Hello Group Inc.
Q1 2017 Earnings Call Transcript

Published: 23 May 2017

[Operator:]

Hello everyone and thank you for joining us today for Momo’s First Quarter 2017 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. Jonathan Zhang, Chief Financial Officer; and Mr. Wang Li, our Chief Operating Officer. Mr. Tang will discuss Momo’s business operations and company highlights followed by Mr. Zhang who will go through 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 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 would translate for him. Mr. Tang, please.

[Tang Yan:]

[Foreign Language] Good morning and good evening everyone. Thanks for joining our conference call today. I am glad to be delivering another quarter with remarkable achievements across all of our strategic priorities that account to our shareholders at the beginning of the year. [Foreign Language] Firstly from a high level, despite the seasonality, we experienced around Chinese New Year, total revenues for the quarter to the new record high of $265.2 million, up 412% year-over-year. Adjusted net income for the quarter reached $90.7 million, up 615% from the same period last year demonstrating the significant operating leverage of our business, which in turn allows us to reinvest in a big way to build long-term growth drivers towards the platform. [Foreign Language] Now digging deeper into the quarter, I'm going to mainly focus on the progresses that we've made in the following three areas

[Jonathan Zhang:]

Thanks, Tang Zong and Cathy. Hi, everyone, and thanks for joining our conference call today. Q1 2017 was another remarkable quarter for us, with a total net revenue growth of 421% year-over-year, reaching $265.2 million compared to $50.9 million in the first quarter 2016. Due to our highly scalable business model, non-GAAP net income was $90.7 million for the quarter, representing a 615% growth in the bottom line, compared to $12.7 million in the same quarter last year. Looking into the key revenue line items, the first quarter of 2017. Strong growth momentum of our live streaming service continued from previous quarters. Its revenue reached $212.6 million, up 9% sequentially, which fully offset the negative seasonality impact around Chinese New Year, and outgrows the revenue boosted in Q4 last year driven by the year-end tournament. The growth of live streaming revenues was attributed by our further expanded viewer base, mainly by the paying users’ growth. In March, the effective viewer for our live streaming service covered 24% of total daily active users, on average basis. Paying users for the first quarter of 2017 reached 4.1 million compared with 3.5 million for the previous quarter. Average revenues per paying user per quarter, or the quarterly RP pool before excluding value-added tax for the quarter, was RMB385, slightly down from RMB408 in the previous quarter. The main reason for the slight downtick of RP pool was that we had significantly fewer number of days with the competition event in the first quarter of 2017 compared to the fourth quarter of 2016. As Tang Zong mentioned earlier, we would like to experiment different tournament approaches to not only drive revenue growth, but also provide a compelling entertainment and community experience for our users. On the revenue from marketing – mobile marketing services. The total revenue from marketing service was $17.9 million, up from $12.4 million for the first quarter of 2016. The 45% year-over-year growth was mainly powered by the increase in effective eCPMs as well as better sales grew of our existing ad inventories. The big majority of our mobile marketing revenue came from our performance-based ad system. And the top three advertising sectors in Q1 were online games, local merchants and financing. With the whole platform going video and recreational, we wanted to drive the same changes – change in the way we connect business. In order to build a more coherent user experience, this year we’ll continue our efforts to replace the picture-based ad units, with a more video-based ones. At the same time, as Tang Zong mentioned in his prepared remarks, we have already started to scale back from the ad format and categories that are less compatible with our core attributes and try to dedicate more resources in exploring new and more native ad formats that fit better in our community atmosphere. Although these kind of experiments are extremely early, and will take time to reach a scale, we believe these pioneering efforts will benefit our platform over a long-term horizon. Now quickly on the VAS and gaming services. Revenue from VAS, which currently include membership subscriptions and virtual gifting service, together was $22.9 million, up 54% from the same period last year. Both membership subscriptions and virtual gifting services contributed to the year-over-year growth in this revenue line