Hello Group Inc. (NASDAQ:MOMO) Q3 2023 Earnings Call Transcript
Hello Group Inc. (NASDAQ:MOMO) Q3 2023 Earnings Call Transcript December 8, 2023
Hello Group Inc. reports earnings inline with expectations. Reported EPS is $0.42 EPS, expectations were $0.42.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Third Quarter 2023 Hello Group Inc. Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [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. Ashley Jing. Thank you. Please go ahead, ma'am.
Ashley Jing: Thank you, operator. Good morning, and good evening, everyone. Thank you for joining us today for Hello Group's third quarter 2023 earnings conference call. The company's results were released earlier today and are available on the company's IR website. On the call today are Mr. Tang Yan, CEO of the company; Ms. Zhang Sichuan, COO of the company; and Ms. Peng Hui, CFO of the company. They will discuss the company's business operations and highlights, as well as the financials and guidance. They will be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this call may contain forward-looking statements made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties, and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future event, or otherwise, except as required under law.
I'll now pass the call over to our COO, Mr. Zhang Sichuan. Ms. Zhang, please.
Zhang Sichuan: Hello, everyone. Thank you for joining our call. We are pleased to report strong financial results for the third quarter and steady progress on various strategic priority across all business lines. I will now walk you through the details of our work for the quarter end. Together with Tang Yan and Cathy, take questions in the Q&A session that follows. I will start with a brief overview of our financial performance. Total group revenue was RMB3.04 billion, down 6% year-over-year and 3% sequentially, exceeding our previous guidance. The main reason for the decline in revenue were the consumption softly caused by the softer economy and product adjustments we made to maintain a healthy community ecosystem. Adjusted operating income was RMB681 million, up 30% year-over-year, but down 4% sequentially.
Profit margin was 22.4%, up 3.7 percentage point year-over-year and down slightly, 0.2 percentage point quarter-over-quarter. Compared to the same period with last year, adjusted operating profit increased significantly despite lower revenue. This improvement was driven by our effective cost optimization and efficiency improvement initiatives, which turned Tantan profitable compared to a year ago as well as supported the stable productivity of Momo cash cow business. Total revenue from the Tantan app from the Momo app and standalone new app was RMB2.74 billion, down 5% year-over-year and 3% sequentially. Adjusted operating income was RMB675 million, up 4% year-over-year and down slightly 1% quarter-over-quarter with a margin of 24.6%, up 2.2 percentage points year-over-year and 0.4 percentage point quarter-over-quarter.
Profit margin improved despite the decline in revenue, primarily due to our team's solid ability to control costs and expenses. Total revenue from Tantan came in at RMB295 million, down 40% year-over-year and 8% sequentially, mainly due to our reduction in channel investments, combined with our anti-spam initiatives, resulting in a drop in our user base. Thanks to improvements in staff and channel marketing efficiency. Tantan achieved an adjusted operating income of RMB27.6 million in the third quarter with a margin of 9%. Adjusted operating loss in Q3 last year was RMB38.3 million and adjusted operating income in the previous quarter was RMB31.9 million. Now I will discuss the progress we made against our strategic priorities and future development plans for Momo, Tantan and the new endeavors.
Starting with the mature Momo app. Our goal for Momo is to keep the users and revenues scale stable, continue to optimize cost structure and maintain the productivity of the cash cow business. To achieve this goal, our team has focused on two aspects, product operation and cost and expenses. First, we mitigated revenue pressure from the external environment by continuously optimizing product operations and introducing new monetization features. Second, we maintain broadly stable profit margin by improving cash unitization and staff efficiency. The group's better than expected financial performance in Q3 was mainly due to the better than expected financial performance of the Momo app. Now, I will walk you through the details. Firstly, on the product and operational front, our focus on product operations this year has been stabilized as user base and improve monetization efficiency, while focusing on providing timely social experience and enriching the content supply.
Our product team further integrated user products and consumer products to improve the overall monetization efficiency of the platform. On the channel side, the continuous improvement in user acquisition efficiency provides an effective way to maintain the stable of the user base under the strategy of cost optimization and efficiency improvement. Thanks to lower unit acquisition costs. We acquired 40% more new users on a slightly lower channel investment year-over-year. In Q3, the number of active users declined slightly quarter-over-quarter due to the start of school year and VAS product adjustments, but the extent of the decline was less than a year ago. On a year-over-year basis, the total user scale was still slightly lower, but the gap has narrowed significantly compared to the first half of the year.
