Hello Group - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to Second Quarter 2023 Hello Group Inc. Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. Please note, this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Ms. Ashley Jing. Thank you. Please go ahead, ma'am.

Ashley Jing (Head of Investor Relations)

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. Yan Tang, CEO of the company, Ms. Sichuan Zhang, COO of the company, and Ms. Peng Hui, CFO of the company. They will discuss the company's business operations and highlights, as well as the financials and guidance. They will be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this call may contain forward-looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

Such statements are based on management's current expectations and current market and operating conditions, and relate to events that involve known, 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, future events or otherwise, except as required under law. I'll now pass the call over to our CEO, Mr. Yan Tang. Mr. Yan Tang, please.

Yan Tang (Chairman and CEO)

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. Sichuan Zhang, 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.

Sichuan Zhang (COO)

Hello, everyone. It's 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+ 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. I will start with a brief overview of our financial performance. For the second quarter of 2023, total group revenue was CNY 3.14 billion, up 1% year-over-year and 11% sequentially, exceeding our earlier guidance.

In Q2, we delivered the first year-over-year growth since the beginning of the pandemic three years ago, mainly due to the stabilization and recovery of Momo's cash cow business. Adjusted operating income was CNY 709 million, a substantial increase of over 53% from Q2 last year and up 37% quarter-over-quarter, with a margin of 22.6%, up eight percentage points year-over-year and four percentage points quarter-over-quarter. The significant year-over-year improvement in profitability was mainly due to Tantan breaking even, the stable performance of Momo's cash cow business and our effective cost control initiatives. The sequential improvement in profitability was mainly attributable to the increase in Momo's profit. Total revenues from the Momo app and standalone new apps was CNY 2.82 billion, up 1% year-over-year and 12% sequentially.

Adjusted operating income was CNY 777 million, up 60% year-over-year, and a significant increase of 34% quarter-over-quarter, with a margin of 24%, up three percentage points year-over-year and four percentage points 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 CNY 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 CNY 31.89 million, representing a margin of 10% compared with adjusted operating loss of CNY 119 million in Q2 last year, and an adjusted operating income of CNY 14.48 million in the previous quarter. Now I will discuss our progress against our strategic priorities in these three business lines: Momo, Tantan, and the new endeavors. Starting with the Momo app, which is at a very mature stage. Our goal for Momo this year is to keep the user at very little 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 chat monetization and staff efficiency.

The better-than-expected financial performance and steady recovery in user scale are good quantitative results. Now, I 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 stabilizing 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 ROIs, as well as our user lifetime value or LTV, driven by the joint efforts of product and operations. The recovery trend 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 rapid increase in user base.

The number of Momo 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 a 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 Yan Tang mentioned last quarter, since Momo is a brand with a history of more than a decade, our current strategic priority is to stabilize user scale, optimize cost, and ensure its commercial productivity. To reflect such priority at the KPI level, our focus has shifted from driving the growth of Momo 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 CNY 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 user of growth overall ARPU growth. In the second quarter, the revenue sharing ratio of live streaming was lower than the previous quarter....

mainly because in Q1, we offer 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. There is no significant structure adjustment is needed. In the second quarter, VAS revenue, excluding Tantan, totaled CNY 1.33 billion, up 1% year-over-year and 11% sequentially. VAS revenue from the Momo app totaled CNY 1.07 billion, up 6% year-over-year and up ten percent quarter-over-quarter, while revenue from the standalone app was CNY 262 million, up 44% year-over-year and 60% sequentially. The main reason for the year-on-year decline in Momo Live's revenue is that the number of paying users had yet to recover to the level in the same period of last year.

Meanwhile, ARPU improved significantly from a year ago, partially offset the revenue pressure from the decline in paying users. The sequential improvement in Momo Live's revenue was driven by the increase in both ARPU and paying user accounts. 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 chat room experience in several features, such as Nearby People and Post. This can not only improve our user experience, but also increase the penetrations of paying features and stimulate 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 experience, which enjoy higher ARPU. 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 breakthrough on both user and commercial product front. As mentioned last quarter, Tantan's user base gradually recovered after the Chinese New Year drops. 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 issue 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 70.3 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 conversion remained stable sequentially. So now, moving on to Tantan's financial. Total revenue from the second quarter was CNY 321 million, down 3% year-over-year, but up 4% sequentially.