item. Paying members totaled 3.6 million, as of March 31, 2017, up from 3.2 million a year ago. Virtual gifting revenue has grown rapidly and become a meaningful portion in the VAS revenue since launch in Q4 last year. If the growth trend continues in the following quarter, we may consider adjusting the disclosure metrics to better reflect the underlying driver of the VAS business. Mobile game revenue was $11.6 million for the first quarter of 2017, a 56% increase from the same period last year. The year-over-year increase in mobile games revenue was primarily due to revenue contribution from Momo [indiscernible] or Momo Dance Battle Version 2, which was recognized on a growth basis. Once again, our strategy to defocus on jointly operated games could pressure the game revenues in the coming few quarters before any of our self-developed games reach version. Now some quick highlights on the costs and expenses. For the first quarter of 2017, our costs and expenses, on a non-GAAP basis, totaled $165.6 million compared to $40.5 million for the same period last year. The year-over-year increase in costs and expenses was primarily attributable from our continuous business expansion. Consistent with the previous quarter, the biggest cost driver for the first quarter of 2017 was still the revenue sharing with live broadcasters. Further down the list, the increased marketing spending also contributed to the year-over-year growth in costs and expenses, as we step up our marketing efforts to drive user expansion. In addition, we held a big award ceremony and a gala night on January 7, 2017, to celebrate the success of our year-end tournament in 2016. The cost associated with that event, and the promotional activities around it, made up a significant portion of the marketing spending in the first quarter. Personnel-related costs was the third largest driver of our costs and expenses, as we continue to build our – build up our talent pool. We ended the quarter with 985 total employees, up from 775 a year ago. Same as in the previous quarter, revenue sharing with the payment channels was also a meaningful contributor to the year-over-year increase in cost and expenses. Except for the revenue sharing with the broadcasters, payment channels and the marketing spending, we continue to gain significant operating leverage in all costs and expenses line items. As a result, our non-GAAP operating margin was 37.9% for the first quarter of 2017 as compared with the 20.8% a year ago. However, as Tang Zong stated in his remarks, in mid-April, we launched a major branding campaign, which covers a nationwide cinema networks, outdoor media in major cities as well as online video and social media platforms. In addition, we will also step up our efforts in working with the paid marketing channels, such as the application stores of the cell phone makers and app install ads of the newsfeed marketing platforms, to drive direct user acquisition. These marketing efforts will cost the sales and marketing expense to increase significantly in the following quarters, both in terms of absolute dollar amount and as a percentage of total revenue. Although we expect to continue to gain some leverage in other OpEx line items, the increase in sales marketing expense will cause our marketing – our operating margin to go down materially starting from the second quarter as compared with what we saw in the first quarter. Now, briefly on effective tax rate. As mentioned in our last earnings call, starting from the beginning of 2017, the income tax exemption holiday of our major profit generating legal entity expired and changed to a 50% tax rate reduction. As a result, our estimated effective tax rate was around 15% in the first quarter, up significantly from the low-single digit level in the previous year. Our non-GAAP net income attributable to Momo Inc. was $98.7 million in the first quarter of 2017, representing a net profit margin of 34% compared to $12.7 million or a 25% net margin in the same period last year. Quickly on the balance sheet items and cash flow. As of March 31, 2017, Momo’s cash, cash equivalent and term deposit totaled $739.9 million compared to $651.3 million as of December 31, 2016. Net cash provided by operating activities in the first quarter of 2017 was $95.4 million compared to $5.6 million for the same quarter last year. Our strong cash position put us in a strong position to fund our future user growth and business expansion initiatives. Finally, our second quarter 2017 guidance. Based on the current momentum and trend we are seeing in all business lines, we estimate our second quarter revenue to come in the range from $283 million to $288 million, which translates into a year-on-year growth rate from 186% to 191%. That concluded the prepared portion of today’s discussion. With that, I’d like to turn the call over to Cathy to start the Q&A session. Cathy, please.

