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Edited Transcript of MOMO earnings conference call or presentation 28-May-20 12:00pm GMT

Q1 2020 Momo Inc Earnings Call

Beijing Jun 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Momo Inc earnings conference call or presentation Thursday, May 28, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cathy Peng

Momo Inc. - Head of IR

* Li Wang

Momo Inc. - COO, President & Director

* Wang Yu

Tantan Limited - Co-Founder & CEO

* Xiaosong Zhang

Momo Inc. - CFO

* Yan Tang

Momo Inc. - Chairman & CEO

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Conference Call Participants

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* Qi Chen

JP Morgan Chase & Co, Research Division - Research Analyst

* Thomas Chong

Jefferies LLC, Research Division - Equity Analyst

* Tianxiao Hou

T.H. Capital, LLC - Founder, CEO & Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to First Quarter 2020 Momo Inc. Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded today.

I would now like to hand the conference over to your first speaker for today, Ms. Cathy Peng. Thank you. Please go ahead, ma'am.

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Cathy Peng, Momo Inc. - Head of IR [2]

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Thank you, operator. Hello, everyone, and thank you for joining us today for Momo's First Quarter 2020 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; Mr. Wang Yu, Founder and Chief Executive Officer of Tantan; and Mr. Jonathan Zhang, Chief Financial Officer. They will discuss the company's business operations and highlights as well as 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 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?

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Yan Tang, Momo Inc. - Chairman & CEO [3]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [4]

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[Interpreted] Good morning and good evening, everyone. Thank you for joining our conference call today. As you can imagine, Q1 was a challenging quarter for Momo as well as for many other companies who operate in China amidst the difficulties caused by the COVID-19 outbreak. I'm proud that the team has been able to adapt well to the changing environment and navigate through these challenges with solid execution against our strategic goals. Today, my team and I will walk you through the key operating and financial results. We are also going to reiterate our priorities for the year and how we are going to approach them in the coming few quarters.

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Yan Tang, Momo Inc. - Chairman & CEO [5]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [6]

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[Interpreted] Firstly, a brief overview of the financial performance. For the first quarter 2020, total revenue was CNY 3.59 billion, down 3.5% year-over-year. Adjusted operating income for the quarter was CNY 801.0 million, representing a 22.3% profit margin. Excluding Tantan's loss, adjusted operating income for the core Momo was CNY 901.5 million or a 28.1% profit margin.

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Yan Tang, Momo Inc. - Chairman & CEO [7]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [8]

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[Interpreted] Now a deeper dive into other aspects of the quarter. First, on operating metrics. The core Momo app had 108 million monthly actives for the first quarter 2020, down 6% year-over-year and representing a 6.5 million net decrease from the previous quarter. As said on our last earnings call, the COVID-19 outbreak has caused a significant portion of our users to delay their time to get back to the big cities for work. It has prolonged and amplified the negative Chinese New Year effect. In addition, the strict social distancing control and associated decline in outdoor activities have also limited the demand for using an open social app to discover new relationships. In response to such a situation, the team has quickly adjusted our strategy by redirecting the traffic from nearby people and one-to-one chatting, which focus mostly on online to offline conversion toward other social entertainment experiences, which provides broader online companionships to the users. As a result, per user time spent per day continued to rise on a sequential basis, reaching a new record high since the beginning of 2018.

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Yan Tang, Momo Inc. - Chairman & CEO [9]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [10]

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[Interpreted] Due to the pressure on MAUs, number of paying users on Momo also saw a 700,000 net decrease from Q4 to 8.6 million in Q1 2020. Paying users on Tantan saw a 300,000 quarterly net decrease to 4.2 million in Q1 2020, also primarily due to the weak dating sentiment caused by the virus-related disruptions.

