Hello Group Inc (MOMO) 2023 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Second Quarter 2023 Hello Group, Inc. Earnings Conference Call.

(Operator Instructions) 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.

Good morning, and good evening, everyone. Thank you for joining us today for Hello Group's Second 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, who 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 and 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 statements as a result of new information, due to events or otherwise, except as required under law. I will now pass the call over to our CEO, Mr. Tang Yan.

[Interpreted] Hello, everyone. Thank you for joining our conference call. We delivered solid results in the Second Quarter with strong financial performance and good progress on the execution of various strategic priorities. Before we go into details, I would like to introduce our COO, Ms. Zhang Sic Sichuan, who rejoined the company last year. She will be the one to review our quarterly performance today. With that, I'll turn the call over to her.

Hello, everyone. It is my pleasure to join today's conference call. We celebrated Momo's 12th anniversary in early August. As a founding team member, it is a great pleasure to see how Momo over the past 10 plus years has grown from a single function app to a multi-brand listed company with a presence in several countries and regions. It is a great honor to return to the Hello Group family, and welcome the next decade of the social era with old and new colleagues.

Next, I will walk you through the details of the Second Quarter. So I will start with a brief overview of our financial performance. For the Second Quarter of 2023, total group revenue was RMB 3.14 billion, up 1% year-over-year and 11% sequentially, exceeding our earlier guidance. In Q2, we delivered the first year-on-year growth since the beginning of the pandemic 3 years ago, mainly due to the stabilization and recovery of Momo's cash cow business. Adjusted operating income was RMB 709 million, a substantial increase of 53% from Q2 last year and up 37% quarter-over-quarter with a margin of 22.6%, up 8 percentage points year-over-year and 4 percentage points quarter-over-quarter.

The significant year-on-year improvement in profitability was mainly due to Tantan's breakeven. The stable performance of Momo cash cow business and our effective cost control initiatives and sequential improvement in profitability was mainly contributable to the increase in Momo's profit. Total revenues from the Momo app and standalone new apps was RMB 2.82 billion, up 1% year-over-year and 12% sequentially, and adjusted operating income was RMB (corrected by company after the call) 677 million, up (corrected by company after the call) 16% year-over-year and a significant increase of 34% quarter-over-quarter with a margin of 24%, up 3 percentage points year-over-year and 4 percentage quarter-over-quarter.

We are very pleased to see that Momo as our cash cow business has maintained stable and strong productivity after over a decade of operation. Total revenue from Tantan came in at RMB 321 million, down 3% year-over-year, but up 4% quarter-over-quarter. Tantan delivered its first operating profit at the beginning of this year and managed to improve its profitability in the second quarter. Adjusted operating income for Tantan for the quarter was RMB 31.89 million, representing a margin of 10% compared with adjusted operating loss of RMB 119 million in Q2 last year and an adjusted operating income of RMB 14.48 million in the previous quarter.

Now I will discuss our progress and our strategic priorities in this 3 business lines, Momo, Tantan and the new endeavors. Starting with the Momo app, which is at a relatively mature stage. Our goal for Momo this year is to keep the user and revenue scale stable, continue to optimize cost structure and maintain the productivity of cash cow business. Since the beginning of the year, our team has made good progress in optimizing product operations, introducing new monetization features and improved cash unitization and staff efficiency. The better-than-expected financial performance and a steady recovery in user scale are good quantitative results.

Now I'll walk you through the details. Firstly, on the product and operational front, since the beginning of the year, our focus on product operation has been to stabilize the user base and improve monetization efficiency. The core of our efforts revolves around providing more timely social interactions and enriching content supply. On the channel front, we have strategically focused on assessing channel ROI as well as our user lifetime value, or LTV. Driven by the joint efforts of product and operations, the recovery trends of user and retention after the Chinese New Year continues in the Second Quarter. Momo's next-day retention rate has returned to its pre-pandemic level, which is the main reason for the continued ramp in user base. The number of Momo's paying users increased by 100,000 to 7.9 million from the previous quarter. The steady growth in paying users has proven that the core value of Momo as the social product remains strong. With our focus on user acquisition tilted towards high-quality users, our overall user quality has been gradually improving, which lays a solid foundation for the cash cow business to maintain its productivity.

