Hello Group - Q3 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to third quarter 2023 Hello Group Inc. Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. 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 (Director of Investor Relations)

Thank you, operator. Good morning and good evening, everyone. Thank you for joining us today for Hello Group's third quarter 2023 earnings conference call. The company's results were released earlier today and are available on the company's IR website. On the call today are Mr. Tang Yan, CEO of the company, Ms. Zhang Sichuan, COO of the company, and Ms. Peng Hui, CFO of the company. They will discuss the company's business operations and highlights, as well as the financials and guidance. They will all be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this call may contain forward-looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

Such statements are based on management's current expectation and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties, and other factors. All of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties, and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under law. I will now pass the call over to our COO, Ms. Zhang Sichuan. Ms. Zhang, please.

Zhang Sichuan (COO)

Hello, everyone. Thank you for joining our call. We are pleased to report strong financial results for the third quarter and steady progress on various strategic priorities across all business lines. I will now walk you through the details of our work for the quarter end. Together with Tang Yan and Cathy, take questions in the Q&A session that follows. I will start with a brief overview of our financial performance. Total group revenue was CNY 3.04 billion, down 6% year-over-year and 3% sequentially, exceeding our previous guidance. The main reasons for the decline in revenue were the consumption softly caused by the softer economy and product adjustments we made to maintain a healthy community ecosystem. Adjusted operating income was CNY 681 million, up 30% year-over-year, but down 4.4% sequentially.

Profit margin was 22.4%, up 3.7 percentage points year-over-year, and down slightly 0.2 percentage points quarter-over-quarter. Compared to the same previous last year, adjusted operating profit increased significantly despite lower revenue. This improvement was driven by our effective cost optimization and efficiency improvement initiatives, which turned Tantan profitable compared to a year ago, as well as supported the stable productivity of Momo cash cow business. Total revenue from the Tantan app, or from the Momo app and Standalone new apps, was CNY 2.74 billion, down 5% year-over-year and 3% sequentially. Adjusted operating income was CNY 675 million, up 4% year-over-year and down slightly 1% quarter-over-quarter, with a margin of 24.6%, up 2.2 percentage points year-over-year and 0.4 percentage points quarter-over-quarter.

Profit margin improved despite the decline in revenue, primarily due to our team's solid ability to control costs and expenses. Total revenue from Tantan came in at CNY 295 million, down 40% year-over-year and 8% sequentially, mainly due to our reduction in channel investment, combined with our anti-spam initiatives, resulting in a drop in our user base. Thanks to improvements in staff and channel marketing efficiency, Tantan achieved an adjusted operating income of CNY 27.6 million in the third quarter, with a margin of 9%. Adjusted operating loss in the Q3 last year was CNY 38.3 million, and adjusted operating income in the previous quarter was CNY 31.9 million. Now, I will discuss the progress we make against our strategic priorities and future development plans for Momo, Tantan, and the new endeavors.

Starting with the mature Momo app. Our goal for Momo is to keep the user and revenue scale stable.... continue to optimize cost structure and maintain the productivity of the cash cow business. To achieve this goal, our team has focused on two aspects: product operation and cost and expenses. First, we mitigated revenue pressure from the external environment by continuously optimizing product operation and introducing new monetization features. Second, we maintained broadly stable profit margin by improving cash monetization and staff efficiency. The group's better-than-expected financial performance in Q3 was mainly due to the better-than-expected financial performance of the Momo app. Now, I will walk you through the details. Firstly, on the product and operational front, our focus on product operation this year has been stabilize the user base and improve monetization efficiency.

While focusing on providing timely social experience and enriching content supply, our product team further integrated user products and consumer products to improve the overall monetization efficiency of the platform. On the channel side, the continuous improvement in user acquisition efficiency provides an effective way to maintain the stability of the user base under the strategy of cost optimization and efficiency improvement. Thanks to lower unit acquisition cost, we acquired 40% more new users on a slightly lower channel investment year-over-year. In Q3, the number of active users declined slightly quarter-over-quarter due to the start of school year and VAS product adjustments. But the extent of the decline was less than a year ago. On a year-over-year basis, the total user scale was still slightly lower, but the gap has narrowed significantly compared to the first half of the year.

In quarter three, the number of Momo paying users decreased by 100,000 to 7.8 million from the previous quarter, mainly due to the policy adjustment in VAS membership, which results in a decline in the number of VAS-paying users. Now, let's go through the productivity of our Momo cash cow business. In the third quarter, Momo's live streaming revenue was CNY 1.41 billion, down 7% year-over-year and 2% sequentially. The pressure on revenue mainly came from a softer consumer sentiment. Considering the current macroeconomic environment, our team decided to reduce revenue-oriented competition events. Meanwhile, on the product front, we have launched new interactive gamified features that enable us to keep the number of core paying users, relatively stable.

