Hello Group Inc (MOMO) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Momo's First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today, Tuesday, the 19th of May, 2015.

I would now like to hand the conference over to your first speaker today, Ms. Cathy Peng, Investor Relations Director for Momo. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today for Momo's First Quarter 2015 Earnings conference call. The Company's results were released earlier today and are available on the Company's IR website.

On the call today for Momo are Mr. Tang Yan, Co-Founder, Chairman and Chief Executive Officer, and Mr. Jonathan Zhang, Chief Financial 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.

I'd 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 involved 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 contained in the forward-looking statements.

Further information regarding these and other risks, uncertainties and factors is included in the Company's filings with the US 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 to Mr. Tang. Ms. Vanessa Chen, our IR Manager will translate for him. Mr. Tang, please?

(Interpreted) Good morning everyone and thanks for joining the call today. Q1 was a busy and fruitful quarter for us and a great start to the year.

The scale of our platform continued to expand rapidly with MAU increase by 8.8 million during the quarter, reaching 78.1 million in March 2015, up 183% year-over-year.

I'm proud to see that as our overall user base rapidly expands, the average time spent per day in our platform remains approximately 30+ minutes demonstrating the healthy and stable engagement level and stickiness on our platform has.

In addition, I am delighted to see that our users are engaging with our platform in a more diversified manner. The number of groups increased to 5.5 million as of March 31st, 2015, up from 5.1 million last quarter. Furthermore, the number of users participating in groups as a percentage of total continued to trend up during Q1.

For the first quarter 2015, total revenue reached $26.3 million, up 383% year-on-year and 42% sequentially.

In the first quarter of 2015, we achieved profitability for the first time in our operating history, marking a significant milestone for Momo. Non-GAAP net profit for the first quarter of 2015 reached $9.4 million compared to a non-GAAP net loss of $270,000 for the same period last year and a non-GAAP net loss of $105,000 last quarter.

The bottom-line outperformance demonstrated the scalability of our business and the confidence we have in the efficiency of Momo's operating model.

I would like to remind our investors that our Q1 spending was relatively low due to seasonality as well as the timing of our marketing campaign. In addition, Momo is still a young platform at fast-growing stage. All these factors could cause fluctuations in our profitability levels for the quarters ahead.

We shared our strategic framework at the time of the IPO. I would like to reiterate two of the most important.

Firstly, as we have mentioned earlier, our number one priority is to keep growing our user base and increasing user stickiness and engagement. More specifically, in 2015, our main focus is still on product innovation as well as brand empowerment.

Secondly, on top of user growth, we are continuing to explore various monetization opportunities surrounding social entertainment and local services. We will focus on those initiatives that not only drive monetization but also enhance our user experience and increase platform activity and stickiness.

Next, I would like to walk you through some of the key initiatives we took during the past quarter and explain how this is fit into our overall strategic framework.

Starting from product innovation, in late April, we announced the major updated version Momo 6.0. During the past few quarters, we have constantly noticed that our users were becoming increasingly active on Message Board function.

For example, total number of refreshes on Message Board kept rising and was approaching the level of that on Nearby People List. At earlier stage, part of the social behaviors centered around Nearby People List were purely based on gender and appearance.

The recent trend showed that Momo users are showing more diversified social behaviors, paving the road for us to drive more social interactions based on the multidimensional user profile. With this upgrade, the revamped Message Board became the default page and Nearby People List reduced under Discovery function as a secondary page.

In the new version, after launching the app, users will immediately be facing a stream of posting by relevant users who share similar user profile in certain aspects such as hometown, college, profession, residential and workplace information as well as interest.

The order of the feed flow is defined by our algorithm, which is based on both physical proximity and the compatibility of user profiles. We have also redesigned the user interface to provide more incentives for users to complete their profiles on Momo so that our algorithm can deliver more relevant content and matches.

Another major change of version 6.0 is the debut of interest and location-based chat rooms. Compared to group, chat rooms are more loosely knitted and open network where a Momo user can easily participate in the conversations without preapproval from the group administrator.

We believe these changes will enable our users to better connect with the people and discover content they may find interesting and thus drive more interactions and stickiness on our platform.

Within the three weeks following the new version launch, 60+% of our MAU have migrated to the new version which is the fastest pace we've ever seen in our history of major upgrades. The preliminary stat showed that the result of the upgrade has met our first-step expectations.

More specifically, we have not seen any material negative impact to our old users while the number of daily new registered user is stable with a slight uptick and the overall traffic on our platform remained stable.

Our initial data showed that we're off to a good start in our effort to drive more diversified social behaviors. This is the upgrade we have seen a considerable improvement in the quality and efficiency of social interactions in between users. We will continue to keep optimizing the product and improve user experience surrounding the new features of version 6.0.

