Hello Group - Earnings Call - Q3 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2024 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'll 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)

Thank you, Operator. Good morning and good evening, everyone. Thank you for joining us today for Hello Group's third quarter 2024 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. 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 all be available to answer your questions during the Q&A sessions that follow. 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 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 statement 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. Sichuan Zhang. Ms. Sichuan Zhang, please.

Sichuan Zhang (COO)

Thank you. Hello, everyone. Thank you for joining our call. I would now like to give you an update on our business on Q3 2024, starting with an overview of our financial performance. For Q3 2024, total group revenue was RMB 2.67 billion, close to the high end of our guidance, down 12% from the year ago, with a smaller year-over-year decrease than in Q2. Adjusted operating income was RMB 465 million, down 33% year-over-year, representing a margin of 17%, down 5.4 percentage points from a year ago. Looking at the Momo app and SoulChill app, total revenue was RMB 2.46 billion, down 10% year-over-year. The decrease was mainly due to the 17% year-over-year decline in the Momo app, resulting from our proactive product adjustment and the spending softness amid the weak macroeconomy.

The decrease was partially offset by the accelerated 41% year-over-year revenue growth in SoulChill app, driven by our overseas business. Adjusted operating income was RMB 440 million, down 33% year-over-year, with a margin of 17.8%, down 5.9 percentage points year-over-year, mainly due to the decline in revenue and margin of the Momo app. For Tantan, Q3 total revenue was RMB 212 million, down 28% year-over-year, due to the decreased number of paying users. Adjusted operating income was RMB 15.17 million, compared with RMB 27.58 million from the year ago, representing a margin of 7.2%, down 2.2 percentage points year-over-year. Now, I will give you an update on executing our strategic priorities for each business line. Our main goal for the Momo app this year is to maintain the productivity of this cash cow business, with a healthy social ecosystem.

Tantan's goal is to continue improving the core dating experience and build an efficient business model that drives profitable growth. As for our new endeavors, our goal is to enrich the brand portfolio further, push the business boundary beyond Momo and Tantan, and build a long-term growth engine. I will now walk you through the details of our execution. First, on the Momo app product and operations in Q3, our product team focused on optimizing the user experience and increasing the volume of effective user interactions. We introduced multiple voice-based one-on-one chat experiences in our legacy tech-based chat greeting features to facilitate in-depth user interactions. As for female users, we used women's favorite mini social games and sign-in reward mechanisms to increase female user engagement and stickiness.

We also provide an AI-assisted greeting tool to improve the quality of ice-breaking greeting messages for male users, thereby increasing the response rate and interactive experience for female users. On the user acquisition front, we have optimized traditional channels over the past two years, bringing down acquisition costs and improving ROI. Therefore, we reduced overall marketing spending but kept traffic relatively stable. However, as the costs continued to decline, the potential to further optimize traditional channels is getting limited, so we started exploring new ways to drive traffic from KOLs. For example, increasing brand exposure and user favorability by working with short video influencers in new media. In Q3, we increased our investments in KOL channels, and the numbers of videos released and played related to the Momo app increased significantly from quarter two. While deepening our collaboration with KOLs, we have also been refining our channel strategy.

Continuous cost optimization has given KOL marketing costs a clear advantage over traditional channels. Therefore, we plan to continue working with KOLs, including enhancing the selection and accumulation of influencers, further innovating ad materials, and optimizing onboarding and conversion strategies. This helps us further improve user acquisition ROI and strengthen Momo's branding. To increase the proportion of female users, our user acquisition team continued to refine the ad materials tailored to women and collaborated with our product and operation team to emphasize features favored by female users. In quarter three, the Momo app had 6.9 million paying users, a sequential decrease of 300,000. This is mainly due to two factors. First, the live ecosystem adjustment reduced competition events and operational activities, resulting in a decrease in the number of paying users.