During the last eighteen months ago, 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 quite limited decrease in revenue due to the team's efforts to improve ARPU. In the second quarter, VAS revenue was CNY 170 million, up 1% sequentially. Live streaming revenue was CNY 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 CNY 31.89 million. Now I would like to share our progress against Tantan strategic priority during the quarter.

Since the beginning of the year, our team has delivered good results with respect to our strategic priority of achieving breakeven. This is primarily due to our efforts in both marketing and monetization. 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 cost. 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 our optimization of our channel strategy and the data feedback system, our new 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 users 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 utilization 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 in 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 play 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 privilege package, which effectively drove further ARPU growth. In the past year, Tantan's ARPU 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 non-interference options. Meanwhile, we will optimize the matching algorithm, matching algorithm for members based on user feedback and improve the post-sales experience for members to drive new renewal rate. Overall, in the first half of the year, our team has made good progress in improving user acquisition, efficiency, and driving ARPU growth.

We are happy to see that the decrease in costs and increase in ARPU enable Tantan to achieve breakeven. However, we have to admit that we haven't made any substantial breakthrough in terms of user growth or any significant innovation in commercial products. Such breakthrough on product innovations 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 campaign. In quarter two, we started testing some product experience to improve female user engagement and retention. However, based on our preliminary data feedback, this product still needs further iterations.

In the second half of the year, our product operation team will continue to optimize the core live and match mechanisms, and explore other social experience to improve user time spend 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 of the profit-oriented standalone app, including domestic and overseas social and games product, was CNY 264 million, up 33% year-over-year, and 60% sequentially. Revenue of domestic product was back on a sequential growth track after the Chinese New Year trough. Revenue growth in overseas social products temporarily slowed at the beginning of the year due to the earthquake impact in Turkey and the evaluation of Egyptian currency.

In the second quarter, consumer sentiment in Turkey recovered. Our team shifts 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 a significant sequential increase in revenue. In addition, our team optimized the overall revenue sharing ratio and, revised costs and expense items by fine-tuning operations. Thanks to operating leverage, the net margin improved sequentially. As a result, the net income grew much faster than revenue. As we dive deeper into the overseas market, we realized that the Middle East and emerging North Africa markets still have much room for growth.

Therefore, in the second quarter, while we increased our investment in existing products to drive rapid revenues 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 connectivity and monetizing through value-added service, we are hopeful that these new products will contribute sizable revenue and profit to the group in the foreseeable future. This concludes my remarks. Now, I will pass the call over to Cathy for the financial review. Cathy, please.

Cathy Peng (CFO)

Thank you, Sichuan. Hello, everyone. Thank you for joining our conference call today. Now let me briefly take you through the financial review. Total revenue for the second quarter 2023 came in better than our previous expectation, at CNY 3.14 billion, up 1% year-on-year, and 11% quarter-over-quarter. Non-GAAP net income attributable to the company was CNY 632.1 million, up 36% year-on-year, and 34% from the previous quarter. The 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 three 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 CNY 1.59 billion, up 5% year-over-year, and 11% quarter-over-quarter. Momo app live broadcasting revenue totaled CNY 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 ARPU growth.

Tantan's live broadcasting revenue amounted to CNY 145.2 million, up 25% from Q2 last year and 4% from the previous quarter. Revenue from value-added service for the second quarter of 2023 was CNY 1.50 billion, down 2% from Q2 last year, but up 10% sequentially. Revenue from VAS on an ex Tantan basis was CNY 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 standalone 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 CNY 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 RP2, driven by commercial product efforts. Now turning to costs and expenses. Non-GAAP cost of revenue for the second quarter of 2023 was CNY 1.82 billion, compared to CNY 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 CNY 200.8 million, compared to CNY 214.3 million for the same period last year, or a 6% decrease year-over-year. The decrease was due to the continuous optimization in 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 employee for the group was 63%, compared with 61% Q2 last year. Non-GAAP sales and marketing expenses for the second quarter was CNY 349.7 million, or 11.1% of total revenue, compared to CNY 601 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 CNY 83.2 million for the second quarter of 2023, compared to CNY 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 CNY 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 CNY 166.0 million for the quarter, with an effective tax rate of 20%.