[Cathy Peng:]

Just one quick reminder before the Q&A. For the Chinese speakers, please ask the question in Chinese first, followed by English translation. Also maybe if you could limit the question, number of questions so that we could kick in more people. Operator we’re ready for questions.

[Operator:]

The first question comes from the line of Zoe Zhao from Credit Suisse. Please ask your question.

[Zoe Zhao:]

[Foreign Language] Translate myself. So first question is regarding the number of bankers in this quarter, as well as the revenue concentration from the, like, top bankers as well as top users. And the second question is regarding the full year sales and marketing budget as we spent now? Yes. Thank you.

[Tang Yan:]

[Foreign Language] The revenue distribution pattern on the broadcaster side and on the paying user side in the fourth – in the first quarter of 2017, we haven’t really seen much changes as compared with Q4 last year. In the March month, if you look at the top broadcasters who brought in more than RMB 30,000 on monthly basis per person, the number of that cohort of top broadcasters increased moderately as compared with what we saw in December last year. And they, in terms of revenue contribution from this cohort of broadcasters, they represented a bit higher than 50% of the total live streaming revenues. On the broadcaster – on the top paying users side, if you look at the number of the top paying users who tend to more than RMB 5,000 per month per person, the number of these cohort of broadcasters also increased pretty meaningfully from the level we saw in December last year. In terms of revenue contribution, they also represented a bit higher than 50% of the total live streaming revenues. And the concentration – the revenue contribution from the top layer broadcasters, as well as the users, was a bit higher in March because of the quarterly tournament that we run in that month. And in April, and so far we could see in May, the revenue concentration went down a little bit to their normal levels.

[Jonathan Zhang:]

This is Jonathan. Let me take your second question. Even though, as Tang Zong mentioned, during the prepared remarks session, we have the intention to increase our investment in the marketing campaign, including the marketing channels for new user acquisition. However, because the nationwide marketing campaign just kicked off in April, we are managing our investment pace on a rolling basis, depending on the results and the valuation management team who will conduct, by the end of the first quarter placement on our marketing investments. And then we’ll make our budget allocation accordingly. So currently we don’t have a fixed dollar amount. We’d like to invest for all year round, but it is our intention that we’re going to step up our marketing efforts throughout 2017. So I hope, at this moment, I can only give you a directional view.

[Zoe Zhao:]

Sure. That’s very helpful. Thank you. [Foreign Language]

[Jonathan Zhang:]

Thank you.

[Operator:]

Thank you. The next question comes from the line of Binnie Wong from Merrill Lynch. Please ask your question.

[Binnie Wong:]

[Foreign Language] Now let me translate my two questions. So first on the user growth strategy. How are we – based on the marketing budget that we have spent so far, and the efficiency of marketing spending, how should we expect that helps of user growth trend? And also how would that impact our margin in the next quarter? And then my second question is on the conversion ratio to paying users. We see that has improved significantly to close to 5%. It’s actually better than some of the peers. Can you help us understand the key drivers this quarter that drive an improvement in conversion ratio to paying users? So we can better understand the sustainability of improvement. Thank you.

[Tang Yan:]

[Foreign Language] Our branding campaign really started to kick in, in the mid-April kind of timeframe. And the key marketing objective is to educate the market about the video-based social use cases that we’ve introduced during the past few quarters. And at the same time, to lift the brand image of the Momo platform. Later this year, we are going to – we are going to bring in some professional marketing agency to evaluate how effective the campaign has been in terms of raising the awareness as well as lifting the brand image. So far, from some of the simplified measures, such as Baidu index, the campaign is already having some very positive impact in raising the market awareness on the changes. However, I don’t think it’s a realistic target to try to evaluate how effective a branding campaign is just two months after it was launched. With regards to the impact on direct user acquisition, I think paid channel marketing is always going to be more effective as compared with branding. And so far, the effectiveness of our paid channel marketing efforts have been pretty satisfactory. I think branding is going to be a long-term initiative of our team, which means that we’re going to keep investing in this area in the future. I do believe that over the longer-term horizon branding is going to be very, very crucial and helpful in terms of expanding the overall user base of the platform. [Foreign Language] With regards to your question on user growth strategy other than branding, I think I’ve mentioned many times during the past earnings conference calls, as well as my prepared remarks just now, that product innovation is going to stay on top of our agenda and our product innovation is going to be revolving around the whole video transition and driving more entertaining content into the system for users to build recreational activities. And the other thing is, obviously, going to be the branding and channel marketing efforts that I mentioned. And also I talked about the things that we have done in order to improve the on-boarding experience and increase the registration conversion. We are making pretty good progresses on that front as well. I think as we move deeper into the year we’re going to continue to be pushing very hard on all those three aspects. Binnie, I think you have a second question on the paying ratio? We didn’t quite get that question. Can you repeat in Chinese?

