Hello Group Inc (MOMO) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2017 Momo Inc. Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded today.

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

Thank you, operator. Hello, everyone, and thank you for joining us today for Momo's Second Quarter 2017 Earnings Conference Call.

The company's results were released earlier today and are available on the company's IR website. On the call today from Momo are Mr. Tang Yan, Co-Founder, Chairman and Chief Executive Officer; and Mr. Wang Li, Co-President and Chief Operating Officer; and Mr. Jonathan Zhang, Chief Financial Officer. Mr. Tang and Mr. Wang will discuss Momo's business operations and company highlights followed by Mr.Zhang, who will go through the financials and guidance. They will all be available to answer your questions during the Q&A session that follows.

Before we begin, I would like to remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

I will now pass the call to Mr. Tang. I will translate for him. Mr. Tang, please.

(foreign language)

Good morning, and good evening, everyone. Thanks for joining our conference call today. We had another good quarter with solid financial performance as well as progresses and achievements in user expansion, product innovations and business development.

(foreign language)

Total revenues keep getting new record highs at $312.2 million, up 215% year-on-year. Adjusted net income for the quarter reached [$73.8 million], (corrected by company after the call) up 217% from the same period last year.

(foreign language)

Now a deep dive into the quarter. Firstly, on user works. Total MAUs on Momo platform reached 91.3 million for the quarter, up 22% year-over-year and representing a 6.1 million net addition from the previous quarter. As the user growth continues to accelerate, average content per DAU in the second quarter remained stable both on a year-over-year basis and on a sequential basis.

(foreign language)

Our reported MAU only includes those users who access our help service through the main Momo platform. Those users who access our content and services through properties owned and operated by third parties are not calculated as our active users. In the month of June, the users who accessed our services and content from third-party properties were somewhere around 20 million in total. Although we are seeing the third-party traffic growing rapidly as we continue to expand our costs and offerings in short video and live streaming areas, at the current stage, we are not including them in our MAU calculation because of the limited amount of information that we have on those users and the fact that we have no intention to monetize the third-party traffic in the near term. Active users on our stand-alone applications, such as Hani and jointly operated games, are not included in our reported MAUs either.

(foreign language)

Now let me walk you through the key initiatives that we took in the second quarter to drive the user growth.

(foreign language)

Firstly, on the marketing efforts, as many of you know, in mid-April, we launched the nationwide branding campaign to drive the market awareness of our use case expansion and to list the brand image of the Momo platform. In June, we worked with a third-party agency to evaluate the effectiveness of the Q2 campaign regarding those objectives.

According to the survey results, the campaign has met our expectation in terms of coverage and reach. It also contributed positively to improvement in brand image. However, we do have further room to refine the key messages in our campaign.

As we move into Q3, we are adjusting our marketing strategies accordingly to improve the long-term effectiveness of our branding efforts. At the same time, we plan to lean more toward direct-pay channel marketing efforts in terms of the budget allocation in order to optimize the return on investment of our marketing initiative.

(foreign language)

On the direct user acquisition front, in Q2, we pushed harder on the pay channel and user callback side to drive new downloads and resurrect the users. At the same time, we continue to optimize the registration process in order to bring down the barriers in our onboarding experience. Historically, paid user acquisition and conversion were not one of our key area of focus. As we start to beef up our efforts on those fronts, we are bringing in a professional team to manage the user growth process with greater granularity. The goal here is to make sure that our channel marketing efforts meet our standards in both quality and profitability term. We do believe that we have plenty of opportunities to drive continued strength at the top of the user funnel and improvement in retention within the funnel.

(foreign language)

As I've said many times before, the ultimate underlying driver for user growth is product innovation. In the second quarter, we saw pretty strong growth in organic new registrations that are not from paid marketing channels. That can be attributed to the continuous expansion of our entertaining content ecosystem.

Now let me give you a brief overview of the progresses we made on the product development and operation front.

(foreign language)

One of the key area of focus in Q2 was constant operation revolved around short video. We are making remarkable progress in optimizing the algorithm of our recommendation engine to more effectively disseminate the UGC content on our platform, which is increasingly video-centric. The improving content distribution efficiency is driving impressive growth in short video activities.