In addition to the newly launched functionalities, we're also working on a number of initiatives to introduce more content and build stronger user stickiness on our platform. For example, we're moving forward with our preparation to launch live performance show in the second half of this year. We're also working with third parties to allow more content sharing to our platform.

Now, I would like to give you an update on our gifting service which was launched in late January this year. During the first quarter, we listened to our user feedbacks, analyzed user behavior data and adjusted our product offerings and key feature sets accordingly while streamlining the related business process.

We're happy to see that this feature fits well into the various social components on our platform. The data we have seen since Chinese New Year also showed very encouraging growth from this product.

We believe over its long run, it will stimulate more interactions between users and increase the user stickiness on our platform. Based on user feedbacks and the problems we encountered in Q1, we plan to keep owning the system and adjusting the business process during the second quarter.

At the same time, we're also working to enrich the gift offerings and refine the user interfaces in order to deliver better user experience and create more social situations for each product.

Turning to monetization, total subscription members reached 3.1 million as of end of March 2015, up 138% year-over-year and a net add of around 200,000 during the quarter. We believe that when compared to last quarter, the smaller number of subscription in Q1 was mainly a result of seasonality, and in particular the late arrival of Chinese New Year.

Turning to gaming, in Q1 2015, we had 6.2 million active game players on Momo and launched eight new titles during the quarter. I'm happy to see that during the past six months, we were able to build a much more diversified game portfolio including role-playing games, strategy card games, casual games and shooting games.

In 2014, Momo Craft represented a big majority of our gross billing. During the first quarter, our top five games in aggregate accounted for 57% of gross billing while no single one contributed to more than 15% of our total gross billing.

In February 2015, we launched our first in-house developed game called Momo Xiong Xiong Xiao which is the casual puzzle game. We're extremely happy with the performance of this game. It was ranked No. 2 in iOS top game downloads ranking shortly after it was launched in February.

Despite its casual game nature, Xiong Xiong Xiao revenue performance exceeded our internal expectations. The outperformance of this game not only speaks to the possibility of in-house game development team but also showcases to the third party game developers how did games can be tailored and customized to leverage the social elements on Momo.

We also launched a number of jointly operated role-playing and strategy card games during Q1 and are seeing satisfying performance from them. For example, Cold Jokes, a 3D card game that we jointly operated was beta launched on Momo in March 2015.

Through premarketing among the users on our platform, Momo added a significant number of players to the game on its first day of launch and the game quickly shut up and ranking to No. 3 in the iOS top game downloads ranking after it was launched.

As one of the top mobile SMS platform in China, we have natural advantages in game distribution area compared to the standalone distribution channels. We're delighted to see that Momo as a distribution platform has been receiving gaming recognition from game developers and has become an important business partner for many of them.

Now, let me share with you how we view our mobile marketing business. During the quarter, our marketing revenues mainly came from our strategic relationship with 58.com and Alibaba. Both of which went pretty well during Q1.

However, due to the impact from the Lunar New Year, progress is still centered around preparation work and we've started to grab some of the low hanging fruits along the way. Looking forward, we are going to develop deeper relationships into more strategic areas with both of these partners.

For Alibaba, we will integrate more on the data and add format fronts. We're also working with them to explore other opportunities in combining social with small business on mobile.

As related to the 58.com partnership, we wanted to dig in deeper and create more relevant user cases. In addition, we are also seeking new partnership opportunities within O2O areas. Looking beyond the strategic relationships, our brand marketing business met our internal expectations in Q1.

During the quarter, we worked with 19 brand names including GM, Volkswagen, Mazeda, Samsung, Haier, Suning.com, Nike and PingAn Bank among others to promote their brands on our platform.

Our top three marketing sectors are also Internet, services and apparel. Our proprietary O2O marketing service, Dao Dian Tong, also progressed well during the first quarter with customer deposit nearly doubled from last quarter's level and actual consumptions growing 80+% sequentially.

Going forward, we will focus on optimizing and upgrading our advertising system and at the same time, try to work with local distributors in order to expand our customer base. More broadly, we're also seeing demand from a variety of businesses who want to connect to our platform.

As the third largest mobile SMS platform in China, we have tens of millions of users connected to our platform on daily basis with a rich amount of location-based information and other valuable data.

This data made an extremely valuable asset to online and offline businesses who want to connect and engage with mobile and phone users in a targeted way. We're beefing our internal capabilities in order to offer native marketing solutions with richer app formats to meet different marketing objectives that we're seeing right now.