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Yan Tang, Momo Inc. - Chairman & CEO [11]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [12]

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[Interpreted] Active users and other engagement metrics on Momo has been gradually rebounding since March. As we move deeper in executing our product strategies and enhancing our user experience, we plan to step up our marketing efforts from June to drive the top-of-the-funnel activities. Based on the current trajectory, we expect to see a full recovery on Momo within the coming few months. Tantan's traffic has been showing initial signs for recovery since early May as outdoor activities gradually picks up. We expected recovery to be a progressive process as the dating sentiment comes back on a graduated basis.

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Yan Tang, Momo Inc. - Chairman & CEO [13]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [14]

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[Interpreted] Despite a rough start of the year caused by the virus-related factors, we won't let these disruptions get in way of executing our user growth strategies, which we laid out at the beginning of the year. I'd like to take a few minutes to reiterate here: first, continue to improve the social experience on our platforms, so that we can better satisfy the user demand we were not able to serve well in the past; second, penetrate into the lower-tier markets more effectively through specific product and marketing approaches; third, drive Tantan's user growth more effectively; and lastly, enrich our product matrix with new applications.

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Yan Tang, Momo Inc. - Chairman & CEO [15]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [16]

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[Interpreted] During the past several months, we've been taking solid steps on all those fronts. In Q1, one of our big focus was to optimize the chat room experience. It was particularly important during the social distancing period because chat room enables people to stay connected and have fun together when they are physically isolated. Last year, our VAS team introduced a very popular chat room experience called Love Planet, which is a moderated dating experience that emulates some of the popular TV reality shows. This year, we brought in a couple of other similar moderated shows into the chat room experience. This new initiative turned out to be effective, both in terms of driving engagements and in terms of revenue contribution. As a result, although the overall traffic was under pressure in Q1, the time spent in chat room ended up growing 20% on a sequential basis.

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Yan Tang, Momo Inc. - Chairman & CEO [17]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [18]

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[Interpreted] In April, we also started an experimental project called Social DNA. Under this project, we have assigned different tasks to the users that help them better express their personalities, personal image, social preferences, hobbies or other aspects that they would like other users to know about themselves. These tasks, also known as Social DNA on our platforms, are based on our big data analysis of user behavioral and profile information as well as users' own choices. We are then building these tests into our algorithm, which will make more relevant recommendations of people and content accordingly. This project is a pioneering experiment that helps us better understand how people connect and interact effectively in an open environment. It shows our commitment to improving the efficiency in helping our users discover new relationships and build meaningful interactions on Momo.

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Yan Tang, Momo Inc. - Chairman & CEO [19]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [20]

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[Interpreted] Now in the second area of focus, penetrating into the lower-tier markets through tailor-made product and marketing approaches. In Q1, we launched Momo Lite, which is a stand-alone version of Momo, that is fully connected on the back end to the core but loads much faster and requires much less data consumption than the main application. Although Q1 was relatively slow in development due to the constraint of resources caused by the stay-home order, we have been getting positive data feedbacks on Momo Lite. With the productivity coming back, we are now speeding up on the iterations to enhance the user experience. On the main application, we also have started showing localized version with tailored content and activities that better appeal to the users in lower-tier cities. Soon, we will be supporting these new product efforts with the promotion programs that are also tailor-made for the lower-tier markets. We believe these initiatives will help us better satisfy the social demand in different geo regions and thus better seize the growth opportunities there.

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Yan Tang, Momo Inc. - Chairman & CEO [21]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [22]

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[Interpreted] On our last earnings call, I mentioned that due to the fragmentation of the open social space and the diversity of social preferences, we are adopting a portfolio approach to better serve the social demand of our users. This is also an important strategy for us to penetrate the market more effectively and strengthen our leadership in the open social space. During the past few months, we're having solid progresses on that front. For example, Hezi or Hertz in English, an audio-based dating application we launched last year, have already scaled to a level where we can start monetizing and reap profits to support its own growth. In addition, we also have a number of other projects branching out to different subsectors within the social and entertainment space. Some of these projects are starting to take shape. We look forward to sharing more information as the year progresses.