During the second week of August, our users created and shared 3.5 million posts on daily basis, and a considerable portion are already in video format. Over that same period of time, the average number of daily original video published grew 49% from 3 months ago. Daily video viewed increased by 57% and the number of interactions, which for videos, were up 60%. The effective users of our short video service has already covered around 58% of our total active users. We are happy to see that more and more people are adopting video as a way to more effectively express themselves and also to better get to know and interact with each other. The core of our short video effort is helping the users make connections more effectively through content creation and consumption. We will continue to steer our short video and other content initiative toward that direction.

(foreign language)

In addition to the remarkable progress we've made around short video service, on July 12, we launched a major new version, Momo 8.0. In this version, we adopted a pioneering modular design for the homepage, featuring all the major existing social and entertainment offerings on the platform as well the newly piloted product initiative.

(foreign language)

I said in our last earnings call that in the coming couple of years, there are 2 secular trends that we need to ride on. Number one is that video increasingly becomes the primary way that younger generation share and interact with each other. Number two is that offline recreational activities are moving online. While we are seeing big opportunities here, a lot of the transitions in those territories are still in their early days. Therefore, we need to continue to innovate and test new things out.

One of the key objectives we are trying to achieve through the 8.0 update is to build a foundational structure to scale our future product experiments without interfering on the existing social and content experiences. Under the new structure, our team will be able to pilot new services with the support of sizable traffic from the homepage so that we can quickly experiment on new projects and reiterate on the experiences in a much more efficient manner.

During the past 6 years, Momo's growth has been powered by constant product innovations and use case expansion. What we learned from that evolution process is that, when it comes to how young people socialize and have fun, their demands and preferences are so diversified that it's hard to find a one-size-fits-all kind of solution to engage everybody. The modular design allows us to support multiple social experiences without having an overly complex catalog system and navigation process. At the same time, it also opens up more diversified development tasks for our future.

(foreign language)

Version 8.0 also brought to the users a few new live interaction experiences, including Lang Ren Sha or Werewolf, which is a social game, and 2 live video chat experiences, Kwai Liao and Pai Dui, or Quick Chat and Party. With these new social and entertainment experiences, we are going deeper with the strategy to connect social activity with recreations and entertainment. In addition, we are exploring ways to apply the live streaming technology to a broader set of use cases than the traditional virtual showroom experience with the top performers. We believe live video and streaming technology can make the interactive experience in between ordinary users more compelling and immersive as well. We will continue to reiterate on the experiences and make further explorations on that front.

(foreign language)

Today, the various social and content experiences on Momo, including Nearby People List, Diandian, live video and short video services, the social games, and the group start forming a dynamic community for our users to build social activities around. All of these different offerings serve the same core user demand that we've always been wanting to serve to discover and connect with interesting people around and interact with them in a timely and effective manner.

(foreign language)

Overall, we are happy with the new version. Based on the analytics that we have seen and the consumer feedback, we will quickly allow new iterations to optimize the existing offerings and continue to bring new experiences to our users.

With that, I'm passing the call over to Mr. Wang Li, our Co-President and COO for business review. Mr. Wang, please?

(foreign language)

Now let me walk you through the key things that we've done as well as the future direction for our major business lines.

(foreign language)

Firstly, on the live streaming business. In Q2, we continue to optimize our tournament experience. In June, we won the second season of our 2017 live streaming tournament and introduced a new gamification called Lian Sheng to make the knockout matches more compelling as a content experience. At the same time, the tournament also outperformed our original expectation in driving the tipping revenue. Through continuous upgrade of the tournament system and the introduction of new gamification, we're building the tournament into an indicative content and community experience that provide ongoing motivation for the performers and the viewers.

(foreign language)

Other than the quarterly tournament, we also took a few other initiatives to drive the content upgrade. For example, in the second quarter, we teamed up with 4 prestigious record companies to roll out a music production project called Momo Golden Song. The program involves an open audition and the contract system to service singing talents from the platform. We have been working with BMG and Taihe Music to publish songs for the top winners in the first season of the Golden Song contest.