In quarter three, the number of Momo paying users decreased by 100,000 to 7.8 million from the previous quarter, mainly due to the policy adjustments in VAS membership, which result in a decline in the number of VAS paying users. Now let's go through the productivity of our Momo cash cow business. In the third quarter, Momo's live streaming revenue was RMB1.41 billion, down 7% year-over-year and 2% sequentially. The pressure on revenue mainly came from a softer consumer sentiment. Considering the current macroeconomic environment, our team decided to reduce revenue oriented competition events. Meanwhile, on the product front, we have launched new interactive gamified features that enable us to keep the number of core paying users relatively stable.
The launch of interactive gamified features has not only improved the paying user experience of middle and long-tail cohort users, which plays a positive growth in stabilizing livestreaming user engagement, but has also created new revenue streams for long-tail broadcasters in a transitional showroom live streaming business. In the third quarter, the revenue sharing ratio of live streaming decreased slightly quarter-over-quarter, mainly due to the reduction in event related bonuses. User oriented operational efforts led to a slight decrease in the proportion of revenue contributed by talent agencies, but engagement of the supply side remains stable. In the third quarter, VAS revenue, excluding Tantan, totaled RMB1.3 billion, down 3% year-over-year and 2% sequentially.
VAS revenue from the Momo app totaled RMB1 billion, down 12% year-over-year and 6% quarter-over-quarter. Revenue from the standalone app was RMB295 million. The year-over-year growth accelerated to 51% and revenue was up 30% sequentially. The decrease in Momo VAS revenue was mainly due to our proactive product adjustments to improve the overall ecosystem and the impact of macroeconomy on consumer sentiment. As I mentioned earlier about our user product, in order to improve the monetization efficiency of the Momo app, we have embedded assets to pay experience in, for example, nearby people and some other non-paying features. The income in DAU and the paying ratio of audio and video based VAS experience, particularly mitigated the pressure on revenue caused by product adjustments and the external environment.
The overall VAS revenue sharing ratio decreased slightly quarter-over-quarter, primarily due to the discontinuation of lower gross margin features following our ecosystem adjustments. This shift in the product mix contribute positively to the improvement in VAS gross margin. Now, let's review Tantan's performance. Our strategic goal for Tantan is to achieve overall breakeven from a year end developed product and monetization models that are suitable for the Asian dating culture in order to pursue sustainable growth on the back of a positive business cycle. Over the past year, Tantan has made solid progress in reducing low-efficiency channel marketing spend to achieve breakeven. It delivered first operating profit at the beginning of this year and maintain profitability in Q3 despite lower revenue.
However, we still have a long way to go in achieving our strategic goal of sustainable growth on the back of positive business cycle. The underlying reason is that we have yet to make breakthroughs in the development products and monetization models that are suitable for the Asian dating culture. The ongoing anti-spam campaign started this spring, coupled with the seasonal impact of the new school year put notable pressure on content user base in September. MAU decreased 9% sequentially to 15.7 million. As of the end of Q3, Tantan has 1.4 million paying users despite a decrease in overall user base. The paying user count remained stable sequentially, primarily due to our commercial product team's efforts to improve user paying experience and higher stickiness of the group compared to non-paying users.
Total revenue for the third quarter was RMB295 million, down 40% year-over-year and 8% sequentially. The year-over-year decrease was solid contributed to a reduction in the number of paying users caused by decline of overall user base. Thanks to improvement in growth products and channels. ARPPU increased by 20% from a year ago, which particularly offset the revenue loss from the decline in paying users. The sequential decrease in revenue was mainly due to significant impact of softer macroeconomy on the streaming -- live streaming business. Additionally, the policy adjustments on automatic renewal by the Ministry of Industry and Information Technology has some impact on VAS membership subscription revenue. However, Tantan's gross margin was up by nearly 4 percentage points year-over-year and 1 percentage point quarter-over-quarter, driven by the greater revenue contribution of VAS business, which carries a higher gross margin.
As I mentioned at the beginning, the decline in users and revenue of Tantan has mainly attributes by -- to our initiatives in cost optimization and efficiency improvement. In terms of improving staff efficiency, we have continued to reduce features and operational activities that cannot provide high quality user experience and incremental revenue and realigned human resource accordingly. In terms of improving marketing efficiency, we have continued to reduce unit acquisition costs and further cut marketing expenses that cannot generate positive ROI. Although, this approach has resulted in a reduction in the number of users and revenue, the cost optimization strategy has brought greater benefit to our bottom line as the market spend that we cut were ROI negative.