As Tang Yan mentioned last quarter, since Momo is a firm with a history of more than a decade, our current strategic priority is to stabilize user scale, optimize costs and ensure its commercial productivity. To reflect such priority at the KPI level, our focus has shifted from driving the growth of Momo's user scale to pursuing profitable user growth. MAU, therefore, is no longer the most meaningful operational metric for investors. Therefore, we have decided to no longer disclose MAU data on a quarterly basis unless there is a significant change in our user base. We believe that investors should rather focus on the number of paying users when evaluating Momo's overall scale and operation -- operating performance.

Now let's go through the productivity of our Momo cash cow business. In the Second Quarter, Momo's live streaming revenue was RMB 1.44 billion, up 3% year-over-year and 12% sequentially. The revenue growth was mainly due to the significant increase in the number of top-cohort users, driven by new operational events and gamified features. And the increase in high paying users drove overall ARPPU growth.

In the second quarter, the revenue sharing ratio of live streaming was lower than the previous quarter, mainly because in Q1, we offered a one-off incentive to broadcasters to resume live shows after the Chinese New Year. As the supply side remains stable, we believe the current revenue sharing policy is effective enough to incentivize broadcasters and there is no significant structure adjustment is needed.

In the second quarter, VAS revenue excluding Tantan, totaled RMB 1.33 billion, up 1% year-over-year and 11% sequentially. VAS revenue from the Momo app totaled RMB 1.07 billion, (corrected by company after the call) down 6% year-over-year and up 10% quarter-over-quarter, while revenue from the standalone app was RMB 262 million, up 44% year-over-year and (corrected by company after the call) 16% sequentially. The main reason for the year-on-year decline in Momo VAS revenue is that the number of paying users had yet to recover to the level in the same period of last year. Meanwhile, ARPPU improved significantly from a year ago, partially offset the revenue pressure from the decline in paying users.

The sequential improvement in Momo VAS revenue was driven by the increase in both ARPPU and paying user count. Since the beginning of the year, our team has been integrating user products with commercial products to improve monetization efficiency. For example, we added access to the Chatroom experience in several features such as "Nearby" people and post. This can not only improve our user experience but also increase the penetration of paying features and simulate users' spending behavior. The expansion of new entry points combined with optimizing the recommendation algorithm drove steady sequential growth of audio and video-based social entertainment experiences, which enjoy higher ARPPU.

So let's review Tantan's performance. Our strategic goal for Tantan is to achieve overall breakeven for the year and develop products and monetization models that are suitable for the Asian dating culture, in order to pursue suitable sustainable growth on the back of the positive business cycle.

At the beginning of the year, we achieved the first step of our strategic goal, which is to break even. However, in terms of user growth, we still need to make further breakthroughs on both user and commercial product fronts. As mentioned last quarter, Tantan's user base gradually recovered after the Chinese New Year trough. However, entering spring, with the recovery in user activity after the pandemic as well as the adjustment of user registration process, Tantan was attacked by large-scale spamming activities, which became the main issues that plagued us in the second quarter. In order to maintain a healthy and stable dating ecosystem, we launched a stringent anti-spam campaign, which resulted in an 11% decrease in MAUs to 17.3 million in June compared to March.

As of the end of Q2, Tantan had 1.4 million paying users, a net decrease of 200,000 from the previous quarter. The decrease was due to the decline in user base, whereas paying commercial remained stable sequentially.

Now moving onto Tantan's financials. Total revenue for the second quarter was RMB 321 million, down 3% year-over-year, but up 4% sequentially. During the last 18 months or so, although Tantan's user base and number of paying users declined on a large scale due to the factors such as the pandemic, marketing spend reduction and anti-spam initiatives, the platform has experienced a limited decrease in revenues due to the team's efforts to improve ARPU.