In August, we started to debut the professionally produced songs through the top online music platforms in China. With that effort, we are hoping our top singing talents to extend their career paths from live streaming to the broader entertainment industry, which, in turn, would help us attract more broadcasters with real performing talents to improve the content quality on the platform.

(foreign language)

During the second quarter, based on the multiple connected channel technology, we launched the dating live channel within the live streaming service. Both operational and financial indicators of the dating business have been satisfactory. We are in the process of recruiting channel moderators to expand from dating to other types of gamification for these channels. We will continue to experiment on new ways to utilize the live streaming technology and push the use case beyond the traditional virtual showroom model.

(foreign language)

Now turning to mobile marketing business. In our last earnings call, we said that the team will start to defocus on some of the app formats that have low compatibility with the core attributes of the platform and devote more efforts into exploring the type of ads that work more natively with the video and entertaining content environment. With the 8 series launch, that trend is accelerating. Traffic and engagements are moving from older use cases such as Nearby People to newer ones, such as Diandian, short video and live video. Eventually, we want to see the same trend in ad placement as well. Although we won't be aggressively pursuing revenue growth for the marketing business in the near term over a mid- to longer time-horizon, we do see plenty of opportunities to drive the growth of this business.

We've been testing a couple of ad units in the 3 major product modules in the new version. Even at the testing phase where the bidding is only open to a limited number of customers, the effective CPM is already meaningfully higher than the average level we saw in the past Q2. That shows that the newer content environment and the product format leave more room for native ad creatives, and thus, is also going to be more effective.

As we continue -- as we keep building up the engagements and traffic around the video and entertainment content experiences, the marketing canvas is becoming richer to the marketers. We will continue to explore and innovate on the ad format to figure out the best way to conduct effective marketing in the new environment.

(foreign language)

Now firstly on game and app. For the game business, in the near term, the bigger focus is on growing the user base and engagement of Werewolf. Our goal for the game is to build it into a social and entertainment experience with a sizable user base, facilitating the effective interactions in between the Momo users.

(foreign language)

That business continues to do well, driven by the virtual gifting service. We've already brought virtual gifting service into some of the newly introduced experience, such as Quick Chat and Werewolf. We intend to continue to test new use cases to further drive the monetization and the improvement in the interactive experience around it. As we keep expanding the use cases for the virtual gifting service, we expect the vast business to continue its healthy growth trend in the future.

(foreign language)

Overall, Q2 was a busy quarter for us. Many big plans have been carried out and more hard works are ahead of us. We will continue to execute and deliver according to the laid out roadmap.

With that, I'm handing over to Jon for financial review. Mr. Zhang, please?

Thanks, Tang Zong and Cathy. Hi, everyone. Thanks for joining our conference call today. We are very pleased to deliver another strong quarter with the total revenues growth of 215% year-over-year, reaching $312.2 million compared to $99 million in the second quarter of 2016. The total revenues for the quarter exceeded the top range as we guided during the previous quarter earning announcements. Although we significantly stepped up our investment in branding campaigns in the second quarter, I'm glad to see that, with a robust top line growth hooked with a strong operating leverage of our business model, we were able to deliver a 28% non-GAAP operating margin, up from 22% the same period last year.

Non-GAAP net income for the quarter was [$73.8 million], (corrected by company after the call) up 217% from the same period last year.

Now looking into the key revenue line items. In the second quarter of 2017, revenues from live video services continued to generate strong momentum with the total revenues reaching $259.4 million, up 348% year-over-year. The year-over-year growth in live streaming revenues was largely contributed by the 206% increase in the quarterly paying users, which totaled $4.1 million for the second quarter 2017 versus $1.3 million for the same quarter last year. And to a lesser extent, the 54% increase in average revenues per paying users per quarter before excluding value-added tax or quarterly ARPU, which was RMB 463 for the second quarter 2017 compared to RMB 301 for the second quarter of 2016.

Effective DAU penetration rate for the live streaming services was approximately 24% in the second quarter of 2017, up from 13% for the same period last year. In addition to the overall business base expansion, I'd like to reiterate that the higher-than-expected revenues from live streaming service were attributable to our continuous effort in further improvement of our tournament system and developments of new gamification to enhance experiences and involvements for the broadcasters and viewers, as Wang Zong mentioned earlier.