Second, to improve profitability and pursue profitable growth, we further reduced the acquisition of small-ticket paying users with negative ROI, decreasing long-term users. Now, on the productivity of Momo's cash cow business, Momo's live streaming revenue was RMB 1.22 billion, down 14% year-over-year and flat sequentially. The year-over-year decline was mainly due to our strategy to proactively reduce revenue-oriented large-scale competition events to maintain a healthy social ecosystem and spending softness among core users amid the weak macroeconomy. To mitigate the revenue pressure, our live streaming team focused on introducing innovative features to improve the product experience for mid and long-term users. Meanwhile, we stepped up our live streaming promotion efforts in the nearby people and the nearby post features, which resulted in a steady increase in live streaming penetration and paying ratio.

The reduction in high-price competition events coincided with the increase in sales of live streaming showrooms, costumes, and PK props that do not require any revenue sharing, resulting in a slight sequential decrease in the revenue sharing ratio, which played a positive role in stabilizing the profit level of the cash cow business. Revenue from value-added services, excluding Tantan, totaled RMB 1.22 billion, down 6% year-over-year, up 1% sequentially. VAS revenue from the Momo app was RMB 828 million, down 17% year-over-year and 3% sequentially. Revenue from the SoulChill app was RMB 391 million, up 32% year-over-year and 10% sequentially. The year-over-year decline in Momo app VAS revenue was mainly due to our proactive product and operational adjustments to mitigate regulatory risks, combined with the impact of spending softness amid the weak macroeconomy.

In Q3, our product team promoted chat rooms in the nearby feature and nearby people features, applying new algorithms to improve penetration. On the operational front, we organized operational activities that tie into holidays and festivals to boost consumer sentiment. In addition to transitional audio features, we continued introducing new voice-based gamified plays, such as billiards and matching puzzle game in chat rooms. Early data shows that the retention of these new mini-game-like features is better than the average retention of chat rooms. We expect the full rollout of these new features will help increase chat rooms user engagement rate. Coming to Tantan, first on user trends and financial performance. Since the acquisition of Tantan, the number of organic new users has shown a long-term downward trend due to the need for new branding investment, and user growth was largely dependent on acquisition channels.

Although the ROI-oriented channel investment reduction and cost control strategy over the past two years has effectively driven Tantan to achieve profitability, it also has put much pressure on Tantan's user base. The product upgrade we launched in Q2 aimed to explore effective solutions to improve the core dating experience and increase user retention. However, the upgrade is still in early stage, and it has not yet significantly impacted overall user retention. Due to the combination of the above factors, Tantan's user base has not yet stabilized. MAU decreased by 7% sequentially to 12 million in September. As of the end of Q3, Tantan had 940,000 paying users, down 60,000 sequentially, mainly due to the decline in MAU and the short-term impact of the product upgrade on new user paying conversions.

Coming to Tantan's financials, quarter three total revenue was RMB 212 million, down 28% year-over-year and 9% sequentially. The year-over-year decrease was due to the decline in payers, whereas overall ARPPU increased slightly. ARPPU of our live streaming business decreased significantly as we continue to de-emphasize live streaming, whereas some low correlation with the dating experience. Meanwhile, the live team drove the sales of SVIP and Black Gold membership by subdividing members' paying features and redesigning the guidance narratives on paying experience, which drove a slight increase in Tantan's overall ARPPU, partially alleviated revenue pressure. The sequential revenue decrease was mainly due to the decrease in payers and slightly lower ARPPU due to the impact of live streaming business. In terms of live business, VAS revenue was RMB 137 million, down 19% year-over-year and 2% sequentially.

Live streaming revenue was RMB 66.65 million, down 45% year-over-year and 20% sequentially. Now, moving to our efforts on Tantan's product and user acquisition and the challenges we faced. First, on the marketing and user acquisition front, to address the continuous decline in organic traffic caused by years of inadequate brand exposure, in quarter three, our marketing team selected online and offline events that are popular among young men and women and organized various marketing activities at a controllable cost to promote Tantan's brand awareness. For example, we set up interactive booths at music festivals, which we believe is the most effective way to reach young people offline and guide them using Tantan to explore the music club dating experience. We combined online community activities and KOL events marketing to expand brand influence.