The launch of interactive gamified features had not only improved the paying user experience of middle and long-term cohort users, which plays a positive role in stabilizing live streaming user engagement, but has also created new revenue stream for long-term forecasters in the traditional showroom live streaming business. In the third quarter, the revenue sharing ratio of live streaming decreased slightly quarter-over-quarter, mainly due to the reduction in event-related bonuses. User oriented operational efforts led to a slight decrease in the proportion of revenue contributed by talent agencies, but engagement of the supply side remained stable. In the third quarter, VAS revenue, excluding Tantan, totaled CNY 1.3 billion, down 3% year-over-year and 2% sequentially. VAS revenue from the Momo app totaled CNY 1 billion, down 12% year-over-year and 6% quarter-over-quarter.

Revenue from the standalone app was CNY 295 million. The year-over-year growth accelerated to 51%, and revenue was up 30% sequentially. The decrease in Momo VAS revenue was mainly due to our proactive product adjustments to improve the overall ecosystem and the impact of macroeconomy on consumer sentiment. As I mentioned earlier about our user product, in order to improve the monetization efficiency of the Momo app, we have embedded assets to paying experience in, for example, nearby people and some other non-paying features. The income in DAU and the paying ratio of audio and video-based VAS experience, particularly mitigated the pressure on revenue caused by product adjustments and the external environment. The overall VAS revenue sharing ratio decreased slightly quarter-over-quarter, primarily due to the discontinuation of lower gross margin features following our ecosystem adjustments.

This shift in the product mix contributes positively to the improvement in VAS growth margin. Now, let's review Tantan's performance. Our strategic goal for Tantan is to achieve overall breakeven from the year and develop products and monetization models that's suitable for the Asian dating culture, in order to pursue sustainable growth on the back of a positive business cycle. Over the past year, Tantan has made solid progress in reducing low efficiency channel marketing spends to achieve breakeven. It delivered first operating profit at the beginning of this year, and maintained profitability in Q3, despite lower revenue. However, we still have a long way to go in achieving our strategic goal of sustainable growth on the back of positive business cycle. The underlying reason is that we have yet to make breakthroughs in the development of products and monetization models that's suitable for the Asian dating culture.

The ongoing anti-spam campaign started this spring, coupled with the seasonal impact of the new school year, put notable pressure on Tantan's user base in September. MAU decreased 9% sequentially, to 15.7 million. As of the end of Q3, Tantan has 1.4 million paying users. Despite a decrease in overall user base, the paying user count remained stable sequentially, primarily due to our commercial product team's effort to improve user paying experience and a higher stickiness of the group compared to non-paying users. Total revenue for the third quarter was CNY 295 million, down 40% year-over-year and 8% sequentially. The year-over-year decrease was solely contributed to a reduction in the number of paying users, caused by decline of overall user base.

Thanks to improvement in both product and channels, ARPPU increased by 20% from a year ago, which partially offset the revenue loss from the decline in paying users. The sequential decrease in revenue was mainly due to significant impact of softer macroeconomy on the live streaming business. Additionally, the policy adjustments on automatic renewal by the Ministry of Industry and Information Technology had some impact on VAS membership subscription revenue. However, Tantan's gross margin was up by nearly 4 percentage points year-over-year and 1 percentage point quarter-over-quarter, driven by the greater revenue contribution of VAS business, which carries a higher growth margin. As I mentioned at the beginning, the decline in users and revenue of Tantan has mainly attributed to our initiative in cost optimization and efficiency improvement.

In terms of improving staff efficiency, we have continued to reduce features and operational activities that cannot provide high quality user experience and incremental revenue, and realigned human resource accordingly. In terms of improving marketing efficiency, we have continued to reduce unique acquisition costs and further cut marketing expenses that cannot generate positive ROI. Although this approach has resulted in a reduction in the number of users and revenue, the cost optimization strategy has brought greater benefit to our bottom line, as the market spend that we cut were ROI negative. This is why despite lower revenue, Tantan still achieve an adjusted operating income of CNY 27.58 million in the third quarter. So now, I would like to walk you through the details of Tantan's progress on the channel and product front.

Firstly, on the marketing front, the unique acquisition cost of App Store increased sequentially in the third quarter, due to the decline on its own traffic. Our team timely adjusted the proportion of investment across different channels in order to acquire more users, while controlling the increase in unit acquisition costs to low single digits sequentially. On the product and operational front, the biggest achievement in the third quarter is that we managed to maintain spamming activity to a low level significantly, and therefore, the community returned to normal. Our product team emphasized guiding of real person authentication on the Swipe and Match homepage. The increase in real person authentication rates positively contribute to the improvement of the community ecosystem.