Revenue from mobile marketing was $19 million, up from $16.6 million for the second quarter of 2016. The 15% year-over-year growth was mainly driven by better sell-throughs of our ad inventories. Although the big majority of mobile marketing revenue for the second quarter this year still came from small and medium-sized businesses, the revenues from brand marketers and the number of key account customers rose significantly year-over-year and sequentially. However, as a percentage of total mobile marketing revenues, it's still at ramping phase. We do anticipate it will become more significant in the coming few quarters.

Now I'd like to briefly comment on how the version 8.0 upgrade would impact the mobile marketing revenue in the near term and more specifically, the third quarter. On July 12, we launched the version 8.0. In the new version, usage and traffic were moved away from Nearby People function, the previous default landing page towards newer use cases that are more video and entertainment-centric. We also removed all of the 3 ad inventories that were previously in the stream of nearby posts. We expect these changes to negatively impact mobile marketing revenues in the third quarter.

On the other hand, as we have currently seen increasing demand for video marketing solutions, we started testing a few new format ad units in 3 major product modules in the new version, namely: Nearby posts, Diandian and recommended short videos.

The eCPM we have seen so far into Q3 is higher than the average level that we saw in Q2, which could partially offset the significant decrease in the total ad inventory made available to new version. Even we are carefully limiting the ad load in order to protect user experiences in the short term, we are very optimistic about plenty of opportunities to drive the longer-term growth of mobile marketing business on our platform as long as we continue to build up traffic and engagements within our content ecosystem.

Now quickly on VAS and gaming services. Revenue from VAS, which currently includes membership subscriptions and virtual gifting service, together, was $24.6 million, an increase of 58% from the same period last year. Virtual gifting service was the main driver for the growth in this line item during the second quarter, while membership subscription revenues also contributed to the year-over-year growth. Since virtual gifting revenue has become a very significant portion of VAS revenue, starting from this quarter onward, we will disclose the paying users for the VAS business to include the paying members as of the last day of the quarter and paying users for any nonlive streaming-related virtual gifting service without double counting the overlap of the 2 cohorts.

For the second quarter 2017, total VAS paying users were 4.5 million, up from 3.2 million for the same quarter last year. Mobile games revenue was $9.1 million, a 23% increase from the same period last year. The year-over-year increase in mobile game revenue was, once again, primarily due to the revenue contribution from Momo Dance Battle version 2, which was recognized on a gross basis. However, from a sequential perspective, our strategy to be focused on jointly operated games could continue to pressure the game revenue in the near term before any of our self-developed games reaches fruition in monetization.

Now a brief review on the costs and the expenses items. Consistent with the previous quarter, the 2 biggest cost drivers for the second quarter of 2017 were still the revenue sharing with live broadcasters and payment channel fees. Growth rate of these cost components are linear to the live streaming revenue growth, while we continue to enjoy significant scale efficiencies in other cost items year-on-year.

Non-GAAP sales and marketing expenses for the quarter was $66.1 million compared to $24.8 million for the same quarter last year, representing 21.2% and 25.1% of revenues, respectively. The increased marketing spending contributed significantly from the nationwide branding campaign that we launched in the second quarter this year and to a lesser extent, the stepped-up efforts on paid marketing channels, sponsorships to Internet dramas, variety shows, promotional events on live streaming and short videos services.

Our Q2 branding campaign cover a nationwide movie theater network, public transportation hubs, office and residential buildings and various other outdoor media outlets as well as online media platforms such as iQiyi ,Youku , Jinritoutiao and Weibo, et cetera, and achieve an expanded expected reach of our targeted user base.

For the third quarter, we plan to continue to invest in the branding efforts in the movie theater network, sponsorships to Internet dramas as well as online media platforms. Promotional efforts on live streaming and short video services will continue as our ongoing part of our operation. Overall, we expect the total marketing budget to remain at similar level in terms of absolute dollar amount comparing to the second quarter. However, we intend to allocate relatively more budget towards direct user acquisition efforts and maintain some level of flexibility on an as-we-go basis in order to optimize the results of our overall marketing investments.