In the second quarter, revenue was RMB 170 million, up 1% sequentially. Live streaming revenue was RMB 145 million, up 4% quarter-over-quarter. At the same time, we continue to optimize costs and expenses related to staff and infrastructure, resulting in a sequential growth of operating income to RMB 31.89 million.

Now I would like to share our progress against Tantan's strategic priorities during the quarter. Since the beginning of the year, our team has delivered good results with respect to our strategic priority of achieving breakeven. So this is primarily due to our efforts in both marketing and monetization.

So firstly, on the marketing front, in the second quarter, channel competition intensified due to the impact of the e-commerce shopping festival in June, resulting in a quarter-on-quarter increase in unit acquisition costs. Our team tried to limit the increase in unit acquisition cost by adjusting the channel structure and avoiding channel competition during peak times. Thanks to the optimization of our channel strategy and the data feedback system, our new (added by company after the call) user ARPU increased significantly from the previous quarter. The channel ROI remained stable despite the sequential increase in unit acquisition cost.

On a year-over-year basis in Q2 2023, unit user acquisition cost decreased by almost 50% and new user ARPU increased by almost 60%. In the second half of the year, we will continue to focus on improving user acquisition efficiency. The plan is to continue to closely monitor channel ROI and adjust channel investments accordingly. In addition, we will further improve resource unitization by carefully selecting the KOLs we work with and optimizing advertising materials.

On the monetization front, our commercial product team has delivered good results over the past year and optimizing the existing paying experience and launching new paying features, continuously driving ARPU growth.

The Black Gold membership service launched at the end of last year and has played a positive role in driving ARPU growth. In the second quarter, our product team increased the exposure of the Black gold privilege service and added a premium privileged package, which effectively drove further ARPU growth. In the past year, Tantan's ARPPU has continued to increase significantly as we provided more new paying features that can effectively improve matching efficiency and enhance users' dating experience.

Moving forward, we will follow the path by adding new use cases while increasing the exposure of commercial products, for example, introducing exclusive privilege for female members, providing female users with high-quality matches and no-interference option. Meanwhile, we will optimize the matching algorithm -- matching algorithms for members based on user feedback and improve the post-sales experience for members to drive renewal rates.

Overall, In the first half of the year, our team has made good progress in improving user acquisitions, efficiency and driving ARPPU growth. We are happy to see that the decrease in cost and increase in ARPU enabled Tantan to achieve breakeven. However, we have to admit that we haven't made any substantial breakthroughs in terms of user growth or any significant innovation in commercial products. Such breakthrough on product innovation is the key for Tantan to drive a positive business cycle and achieve sustainable growth. During the second quarter, the outbreak of spamming activities on Tantan created a serious negative impact on the ecosystem, so our product team had to focus its main efforts on the anti-spam campaigns.

In quarter 2, we started testing some product experience aimed at improving female user engagement and retention. However, based on our preliminary data feedback, these products still need further iterations. In the second half of the year, our product operation team will continue to optimize the core swipe and match mechanism and explore other social experience to improve user time spent and female user retention.

Lastly, in terms of our new endeavors, the goal here is to enrich our product portfolio, push the boundaries beyond Momo and Tantan and deliver long-term growth engine for the group. In the second quarter, the total revenue for -- of the profit-oriented stand-alone apps, including domestic and overseas social and game product was RMB 264 million, up 33% year-over-year and (corrected by company after the call) 16% sequentially. Revenue of domestic products was back on sequential growth track after the Chinese New Year trough. Revenue growth in overseas social products temporary slowed at the beginning of the year due to the earthquake impact in Turkey and the devaluation of Egyptian currency.

In the Second Quarter, consumer sentiment in Turkey recovered. Our team shifted its market focus from Egypt to several affluent middle eastern markets. With the combined efforts of product and channel teams, the number of paying users of overseas social products increased rapidly, which led to our significant sequential increase in revenue. In addition, our team optimized the overall revenue sharing ratio and (corrected by company after the call) various costs and expense items by fine-tuning operations. Thanks to operating leverage, the net margin improved sequentially. As a result, net income grew much faster than revenue.