In terms of commercial products, on top of the basic monthly membership service, we launched a variety of pay-as-you-go privilege that aims to increase exposure and improve matching efficiency. As a result, our VAS app group continued to grow on both a year-over-year and a sequential basis, largely offset the impact of user decline on VAS revenue. However, due to the lack of breakthrough in user products, our user retention unfortunately have not yet been stable, but basically improved. Additionally, the outbreak of spamming activities, combined with a softer spending among live streaming users, led to a decline in channel ROI.

Therefore, our team's execution for the rest of this year has been focusing on further reducing costs and channel investments, relocating excess human resources to new endeavors, and driving output growth through new product features on the basis of operational efficiency improvement until ROI turns positive. Lastly, in terms of new endeavors, our goal is to enrich our product portfolio, push the boundary beyond Momo and Tantan, to develop long-term growth engine. In the third quarter, total revenue of the new apps, including social and games products, was CNY 302 million, up 49% year-over-year and 50% sequentially. Among them, while the revenue of domestic and overseas social products was CNY 295 million, up 51% year-over-year and 30% sequentially.

For domestic apps, given their relatively mature stage, the operational focus on our team is to control costs and expenses while pushing harder on monetization, so that profit can grow in line with revenue. Now, in terms of our overseas business, thanks to a broader market space, revenue in the third quarter continued to grow rapidly from a higher base. The introduction of new features, together with our paying user-focused acquisition strategy, play a pivotal role in driving revenue growth. In Turkey, which accounts for a substantial portion of overseas market revenue, significant currency fluctuation during the quarter impacted revenue and exerted pressure on growth margin. To protect profits, our team reduced channel investments in a timely manner, resulting in continued sequential growth of operating income.

At the moment, we have mitigated some of the problems affected the profitability level of overseas business, and it's expected that it will deliver better sequential performance in both revenue and profit yet at the end of the year. So this concludes my remarks. Now, I will pass the call over to Cathy for the financial review. Cathy, please.

Hui Peng (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 third quarter of 2023 came in better than our previous expectation at CNY 3.04 billion, down 6% year-over-year and 3% quarter-over-quarter. Non-GAAP net income attributable to the company was CNY 605.9 million, up 13% year-on-year, but down 4% from the previous quarter. Net income significantly outperformed our expectation, mainly due to two factors. One, number one, better-than-expected top line performance. And number two, our continuous cost control efforts resulted in better than expected profitability for both Momo and Tantan.

Net income continued to grow on a year-over-year basis, despite lower revenue, thanks to our effective cost optimization and efficiency improvement initiatives, which enabled us to maintain the stability of Momo cash cow business, turn Tantan profitable, as well as support the development of new endeavors. Now let me walk you through the details. Looking into the key revenue line items for the quarter. Firstly, on live broadcasting. Total revenue for live broadcasting business for the third quarter of 2023 was CNY 1.53 billion, down 8% year-over-year and 4% quarter-over-quarter. The decrease was mainly due to a soft consumer sentiment in the current macro environment, and to a lesser degree, Tantan pivoting away from the live streaming service, which we deem is not the priority for Tantan at this point for the dating business.

Momo app live broadcasting revenue totaled CNY 1.41 billion for the quarter, down 7% year-over-year and 2% quarter-over-quarter. Tantan's live broadcasting revenue amounted to CNY 120.0 million, down 14% from Q3 last year and 17% from the previous quarter. Revenue from value-added service for the third quarter of 2023 was CNY 1.47 billion, down 5% from Q3 last year and 2% sequentially. Revenue from value-added service on an ex-Tantan basis was CNY 1.30 billion in the third quarter of 2023, down 3% year-on-year and 2% sequentially. The decrease in Momo app value-added service was due to our proactive product adjustments, as well as the impact of macroeconomy on consumer sentiment.

However, the downward pressure on Momo value-added service revenue was largely offset by the growth of stand-alone new apps.. Tantan's value-added service revenue amounted to CNY 168.4 million, down 16% from Q3 last year and 1% from the previous quarter. The decrease was due to the decline in paying users, which was in turn an outcome of us scaling back from the low efficiency marketing spend. However, the downward pressure was partially offset by the growth in our ARPPU, driven by commercial product efforts. Now turning to cost and expenses. Non-GAAP cost of revenue for the third quarter of 2023 was CNY 1.77 billion, compared to CNY 1.88 billion for the same period last year. Non-GAAP gross margin for the quarter was 41.8%.