This is why despite lower revenue, Tantan still achieved adjusted operating income of RMB27.58 million in the third quarter. So now I would like to walk you through the details of Tantan's progress on the channel and product front. Firstly, on the marketing front, the unit acquisition cost of App Store increased sequentially in the third quarter due to the decline on its own traffic. Our team timely adjusted the proportion of investment across different channels in order to acquire more users while controlling the increase in unit acquisition costs to low-single digits sequentially. On the product and operational front, the biggest achievement in the third quarter is that we managed to maintain spamming activity to a low level significantly, and therefore, the community returned to normal.
Our product team emphasized guidance of real person authentication on the swipe and match homepage. The increase in real person authentication rates positively contribute to the improvement of the community ecosystem. In terms of commercial products, on top of the basic monthly membership service, we launch a variety of pay-as-you-go privilege that aims to increase exposure and improve matching efficiency. As a result, our VAS active group continued to grow on both on a year-over-year and a sequential basis, largely offset the impact of user decline on VAS revenue. However, due to the lack of breakthrough in user products, our user retention unfortunately have not yet been stable or successfully improved. Additionally, the outbreak of spamming activities combined with a softer spending among live streaming users led to a decline in channel ROI.
Therefore, our team's execution for the rest of this year has been focusing on further reducing costs and channel investments. Relocating exceeded access human resources to new endeavors and driving ARPU growth through new product features on the basis of operational efficiency improvement until ROI turns positive. Lastly, in terms of new endeavors, our goal is to enrich our product portfolio push the boundary beyond Momo and Tantan to develop long-term growth engine. In the third quarter, total revenue of the new app included social and games products was RMB302 million, up 49% year-over-year and 50% sequentially. Among them, VAS MAU revenue of domestic and overseas social products was RMB295 million, up 51% year-over-year and 30% sequentially.
For domestic apps, given their relatively mature stage, the operational focus on our team is to control costs and expenses while pushing harder on monetization, so that profit can grow in line with revenue. Now, in terms of our overseas business, thanks to our border market space. Revenue in the third quarter continue to grow rapidly from a higher base. The introduction of new features together with our paying user focused acquisition strategy play a pivotal role in driving revenue growth. In Turkey, which accounts for a substantial portion of overseas market revenue, significant currency fluctuations during the quarter impacts revenue and exerting pressure on gross margins. To protect profit, our team reduced channel investments in a timely manner, resulting in continued sequential growth of operating income.
At the moment, we have mitigated some of the problems affected the profitability level of overseas business and is expected that it will deliver better sequential performance in both revenue and profit at the end of the year. So this concludes my remarks. Now I will pass the call over to Cathy for the financial review. Cathy, please.
Hui Peng: Thank you, Sichuan. Hello, everyone. Thank you for joining our conference call today. Now let me briefly take you through the financial review. Total revenue for the third quarter 2023 came in better than our previous expectation at RMB3.04 billion, down 6% year-over-year and 3% quarter-over-quarter. Non-GAAP net income attributable to the company was RMB605.9 million, up 13% year-on-year, but down 4% from the previous quarter. Net income significantly outperformed our expectation mainly due to two factors: one -- number one, better than expected top line performance; and number two, our continuous cost control efforts resulted in better than expected profitability for both Momo and Tantan. Net income continued to grow on a year-over-year basis despite lower revenue, thanks to our effective cost optimization and efficiency improvement initiatives, which enabled us to maintain the stability of Momo cash cow business turned Tantan profitable as well as support the development of new endeavors.
Now let me walk you through the details. Looking into the key revenue line items for the quarter. Firstly, on live broadcasting. Total revenue for live broadcasting business for the third quarter of 2023 was RMB1.53 billion, down 8% year-over-year and 4% quarter-over-quarter. The decrease was mainly due to a soft consumer sentiment in the current macro environment. And to a lesser degree, Tantan pivoting away from the live streaming service, which we deem is not the priority for Tantan at this point for the dating business. Momo app live broadcasting revenue totaled RMB1.41 billion for the quarter, down 7% year-over-year and 2% quarter-over-quarter. Tantan's live broadcasting revenue amounted to RMB120.0 million, down 14% from Q3 last year and 17% from the previous quarter.
Revenue from value-added service for the third quarter of 2023 was RMB1.47 billion, down 5% from Q3 last year and 2% sequentially. Revenue from value-added service on an ex-Tantan basis was RMB1.30 billion in the third quarter of 2023, down 3% year-on-year and 2% sequentially. The decrease in Momo app value-added service was due to our proactive product adjustments as well as the impact of macroeconomy on consumer sentiment. However, the downward pressure on Momo value-added service revenue was largely offset by the growth of stand-alone new apps. Tantan's value-added service revenue amounted to RMB168.4 million, down 16% from Q3 last year and 1% from the previous quarter. The decrease was due to the decline in paying users, which was in turn an outcome of us scaling back from the low efficiency marketing spend.