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Yan Tang, Momo Inc. - Chairman & CEO [23]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [24]

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[Interpreted] Overall, Q1 2020 has been a tough and yet very fruitful quarter for us. I'm glad that the team have been able to stick to our goals and keep pushing forward on the strategic front. Although the macroeconomic environment is probably going to remain as a headwind for the coming few months, we are seeing plenty of growth opportunities ahead of us. We will continue to pursue these opportunities and drive value for our shareholders. Thank you for trusting Momo.

With that, I'm handing over to Wang Li for business review. Wang Li, please.

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Li Wang, Momo Inc. - COO, President & Director [25]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [26]

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[Interpreted] Thanks. Now let me take you through the progresses we've made across our key business lines.

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Li Wang, Momo Inc. - COO, President & Director [27]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [28]

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[Interpreted] Firstly, on live broadcasting, total revenue from live broadcasting business for the first quarter 2020 was CNY 2.33 billion, down 13% from the same period last year. As we mentioned on the last earnings call, the pressure on live broadcasting business was due to the compound of a number of different factors, among which the 2 most important ones are the economic impact of the COVID-19 adversely affecting the consumer sentiment, especially among the top of the pyramid paying users and the pressure around the traffic in connection with the virus outbreak.

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Li Wang, Momo Inc. - COO, President & Director [29]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [30]

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[Interpreted] In view of the challenging environment, the biggest priority of the team is to strengthen the product and operational efforts to mitigate the impact on revenue. After Chinese New Year holiday, the team rolled out a number of new gameplays within live broadcasting to improve the paying experience. Many of these are interactive gifts similar to the Penguin, which largely focus on improving the engagement and spending from the middle cohorts via mini game content. In the second quarter, we plan to continue to step up the operational efforts to drive the engagement and spending from the middle layers of the spending pyramid. Many of the planned efforts will revolve around building richer content experience that appeal to the middle layer and long-tail audience base.

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Li Wang, Momo Inc. - COO, President & Director [31]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [32]

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[Interpreted] The other thing that we believe is critical for driving middle cohorts and long-tail spending is to have an effective mechanism that discovers and supports new and entry-level performers. This is an area where we see a lot of opportunities for optimizations and improvements. It is also a key area of focus for the team in the coming few quarters.

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Li Wang, Momo Inc. - COO, President & Director [33]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [34]

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[Interpreted] For the high-paying users, given that most of them are private business owners, whose financial conditions were pressured by the pandemic, we believe that our efforts should focus on keeping them engaged rather than letting them spend more. One of the key issues we had last year was that the top vendors were becoming less enthusiastic about the quarterly tournament events. So this year, we rebranded the tournament experience into a new competition event that we call the producer program. The new program was created as an online version of Xun Le Hui or the offline VIP music tours which was a big success last year.

It is called the producer program because we let the top vendors play important roles in the event. They get to handpick their favorite performers to form their own task force and compete with others as a team. In early April, we held the first season of the producer program. Although the overall spending was lower than the prior tournament events due to the negative wealth effect in connection with the pandemic, the level of participation from the top spenders improved meaningfully as compared with what we saw in the quarterly tournaments last year. We plan to continue to optimize on it and roll out a second season somewhere in summer.

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Li Wang, Momo Inc. - COO, President & Director [35]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [36]

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[Interpreted] Now turning to VAS. Wang Yu will talk about Tantan's business later, so I will be focusing on the VAS business for the quarter. Revenue from VAS on an ex Tantan basis reached CNY 800.1 million in the first quarter of 2020, a 31% increase on a year-over-year basis. The decrease in the number of active users and engagement levels had direct impact on VAS business. However, as compared with live broadcasting, VAS is still under monetized. In addition, because the paying user structure for VAS is long tail driven, it's much more resilient in a tough macro environment. Therefore, in order to alleviate the stress on overall revenues in Q1, we pushed the gas pedal a bit harder to drive revenue growth through operational events and richer paying experiences.