Gross margin remained relatively stable compared to the same period last year and the previous quarter. Non-GAAP R&D expenses for the third quarter was CNY 186.7 million, compared to CNY 223.4 million for the same period last year, or a 16% decrease Y-o-Y. The decrease was due to the continuous optimization in personnel costs. Non-GAAP R&D expenses as a percentage of revenue were 6.1%, compared with 6.9% Q3 last year. We ended the quarter with 1,410 total employees, of which 314 are from Tantan, compared to 1,750 total employees, of which 479 from Tantan a year ago.

The R&D personnel as a percentage of total employee for the group was 64%, compared with 62% Q3 last year. Non-GAAP sales and marketing expenses for the third quarter was CNY 368.1 million, or 12.1% of total revenue, compared to CNY 458.6 million, or 14.2% of the total revenue for the same period last year. The significant year-over-year decrease, both in terms of absolute RMB 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 76.5 million for the third 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 largely stable at around 2.5% compared to Q3 last year. Non-GAAP operating income was CNY 681.2 million, up 13% from Q3 2022, but down 4% from the previous quarter. Non-GAAP operating margin for the quarter was 22.4%, up 3.7 percentage points from the same period last year, but slightly down 0.2 percentage points from the previous quarter.

Non-GAAP operating expenses as a percentage of total revenue was 20.7%, a decrease from 23.6% in Q3 2022, but slightly up from 20.2% in Q2 this year. Non-GAAP expenses in absolute RMB amount decreased 17% year-over-year. This was due to reduction in sales and marketing expenses and optimization in personnel costs. Now briefly on income tax expenses. Total income tax expenses was CNY 158.1 million for the quarter, with an effective tax rate of 21%. In Q3, the company accrued withholding income tax of CNY 47.9 million, which is 10% of undistributed profit generated by our WFOE. Without withholding tax, our estimated non-GAAP effective tax rate was around 15% in the third quarter. Now turning to balance sheet and cash flow items.

As of September 30th, 2023, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits, short-term investments, and restricted cash totaled CNY 13.64 billion, compared to CNY 13.40 billion as of December 31st, 2022. Net cash provided by operating activities in the third quarter 2023 was CNY 582.5 million. Lastly, on business outlook, we estimate the group's fourth quarter revenue to come in the range from CNY 2.9 billion to 3.0 billion, representing a decrease of 7.9%-6.6% year-over-year, or a decrease of 4.7%-1.4% quarter-over-quarter. At segment level for Q3 2023, on a sequential basis, we expect Momo revenue to decrease mid- to low-single digits.

The decrease was primarily, primarily due to the pressure on value-added service from the product adjustment we made in mid Q3, which will have a full quarter impact in Q4, and to a lesser degree, the macro impact on the overall spending sentiment. Considering the external environment, we've decided to cut back on the incentives to the agency-driven year-end competition events. Therefore, revenue contribution from year-end competition events will be quite limited. On the Tantan side, we expect revenue to decrease in low teens, primarily due to us pivoting away from live streaming business in Tantan, and to a lesser extent, the product adjustments we made to comply with the new policy rolled out by MIIT, which will have some negative impact on membership renewal revenue.

Please be mindful that this forecast represents the company's current and preliminary view on the market and operational conditions, which are subject to changes. That concluded the prepared portion of today's discussion. With that, let me turn the call back to Ashley to start Q&A. Ashley, please.

Operator (participant)

Thanks. Just a quick reminder before we start taking the questions. For those who can speak Chinese, please ask your questions in Chinese first, and followed by English translation by yourself. Thank you. We're ready for questions, operator.

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 then two. If you are on a speakerphone, please pick up the handset to ask your question. The first question today comes from Leo Chiang with Deutsche Bank. Please go ahead.

Leo Chiang (Equity Research Analyst)

Hi, hi.

[Foreign language] 管理层晚上好，谢谢接受我的提问，恭喜这个quarter强劲的业绩。我的问题是关于探探的，可以请管理层分享一下，明年探探的用户规模以及财务的这个outlook是怎么样的吗？谢谢。I'll translate myself. So hi, management. Thanks for taking my question, and congratulations on the strong results. My question is on Tantan side. Can management share the outlook of Tantan user scale and financial outlook in 2024? Thank you.