As we dive deeper into the overseas market, we realize that the Middle East and emerging North Africa markets still have much room for growth. Therefore, in second quarter, while we increased investments in existing products to drive rapid revenue and profit growth, we also tested several new ROI-oriented products in the MENA area. We'll try to replicate our success so far in our overseas expansion to grow our user base further. With our expertise in attracting users through social attributes and monetizing through value-added service, we are hopeful that these new products will contribute sizable revenues and profits to the group in a foreseeable future. This concludes my remarks. Now I will pass the call over to Cathy for the financial review. Cathy, please.

Thank you. Hello, everyone. Thank you for joining our Conference Call today. Now let me briefly take you through the financial review. Total revenue for the second quarter of 2023 came in better than our previous expectation at RMB 3.14 billion, up 1% year-on-year and 11% quarter-over-quarter. Non-GAAP net income attributable to the company was RMB 632.1 million, up 36% year-on-year and 34% from the previous quarter. Better-than-expected bottom line performance was attributable to the outperformance of the top line as well as our continuous cost control efforts, which led to improvement in both Momo and Tantan's profitability.

We are proud that after 3 years of pandemic, we emerged on the other side with a very healthy and solid cash cow business and at the same time, stronger capability of managing new business endeavors to drive future growth while delivering decent profits to the shareholders. Now let me walk you through the details. Looking into the key revenue line items for the quarter. Firstly, on live broadcasting, total revenue from live broadcasting business for the second quarter of 2023 was RMB 1.59 billion, up 5% year-over-year and 11% quarter-over-quarter.

Momo app live broadcasting revenue totaled RMB 1.44 billion for the quarter, up 3% year-over-year and 12% quarter-over-quarter. The increase was driven by an increase in the number of high paying users, which in turn drove overall ARPPU growth. Tantan's live broadcasting revenue amounted to RMB 145.2 million, up 25% from Q2 last year and 4% from the previous quarter.

Revenue from value-added service for the second quarter 2023 was RMB 1.50 billion, down 2% from Q2 last year, but up 10% sequentially. Revenue from VAS on an ex Tantan basis was RMB 1.33 billion in the second quarter of 2023, up 1% year-on-year and 11% sequentially. Momo app VAS revenue decreased from the year ago due to a decrease of paying user count. However, the downward pressure was completely offset by the growth of stand-alone new applications which led to a slight year-over-year increase in value-added service revenue on an ex Tantan basis. The sequential growth was primarily attributable to the seasonal recovery of Momo app's value-added service business as well as the continuous growth of the new applications.

Tantan's value-added service revenue amounted to RMB 170.2 million, down 21% from Q2 last year, but up 1% from the previous quarter. The year-on-year decrease was due to the decline in paying users. However, the downward pressure on value-added service revenue 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 second quarter of 2023 was RMB 1.82 billion compared to RMB 1.79 billion for the same period last year. Non-GAAP gross margin for the quarter was 42.1%, down slightly by 0.4% from the year ago period, but up 1.1% from the last quarter. The sequential increase was due to the discontinuation of one-off incentives in Q1 provided to live streamers after the Chinese New Year to speed up supply side recovery.

Non-GAAP R&D expenses for the second quarter was RMB 200.8 million compared to RMB 214.3 million for the same period last year, or a 6% decrease year-over-year. The decrease was due to the continuous optimization and personnel costs. Non-GAAP R&D expenses as a percentage of revenue was 6.4% compared with 6.9% Q2 last year.

We ended the quarter with 1,470 total employees of which 339 are from Tantan compared to 1,825 total employees, of which 516 from Tantan a year ago. The R&D personnel as a percentage of total employees for the group was 63% compared with 61% Q2 last year.

Non-GAAP sales and marketing expenses for the second quarter was RMB 349.7 million or 11.1% of total revenue compared to RMB (corrected by company after the call) 600.1 million or 19.3% of 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's strategy to trim low-efficiency channel marketing spend.

Non-GAAP G&A expenses was RMB 83.2 million for the second quarter of 2023 compared to RMB 82.6 million for the same quarter last year. G&A expenses as a percentage of total revenue remained stable at 2.7% from the year ago period.