In Q2, the company accrued withholding income tax of CNY 48.1 million renminbi, which is 10% of undistributed profit generated by our WFOE. Without the 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 30th, 2023, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits, short-term investments, and restricted cash total of CNY 11.27 billion, compared to CNY 17.40 billion as of December 31st, 2022. In Q2, we paid an equivalent of CNY 937 million RMB cash dividends to our shareholders, and in late June, we prepaid an equivalent of CNY 2.26 billion RMB cash 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 CNY 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 impacts 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 CNY 2.82 billion, up 1.3% year-over-year. This was the first positive quarter for Momo on a YoY 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 impacts 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 poses 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 CNY 2.9 billion-CNY 3.0 billion, representing a decrease of 10.3%-7.2% year-on-year, or a decrease of 7.6%-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.

Ashley Jing (Head of Investor Relations)

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 (participant)

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset before asking your question. The first question today comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong (Managing Director)

晚上好，谢谢管理层接受我的提问，我的问题是关于core Momo的，管理层可以分享一下从这个core Momo的用户的一个恢复的一个情况，还有就是未来的发展的一个趋势。另外的话呢，就是刚刚也有提到宏观的那个情况，对core Momo的直播，还有BAS的影响。最后一个呢，是关于我们core Momo下半年收入的预期。谢谢。Thanks management for taking my question. 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's going to impact live streaming and VAS? And the third part is about our second half core Momo revenue expectation. Thank you.

Cathy Peng (CFO)

谢谢。我来回答一下。正如我刚刚在发言稿中提到，Momo主站今年的战略重点是维持大盘生态稳定，提高整体商业化效率。这 是团队制定产品策略以及渠道方案的一个核心依据。在产品上面，我们打通了用户和商业产品的入口，并及时推出了，新的强调即时化的社交体验和互动的场景，提升关系达成效率的同时，让用户通过付费得到更好的社交正反馈。

Ashley Jing (Head of Investor Relations)

We are in the On the back end will continue to optimize the content promotion strategy, for women and low hormone users to create a better community atmosphere, output emotional companionship value. These product experience improvements will improve retention, play a very good incentive role. Therefore, even though the overall user base has decreased compared to the same period last year as a result of reduced channel investment, it has been steadily rising since Spring Festival. 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 the 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 their 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. The enhancement in product experience has played a positive role in improving user retention. Therefore, even with reduction in channel investment versus a year ago, the user base continue to grow steadily after the Chinese New Year trials.

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 the paying users are the fundamental basis for maintaining the high productivity of the cash cow business. From a consumer sentiment perspective, we felt that user 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. 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.

Cathy Peng (CFO)

Hey, you know, 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 Sichuan mentioned, 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 play out. But if the macro stays the way it is, I think it is possible that you know we can see a flattish quarter you know from in Q4, from Q3. As you guys know, Q4 is usually a very strong season due to the year-end competition events.

But the full quarter impact from the product adjustments that I just mentioned on the Momo 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 reopen, 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. Uh, yeah, yeah.

Ashley Jing (Head of Investor Relations)

Operator, next question, please.

Operator (participant)

The next question comes from Raphael Shen with BOCI Research. Please go ahead.

Raphael Shen (Managing Director)

Hi, good evening. Thank you, management, for taking my question. My question is about the new business. First, could management please share the progress of the new business, especially the recent situation with Soulchill here. Second, could you share some details about the new products? Because on the call, management also mentioned that there are some new ROI products directed to some new apps.

Finally, could you share with us the revenue expectation for the new business in the second half of the year and next year? Let me translate it myself. Thanks, management, for taking my question. My question is regarding our new apps. Firstly, could management share some latest update, especially Soulchill? Also, could we have some insight on whether if company has other new apps or products to share? Lastly, could we have any revenue guidance of new apps in the second half of this year or 2024? Thank you.