At the same time, we continued to accumulate influencer resources and optimize channel investment strategies, resulting in a significant sequential reduction in average KOL user acquisition costs. In terms of channels, we continued to reduce investment based on ROI and further reduced costs from the transitional channels such as feeds and app stores. This, coupled with increased investment in KOL channels with the most competitive user acquisition costs, helped significantly reduce unit acquisition costs quarter-over-quarter. Therefore, we acquired more users with a slight sequential decrease in total channel investment. With lower unit acquisition costs and a slightly higher new user ARPPU, although channel ROI has not turned fully positive, we have seen various degrees of improvement year-over-year and quarterly. Next, an update on Tantan's product and operations.

In quarter two, based on the results of user surveys, we initiated a product upgrade to address two major problems that made user feel their experiences are unrealistic. First, uncertainty about the authenticity of user identity, and two, lack of response to chat after matching. To address the first issue, such as product picture looking too good to be true, limited information that lacked real-life references, and if sufficient real-person verification, our product team has increased the proportion of high-quality profiles on the platform by providing prompts to encourage users to enrich their profile information and guiding users in choosing suitable profile pictures. Meanwhile, we offered rewards such as extra swipes to users who completed their real-person verification to increase the overall real-person verification rate.

Regarding the lack of response to chat after matching, previously, we deliberately increased the exposure of some high-quality active users in the algorithm to improve the experience of some users who don't get matching opportunities easily. While this approach increased the number of matches, it unfortunately resulted in many matches that did not convert to chat. This quarter, we reduced matching concentrations in our algorithm to address the issue of some female users not chatting after matching because they received too many matches. At the product level, we tested several features aimed at improving the response rate, such as Xingxu or Love Letters, which allow users to directly deliver a message to a favorite person every once in a while. Improving interactive quality through this unique outreach, we expect this series of product trials to play a positive role in improving the response rate.

Product upgrades have enhanced matching quality and encouraged more in-depth conversations. However, in the short term, this has a negative impact on Tantan's original business model, which was built around look-at-picture swipe play to increase matching odds. The decline in new user paying conversion was one of the reasons for the sequential decrease in Tantan's paying users. However, we believe that providing a good product experience to improve user retention and drive organic user growth is the foundation of Tantan's to achieve long-term sustainable revenue and profit growth. We need to drive user growth based on profitability to sustain a long-term positive business cycle. Lastly, in terms of new endeavors, in Q3, the total revenue of the new apps reached RMB 418 million, with an accelerated growth rate of 41% year-over-year and 17% sequentially, mainly driven by our overseas business.

SoulChill revenue in Q3 achieved its highest sequential growth of the past year, driven by improvements in our operational efficiency. In Q3, our management, key product, and tech team from the Beijing headquarters visited several key social markets. They worked with local teams to analyze user feedback and optimize product and technical solutions. We optimized agency broadcasters' payment and compensation systems and strengthened our frontline staff decision-making power, boosting their work morale. We also optimized channel strategies for paying users' growth paying ratio and the number of paying users. ARPPU increased significantly quarter-over-quarter, driven by various factors such as introducing new virtual gifts, gameplay enhancements, and product design improvements. Together, the improvements in paying users and ARPPU drive rapid sequential revenue growth.

In Q3, we strengthened our supply-side collaboration with new agencies and increased the number of broadcasters, which also played a positive role in driving revenue growth. With the gradual expansion of the business, SoulChill's revenue sharing ratio has trended slightly upward since the beginning of the year, mainly because of the relatively low margin business. Including the Turkish market and the newly introduced live streaming business, growth is much faster than the overall overseas market. Our team has particularly alleviated the pressure on GP margin caused by the increase in revenue sharing ratio by optimizing top-up channel costs. Combined with our ROI-oriented user acquisition strategy, enabling us to enjoy operation leverage and fast profit growth despite the increase in channel investment. In Q3, we made good progress in enhancing the localization progress and expanding the voice-based features to live streaming.

The growth in users and financial metrics has well reflected our team's recent efforts. We believe that continuously strengthening localized operations and improving user and product experience, we can bring continuous growth to Social and our other overseas products in the MENA region. We will commit more firmly to overseas business in the future. This concludes my remarks. Now, let me pass the call to Cathy for the financial review. Cathy, please.

Hui Peng (CFO)

Sure. Thanks. 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 2024 was RMB 2.67 billion, down 12% year-on-year and a slight decrease of 0.6% quarter on quarter. Non-GAAP net income attributable to the company was RMB 493.3 million, down 19% year-on-year but up 10% from the last quarter.