Our non-GAAP R&D and G&A expenses for the second quarter of 2017 were $8.2 million and $8.5 million, representing 2.6% and 2.7% of total net revenue, respectively, compared to $6.1 million and $4.6 million or 6.1% and 4.6%, respectively, for the same quarter of 2016. That demonstrated our highly scaled efficient business model, allowed us more room to strengthen our talent pool. We ended the quarter with 1,072 total employees, up from 805 a year ago. The vast majority of the increased headcounts are in the technology, product and service development areas.

In the second quarter of 2017, one of our operating entity received a $7.2 million incentive from a local government. Such an incentive is based on a total taxes paid locally, including value-added tax, corporate and individual income taxes. As there are significant uncertainties on timing and the amount we'll receive such the incentives, we only recognize the amount we received as other operating income upon receipt.

Now turning to our third quarter 2017 guidance. We estimated the third quarter revenues to come in the range from $337 million to $342 million, which translate into a year-on-year growth rate from 115% to 118%. This guidance range is based on continuous strong growth in live video service we currently observed and a meaningful decline in revenue from marketing services and mobile game business from the Q2 level, as I described earlier. Please be mindful that the forecast represents the company's current and preliminary view on the market and operational conditions, which are subject to change.

That concluded the prepared portion of our today's discussion. With that, I'd like to turn the call over to Cathy to start the Q&A session. Cathy, please.

Right. Just a quick reminder. For the Chinese speakers, please ask the question in Chinese first, followed by English translation. (Operator Instructions) Operator, we are ready. Please start to connect people in.

(Operator Instructions) We have the first question from the line of Binnie Wong.

So I have 2 questions here. One is that we see the growth with the number of paying user this quarter, it has been quite flattish. Conversion rate has also been coming down. What is the reason behind that? In relation to that, we understand the latest 8.0 version offers more social networking tools beyond live forecasting, say, short video, Quick Chat, Diandian. Since that monetization potential is currently quite limited on these new functions, why would Momo divert its traffic away from live broadcasting, a very good monetization tool? That's my first question. My second question is in terms of the margin trend. I understand we're investing more sales and marketing expenses to drive the faster user growth. How effective have you seen in terms of like, say, any metrics you can share? Say, percentage of new user recruit or any user cohort would be helpful. And how should we expect this to normalize? Will you expect that some of this marketing and branding investment would more -- so like a one-off maybe in second, third quarter? When should we expect this to normalize going forward?

Binnie? Binnie?

(foreign language)

Yes, if you could do that, that would be great.

Sure, sure. Hold on. (foreign language)

(foreign language)

Okay, I'll try to capture everything. So the first question is on the flattish trend in the large streaming paying users in this quarter. I think that can be attributed to the fact that some of these users have shifted part of their activities from the long-tail, smaller, live streaming chat rooms towards newer use cases and in these audio and video-based large interaction experiences, such as Quick Chat and Werewolf because, essentially, they kind of -- these newer use cases kind of satisfy exactly the same kind of user demand. I'll give you an example here. For the Quick Chat experience, on a daily basis, we had somewhere around 50,000 daily paying users sending red packet. On monthly basis, we had 800,000 this type paying users sending red packet. However, because the red packets are not recorded as the company's revenues because we are not taking revenue share from the red packets and on the platform, so the revenues going into red packet are actually not recorded as the company's revenues. And thus, the users sending red packet are not reported as our paying users either. However, we are seeing for the Quick Chat kind of new social experiences, the paying users who pay to send red packet have been increasing pretty rapidly. Your second point is why we would divert traffic from a very monetizable live streaming service toward newer use cases. I think the key thing here is that we've never been positioning Momo as a live streaming company. We have always been positioning Momo as a social company, and we're seeing the user experience, the social experience around the newer use cases are actually pretty good. In some ways, they're actually better than the live streaming service. So although the newer use cases currently do not monetize at the same level as the live streaming, traditional live streaming service does, we would like to make more explorations on those fronts to drive the overall user experience around the social activity. We think that kind of transition is very healthy for the platform for Momo as a social platform in the long term. So that's for your first question.