Yan Tang (Chairman and CEO)

谢谢，我来回答一下。在新业务里面，国内的app由于起步相对比较早，产品的形态，用户规模已经进入到相对比较成熟一些阶段。目前团队的精力主要是在深挖商业化的潜力，优化成本费用结构，来推动这个利润规模的增长。而发展潜力最大，确定性最强的海外业务，我刚才跟大家提到过，介绍过，虽然年初受到一些外部因素的影响，增长有点放缓，但是由于团队及时调整了市场方向，二季度用户和财务数据就恢复到比较满意的增长趋势。团队在深挖成熟市场，拓展新的营收区域的同时，凭借着我们的品牌影响力，逐渐扩大，行业的话语权越来越强，也会根据公司的关系变化，去及时优化分成政策。所以我们看到Soulchill的利润增长速度会比收入增长更加可观。

Cathy Peng (CFO)

In terms of new endeavors, our domestic apps, which are launched relatively early, have now entered a rather mature stage in terms of our product and product format and user scale. 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 our profit scale. 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 marketing, market focus. While digging deeper into mature markets and exploring opportunities for revenue expansions in new markets, we also optimize the revenue sharing policy in favor of our GP margin as we build on our brand power and industry influence. That is why, if you look at Soulchill's profit growth rate, and it went much faster than its revenue or growth rate level.

Yan Tang (Chairman and CEO)

近期我们还成立了海外事业部，并在海外先后测试了几款新的产品，目标是持续地发力，现有，现有产品的同时，可以能够将海外的成功经验更有效地复制到新的垂类产品当中。我们会在用户数据达到一定的内部标准之后，开始进行市场投放。

Ashley Jing (Head of Investor Relations)

Actually, we are currently starting some投放 testing in some areas. We expect that within the year, the team's main efforts will focus on optimizing the product's form based on user feedback, rather than, on a large scale, acquiring customers, as well as commercialization and monetization. However, our several new products in the Middle East are all ROI-oriented products. Therefore, the product's iterations and operations will have relatively strict payback period requirements. We also hope that next year, we can make some more practical contributions to the company at the revenue 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. So we'll start making channel investments once user metrics reach a satisfactory level. In fact, we have started trial marketing in selective regions. 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 apps, so we have strict requirements for the financial return or financial performance of the product iteration and operations. Hopefully, these apps can make some real contribution to our top line next year.

Yan Tang (Chairman and CEO)

至于其他新产品方面，其实在唐岩回归团队之后，我们在新产品和新业务研发方面加大了投入。虽然目前消费互联网的行业需求已经非常饱和，但我们认为社交行业每一代年轻人都会产生不一样的需求和偏好。这，既是我们公司的挑战，也是我们最大的机会。我们公司在这一领域已经耕耘了超过12年，积累了大量的成功经验和失败的案例，同时也拥有雄厚的资金以及人才储备。因此，我有信心在这个行业继续探索，通过自研和投资不断地巩固Hello Group在社交领域上的领先地位，并探索新的增长机会。

Ashley Jing (Head of Investor Relations)

As for other new products, after Yan Tang returned to the management team, our investments 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 learned. With our strong capital and talent pool, I'm confident that through self-research and investment, we will continue to consolidate our leading position in the social field and explore new growth opportunities.

Cathy Peng (CFO)

Okay. Let me, this is Cathy. Let me give, you know, some give you some color on the, size of, of the revenue from the new apps. To be, 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 of 2023, value-added service revenue on an ex-Tantan basis was 1.3, around CNY 1.3 billion, roughly 20% of which came from, the new applications.

As Soulchill 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 for me to see.

But trend wise, I guess, Soulchill is gonna continue to grow at a decent pace, driven mainly by new product launches and also, you know, 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 Sichuan just mentioned. Hopefully, next year, some of these new endeavors is going to start bearing fruits on the top-line front. So that's, that's my answer to the revenue outlook question.