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Li Wang, Momo Inc. - COO, President & Director [37]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [38]

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[Interpreted] As Tang Yan mentioned earlier in his remarks, in Q1, we introduced a couple of new moderated experiences in the chat rooms. These experiences are inspired by some of the popular dating reality shows and moderated by professional hosts in the commercial chat rooms. Momo users cannot only enjoy the show as audience but also participate and become part of the show. We see a lot of potential in expanding this content genre on Momo because it makes a fun consumer experience that is compatible with our core user mentality. At the same time, it also bears considerable commercial value based on a proven model. In Q1, the chat room experience shined, both in terms of engagement growth and in terms of revenue contribution. We expect it to continue to act as a key driver for the VAS business for the rest of the year.

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Li Wang, Momo Inc. - COO, President & Director [39]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [40]

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[Interpreted] Other than the chat room experience, we are working on a number of new projects that have the potential to become future revenue drivers. For example, as Tang Yan mentioned, Hezi or Hertz, which is an audio-based dating application, is gaining traction within younger demographics. We have already started monetizing the application and put the revenue back into marketing, so that we can drive a virtuous cycle to grow it into a bigger scale. In addition, Hong Niang or the match making experience, which we started testing last year on the core Momo, is also making good progress. I'm very optimistic that these new projects will bring new revenue growth opportunities down the road.

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Li Wang, Momo Inc. - COO, President & Director [41]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [42]

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[Interpreted] Now briefly on other business lines. Mobile marketing revenue declined 29% year-over-year to CNY 57.16 million due to the strong macro headwinds as well as our strategy to underweight the line in terms of resource allocation. Jointly operated game business continued to trend down in Q1 and will likely fluctuate around the current revenue level for the coming few quarters.

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Li Wang, Momo Inc. - COO, President & Director [43]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [44]

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[Interpreted] That's the business review of the core Momo. Now let me hand over to Mr. Wang Yu for a review of Tantan's product and business development. Mr. Wang, please?

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Wang Yu, Tantan Limited - Co-Founder & CEO [45]

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Thanks. So let me briefly review Tantan's operational and business development in the past quarter and our next step plans. First, on user metrics. As many of you know, we had some issues around user retention, which caused a number of daily active users to be under pressure since September last year. Last December, through a series of products and algorithm optimizations, we fixed the issue and pushed the retention back to where it was before the download suspension happened.

As we stepped up the channel marketing efforts in January, we saw the DAU grow rapidly during the 2 weeks period from late January to mid-February. However, since February 10, as the spread of COVID-19 continues beyond Wuhan and the nation-wide lockdown kept getting elevated, we have seen the dating sentiment quickly waning, creating headwinds to new registration as well as the paying conversions on Tantan. In response to these situations, we scaled back our marketing spending in March due to ROI considerations.

The combination of the above-mentioned factors have caused the active users to trend down since mid-February, which led to a 300,000 net decrease in the number of paying users to 4.2 million at the end of Q1. With the lockdowns lifted and the outdoor activities gradually coming back, we expect to see dating sentiment start to recover gradually as well. However, we also believe this can be a progressive process as most of the people are still wearing masks outdoors, and it can take time for young people in China to completely let down the psychological barrier to meet someone he did not know well for intimate interactions.

The other thing worth mentioning is that although the number of active users were under pressure during Q1, the number of active female users and their engagements gradually grew on a sequential basis. This tells us that female users are less focused on online to offline conversions, are more into building deeper level online emotional connections. It confirms our belief that by adding richer online interactive features, we can make Tantan appeal to a broader base of users.

Now briefly on revenues. Total revenue for the first quarter was RMB 381.7 million, up 29% year-over-year and a slight uptick from the previous quarter. Although the number of paying users decreased pretty meaningfully, the ARPPU grew significantly due to the outstanding performance of Flash Chat and revenue mix shifting more towards higher ARPPU subscriptions. The grossing to revenue conversion is another factor for the ARPPU increase.