Looking into the key revenue items for Q3, firstly, on live broadcasting, total revenue from live broadcasting business for the third quarter of 2024 was RMB 1.29 billion, down 16% year-over-year and 1% quarter-over-quarter. The year-over-year decrease was largely attributable to a decline in the core Momo live streaming business and, to a lesser extent, the decrease in Tantan. The sequential decrease was due to the decline in Tantan live streaming, whereas Momo remained relatively stable. In terms of segments, Momo live broadcasting revenue totaled RMB 1.22 billion for the quarter, down 14% year-over-year and flat from last quarter. The year-over-year decrease was due to our proactive product and operational adjustments to scale back from revenue-oriented competition events and the soft spending sentiment amid the weak macroeconomy. Tantan's live broadcasting revenue amounted to RMB 66.6 million, down 45% year-over-year and 20% quarter-over-quarter.

The decrease was due to our strategic decision to de-emphasize the less dating-centric service. Revenue from the value-added services for the third quarter of 2024 was RMB 1.36 billion, down 8% from Q3 last year but up 1% sequentially. The year-over-year decrease was due to a decline in both Momo and Tantan. However, the growth of the standalone new apps partially offset the downward revenue pressure. The sequential growth of value-added service revenue was driven by the growth of new endeavors. Revenue from VAS on an ex-Tantan basis was RMB 1.22 billion in the third quarter of 2024, down 6% from Q3 last year but up 1% from the previous quarter.

Momo app VAS revenue decreased 17% from Q3 last year due to our proactive product adjustments to manage regulatory risks as well as the weak spending sentiment, and down 3% sequentially due to our continued product adjustments to de-emphasize agency-dominated gamified play. Revenue from the standalone new apps, which is consolidated in Momo segment on P&L, continued to grow both on a year-over-year and quarter-over-quarter basis, driven by the improvement of overseas business. Tantan's VAS revenue amounted to RMB 137.2 million, down 19% year-over-year and 2% sequentially. The decrease was due to a decline in paying users, which was in turn due to a decline in user base and the short-term impact of the user interface upgrade on paying conversion. Now turning into costs and expenses.

Non-GAAP cost of revenue for the third quarter of 2024 was RMB 1.62 billion, compared to 1.77 billion for the same period last year. Non-GAAP gross margin for the quarter was 39.4%, down 2 percentage points from the year-ago period. The year-over-year decrease was due to several different factors. Number one, higher payout ratio, which was further due to two factors: overseas business becoming a bigger percentage of total while bearing a higher payout ratio, and to a lesser degree, higher payout from Momo, the old cash cow business, to better incentivize the agencies in view of a downward revenue trend. Number two, de-leverage, where infrastructure and personnel and other relatively fixed costs take up a higher percentage of revenues.

Number three, payment channel costs represent a higher percentage of total revenues as revenue mix shifts towards overseas business, where channel fees as a percentage of revenues are much higher than those from domestic business. Non-GAAP R&D expenses for the third quarter was RMB 185.4 million, compared to RMB 186.7 million for the same period last year, or a 1% decrease year-over-year. The decrease was due to continuous optimization in personnel and infrastructure costs. Non-GAAP R&D expenses as a percentage of revenue was 7% compared with 6% from the year-ago period. We ended the quarter with 1,355 total employees, of which 280 are from Tantan, compared to 1,410 total employees, of which 314 from Tantan a year ago. The R&D personnel as a percentage of total employees for the group was 61% compared with 64% Q3 last year.

Non-GAAP sales and marketing expenses for the third quarter was RMB 350.1 million, or 13% of total revenue, compared to RMB 368.1 million, or 12% of total revenue for the same period last year. Sales and marketing expenses decreased 5% year-on-year in absolute Renminbi amount. Non-GAAP G&A expenses was RMB 85.2 million for the third quarter of 2024, compared to RMB 76.5 million for the same period last year. Both were presenting roughly 3% of total revenue. Non-GAAP operating income was RMB 454.7 million, a decrease of 33% from Q3 2023, down 5% from the previous quarter. Non-GAAP operating margin for the quarter was 17%, down 5.4 percentage points from the same period last year and 0.3 percentage points from the previous quarter. Non-GAAP opex as a percentage of total revenue was 23%, an increase from 21% for Q3 2023 and flat from Q2 this year.