Tang Yan (CEO)

[Foreign Language]. 我来回答一下吧。这个在刚才的发言中提到，探探今年最大的收获是在这个减投控本策略下，实现了运营层面的盈亏平衡，这是产品推动这个ARPPU提升，渠道ROI和人员分配效率持续改善等多个团队共同努力的一个结果。那么产品层面呢，VAS会员在传统按月付费模式的基础上，增加了这个例如加速配对等提升曝光，以及匹配效率的单项付费特权功能，对推动VAS ARPPU增长起到了这个正向的这个帮助。渠道团队在控制单客单位获客成本的同时，以有限的预算测试付费导向的获客素材，为提升渠道的ARPPU和这个获客的这个ROI，探索了新的这个有效的途径。那么受制于这个，今年我们有一个spam的一个爆发，今年产品团队的很大一部分精力集中在于对抗这个灰黑产，维护社区生态平衡的工作当中。在此情况下，我们把部分这个冗余的技术人员调拨到支持新业务的研发和运维工作中，以此来提升整体人员的利用效率。虽然当前的这个社区生态已回归到这个正常的状态，但由于我们直播收入的疲软，造成的这个ARPPU的一个下滑，导致了整体渠道的ROI阶段性的回撤。因此，我们砍掉了...

ROI [Foreign language] 为负的一些渠道预算，投放费用的缩减，对于用户规模的恢复将造成一定的压力。但我们认为，以盈亏平衡为底线，探索-...

提升用户留存和收入的方式，与通过不计成本的买量来实现用户增长相比，是一种更为健康和可持续的一个商业模式。因此，我们2024年的产品和渠道策略将延续当前的这个战略思路。至于收入预期的话，还是Kathy来回答一下。

Speaker 8

Let me translate first. So as Sichuan mentioned earlier, Tantan's biggest progress this year was to achieve a breakeven at the operational level and our effective cost optimization and efficiency improvement initiatives. This is the result of the joint efforts of several teams that delivered, among others, product-driven ARPPU growth and continuous improvement in channel ROI and staff allocation efficiency. On the product front, on top of the basic pay-monthly membership subscription service, we launched a variety of pay-as-you-go privileges, such as accelerated matching, which is called 加 速 匹 配 in Chinese. So this kind of special privileges increased exposure and improved the matching efficiency, thereby driving vast people growth.

So on the channel front, our team controlled unit acquisition cost well, at the same time has been trying to testing paying features oriented marketing materials with a limited budget, to explore new ways to improve ARPPU and channel ROI. Due to the outbreak of the spamming activities this year, our product team had to devote a large part of their efforts to anti-spam and maintaining a healthy ecosystem. In this case, we have reallocated excess R&D staff to support the development and operation of new endeavors to improve the overall staff utilization efficiency. Although the community ecosystem currently has returned to normal, the decline in ARPPU due to a weak live streaming revenue has led to a temporary reduction in the overall channel ROI. Therefore, we cut investment in channels with negative ROI.

The reduction in marketing expenses put some pressure on the recovery of the user scale. But we believe that compared with the approach of pursuing user growth, regardless of costs, being able to improve user retention and VAS revenue on top of breakeven, is a healthier and more sustainable business model. Therefore, our product and channel strategies in 2024 will carry on with this current approach. In terms of revenue-related question, I'll leave it to Cathy.

Hui Peng (CFO)

Okay. I, you know, I've been very optimistic about Tantan, and I continue to be so, despite all the arduous journey that Tantan has been through since 2019. The reason for my optimism is quite simple. Chinese users have genuine demand for dating applications to help them discover romantic relationships, which they can bring to their real life, and that demand is currently underserved. Although Tantan is not doing as good a job as we expected it to, it's still undoubtedly the biggest and most effective, and also the most relentless player in serving that demand in China market today. As long as that is still the case, we believe the revenue and profit potential remains there for us to cultivate.

That's why I remain very optimistic about, you know, Tantan's long-term potential in revenue and profit. I think it's just a matter of continuing to stick to that goal, and finding the right formula, for, you know, the Asian user in the dating space. As far as next year is concerned, there are several things I can share at this point. First of all, we are going to refocus on the dating aspect of the applications, meaning that, we're going to continue to pivot away from some of the peripheral features, such as the live streaming showroom business. Live streaming currently bring in a little bit less than CNY 1 million per day in terms of grossing, daily grossing.

So as we continue to downsize that service, I think top line could be pressured. However, as live streaming bears a 20-something% gross margin and consumes a lot of operational human resources, downsizing live streaming would have minimal or even positive impact on the bottom line. However, the fact that Tantan has built a pretty sizable customer base for live streaming show business shows that its users, Tantan's users, actually have sufficient spending power to support a much higher ARPU. The biggest priority for next year for the team is to build the right product and services to unleash that ARPU potential. Unlike live streaming, the new product and services that we're gonna build should contribute positively to the dating aspect of the application of the Tantan platform.

If we are successful in doing so, that could push our ARPU from negative to positive, and the positive growth cycle will start to form on Tantan. Currently, we're working on several new features in the pipeline to be launched. You know, next year, we'll see whether any of them works as the year progresses. Meanwhile, of course, we are going to continue to optimize the key cost items such as personnel and marketing. One thing we know for sure is that cost efficiency will continue to improve. So although we cannot pin down a revenue target now for next year, we are very optimistic that the profitability is going to continue to see improvement in 2024. So these are the things that I could share for Tantan's financial outlook next year. Yeah, I'm handing back to Ashley for more questions.