Non-GAAP operating income was RMB 708.8 million, a significant increase of 53% from Q2 2022, and up 37% from the previous quarter. Non-GAAP operating margin for the quarter was 22.6%, up 7.7 percentage points from the same period last year and 4.2 percentage points from the previous quarter.

Non-GAAP operating expenses as a percentage of total revenue was 20.2%, a decrease from 28.8% in Q2 2022 and down from 23.9% in Q1 this year. Non-GAAP expenses in absolute renminbi amount decreased 29.3% year-on-year. This was mainly due to a reduction in sales and marketing expenses and, to a lesser degree, optimization in personnel and infrastructure costs.

Now briefly on income tax expenses. Total income tax expense was RMB 166.0 million for the quarter with an effective tax rate of 20%. In Q2, the company accrued withholding income tax of RMB 48.1 million, which is 10% of undistributed profit generated by our WFOE. Without withholding tax, our estimated non-GAAP effective tax rate was around 14% in the second quarter.

Now turning to balance sheet and cash flow items. As of June 30, 2023, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits, short-term investments and restricted cash totaled RMB 11.27 billion compared to RMB (corrected by company after the call) 13.40 billion as of December 31, 2022. In Q2, we paid an equivalent of RMB 937 million cash dividend to our shareholders. And in late June, we prepaid an equivalent of RMB 2.26 billion to repurchase our convertible senior notes, which was settled in early July. Net cash provided by operating activities in the second quarter of 2023 was RMB 828 million.

Lastly on business outlook. Before we give out the numbers, let me spend a few minutes talking about a few things that are expected to have impact on our top line performance in the near term. For the second quarter of 2023, revenues from Momo segment or on an ex Tantan basis totaled RMB 2.82 billion, up 1.3% year-over-year. This was the first positive quarter for Momo on a Y-o-Y basis since the beginning of COVID in early 2020. On the one hand, we are happy to see that the cash cow business showed remarkable resilience on the back of strong platform fundamentals. On the other hand, we remain cautious about the operating environment we are in.

As you guys can probably feel macro rebound is not turning out as promising as we had hoped at the beginning of the year, especially as we entered into Q3, we've got a clear sense that the spending sentiment is softening. In addition, starting mid-Q3, we have also been making product adjustments to make sure that our ecosystem stays healthy. Some of the adjustments have negative impact on the top line performance of Momo's value-added service in the short run. All of these factors are expected to cause revenues for Momo segment for Q3 to decrease on a sequential basis.

For Tantan, in June, we made some product adjustments to comply with the new policy rolled out by MIIT in Q2, which posted a negative impact on the renewal rate of the membership service. This will likely cause Tantan's revenue to see a sequential decrease from Q2 as well. To be more specific, we estimated the group's Third Quarter revenue to come in the range from RMB 2.9 billion to RMB 3.0 billion, representing a decrease of 10.3% to 7.2% year-on-year or a decrease of 7.6% to 4.4% quarter-over-quarter.

At segment level, for Q3 2023 on a sequential basis, we expect Momo revenue to decrease around mid-single digit, and Tantan revenue to decrease in teens. 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.

Just a quick reminder before we take questions. For those who can speak Chinese, please ask your questions in Chinese first, followed by English translation by yourself. Operator, we're ready for questions, please.

(Operator Instructions)

The first question today comes from Thomas Chong with Jefferies.

(foreign language)

My question is on core Momo. The first part is about the user recovery trend as well as the outlook. And the second is regarding the macro, how it is going to impact live streaming and VAS? And the third part is about our second half core Momo revenue expectation.

[Interpreted] As I mentioned in my prepared remarks, the strategic priority for the Momo app this year is to keep the user base stable and increase the productivity of the cash cow business. The team's mandate is to devise and execute product and channel strategies with idea to accomplish this goal. On the product front, we integrated user products with commercial products to continue to introduce new features that facilitate timely social interactions and improve relationship building.