Now let me give you an update on the progresses we made against our key strategic priorities. First, some product and operations. Our key focus here is to enrich the product experiences in order to drive the long-term user retention. In our early days, Tantan started from the metropolitan cities in China and focused on college students and people in the late teens and early 20s. The simple swipe and match experience were quite effective for this demographic. As Tantan's user base grow and the demographic broadens, we need more features and experiences to better serve the increasingly diversified social preferences.

In November last year, we rolled out the Flash Chat experience on Tantan, which allows the opt-in users to get immediately connected with someone for a conversation before they focus too much on profile pictures. The new feature has been well received, driving immediate surge in the number of 2-way messages. It also opens up new monetization opportunities. As Quick Chat continue to gain traction among users, revenue also ramped up rapidly in Q1, now representing more than 10% of our total revenues. We believe there's still a lot of potential in this experience, and we'll continue to optimize and drive growth from it.

The success of Flash Chat proves that adding new features the right way can indeed benefit us, both in terms of engagements and in terms of financials. In Q1, we also accelerated the rollout of the new version, which features Nearby Posts to allow users to share more aspects of their lives as well as make new discoveries based on content. Up to now, the new version has already reached 100% coverage among Tantan users. Like many other social networking products, having a Tantan community is very critical for driving meaningful interactions between users. The introduction of the Nearby Posts is an important step that we've taken to provide Tantan users richer ways to connect beyond our signature swiping experience.

We will continue to optimize the new version and enhance the community experience around it. In Q1, we also move deeper with the internal testing of an important consumer experience, the live video service. We believe this was especially important during the social distancing period as it provides an alternative way to connect virtually and make people feel less isolated. In mid-April, we released more users into the testing group. As the number of users grow, we can now invite more quality broadcasters onto the platform and improve the quality of content, which will further drive improvements in user engagements as well as the monetization potentials.

Now a brief update on monetization efforts. Obviously, the testing of live video is not just an endeavor to improve user experience, but also an effort to unlock the monetization value of the platform. We believe that Tantan users have strong willingness and motivation to pay for value-added services in order to enhance their social experience. However, this huge paying potential needs to be unleashed by a combination of subscription and ala carte features. Live video is a proven monetization mechanism that drives ARPPU and which, if done carefully in the right way, it can also contribute to user engagements.

We intend to continue the testing with extreme prudence and carefully monitor the data to make sure we stay on the right track with Tantan's core mission, which is helping users build romantic relationships. Other than live video, we also have a number of other priorities, which include optimizing the Quick Chat experience and the existing subscription features as well as testing the formula of other new revenue features. We will continue to give you guys updates as the year progresses. Those are the key things that I'd like to cover for today.

Now let me pass the call over to Mr. Jonathan Zhang for financial review. Zhang, please.

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Xiaosong Zhang, Momo Inc. - CFO [46]

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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 2020 was RMB 3.59 billion, down 3.5% year-on-year or 23% quarter-on-quarter, exceeding the high end of our revenue guidance. Non-GAAP net income attributable to Momo was RMB 736.3 million compared to RMB 910.3 million from the same period of 2019 or 19% decrease year-over-year.

Let me jump into the review of cost and expenses items as revenue line items have been covered comprehensively by Wang Li and Wang Yu earlier. Our non-GAAP cost of revenue for the first quarter of 2020 was RMB 1.85 billion, same as Q1 last year. Non-GAAP cost of revenue as a percentage of total revenue was 51.5%, an increase from 49.7% from Q1 2019. The non-GAAP gross profit margin for Q1 2020 was down 1.8% year-on-year. The decrease was partially attributable to higher payout, which was primarily due to higher revenue contribution from agency represented broadcasters. Secondly, certain fixed nature cost items such as headcount and depreciation of fixed assets related impacted the gross margin negatively as the total revenue declined, and these items represent a higher percentage of total net revenue.

Non-GAAP R&D expenses for the first quarter was RMB 217 million compared to RMB 207.4 million for the same period last year, representing 6% and 5.6% of total revenue, respectively. The increase in R&D expenses was mainly due to the headcount increases during the year. On a sequential basis, the non-GAAP R&D expenses decreased from CNY 244.3 million in Q4 last year due to the year-end bonus incurred. We ended the quarter with 2,344 total employees, of which 725 are from Tantan. R&D personnel as a percentage of total employees for the group was 56% compared to 54% Q1 last year.