(foreign language)

Right. And maybe one quick point to add, right now, we're seeing the newer use cases, such as Quick Chat and Werewolf, already reaching a pretty good level in terms of the user base within the application as well as the per user time spend around these newer use cases. So we do believe that in the long term, we should have plenty of room to drive the monetization around these new product experiences. However, in the short term, I don't think the monetization is the focus here. I think the focus is still around building up the activities and usage around them.

(foreign language)

I think on the one hand, it's a little bit difficult to measure the return on investment in the short term for branding activities. On the other hand, we did see a pretty decent growth in the organic new registrations in the second quarter that are not coming from paid channels. I think that has something to do with the branding efforts. The other thing about the future trend, I think in Q3, the overall marketing budget is still going to remain at a pretty high level. But in terms of how much we will end up spending and in terms of the budget allocation in between the branding activities and direct user acquisition efforts, we're going to maintain some level of flexibility in order to make adjustments on an as-we-go basis. And I think, overall, we are going to, in terms of budget allocation, try to lean more towards direct user acquisition efforts as opposed to branding efforts.

We have the next question from the line of Zoe Zhao from Credit Suisse.

(foreign language) I will translate myself. The third question is regarding paying members. We saw the paying members up a lot this quarter. How much of that is related to new features of the version 8.0? And how much of that is membership subscription? And the second question is when shall we expect an acceleration in advertising revenue?

Zoe, this is Jonathan. Let me address your 2 questions. Firstly, as I mentioned during the prepared remarks, starting from this quarter on, since we have seen the virtual gifting paying users has become a significant -- virtual gifting revenue has become a very significant portion of VAS revenue. So we started from this quarter, we disclosed the paying users for the VAS services on a blended pattern. So the 4.5 million paying users for VAS services for second quarter 2017 actually includes both membership subscribers and paying users for virtual gifting. We do not separately disclose further breakdowns from this point onward. And for the 3.2 million paying members during the second quarter 2016, because that was purely for the membership subscriptions because we launched the virtual gifting services in Q4 2017. So I hope that answers your first question. Second one is, as I stressed during the prepared remarks, because of the product changes, we predict the marketing revenue will decline on a sequential basis in Q3. And as Wang Zong mentioned, we are testing out new set of advertising inventories to be launched in full scale gradually over time. So we anticipate the marketing revenue will start on upward trend in Q4. So Q3 probably will be the lowest.

We have the next question from the line of Tian Hou from T.H. Capital.

(foreign language) As the company more focusing on short video content, the 2 things I would like to know, one is -- how do you tag each content? What is the tagging logic? The other issue is about the content recommendation. What is -- how do you optimize the recommendation algorithm? So that's the 2 questions.

(foreign language)

Okay. So one of the key things that we did in the second quarter in order to improve the algorithm of our recommendation engine is that we built a system that allows us to evaluate on real time basis, the content quality for the vast amount of user-generated content distributed on our platform. At the same time, we built a hierarchical kind of content distribution mechanism that help us surface the quality user-generated content from the bottom all the way through to the top according to their respective quality grade. And the goal here is to make sure that the higher the content quality is, the greater level of user exposure that piece of content can get on the platform. And through such a kind of content distribution mechanism, we very significantly improved the efficiency in content distribution and increased the user exposure as the quality user-generated content and thus, raised the overall content quality and the engagement level around our short video activities. Regarding the question about personalized recommendation logic and content tagging logic, I think our system is pretty much based on what is called collaborative filtering. This is a rather complicated and sophisticated mechanism. To put it simple, the system will assign different interest tags to users according to their respective interest graph. And then what you're going to see on this -- what you're more likely going to see on the platform is largely determined by the type of content that other users with similar interest tags to you gravitate toward, and that gravitation is further defined by user actions such as clicking through, liking or other type of engagements. I hope that answer your question.

So that concludes our call today. Thank you for joining our conference call. We'll see you next quarter. Operator, we're ready to close.

Thank you, ma'am. Ladies and gentlemen, that does conclude today's conference. Thank you for participating. You may all disconnect.