In addition, users can further enhance the social experience by paying for value-added services. On the back end, we continue to optimize the content recommendation algorithm so we can create a better community atmosphere and deliver more value for female users and those who are seeking for emotional companionship, an enhancement in product experience has played a positive role in improving user retention. And therefore, even with reduction in channel investment versus a year ago, the user base continued to grow steadily after the Chinese New Year trough.

Although Momo's user growth and engagement level performed pretty well so far this year, we will remain our operational focus on keeping the number of paying users at a healthy and stable level rather than the excessive pursuit of MAUs because paying users on a fundamental basis for maintaining the high productivity of the cash cow business.

In terms of consumer sentiment, we felt that the users' social and consumption demand started to pick up after the Chinese New Year. Our better-than-expected user metrics and financial performance in the first half of the year are solid evidence of this. However, since entering Q3, Momo's core revenue started to soften compared with the second quarter. And there are two reasons for this. One is the weakening of consumer sentiment caused by the overall macro environment. And the other is that we took the initiative to make a round of relatively large round of large production adjustments in late August to further ensure a healthy ecosystem.

And for the questions related to revenues, Cathy will take that.

Okay. Now briefly on the revenue outlook for Momo. As you guys can see, we had a pretty good first half of the year due to the post COVID recovery as well as the fact that the team has been doing a good job on the product and operational side. However, as Sic mentioned, moving -- as we moving -- as we move deeper into the year by monitoring the daily grossing and also from some of the anecdotal conversations with our VIPs, we can feel that the consumer sentiment is obviously weakening, possibly due to the macro, not turning out to be as promising as people had hoped earlier in the year.

And the other factor that we have to take into consideration is that we've been making some product adjustments on the value-added service side to make sure that Momo's social ecosystem stays healthy. And such adjustments involve temporary suspension of some of the products and services we previously offered on the Momo platform. And such suspension is expected to have partial impact on Q3 and full impact from Q4 onwards, because the adjustments and suspension took place toward late August time frame.

And due to those two factors, one at the macro level and the other one on the product front, our previous view that I remember saying on our last earnings call that the second half of the year is likely to see continuous improvement from the first half. That view at this point of time, obviously seemed a little bit too optimistic. As you guys can see from our guidance, we are seeing Q3 to show a sequential decline by mid-single digits. Q4 is, at this point of time, still a little bit far out to see because a lot of it will depend on how macro eventually is going to weigh out. But if the macro stays the way it is, I think it is possible that we can see a flattish quarter from -- in Q4 from Q3.

As you guys know, Q4 is usually a very strong season due to the year-end competition event but the full quarter impact from the product adjustments that I just mentioned on the mass side could eat in some of the incremental revenue from the year-end competitions. Also we think it's possible that the October long holiday this year could have a bigger negative impact on us because more people could be traveling due to the reopening instead of hanging out online using the social entertainment services that we offer. So again, at this point of time, I do not really have enough visibility to be very prescriptive about Q4. But if you ask our view at this point of time, we'd rather stay on the conservative side for the whole second half of the year. I hope that helps.

The next question comes from Raphael Chen with BOCI Research.

(foreign language)

My question is regarding our new apps. Firstly, could the management share some latest updates especially social? Also, could we have some insight on whether if the company had other new apps or products this year? Lastly, do we have any revenue guidance of new apps in the second half of this year or 2024?

[Interpreted] In terms of new endeavors, our domestic apps, which launched relatively early, have now entered a rather mature stage in terms of product and -- product format and user scale. And for these apps, our team's current focus is on continuously exploring monetization opportunities and optimizing the cost structure and promoting the steady growth of profit scale. And as for the overseas business with the greatest and most promising potential, as I mentioned earlier, although user and revenue growth are temporarily slowed down at the beginning of the year due to some external factors, the overseas business, operational and financial metrics actually resumed a satisfactory growth trend in Q2 thanks to the timely adjustment our team made in shifting market focus.

While digging deeper into mature markets and exploring opportunities for revenue expansion in new markets, we also optimized the revenue sharing policy in favor of our GP margin as we build on our brand power and industry influence. And that is why if you look at social profit growth rate and it went much faster than it's a revenue growth rate level.