Now, briefly on income tax expenses. Total income tax expense was RMB 95.3 million for the quarter, with an effective tax rate of 17%. In Q3, the company accrued withholding income tax of RMB 15.2 million, which is 5% of undistributed profit generated by our WFOE. Without the withholding tax, our estimated non-GAAP effective tax rate was around 14% in the third quarter. Now turning to balance sheet and cash flow items. As of September 30, 2024, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits, short-term investments, and a restricted cash totaled RMB 14.78 billion, compared to RMB 13.48 billion as of December 31, 2023. Net cash provided by operating activities in the third quarter of 2024 was RMB 341.0 million.

Lastly, on business outlook, we estimated our fourth quarter revenue to come in the range from RMB 2.56 billion to RMB 2.66 billion, representing a decrease of 14.7% to 11.4% year-on-year, or a decrease of 4.3% to 0.5% quarter-over-quarter. At segment level for Q4 2024, on a sequential basis, we expect Momo revenue to decrease mid to low single digit. On the Tantan side, we expect revenue to decrease low single digit. 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 our 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)

Thank you. Just a quick reminder before we take the questions.

For those who can speak Chinese, please ask your questions in Chinese first and followed by English translation by yourself. And please also limit the number of questions to one to two so we can take more people. Okay, so operator, we're ready for questions. Thank you.

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're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Raphael Chen from BOCI Research. Please go ahead.

Raphael Chen (Associate)

谢谢管理层接受我的提问。刚刚管理层在发言中提到了3Q是海外业务过去一年增长最快的一个季度。想具体请问一下推动增长最重要的因素包括哪些，以及能否分享海外业务现在的收入体量和利润的规模，和对第四季度和明年的一个增长预期。 I will translate myself. Thanks for taking my question. Congrats on the strong growth momentum of overseas business. Could management share the main contributors driving the overseas business growth in the third quarter?

Also, could we have the latest revenue and profit figures for the overseas business and the growth outlook for the fourth quarter and the 2025? Cheers.

Yan Tang (CEO)

我来回答一下。上半年海外业务环比增速比我们年初的预期要慢一些，主要原因是我们在本地化运营方面发现了很多短板需要补充，在这上面花了更长的时间。那么我认为三季度收入实现加速增长很重要的一个原因是因为我们优化了跨境员工的一个管理方案，这很大程度上提升了SoulChill团队的运营效率，提升本地员工在产品运营方面的决策权，有助于我们更好地满足来自不同文化背景的用户特有的社交偏好和需求。同时，充分发挥本地员工优势，对加强当地供给侧合作也起到了显见的积极作用。随着海外业务的快速发展，我们涉及的市场和地区也更加多元化，因此集团层面会持续完善跨境管理方案，在各个主要市场设立办公室，储备当地人才，通过大力推行本地化，推动收入和利润的持续增长。

Okay, let me translate. The sequential growth of our overseas business in the first half of the year was slower than we had anticipated at the beginning of 2024, primarily due to the need to address many areas for improvement in local operations, which required more time than we thought. Revenue growth accelerated in the third quarter thanks to the optimization of cross-border personnel management. As a result, the operational efficiency of the SoulChill team got significantly improved. Our strategy of empowering local staff in product operations will help us better address the unique social preferences and needs of users from different cultural backgrounds.

By leveraging the strengths of our local team, we have been able to strengthen cooperation with the local supply side. With the rapid growth of overseas business, our operational markets and regions are also becoming more diverse. Therefore, we will continue to optimize cross-border management, establish offices in key markets, recruit more local talents, and drive continuous growth in revenue and profit through robust focus on localization.