Operator (participant)

Operator, next question, please. The next question comes from Zhang Xueqing from CICC. Please go ahead.

Xueqing Zhang (Media Analyst)

Hey, [Foreign Language] 谢谢，王医生，恭喜这个季度超预期的业绩，我的问题是关于新业务的，能否分享一下关于新业务的更多细节，以及2024年收入和利润的预期？谢谢。[Translator] Thanks management for taking my question. Congratulations on the strong quarter. My question is about our new apps. Could the management share more latest updates on the new apps? And do we have any revenue and profit guidance of new apps in 2024? Thank you.

Tang Yan (CEO)

Let me answer this. Since from 2019 the group incubator successively launched several independent apps with revenue and profit orientation, these products targeting vertical fields as well as overseas social markets successively began to make visible financial contributions to the group. Then taking 2022 as an example, under the revenue pressure brought by the epidemic, in order to let the group level's VAS revenue maintain stability as much as possible, the new business team moderately increased the commercialization intensity of independent apps. Therefore, 2022 new business revenue compared to last year increased nearly 1.5 times.

The incremental flow not only filled a gap in Tantan and Momo in VAS revenue, but also drove the group overall VAS revenue, under multiple adverse factors influence, achieved this slight growth. At the same time as user and revenue growth, our control of expenses was also very outstanding, this benefits from the revenue growth brought leverage effect. We in 2022 achieved three quarters continuous profitability. This year our requirement for new business is revenue and profit both to continue growth. Product side through launching new paid play methods, elevate paid rate and ARPU.

First three quarters, new business to group revenue contribution, from last year full year's mid-single digits elevated to this nearly 10%, expected this proportion next year will break double digits. Operating team according to revenue growth situation and channel ROI changes, real-time adjusted various expense expenditures, to ensure revenue and profit achieve common growth. Then new business overall since beginning of last year achieved this break-even after, profit level is continuous steady elevation.

For revenue and profit growth fastest, also is growth potential largest overseas business, we plan to domestic products in some proven -- already proven to user experience and revenue play promoting role methods, replicate to this overseas product, through elevating ARPU, drive flow further, further growth. Then channel side, we focus affluent country regions, have paying potential quality users, through commercialization play methods, elevated this high-amount paying group retention. In supply side stable premise under, slightly tuned down split proportion, elevated overall profit margin level. Expected this year new business profit growth amplitude will greatly exceed revenue growth level. Currently, new business in still have some in testing stage apps, still haven't generated substantial revenue, expected in product status adjustment to place after, will to revenue growth play further support role. Then specific revenue and profit expectations, Cathy can come to talk about it.

Speaker 8

Let me translate first. Starting from 2019, our incubator launched several revenue and profit-oriented standalone apps targeting vertical social segments and overseas markets. These apps have begun to gradually contribute to the group financials. In 2022, for example, under the revenue pressure brought by the pandemic, we pushed a little bit harder on the monetization efforts for these new standalone apps, in order to keep the group levels of VAS revenue stable. As a result, revenue from these new endeavors in 2022 increased around 1.5 times compared with the previous year. The incremental revenue not only offsets the decline in VAS revenue from Momo and Tantan, but also drove a slight increase in our group's VAS revenue, despite several unfavorable external factors.

Our team did a good job in controlling expenses while driving users and revenue growth, so we could enjoy operating leverage and achieve sustained profitability for the three small apps last year. Our goal for the new endeavors this year has been to continue to grow our revenue and profit. On the product front, we launched new paying features to increase paying ratio and ARPU. In the first nine months of the year, the contribution of these new endeavors to the group's top line increased to high single digits from mid-single digits last year. We expect this contribution to be in the double digits next year. Our team adjusted various expenses based on revenue growth and channel ROI to ensure the profit will grow together with revenue.

Since new endeavors collectively achieved a breakeven at the beginning of last year, the profits have continued to improve steadily. In the overseas business, which is growing revenue and profit faster and has greater growth potential, we plan to replicate in these apps some gamified features that have proven to be beneficial to user experience and monetization in our domestic products, and further drive revenue growth by increasing ARPU. And on the channel front, we will continue to focus on high quality users with paying potential in the affluent markets, and improve the retention of high-paying users through monetization innovation. We will slightly lower the revenue sharing ratio to improve growth margin based on a stable supply.

