M&A opportunities to pursue higher and more efficient kind of development in growth. Let me translate first. With regard to the second question about Tantan, monetization plan in the future actually addressed a big part of it in the earlier question about Tantan’s subscriber and paying user growth. I think I am going to talk about two points here. Number one is since Tantan started to officially rollout its subscription business in January 2018, it has been growing at a very rapid pace. However at this point, I don’t think monetization is the most important thing that draws the attention and focus of us as the management of the combined company. Instead, the number one priority for us is still user growth from content and the current user growth trajectory of Tantan since the beginning of 2018 is actually very, very positive. So that’s the most important focus of us on Tantan. I think we will pass on to CFO Jonathan to address the financial questions.

[Jonathan Zhang:]

Hi, Alex, this is Jonathan. Just one color to add is as can be seen from our guidance of around $4.5 million revenue added into our guidance. That only reflects the revenues generated on the existing subscription business. However, Tantan does have a plan to rollout new rounds of monetization efforts of getting into the second half of this year. So we do expect the revenue to ramp from the current level in a meaningful way when those initiatives get launched.

[Operator:]

Thank you. The next question comes from the line of Alex Yao from JPMorgan. Please ask your question. Sorry, the line for Alex Yao has dropped. We will move to the next question by Tian Hou from TH Capital. Please ask your question.

[Tian Hou:]

So, I want to follow-up with the first analyst question regarding the short videos and Tik Tok and Kwai short videos developing really rapidly. And certainly because the content difference and user difference and two different things, Momo and the short videos satisfy different needs. However and who knows what’s going to happen. So, I cannot believe that management has not preparing yourself for the future or potential pressure from a short video or at least in the short video maybe one of the direction that Momo can also get into to increase another source of content providing. So, I really want to ask Mr. Tang, what have you done and how you are going to – how are you doing in this area to prepare yourself for the future either on both fronts, defend yourself from competition and getting into a new area of the business?

[Tang Yan:]

Right. So, on the face of it, the two objects might seem the same, but if you peel off the very outer layer, inside they are actually very different things. The way we position our short video service is that we are hoping that our users can, through creation and consumption of short video content, build out very effective connections and interactions. That’s the reason why during the past 1.5 years period of time we have been very proactively driving the integration of short video functionalities with every major social experiences and modules on the platform such as news feeds, user profile page and live streaming. In Q1, because what we did to the algorithm around short video we actually saw new hike around a lot of operating metrics, including the number of video viewed, number of video published and some other operating methods that internally we view as more important such as deal penetration and number of interactions around the short video content. For example in Q1, the short video DAU penetration ratio has already reached 67%. So, it’s fair to say that short video has already become a very important content medium over which users are building up your social activities. Okay. With regards to future optimization around the short video service, basically we are looking at several key areas. Number one is that we are going to continue to optimize the short video creation tools. For example, we will soon be launching a new feature that encourages the professional short video creators on the platform to set examples and drives more and more content creation activities from regular Momo users. Number two is that we are going to continue to optimize the algorithms. And as a social platform, we are going to be optimizing for interactions, for the users to build interactions and form new relationships instead of focus on – purely focus on encouraging users to consume more and more content. Number three is that we will be working on to drive more synergies between live video service and short video service and we are seeing several benefits in here. Number one is that live broadcasting actually provides a very effective way for the short video creators to monetize. At the same time, the broadcasters, especially new ones can very quickly build up their fan base and influence through the creation and distribution of short video content. And number three that cycle between live video service and short video service can drive more and better quality short video content into the system for our users to consume and interact. So, although I think we designed this overall short video product within Momo platform in a very different way as the way you see in some of the pure content consumption platforms. We do think that short video has a content medium that people used to build social activities. We will continue to be playing a very positive role to the overall social ecosystem. I think in the interest of time that’s going to be the last question for today’s conference call. For those who really haven’t got an opportunity to ask questions on the call we are happy to entertain your questions offline. Thanks for joining us today. We will see you next quarter.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all disconnect your lines now. Thank you.