Overall, I am very pleased with our first quarter performance on both the operational front and financial front. We're executing our priorities well and are on-track to deliver long-term value to our users, customers as well as our shareholders.

With that, I would like to turn the call over to Jonathan.

Thank you, Tang Zong. Good morning and good evening, everyone. Thank you all for attending our conference call today.

First quarter of 2015 was quite a successful quarter for us. We've posted better than expected top-line and bottom-line. With the continuous growth in our revenue, our highly scale-efficient business model resulted in profitability in the past quarter, the first time in our operating history.

Let me first walk you through the major financial highlights for the first quarter of 2015. Total net revenues grew 383% year-on-year or 42% sequentially to $26.3 million, higher than our earlier guidance of $26 million. At the same time, we are very happy to see that our sources of revenue continued to diversify in the first quarter of 2015.

Since the cooperations with Alibaba and 58.com generated significant revenue during the quarter, from this earnings release onwards, we are reporting it as a separate sub-revenue category rather than lumping it in other revenue lines.

Marketing services revenue for the first quarter of 2015 represented 23% of our total net revenue while 50% for membership subscription revenue and 23% for revenue from mobile games, significant declines from 58% and 36%, respectively, during the same period of last year and 64.2% and 23%, respectively, when compared with the fourth quarter 2014.

Membership subscription revenue was $13 million, up 311% comparing to Q1 of 2014 and a 9% quarter-on-quarter.

The year-on-year growth of membership revenue was primarily driven by substantial increase in the number of paying members which reached 3.1 million at the end of March, up from 1.3 million a year ago.

As Tang Zong mentioned, the sequential growth of membership subscription revenue was a bit slower mainly due to the seasonality especially the impact from the late arrival of Chinese New Year in 2015.

Mobile game revenues continued its strong momentum, growing 213% year-on-year and 41% sequentially to $6.1 million in the first quarter of 2015. The growth in game revenue was powered by a combination of factors, including the increase in the number of games as well as the growth of our game players.

Mobile marketing revenue was at $6 million during the quarter, more than quadrupled from fourth quarter last year. The same period last year, it was immaterial. The year-on-year growth of mobile marketing revenue was powered by the Company's strategic partnerships with Alibaba and 58.com, and to a lesser degree, the increase in revenue from the Company's brand ad services.

The revenue from brand ads during this quarter was slightly down comparing to the last quarter due to seasonality.

Revenues from other services which mainly consisted of paid emoticons, revenues from gifting services totaled $1.1 million, up 291% year-on-year, 46% sequentially. The increase in other services revenue was primarily driven by the growth in paid emoticons.

Revenue from gifting services was insignificant to our total revenue during the quarter as the services was launched at the end of January of 2015. As Tang Zong mentioned earlier, we are currently focusing on fine-tuning the commercial process, making adjustments to our system and gaining more experience in coordinating procurement and the logistic processes.

We expect the revenue will grow significantly down the road, however, once again, we do not include the financial impact from gifting service in our second quarter guidance because it is still at the experimental phase and the company needs to accumulate adequate operating data before building our reasonable basis for financial projection.

Our cost and expenses on a non-GAAP basis totaled $18.7 million, up 221% year-on-year, and down 2% from last quarter. The year-over-year increase was primarily attributed to the scale expansion of our operations. For example, our headcount at the end of March 2015 was 547, comparing to 249 a year ago and 456 at the end of last year.

The infrastructure-related spendings which mainly include bandwidth costs, SMS costs, and server depreciations, directly relates to our user base growth. The higher payments to channels resulted from higher revenues.

Higher year-on-year marketing expenditures reflected strengthened branding efforts and the mobile game promotions. The sequential decrease in cost and expenses was mainly due to a seasonality on marketing spending as we normally launch our branding campaign starting in the second quarter onwards.

As our top line continues to expand over time, we have seen significant operating leverages as evidenced by sharp declines as a percentage of total revenue, you know, almost all major cost and expense items except for compliance-related expenses as a public company and currency exchange impacts from strengthened U.S. dollar in the recent periods.

Non-GAAP net income attributable to Momo was at $9.4 million in the first quarter of 2015, compared to a non-GAAP net loss of $0.3 million in the same period last year and a loss of $0.1 million last quarter.

We are very delighted to see the milestone achievements in the first quarter of 2015, however, I'd like to mirror our CEO's earlier statements. Growing use base and exploring various business and monetization opportunities stay on top of our agenda. We believe that at this stage, it's much more important for us to invest in our future rather than aggressively pursue margin expansion.

Please be mindful that as we continue to invest on product innovation, brand promotion as well as infrastructure building, depending on the timing of such spendings, our profitability will tend to fluctuate significantly from quarter to quarter.