Profit from the new endeavors is expected to grow much faster than revenue this year. Currently, there are some new apps that are being tested and have not yet generated meaningful revenues. We expect them to further support revenue growth once these product formats are stabilized. For the specific revenue and profit guidance, I will leave it to Cassie.

Hui Peng (CFO)

Sure. That was already a pretty thorough description of our strategy to the new apps and the achievement we've made under those strategies. For financial outlook, as you understand, it's a little bit too early to talk about the numbers now in December, but there are a couple of things we see happening next year, which I can share to help you understand how the new apps are gonna contribute to the P&L in 2024. First of all, Soulchill, which is the social app that we run in the Middle East and North Africa area, is going to continue to grow pretty rapidly next year. The driver will come from three directions.

One is the continuous penetration into the existing markets by beefing up local operations and providing better customer service, so on. Compared with our peers, we believe we still have potential in driving further user and ARPU growth in those markets. The second direction of growth is that, as Sichuan and Tang Yan mentioned just now, we are now mainly providing the peer-to-peer social entertainment on Soulchill, and we expect to launch new feature and services such as live streaming. That obviously can help us increase the share and ARPU as well. And, thirdly, we're also looking at some other markets that we might be able to penetrate in. But as competition is already pretty intensive, elsewhere in the GCC region, in the Gulf countries, this third strategy will be more of an uphill battle, but we'll see how it plays out.

Overall, you know, for Social and also the other, you know, two smaller apps in China, you know, should continue to grow quite rapidly next year. This year, these three apps grew 50-something% year-over-year, and are on track to bring in somewhere between CNY 1.1 billion-1.2 billion in top line, and more than 100 million at bottom line. Next year, the top line could slow down a little bit, the growth could slow down a little bit, but profit growth should be quite impressive as the operating leverage manifests itself. That, that's, that's my answer to the financial outlook for the new business. Back to Ashley for the questions.

Ashley Jing (Director of Investor Relations)

In the interest of time, let's just take one last question. Operator, we're ready. Thank you.

Operator (participant)

The next question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong (Managing Director)

Thanks, management, for taking my questions. My first question is about core Momo. Can management comment about the 2024 product strategies as well as the revenue outlook? My second question is about shareholders return. Can management comment about the thoughts on share repurchase and dividends? Thank you.

Tang Yan (CEO)

Okay, [Foreign language] 我来回答一下这个关于陌陌主站的产品规划，还有收入的一个预期吧。对，收入预期的話，开始来回答一下吧，包括股东价值回购的，可能也由开始来回答更合适一些。那么稳规模、降成本跟保证现金流业务的稳定产出，是当前也是未来几年我们对于陌陌主站成熟，成熟业务的一个战略定位。因此，用户产品、商业产品和渠道团队的全部执行计划，都会围绕着这个战略目标来展开。例如，今年用户产品团队在首页添加的闪聊，用来分发的这个云连麦，以及悄悄等语音或文字的实时匹配的聊天场景。而商业产品团队在这些免费场景内接入直播和聊天室等付费玩法的入口，这样既能凸显陌陌社交即时化的产品价值，又能提升付费场景，场景的渗透率，以及平台的变现能力。而获客团队在明确了......

[Foreign language] 专注于付费用户的这个获客目标的同时，加强了与商业产品团队的合作，从而提升平台对渠道用户的承接能力。因此带来的ARPU提升，推动获客ROI持续改善，令我们能以不断降低的市场预算来维持平稳的用户规模和社交的基本盘。这对提升陌陌整体利润水平起到了促进作用。2024年陌陌主站的产品和渠道规划都会沿着当前的思路继续执行下去。至于收入预期，还是Cathy来回答一下。

Speaker 8

Okay, let me translate first. Our goal for the mature Momo app for now and for the next few years is to keep the users and revenue scale stable, and continue to optimize the cost structure and maintain the productivity of this cash cow business. Therefore, our execution plans for our products, user products, commercial products, and channel efforts are all focused on this strategic goal. For example, this year, our user product team added a navigation bar for FlashChat on the homepage to direct users to matching-based real-time voice or text chatting experiences, such as Yuyin Lianmai and Qiaoqiao. Our commercial product teams embedded paying features such as live streaming or chat room into these experiences.

This design not only highlights the timely social value of the Momo app, but also increases the penetration rate of paying features and the monetization potential of the platform. Our user acquisition team has fine-tuned its focus on paying users and has strengthened cooperation with the commercial product team to better accommodate users from the channels. And the resulting ARPU growth has supported the continued improvement in channel ROI, enabling us to maintain a stable user scale and solid social fundamentals with a continuously decreasing marketing budget, which plays a positive role in improving Momo's overall profit. In 2024, we'll continue to execute this strategy for the Momo product and channels. In terms of financials, I'll leave it to Cathy.