We have recently set up an overseas business unit and has launched several new products overseas. Our goal here is to further develop existing products while more effectively replicating our successful overseas experience in new vertical markets, but we'll start making channel investments once user matrix reach a satisfactory level. In fact, we have started trial marketing in selected regions. But our focus this year will be on optimizing products from product form according to user feedback rather than engaging in large-scale user acquisition and monetization. However, given that all of new products in the Middle East are ROI-oriented app, so we have strict requirements for the financial return on financial performance of the product iteration and operations. Hopefully, these apps can make some real contribution to our top line next year.

As for other new products, after Tang Yan returned to the management team, our investment in research and development of new products and businesses has greatly increased. Although the current demand in the consumer Internet industry is very saturated, we believe that each generation of young people will have different social needs and preferences. This is our challenge and also our greatest opportunity. We have been working in this field for more than 12 years, and we have accumulated a lot of successful experiences and lessons learnt. With our strong capital and talent pool, I'm confident that through self research and investments, we will continue to consolidate our leading position in the social field and explore new growth opportunities.

Okay. Let me -- this is Cathy. Let me give you some color on the size of the revenue from the new apps. To be clear, the revenues from the new applications is currently reported within the value-added service line under Momo segment. For example, in the Second Quarter 2023, value-added service revenue on an ex Tantan basis was 1.3 -- around RMB 1.3 billion, roughly 20% of which came from the new applications. As social continues to gain momentum, this year that 20% new piece within the value-added service line could grow I think, around 50% on a year-over-year basis. Such top line -- the other thing worth noting is the top line growth that I just mentioned also comes with margin improvement, so bottom line is growing even faster than top line.

With regards to the outlook about next year, next year in, I think, in late August this year is still a little bit too far to -- for me to see, a trend wise, I guess, social is going to continue to grow at a decent pace, driven mainly by new product launches and also some of the new regions that we're pushing into at this point of time. And the other growth driver -- potential growth driver for this new piece within value-added service is the new applications that we launched this year, as Sic just mentioned. Hopefully, next year, some of these new endeavors is going to start bearing fruits on the top line front. So that's my answer to your question. So let's move on to the next question. Please, operator.

The next question comes from Xueqing Zhang with CICC.

(foreign language)

My question is in regards to Tantan. Firstly, could management share about latest user trends. Secondly, do you have some initiative on the monetization. Lastly, what's your outlook for Tantan's revenue and the profitability in the second half of this year.

[Interpreted] Tantan has made good progress in improving channel ROI and ARPU over the past year, achieving breakeven ahead of schedule at the beginning of the year. Our next goal is to drive significant growth in ARPU and retention in order to create a positive business cycle and deliver sustainable growth. However, it's not that easy to get that as it requires us to make more substantial progress in both user and commercial products. Although we haven't yet found a breakthrough point for this, as the team has achieved breakeven, we have enough patience and confidence to continue exploring products and making Tantan a more effective dating app for users and creating more value to shareholders. And for the financial questions, I will leave it to Cathy.

Okay. Before I talk about the financial outlook for Tantan, maybe just one quick point to add to what Sic just said about users. I believe the big part of Tantan team's efforts for the rest of the year will be on cleaning up spammers and putting in a more comprehensive system to make sure we keep these bad actors off the platform. This is crucial for us to deliver the right kind of user experience for a dating platform. Other than that, the team is also going to be pushing harder on new product experiments, by pushing harder what I mean is it's probably time to try out whatever that we believe is worth trying without worrying too much about short-term fluctuations in user count.

With that in mind, it's hard for me, at this point to put down a definitive number for Tantan's MAU for the coming couple of months. I think Q3 is going to be a period where the team allows bigger room for trial and error. So I think that's the reason why we would rather defer that question on user target to next quarter. By then, we should have enough visibility to give you guys a user target for the near term. So that's the question on the user front for Tantan.

With respect to financial outlook for the back half for Tantan, I think for Q3 guidance, we are modeling in a sequential decrease from high single digits to low teens. That's largely reflecting the macro impact on live streaming and to a lesser degree, the product adjustments as directed by MIIT, which I mentioned on -- in my prepared remarks. And that's going to have a negative impact on the renewal rate of Tantan's membership service. On the other hand, the team is also working on new features to continue to drive the ARPU which will be able to counter some of those negative factors.