那么关于三季度的营收呢，独立的新APP接近了4.2亿人民币。那么其中有60%、70%来自SoulChill。这款海外产品目前收入规模已经超过了Tantan，跟去年同期相比收入增长了50%以上。那么随着我们本地化运营能力的加强，明年我们预计SoulChill将会持续快速增长。同时，另外两款中东的APP明年也将进入营收的快速成长期，并且有希望实现盈亏平衡。海外业务创造的增量收入和利润一定程度上弥补了Momo主战收入下滑造成的利润缺口。实际上，我们认为与面临宏观经济和政策等诸多不确定性的国内业务相比，海外业务的发展空间和增长路径都相对要明确一些，尤其是我们在社交领域具有明显的产品和运营优势。这是为什么近年集团层面倾向于把人力和资金都投入到海外业务的拓展和运营当中。那么未来海外业务对集团的收入和利润将会发挥更重要的一个作用，这一点在明年就会有非常清晰的体现。那么至于财务预期的问题的话，交给Cathy来回答。

Okay, let me translate first. So in the third quarter, total revenue of the new APPs reached close to RMB 220 million, with SoulChill contributing 60% to 70%. And SoulChill has now surpassed the revenue scale of Tantan. And its revenue in the third quarter was up more than 50% year-on-year. And as we strengthen our localized operation capabilities, we expect SoulChill to continue to grow rapidly next year.

Meanwhile, we expect our other two Middle Eastern apps to enter a period of rapid revenue growth and possibly break even next year. The incremental revenue and profit generated by our overseas business partially offset the decline in revenue and profit from the Momo app. We believe that compared with our domestic business, which faced many uncertainties such as macroeconomic and regulatory issues, the growth potential and trajectory of our overseas business are relatively clear. This is particularly true in the SoulChill field, where we have distinct product and operational advantages. That's why we have prioritized the allocation of human and financial resources to the operation and expansion of our overseas business in recent years. We believe that our overseas business will play an increasingly significant role in driving the group's revenue and profit in the future, which will be clearly reflected next year.

As for the financial outlook, I will leave that to Cathy, please.

Hui Peng (CFO)

Okay, overseas outlook. In our Q4 guidance, we are assuming SoulChill to grow probably by 40% year-over-year. That would close out 2024 with a year-over-year growth rate of close to 50%. As the app gets bigger, obviously the growth rate could slow down a little bit. However, our two other social entertainment apps in the Middle East, North Africa area have been ramping up rapidly recently. We do expect these two apps to start bearing fruits and contributing to the bottom line, contributing to both the top line and bottom line in a meaningful way in 2025. With these three overseas apps, we believe overseas revenues will continue to grow pretty fast and hopefully could accelerate its growth rate next year.

The other thing worth mentioning is that if you look at the way we manage our overseas business, we are not pursuing just top-line growth at the expense of bottom line. We always want what we call profitable growth. That means next year, as overseas apps continue to grow at top line, bottom line performance for these three apps are going to continue to improve as well. Hopefully, that answers your question. I'm handing back to Ashley for next question.

Ashley Jing (Head of Investor Relations)

Operator, next question, please.

Operator (participant)

Thank you. Your next question comes from Jenny Wang from UBS. Please go ahead.

Jenny Wang (Financial Advisor)

谢谢管理层的提问机会。那首先恭喜管理层这次非常优秀的业绩表现。那我的问题是关于就是我们的现金流业务，Momo主战这边接下来的一个业绩展望。那我们看到主战就是从去年的三季度末开始启动产品调整，到现在其实已经有差不多一整年的时间了。也想请问一下管理层，就是往后看的话，Momo主战这边的产品调整是否还会继续，到什么时间点我们能够看到环比以及说同比上游一个恢复的一个增长趋势，以及说我们应该如何看待就是Momo主战作为我们的一个现金流业务未来的一个利润产出的一个持续性。 So let me translate myself. So thank you, Manager, for taking my question and congrats on the good results. My question is regarding the outlook for our cash cow business. So Momo has been undergoing product adjustments for a year since the end of the quarter last year.

Could you please share whether these adjustments will continue going forward and when we might see a recovery in growth both quarter on quarter and year by year? And how should we view the profit sustainability of the cash cow business going forward? So thank you.

Yan Tang (CEO)

上一年我们针对直播和VAS的音视频场景展开了运营的调整。那么主要目标是降低收入导向的赛事活动。虽然对财务指标造成了一定的压力，但对于降低收入集中度，为现金流业务创造更加健康稳定的社区生态都起到了积极作用。四季度我们还会延续这个运营思路，持续弱化高流水的赛事活动。对于直播业务来说，这意味着年度盛典带来的增量流水与往年比将会非常有限。而VAS的音视频场景中，我们认为还有一些公会主导的场景和玩法，有进一步的优化的空间。所以四季度我们会持续调整的工作.