The non-GAAP sales and marketing expenses for the first quarter was RMB 645.3 million or 18% of total net revenue compared to RMB 567.5 million or 15.2% of total revenue for the same period last year. The year-on-year increase in sales and marketing expenses was mainly due to higher marketing spending from Tantan and to a lesser degree for Momo as well. On a sequential basis, sales and marketing expenses decreased due to less marketing spending from Tantan in response to the COVID-19 outbreak.

Non-GAAP G&A expenses was RMB 105.5 million for the first quarter 2020 compared to RMB 92.9 million for the same quarter last year, representing 2.9% and 2.5% of total net revenue, respectively. Non-GAAP operating income was RMB 801 million, a decrease of 21% from Q1 2019, representing 22.3% non-GAAP operating margin for the quarter, down 5 percentage points from the same period last year.

Now briefly on effective tax rates. Starting from the beginning of 2020, one of our major profit-making subsidiary's preferential income tax rate changed from 12.5% to 15%. As a result, our consolidated non-GAAP effective tax rate was around 19% for the first quarter, up 3 percentage points from the same period last year.

Now turning to the balance sheet and cash flow items. As of March 31, 2020, Momo's cash, cash equivalents and short-term deposits totaled RMB 15.47 billion compared to RMB 14.93 billion as of December 31, 2019. Net cash provided by operating activities during the first quarter was CNY 543.5 million.

Lastly, for the second quarter of 2020 revenue guidance. We estimated our second quarter revenue come to the range from RMB 3.8 billion to RMB 3.9 billion, representing a decrease of 8.5% to 6.1% year-on-year and an increase of 5.7% to 8.5% quarter-over-quarter. Please be mindful that the forecast represents the company's current and preliminary view on the market and operational conditions, which are subject to changes.

The other thing worth mentioning here is that, up to this moment, Momo has made special cash dividends for the past 2 consecutive years. To replenish our U.S. dollar funding consumed, the company will repatriate RMB 2.2 billion in total from our WOFE in China to our offshore entity before the second quarter end. In accordance with the respective taxation laws in China, the company will pay 10% or RMB 220 million withholding tax to Chinese tax authorities. The withholding tax payments will be recorded as income tax expenses for the company in the second quarter 2020.

That concluded our prepared portion of today's discussion. With that, let me turn the call back to Cathy to start Q&A. Cathy, please.

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Cathy Peng, Momo Inc. - Head of IR [47]

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Yes. Just a quick reminder. For those who can speak Chinese, please ask the questions in Chinese first followed by English translation by yourself. And also please try to limit the number of questions to either 1 or 2, so that more people get to ask questions. Operator, we are ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Thomas Chong of Jefferies.

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Thomas Chong, Jefferies LLC, Research Division - Equity Analyst [2]

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(foreign language) My question is on 2 parts. First is about the Q2 revenue guidance and the second half outlook. Can management share more about the core Momo live streaming and Tantan business trends in the coming quarters? And my second question is more relating to the Tantan side. Given that you have started testing for the live streaming services, can management share about what lessons we have learned from the testing? Would that affect the dating ecosystem? And any KPI that we should expect for the live streaming revenue for the year?