However, the downward pressure was partially offset by the growth in ARPPU driven by commercial product efforts. Now turning to costs and expenses. Non-GAAP cost of revenue for the third quarter of 2023 was RMB1.77 billion compared to RMB1.88 billion for the same period last year. Non-GAAP gross margin for the quarter was 41.8%. Gross margin remained relatively stable compared to the same period last year and the previous quarter. Non-GAAP R&D expenses for the third quarter was RMB186.7 million, compared to RMB223.4 million for the same period last year, or a 16% decrease Y-o-Y. The decrease was due to the continuous optimization and personnel costs. Non-GAAP R&D expenses as a percentage of revenue was 6.1% compared with 6.9% Q3 last year. We ended the quarter with 1,410 total employees, of which 314 are from Tantan compared to 1,750 total employees of which 479 from Tantan a year ago.
The R&D personnel as a percentage of total employees for the group was 64% compared with 62% Q3 last year. Non-GAAP social marketing expenses for the third quarter was RMB368.1 million, or 12.1% of total revenue compared to RMB458.6 million, or 14.2% of the total revenue for the same period last year. The significant year-over-year decrease both in terms of absolute renminbi amount and as a percentage of revenue was primarily attributable to Tantan's shift in marketing strategy to control costs and focus on channel ROI and to a lesser degree, Momo strategy to trim low-efficiency channel marketing spends. Non-GAAP G&A expenses was RMB76.5 million for the third quarter of 2023 compared to RMB82.6 million for the same quarter last year. G&A expenses as a percentage of total revenue remained largely stable at around 2.5% compared to Q3 last year.
Non-GAAP operating income was RMB681.2 million, up 13% from Q3 2022 but down 4% from the previous quarter. Non-GAAP operating margin for the quarter was 22.4%, up 3.7 percentage points from the same period last year, but slightly down 0.2 percentage points from the previous quarter. Non-GAAP operating expenses as a percentage of total revenue was 20.7%, a decrease from 23.6% in Q3 2022, but slightly up from 20.2% in Q2 this year. Non-GAAP expenses in absolute R&D amount decreased 17% year-over-year. This was due to a reduction in sales and marketing expenses and optimization and personnel costs. Now briefly on income tax expenses. Total income tax expenses was RMB158.1 million for the quarter with an effective tax rate of 21%. In Q3, the company accrued withholding income tax of RMB47.9 million, which is 10% of undistributed profit generated by our ROFE.
Without recording tax, our estimated non-GAAP effective tax rate was around 15% in the third quarter. Now turning to balance sheet and cash flow items. As of September 30, 2023, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits, short-term investments and restricted cash totaled RMB13.64 billion compared to RMB13.40 billion as of December 31, 2022. Net cash provided by operating activities in the third quarter 2023 was RMB582.5 million. Lastly, on business outlook. We estimate the group's fourth quarter revenue to come in the range from RMB2.9 billion to RMB3.0 billion, representing a decrease of 7.9% to 6.6% year-on-year or a decrease of 4.7% to 1.4% quarter-over-quarter. At segment level, for Q3 2023 on a sequential basis, we accept Momo revenue to decrease mid to low-single digits.
The decrease was primarily due to the pressure on value-added service from the product adjustment we made in mid-Q3, which will have a full quarter impact in Q4, and to a lesser degree, the macro impact on the overall spending sentiment. Considering the external environment, we've decided to cut back on the incentives to the agency driven year-end competition events. Therefore, revenue contribution from year end competition events will be quite limited. On the Tantan side, we expect revenues to decrease in low-teens, primarily due to us pivoting away from live streaming business in Tantan and to a lesser extent, the product adjustments we made to comply with the new policy rolled out by MIIT, which will have some negative impact on membership renewal revenue.
Please be mindful that this forecast represents the company's current and preliminary view on the market and operational conditions, which are subject to changes. That concluded the prepared portion of today's discussion. With that, let me turn the call back to Ashley to start Q&A. Ashley, please.
Ashley Jing: Thanks. Just a quick reminder before we start taking the questions for both who can speak Chinese, please ask your questions from Chinese first and followed by English translation by yourself. Thank you. And we're ready for questions, operator.
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