Okay. So last year, we implemented operational adjustments to live streaming and audio and video-based VAS experiences with a focus on reducing revenue-oriented competition events. And although this impacted our financial performance, it has played a positive role in reducing revenue concentration and creating a more stable and healthier social ecosystem for our cash cow business. So we remain committed to this operational strategy in the fourth quarter and further de-emphasizing high revenue competition events. For the live streaming business, this means that the incremental revenue from the year-end competition event will be very limited compared to the previous years.

In the audio and video-based VAS experiences, we believe there's still room for further optimization of some agency-dominant use cases and gamified play. We will continue to fine-tune our operation in the fourth quarter.

刚才Sichuan介绍过，为了弥补赛事流水的缺口，我们在直播和VAS场景中加大了面向中长尾用户的商业化力度，推出了更多适中小R的互动玩法和内容供给，提升场景渗透和付费率的同时，带动日常流水稳步增长。加强平台中长尾用户的承接能力，扩大中长尾收入规模，是我们在当前的经济和政策环境下的主要运营思路.

As Sic mentioned earlier, in order to offset the decline in revenue from competition events, we have increased the monetization of mid to long-tail paying users in live streaming and value-added services experiences. We rolled out more interactive features and contents suitable for this kind of cohort of users and increasing the penetration and paying ratio while driving steady growth in organic revenue. Our primary operational focus in the current macroeconomy and regulatory environment is to enhance our platform's ability to accommodate mid to long-tail users and expand their revenue scale.

那么经过一年的调整，Momo平台整体内容及生态都达到了比较让人满意的程度。我认为为明年现金流业务的稳定产出打下了一个良好的基础。具体数字方面的趋势，Cathy可以补充一下。

After about a year of adjustments, we are quite satisfied with the overall content and ecosystem of the Momo app. I believe this has laid a solid foundation for us to maintain the productivity of the cash cow business next year. As for the specific financial outlook, I will leave that to Cathy, please.

Hui Peng (CFO)

Okay. Before I talk about 2025, perhaps let me first quickly review the way we've been managing the product, the way how we've been managing the productivity of the cash cow business throughout last year, and then point toward the directions we move toward next year. The biggest theme of 2024 for the cash cow was to de-emphasize the promotional/stimulating agency-driven events in order to improve the healthiness of our ecosystem in view of the current macroenvironment, both from a regulatory and from an economic point of view.

As we took different steps to enable such operational changes, the revenue has been gradually coming down. So in order to maintain the productivity of the cash cow business, we have also been taking measures to control spending more tightly. At the beginning of 2024, the original plan was to put all the adjustments into Q1 and make the revenue impact one-off. However, as we moved deeper into the year, it turned out that we did a pretty good job in cost control and thus over-delivered in terms of profit. As a result, the team decided to take this opportunity to continue to put in additional adjustment measures to scale back on bonus-driven promotional events in the second half. And in turn, we saw the top line of the cash cow business continuing to trend downward throughout 2025 from Q2 onwards.

With that in mind, looking out to 2025, well, first of all, I won't be able to talk about next year in very quantitative terms before we finalize the financial planning next year, early next year. But as in previous years, there are several points to share to help you think about the performance of the cash cow, at least trend-wise, for the coming few quarters. As Tang Yan said, first of all, after a year of pretty significant operational adjustments at the expense of top line, we now feel pretty good on the ecosystem front. And therefore, currently, we do not see additional adjustments needed for next year. If you think about what that translates into top-line performance next year, Q1 2025, Momo is still going to see seasonality, which would cause a sequential decline.

And then Q2, there will be a seasonal bounce back. Since we do not expect any deliberate operational efforts to demonetize next year, how significant the bounce back in Q2 2025 will really depend on macroeconomic factors that would play substantially into the consumer spending sentiment on our platform. So if you put all these analyses together, what we can come down to is that because the revenue has been trending downwards in the second half of 2024, next year, in terms of year-over-year comparison, it's quite likely that cash cow will continue to see revenue decline on a year-over-year basis.