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Yan Tang, Momo Inc. - Chairman & CEO [3]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [4]

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[Interpreted] So the first part of the question on the Q2 guidance. The company's Q2 guidance is based on some of the recent trajectories that we have been seeing and also management's assumptions for the coming couple of months. We can see it in several components. Firstly, for live broadcasting, based on some of the trends that we've seen so far into the second quarter, we believe that the macro conditions, especially the economic condition of the private business owners, are going to continue to be a headwind to to the consumer sentiment, especially that among the higher-paying cohorts. And the other factor that we put into the Q2 guidance is the suspension of live broadcasting service during the national mourning day. That is also going to pressure the overall revenue by a couple of percentage. So the rate of y-o-y decrease in the second Q for Momo's live broadcasting is going to be a little bit higher than what we saw in Q1. But on a sequential basis, live broadcasting is still going to see a pretty nice rebound from the first quarter. And for VAS, I think because of the recovery of traffic, the pressure around the revenue is going to ease up. At the same time, the team also has a plan to scale back on some of the very ARPPU-oriented operational efforts. But overall, we expect the y-o-y growth rate for VAS to be able to maintain the same level as we saw in Q1. Now for Tantan, our expectation is that we're going to see some acceleration. The y-o-y growth rate is going to see some acceleration from Q1's level. And the main driving factors would be the recovery of users as well as the contribution from new revenue project.

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Yan Tang, Momo Inc. - Chairman & CEO [5]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [6]

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[Interpreted] With regards to the revenue outlook for the second half of the year, currently, we believe that the uncertainties at the macro level are probably going to be lingering for some time. But actually, we are still pretty optimistic about the revenue outlook in the second half. And here are some driving factors that we're looking at. Firstly, for live broadcasting, we're going to continue to roll out product and operational efforts. We believe that these efforts will take effect on a progressive basis. For VAS, it's not as deeply monetized. So we do see plenty of headroom for further growth. At the same time, it is also going to be much more resilient in a tough macro environment. As we said on the four parts of this call, based on where we are with the chat room experience and also based on where we are with a number of new projects that we're currently running under VAS, we think that VAS revenue is going to continue to grow very rapidly as we head into the second half of the year. And thirdly, on Tantan, we have already been seeing a recovering trend in Tantan users. And as we said, the new revenue engine is also beginning to warm up. Now even based on the very initial testing data, we can see that there is indeed a huge monetization potential in Tantan's user base. Such potential will start to get released in the second half of the year in a graduated and methodical manner. So I guess, based on these driving factors, we are pretty confident that the revenues in the second half of the year is going to see a pretty meaningful growth from the first half of the year. Now here is Wang Yu for the second question on Tantan.

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Wang Yu, Tantan Limited - Co-Founder & CEO [7]

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Okay. So regarding the live video test results, the test results have been very encouraging so far. Several things are worth sharing here. What matters most to us in the testing is that we don't want to see any new monetization features adversely affecting the dating ecosystem metrics. We've been testing live video for several months now. It's clear that it does not have any negative impact on dating. In fact, I'm happy to see several important dating metrics we follow having turning up and recently reached historical highs. For example, the amount of 2-way messages per user, not only per user, but total amount of 2-way messages is at its historical peak right now. The number of matches and the [percentage] (corrected by company after the call) of matched users. So if we do it the right way, it's possible that live video can even be positive to dating. Second, after we released more users into the testing group, the different operating and revenue metrics around live video services started to ramp up very rapidly. These metrics include the paying ratio, ARPPU, time spent, et cetera. The trajectories that we are seeing confirms our belief that Tantan's user base -- there are huge paying potentials to be released. What's more encouraging is that the current paying structure is extremely long-tail driven, which reflects the attributes of Tantan users. With regards to revenue outlook, we're still at a testing phase, and therefore, I do not want to be too prescriptive about the annual numbers. But based on the current trends, we believe that it can be a meaningful driver in the second half. Thanks.

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Operator [8]

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Our next question is from the line of Tian Hou of T.H. Capital.