Hui Peng (CFO)

Okay. After this earnings call, our job will move forward to putting together the financial plan for next year. Before that plan comes together, it's hard for me to talk about the outlook in a very quantitative way. However, you know, same as in the past, as we approach the end of the year, there are several trends that we can talk about to help you think about how the different line items may move, you know, heading into next year. As many of the investors know, Momo is a brand that has been around for more than 12 years. In terms of monetization, being 12 years old has both advantages and disadvantages.

The biggest disadvantage here, you know, obviously, is that it's already pretty mature in terms of user penetration and also deeply monetized in terms of ARPU. That will make the business more cyclical to the macro and the regulatory environment. So next year, we continue to see macro and regulation as two biggest factors that are going to move the Momo business either upward or down. Macro-wise, I guess, everybody has his or her own estimation, so I don't think I know better than investors do in this space. Regulatory front, you know, as you can see, we've been very prudent and conservative in making sure we stay compliant. That's why in the past few quarters, if you look at our performance, we have clearly been more stable than most of our peers in the social entertainment space.

I guess that will continue to be the case next year. That said, in view of the overall environment, that we face today, what we need to do is to focus more on profitable user and revenue growth instead of pursuing top line growth at all costs. During the past few quarters, we've been scaling back from some of the user, and revenue endeavors that generate limited or sometimes even negative margins. For example, you can see in this year's, year-end competition event, we further cut the incentive for agency-driven promotional events. These competitions are not particularly helpful in building a healthy social ecosystem, and thus pose regulatory risks in today's environment. In addition, although the agency-driven events would create a spike in revenue, but they usually hurt margins and sometimes even bring negative profits.

So in this Q4, what you're gonna see is that the incremental revenue coming from year-end competition is going to significantly shrink down. However, as the actual promotional costs and spending also substantially went down, the profit impact is actually quite limited. That's why although we're guiding, as you can see in our guidance, we're guiding Q4 to show a mid- to high-single-digit percentage year-over-year revenue decline. For core Momo, bottom line for the core could see a high-single-digit year-over-year improvement. Such an overall trend of focusing on bottom line will continue to be the case next year. Now, I'm going to... You know, I wanted to spend a few minutes talking about the good thing about being a 12-year-old application. Over-...

You know, those 12 years, Momo has built up a strong brand loyalty, as the go-to place if you want to be around people, discover, some new friends, and have fun and meaningful interactions with, with people you do not already know. And that brand loyalty allowed Momo, to be able to navigate safely through the three years of pandemic, and emerge on the other side with solid fundamentals and remarkable resilience. Looking into next year, I think Momo is going to, continue to benefit from the stable and, from that stable and loyal user base. What that means, as far as P&L is concerned, is that we're going to be able to maintain the scale of users and revenue, and at the same time continue to optimize on personnel and user acquisition costs.

That naturally leads to the question on profitability, the cash cow business. Looking out to next year, we expect gross margin to continue to be stable, as is the case throughout this year. With respect to operating expenses, for the reason that I just mentioned, we have a good opportunity to further cut the OpEx down with continuous efforts to improve cost efficiency. So if you put these different things together, in a nutshell, I'm pretty optimistic that we'll be doing a decent job in maintaining the productivity of the cash cow business. There's a question on cash use. Okay.

I guess it's really a question of how does the company utilize its cash and you know allocate its capital resources? I've said before that there are three priorities for the company in terms of capital allocation. Number one is, of course, to reinvest back into the business for organic growth. And the second priority is you know if there are good strategic investment opportunities that could help us grow beyond what we can achieve organically, we would go for those strategic opportunities and we prefer to use cash rather than through a stock deal.

And the third priority is if we have excess cash, as we you know as has been the situation in the past, we would return the excess cash to the shareholders in the form of either cash dividends or share repurchase. We have an ongoing repurchase plan of $200 million. Under that plan, I think so far we've bought back a slightly under $90 million worth of shares. So under that plan, we still have $110 million to go. We will continue to take advantage of the undervalued share price and make good use of our excess cash to enhance shareholder value.

In terms of dividend, we have distributed special dividend five years in a row, starting from the year, I think, 2019. This is, this, you know, way has proven our sincerity in sharing the fruit of our work with shareholders. Unless we have an opportunity to, either reinvest our cash to, you know, drive organic business growth or through strategic investments, I think we're gonna, continue to return cash to shareholders in the form of cash dividends. I guess that's, the end of this conference call. I'm handing back to Ashley for closing remarks.

Ashley Jing (Director of Investor Relations)

Right. Thank you all for your time, and I think that's it for the call today. We will see you next year. Thank you. Bye.

Operator (participant)

Thank you for participating in today's conference. You may now disconnect.