So overall, we do see some downward pressure in the second half of the year on top line, but how exactly Tantan's revenue may trend, especially as we enter into Q4, will depend on how good a job our team can deliver in driving the ARPU. With regards to Tantan's bottom line, we're still seeing opportunities to continue to optimize on important line items such as personnel and marketing. Depending on the pace of such optimization, bottom line in the second half should stay around breakeven level or slightly better than that.

The next question comes from Henry Sun with JPMorgan.

(foreign language)

My question is about profit margins. On the gross profit side, is there room for reducing live streaming revenue share. On the OP side, is there a potential for further narrowing the OpEx? Lastly, could you give us an idea of the productive scale of the investment for the new app and overseas business expansion?

Yes. I'm hearing several pieces of the question. Firstly, on gross margin and overall payout structure I think on the prior earnings calls, we've said that currently, we're seeing the supply side of the live streaming ecosystem at a pretty stable state, meaning that, yes there is still competition for the high-quality performers. But overall, we think market is much more stable compared to a year ago or 2 years ago, where some of the bigger platforms were very aggressive in competing with us for high-quality performers. So with that in mind, I think right now, the overall payout structure that we offer on Momo platform should stay relatively stable, meaning that the payout ratio should also stay at a relatively stable level as well.

I think the question if I get it correctly, is asking about whether there is room to maybe lower the payout ratio to the broadcasters. Although we do not see competition as intense as it was like 2 years ago, I do not think it's appropriate to lower the payout to agencies or broadcasters, either because it's true that from the press, sometimes we hear stories about some broadcasters making a lot of money. There are such outliers like some of the top of the pyramid streamers making huge sum of money. But these are not the average, these are the outliers. If you look at the average level of income that broadcasters make, if you look at the margins of some of our -- even some of our costs performer agencies, it's very low.

So if you want them to work hard in the ecosystem, if you want them to earn enough money to care about improving the content, this is probably not the right time for us to lower the payout ratio either. So that's my answer to the payout question. I think right now, we would rather let the status quo continue. So that's gross margin. My answer to the gross margin for this year, I think it would stay more or less the same as we saw in last year. Maybe it could swing a little bit because of the change in revenue mix, more or less, it would stay quite stable versus last year.

For operating margin, I think, in Q2 for ex Tantan part, operating margin on adjusted basis fell back to 24%, 25% on a non-GAAP basis. I think as we move into the second half of the year with some pressure on top line, it's possible that we could see non-GAAP operating margin on an ex Tantan basis to dip a little bit from Q2's level. But as I said, we are also working very hard to continue to optimize the personnel cost as well as the marketing. And we're still seeing pretty decent room for us to continue to improve on those optimizations front.

So I think in any case, we're going to exit 2023 with an adjusted operating margin safely above 20%. That's my view for the ex Tantan part. Tantan already (corrected by company after the call) focused on the overall bottom line outlook for Tantan. So I won't repeat here. I think the last question is perhaps on management's thinking about the expenditures needed for overseas expansion. As Sic mentioned, the new endeavors that we just launched in the Middle East, North Africa area, all of these are ROI-oriented strategy initiatives. This year I think the focus will be on getting the product right, getting the user experience right, building up the infrastructure and back end needed to grow the business. And when time is right, we're going to put in some marketing dollars to build the initial user base.

So overall, I would say the rest of the year would be an investment period for these new applications. But all in all, I think we are talking about if you count personnel and marketing dollars all in, we're talking about maybe RMB 20 million to RMB 30 million in total for the rest of the year for these new applications. And next year, they should start to see -- we should start to see revenue coming in from these new applications. For social, like I said, it's already in a stage where it's generating bottom line profit faster than it's generating revenues. So you don't have to worry about the growth of social creating a drag on the bottom line. So that's my overall answer to your question about margins.

So I think that's it for today. And thank you guys for participating, and we'll see you next quarter.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may now disconnect.

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