[Binnie Wong:]

[Foreign Language]

[Cathy Peng:]

Are you talking about the conversion ratio from…

[Binnie Wong:]

Conversion ratio from traffic to being…

[Cathy Peng:]

To large MAU paying user.

[Binnie Wong:]

No, no, no. Conversion of the traffic to MAU to paying users.

[Tang Yan:]

[Foreign Language] I think the reason why we’ve seen a pretty good increase in the conversion ratio from the overall Momo user to paying user live streaming is because we’ve done a lot of work to optimize the matching and traffic dispatching strategy. For example, according to the location of the user with respect to the broadcaster as well as the grade, respective grades of the broadcaster, we really have done many detail impactful work to better match the users with the broadcasters that they might be interested in. So, overall, I would say that’s the biggest contributing factor for the increase in penetration ratio and paying ratio. Does that answer your question?

[Binnie Wong:]

Yes, that does. Thank you.

[Cathy Peng:]

Operator, next.

[Operator:]

Thank you, Cathy. The next question comes from the line of Thomas Zhang from BOCI. Please ask your question.

[Thomas Zhang:]

Hi, thanks management for taking my questions. I have a question on the competitive landscape front. Can management give us some brief color about how we differentiate from PS, for example, like… [Foreign Language]

[TangYan:]

[Foreign Language] Okay. I don’t think I’m in the right position to comment on other competing platforms. But I do think that a lot of companies are going to benefit from the overall tailwind of the video technological improvements, but a lot of these beneficiaries will be benefiting from the same tailwind in different ways and moving towards different directions because of their respective different positioning. With regards to what we want to do, I think we have always been focusing in the social area, whether it’s live video, short video, nearby people, interest groups, these are all one of the many social use cases on our platform. It’s a little bit like – there are many different facilities in a recreational part. For us, short video is just one of the many services that we provide serving social purpose. [Foreign Language] The other thing is that even if you separately take out the short video service of ours and try to compare it with some of the standalone short video platforms, I think the core user demand on the standalones are more leaning toward content consumption itself, while the type of core user demand that we serve is still social. And, therefore, on the product design logic, as well as content operation side, we are encouraging the users to more interact and form social relationships out of the video activities. And accordingly, our users are paying more attention and focusing more on the person behind the video content itself and the desire and intention to interact with that person behind the video is much, much stronger on our platform. I think I briefly mentioned the use cases on our platform on that front during my prepared remarks, so I won’t repeat here. So on the product – underlying product logic, we are very – we are deeply integrating the short video service with some other basic social product modules, such as the user profile page, the IM, these types of functionalities, in order to better serve that type of user, core user demand. And to look at the product logic, and how the product is designed on some of the more content-oriented short video websites, I don’t think any one of them are emphasizing the connection to social functionalities the way – the same way as we do. [Foreign Language] And last point to add is that the number of relationships formed out of short video activities, as a percentage of total relationships formed out of the platform, has been increasing pretty rapidly. And that shows that short video is playing a very positive kind of role in terms of the formation of social relationships in an open environment. I think that will make the last question for today’s conference call. Thank you for joining the call. We’ll see you next quarter. Operator, we’re ready to close the call.

[Operator:]

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