Ashley Jing (Head of Investor Relations)

Let's move on to the next question, please, operator?

Operator (participant)

The next question comes from Xueqing Zhang with CICC. Please go ahead.

Xueqing Zhang (Equity Research Analyst)

Thank you, management, for taking my question. My question regards to Tantan. Firstly, could management share about the latest user trends and outlook for Tantan users' recent changes? Then, regarding product and commercialization aspects, do we have some new ideas to share with everyone? Finally, what are the expectations for revenue and profit on the Tantan side for the second half of the year? Thank you. Secondly, do you have some initiatives on the products and monetization? Lastly, what's your outlook for Tantan's revenue and profitability in the second half of this year? Thank you.

Yan Tang (Chairman and CEO)

谢谢，谢谢。探探在过去一年以来都在提升，渠道ROI，还有ARPU，两方面呢，都取得不错的进展，以至于我们上半年就提前实现了盈亏平衡。而我们下一步的目标就是能够进一步地显著提升ARPU和留存，进一步地去形成商业化的规范化，实现可持续的增长。然而呢，这个目标，要达成不是很容易，这需要我们在用户产品和商业产品方面都要取得更实质性的进步。目前虽然我们在这方面还没有找到突破点，但，既然团队已经取得了盈亏平衡，我们有足够的耐心和信心在产品方面持续地探索，令探探成为对用户更，更有效的，同时也可以为股东更赚钱的一个dating产品。那至于探探下半年财务部分，由Cathy来回答。

Ashley Jing (Head of Investor Relations)

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. For the financial questions, I will leave it to Cathy.

Cathy Peng (CFO)

Okay. Before I talk about the financial outlook for Tantan, maybe just one quick point to add to what Tang Yan just said about users. I believe a big part of Tantan team's effort for the rest of the year will be on cleaning up spammers and, you know, 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 counts.

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 digit 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 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. Is there a question about bottom line or no? Is there about Tantan's bottom line? Okay, 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. I'll hand back to Ashley.

Ashley Jing (Head of Investor Relations)

The next person, please, Operator, thank you.

Operator (participant)

I think this should be the last question.

Cathy Peng (CFO)

Oh, okay. Yeah, one last one.

Operator (participant)

With Peter Morgan. Please go ahead.

Peter Morgan (Founder and CEO)

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

Cathy Peng (CFO)

Yeah, 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, you know, 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, you know, high-quality performers, but overall, we think market is much more stable compared to a year ago or two 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, you know, 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 two years ago, I do not think it's appropriate to lower the payout to agencies or broadcasters either. Because it's true that, you know, from the press, sometimes we hear stories about some broadcasters, you know, making a lot of money.

There are such outliers, like some of the top of the pyramid, streamers, making a 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 top, you know, performer agencies, it's very low. So, you know, 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, for us to, lower the payout ratio, either. So, that's my answer to the, to the, payout question. I think right now we would rather, you know, let the status quo continue.

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, but you know, more or less, it would stay quite stable versus last year. For operating margin, I think in Q2 for the ex-Tantan part, operating margin on adjusted basis go back to 24-25% on Non-GAAP basis.

I think as we move into the second half of the year, with you know, 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're also working very hard to continue to optimize you know, the personnel cost as well as the marketing. And we're still seeing a pretty decent room for us to continue to improve on those optimization front. So I think you know, in any case, we're gonna exit 2023 you know, with a adjusted operating margin safely above 20%. That's my view for the ex-Tantan part. Tantan, I already talked about the overall bottom line.

I'll look 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 Sichuan mentioned, the new endeavors that we just launched in the Middle East, North Africa area, all of these are ROI-oriented, sort of the initiatives. This year, I think the focus will be on, you know, getting the product right, getting the user experience right, and building up the infrastructures and backend needed to, you know, grow the business. And when time is right, we're gonna put in some, you know, 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're talking about if you count, personnel and marketing, dollars all in, we're talking about, maybe CNY 20 million-CNY 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 Soulchill, like I said, you know, 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 Soulchill creating a drag on the bottom line. And 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.

Operator (participant)

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