Turning to balance sheet and cash flow items, as of March 31, 2015, our cash and term deposits totaled US$452 million, mostly deposited in offshore bank accounts. We generated a positive operating cash flow of $8.7 million for the first quarter of 2015 compared to $1.4 million for the same quarter last year, $2.5 million last quarter.

Now, quickly, on our guidance, for the second quarter of 2015, we expect our total net revenue to fall in the range of $31 million to $33 million, which translates into a year-on-year growth rate from 267% to 291%, 18% to 25% sequentially.

With that, I would like to open the call to address your questions. Operator, go ahead please.

Thank you. (Operator Instructions). Your first question today comes from the line of Alex Yao from JPMorgan. Alex, please go ahead.

Hi, good morning, Tang Zong and Jonathan. Congratulations on a very solid quarter. (Spoken in Foreign Language).

So my question is a follow-up question on the latest version 6.0. Tang Zong, you mentioned during the prepared remark the new version added a lot of new features which in my view changed the way the user is able to look for each other and interact with each other.

Can you share with us what exactly does these new features benefit the Momo platform? Do they increase the existing per user activity or do they broaden the addressable market from user demographic perspective? And also lastly, is there any negative impact to the existing user base? Thank you.

(Interpreted) The 6.0 is a new major upgrade version of our product. It might take me a long time to explain it all.

I like how you divided your question into existing user activity and the new user base. I like that. In terms of the existing users, we have some uncertainties when we first launched the product.

After observing for about three weeks, we can see that trend data shows everything is very stable.

The total number of messages has been flat. And total PV on previously existed functions stay flat as well. It didn't include the new more refreshes that chat room has brought. So the total number has grown.

Also, there are less complaint reported after the launch of 6.0 which demonstrates the positive influence on our social ecosystem. And there has been a great improvement on efficiency of social interactions for existing users.

For example, there has been the increase on newly formed friendships which is when friends follow each other on our platform, and the further influence on existing users which still account for the majority of our users.

So in terms of new users, there has been a slight increase on the total numbers. There has also been an increase for new users' efficiency for their social connections and interactions.

It's still only been a short period since we launched the new version. We would like some time to prove ourselves on whether the efficiency of the new product, also we need some time to promote and do more marketing as well.

(Spoken in Foreign Language).

Thanks. (Spoken in Foreign Language). So the next question is on the financial side. Jonathan, you mentioned that the budget allocation for this year might be a bit of volatile, so margin could be a bit volatile as well. Can you share with us, you know, the thoughts in terms of how the margin could trend in the next few quarters and also for this year? Thank you.

Yes, actually, if we look at our profit margin for the first quarter of 2015, our non-GAAP net margin was that around 36% which is a very impressive achievement for the quarter, but however, as I mentioned during my prepared remarks that we typically launch our marketing campaign in the second quarter particularly for right now, we have already launched our marketing campaign to promote our 6.0 new product version.

And given the magnitude of the marketing spending, because our other cost and the expenses components relatively remained at a much slower growth pace as we continue to grow the top-line.

And our profitability will tend to be lower. That's our current view. And also in the third quarter, we typically launch TV-related programs in terms of brand promotion. So in terms of the dollar amount, it's more costly. That will definitely impact our margin. So typically Q2 and Q3 are the high seasons for us in terms of marketing.

Got it. Thank you very much.

Thank you, Alex.

Your next question today comes from the line of Yu-Heng Fan from China Renaissance. Yu-Heng, please go ahead.

Hi. Good morning. Thanks for taking my question and congrats on the first profitable quarter.

My first question is related to your new monetization plan for the rest of the year including O2O and the local service in the entertainment. I understand that Tang Zong already mentioned some of that on the prepared remark, as I appreciate you mentioning. Can you give us more detailed update in terms of, for example, like O2O, like which vertical we are going to -- are we collaborating with other partners in addition to 58.com?

And also in terms of the -- for the live broadcast videos, what kind of format in the monetization means that we are planning?

Tang Zong and Jonathan, (Spoken in Foreign Language).

(Interpreted) I'll begin with the live performance, official plan, we shared a little bit during our IPO process. Everything is still on-track. We are in the preparation process. In particular, it should be launched in the earlier time during the second half of the year.

In terms of O2O, we are communicating with some of our potential partners. In terms of timing, it will combine with some of our minor upgrades.

It might combine with our current, existing cooperation with 58.com and Alibaba and there might be some other potential cooperations. For timing in particular, it will also be in the early stage of the second half of the year.