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Tianxiao Hou, T.H. Capital, LLC - Founder, CEO & Senior Analyst [9]

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(foreign language)

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Li Wang, Momo Inc. - COO, President & Director [10]

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(foreign language)

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Yan Tang, Momo Inc. - Chairman & CEO [11]

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(foreign language)

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Cathy Peng, Momo Inc. - Head of IR [12]

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[Interpreted] Okay. Let me translate the first question on Momo Lite first. So far, we haven't run any large-scale promotional campaigns around the Lite version. But at this point, it has already built up a pretty sizable user base. However, as compared with the main version, the overall user base on the Momo Lite version is still relatively small. Our plan is that starting from the third quarter, we're going to step up the marketing efforts around the Momo Lite. Our expectation is that starting from the second half of the year, Momo Lite will start to make some meaningful contribution to the overall user base as the core application. With regards to the monetization potential, at this point, the Lite version only has membership and live broadcasting. But based on the live broadcasting data, the willingness to pay and the paying potential on Lite is not any weaker than that the users on the main app. But at this point, there are just not as many core paying experiences on the Lite as there are on the main versions because the focus of the team is still on improving user experience and building up the scale. I think we're going to start to open up more monetization opportunities at a pace that we deem fit. So that's for the Lite version.

Regarding the second question on the e-commerce-related live broadcasting, as management of the company, we've actually noted the rising trends and the rising popularity of the e-commerce-related live broadcasting of some of the major e-commerce platforms. And this is indeed one of the areas that we have been closely monitoring. And we are also pretty actively studying and exploring some of the potential opportunities that we can potentially seize. But at this point, we are not at the stage to share any deeper information publicly yet, maybe later. So that's the answer to both of the questions.

Operator, I think we're ready to take one last person and then ready to close given time.

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Operator [13]

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We have our next -- our last question from the line of Daniel Chen, JPMorgan.

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Qi Chen, JP Morgan Chase & Co, Research Division - Research Analyst [14]

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(foreign language) I will translate myself. My first question is on Tantan. So we do see that on the dating market many other companies have launched kind of various dating products such as Soul and Yidui and Tencent also launched some new products. So could management comment on the competitive landscape and how Tantan is going to cope with the competition? Second question is on the margin. Could Jonathan provide some update on the second quarter and like full quarter margin trend and also the trend of the key cost items?

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Wang Yu, Tantan Limited - Co-Founder & CEO [15]

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Okay. So regarding competition and competitors, like you mentioned, Soul and Yidui are probably the biggest ones other than Momo and Tantan at the moment. But as far as we know, they are focused on very different areas, while we are committed to helping users build romantic relationships. And as I've mentioned earlier, enriching the services and features is very critical in our user growth strategy. So we will definitely be considering adding more features in order to further strengthening our product offering. Thanks.

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Xiaosong Zhang, Momo Inc. - CFO [16]

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This is Jonathan. Let me address your margin questions. Let me answer that in 2 aspects. For core Momo, actually, as Tang Yan mentioned, based on the sequential revenue growth, we are very confident that we're going to achieve the revenue sequential growth annual target. And at the same time, we're going to maintain discipline in managing our costs and expenses to help us to achieve annual non-GAAP operating margin at 30%, as I discussed last earning conference call. So that's still our target. And also, our operating gross margin will be relatively stable. The only variable factor is the payout. So we do see a couple of percentage pressure based on the higher percent of the revenue contributed by the agencies down the road. And also, we allocate certain budget for promotional events. And then we're going to, on a rolling basis, manage our selling and marketing expenses. The rest of the operating expenses, R&D and G&A, are relatively fixed in nature. As the revenue continues to grow, we will see some operating leverage. So that's for core Momo.

For Tantan, we do see a potential for faster growth on Tantan's revenue. And however, we believe at this stage Tantan's priority is still focusing on achieving a user base recovery and then acceleration of the user base growth. So they would like to reinvest some of the additional profits generated by the new revenue driver into the selling and marketing to support that initiative and then for the rest will help to further accelerate the deceleration on net loss. So for the full year, the net loss on Tantan will come down sequentially on a quarterly basis.

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Cathy Peng, Momo Inc. - Head of IR [17]

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Great. Operator, we're ready to close.

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Operator [18]

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Thank you. Ladies and gentlemen, that concludes the conference for today, and thank you for participating. You may now all disconnect.

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Cathy Peng, Momo Inc. - Head of IR [19]

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Thank you. Thank you for joining us. We'll see you next quarter. Goodbye.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]