Thank you, Tang Zong. It's very helpful. And my second question is related to the newly launched, the open chat room functioning in the 6.0. Tang Zong, you mentioned already about it, you made the traffic comparison between the Nearby page and the Message Board page.

I understand the product was launched for about three weeks but I wonder if you can share with us some of the traffic metrics for this open chat room group in terms of the PV, daily message exchange on the open chat room.

(Spoken in Foreign Language)

(Interpreted) In terms of --

I understand.

(Interpreted) So in terms of PV on the chat room, it's relatively high as well as the messages exchanges in the chat room.

In terms of number of topics, currently, since the nature of the chat rooms, it changes pretty fast, so the data is -- has not been collected on the high clarity at this stage. We will collect more data and share with you, guys, in the future.

Thanks very much. That's very helpful. Thank you.

Your next question today comes from the line of Amanda Chen form Morgan Stanley. Amanda, please go ahead. Hello, Amanda, your line is open. Please go ahead.

Hello. Hi. Good morning, management. Good morning, Tang Zong and Jonathan and Cathy. Thank you for taking my question and congratulations on the strong quarter. (Spoken in Foreign Language).

So my question is regarding the mobile marketing revenue. It seems that it grew much faster than our estimates. If we assume that revenue committed by Alibaba is on-track, the incremental revenue should be mainly from our 58.com. So we just want to know how is the trend in 2015 and beyond 2015. Thank you.

(Interpreted) based on the financial performance of our mobile marketing services in Q1, it didn't really exceed our expectation, it exceeded a little bit, it's mainly from our own brand ads.

Okay. (Spoken in Foreign Language).

Yes, yes, actually, the outperformance is really based on our revenue from Dao Dian Tong and our brand ads. As I highlighted in my prepared remarks, we anticipate we are going to accelerate, you know, the brand ads revenue down the road and also our revenue from Dao Dian Tong will accelerate as we roll out our cooperations with our local agents to help us with the local merchants education.

Okay, thank you, very helpful. And my second question is also regarded to 6.0 version. Could you please share some colors on the -- some operating metrics like the retention rates of newly registered users, turn rate of new and old users? And also, especially for the new users, would there be any difference profile for the new users like more (inaudible) more -- maybe older aged people, any colors will be appreciated. Thank you.

Do you want to translate, Amanda, or --

I'm sorry, I was (inaudible). (Spoken in Foreign Language).

(Interpreted) In the new version, I can ensure you that for our female users, the user experience has definitely increased.

In terms of new user retention rate, it pretty much reached our expectations but we believe in calculating new user retention rate on a one-month or even three-month or longer period basis. So maybe better to collect more data and then determine the more valid judgment.

Got it. Thank you, very helpful.

Okay.

I'm sorry. (Spoken in Foreign Language).

(Inaudible) And not much change on the user geographic demographic theme.

(Spoken in Foreign Language).

Your next question today comes from the line of Dick Wei from Credit Suisse. Dick, please go ahead.

Hi, good morning. Thanks for taking my questions. Just quick questions on the O2O opportunities, I just want to understand maybe what the management thinks about some of the -- what are counted verticals that have like greatest synergy with our existing user base. That would be like taxi or like food ordering or some of the home services. (Spoken in Foreign Language).

(Spoken in Foreign Language).

(Interpreted) We see a lot of potentials on the home services, for example, the 58 Daojia. Also, we're looking into the food delivery area. Also the services based on location like car pulling and tourism. For example, like Airbnb's business model.

(Spoken in Foreign Language).

Understand. (Spoken in Foreign Language). This is a follow up. Comparing with Momo and other mobile social platform, what are our advantages compared to them?

(Interpreted) We have both significant advantage and some disadvantage. For advantage, we have a big amount of traffic with some location and other user data. They are very active and very engaged with our platform.

We also have our disadvantages, for example, for the O2O services, they are very divided in terms of categories.

So in the near to mid-term of our cooperations on this O2O services, we would still like to work with our existing partners to -- whether on data exchange or, you know, user traffic sharing, work together and to achieve our goals.

Maybe just one last question is any kind of current plans for investing in some of the kind of the local services vertical? I understand you mentioned that, we have cooperation with some of our private partners, but I wonder if you want to have some investments in some of the other verticals as well. (Spoken in Foreign Language).

(Interpreted) We don't have a clear plan in the near term but it is in our investing direction for the future.

(Spoken in Foreign Language), Jonathan and Cathy and thanks, Vanessa, for translating. (Spoken in Foreign Language).

That concludes the question-and-answer session for today. I would now like to hand the conference back to Ms. Peng for closing remarks.

That concludes our conference call for today. Thank you, everyone, for joining us. We'll see you next quarter.

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

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.