In 2024, if you throw in the midpoint of our Q4 guidance, it looks like that the Momo segment, which, by the way, includes both the cash cow business and the overseas apps, that whole Momo segment will likely still see a revenue decline in the low teens kind of range. That reflects both voluntary demonetization efforts on regulatory concerns and macro headwinds. For 2025, because on the regulatory side, it seems that we are now in a pretty safe place, and the overseas, as Tang Yan said a little bit earlier, the overseas growth will continue to push the top line up for Momo segment. Assuming macro status quo continues, the YoY decrease should significantly narrow from what we saw in 2024, but of course, assuming macro status quo is going to continue is kind of a big assumption. We'll see how things play out next year.

But of course, even assuming a substantial narrowdown in YYY decrease ratio in absolute dollar amount, the cash cow may still face a pretty significant top-line decrease in 2024. So we are going to have to see what we can do on the cost control front to mitigate the impact on bottom line. On that specific point, I shall have more color to share as we finish our financial planning at the beginning of 2024 when we have our Q4 earnings call early next year. So that's basically the color that I can give on the productivity of the cash cow. Now back to Ashley for the next question.

Ashley Jing (Head of Investor Relations)

Hi, Operator. Next question for you.

Operator (participant)

Thank you. Your next question comes from Thomas Chong from Jefferies. Please go ahead.

Thomas Chong (Managing Director)

晚上好，谢谢管理层接受我的提问。我的问题是关于碳碳的。刚刚管理层在发言中也介绍了近期产品的方面的一些尝试，但是也是提到了目前改版的用户留存还没有一个比较实际性的一个影响，也看到用户的规模还有收入的下滑的趋势还在延续。想请问在我们诸多尝试中是否有一些比较看好的一些产品的方案，以及对改版要持续到多久的一个时间上有没有一个明确的预期？我们应该怎么去看碳碳四季度以及明年的一个财务的表现呢？谢谢。 Good evening. Thanks, management, for taking my question. My question is about Tantan.

Just now, management mentioned in prepared remarks that there are various updates to our product offerings, but also highlight the impact is yet to be seen, such as on the user retention side. And also, we are seeing user scale and revenue remain soft. My question is about which product ideas or solutions management gets more positive? How long does it take about the upgrade and the timeline? And how should we think about Tantan Q4 and 2025 outlook? Thank you.

Yan Tang (CEO)

这个问题我尽量回答得详细一点吧。碳碳的目标是提升核心约会的体验，并在此基础上建立一个高效的商业模式，实现有利润的增长。那么目前的碳碳这个产品有两个核心的问题，第一个是产品方面的，另外一个是偏向商业模型方面的。产品体验方面的问题是用户真实感低以及聊天的互动率低的问题。所以尽管用户有着真实而旺盛的一个约会需求，但碳碳对于很多用户来说都无法真正满足他们的需求。第二个是产品弱化，自然量过低的问题，这个导致碳碳的平均买量成本过高，无法形成商业正循环，从而实现有利润的增长。我们觉得必须要先要让产品体验达到OK的程度，再来解决商业模型的问题，否则商业模型就无法持续。

Okay. Let me give you more details regarding your question. For Tantan's goal is to continue to improve the quality and experience and build an efficient business model that drives profitable growth. And currently, Tantan needs to address two issues. One is product experience, and the other is business model.

In terms of product, some users feel the experience is unrealistic, and chat interaction after matching is quite low. And therefore, although users have a real strong demand for dating, Tantan cannot really meet the needs of many of our users. And the second issue is insufficient branding and low organic traffic, which makes unit acquisition costs too high to form a positive business cycle to achieve profitable growth. So we believe that we must first improve the product experience to a reasonable level and then develop a new sustainable business model.

因此，我们过去的两个季度以及未来的一两个季度的工作，会集中解决两个核心的用户体验问题。那么一个是华卡的对象缺乏真实感，另一个是匹配后聊不起天。那么其中引导用户丰富资料页信息、充实生活照等提示性功能，对提升优质资料的占比起到了显见的积极作用。另外，对完成真人认证的用户发放额外的华卡奖励，也是比较有效提升真人认证率的这个产品措施。那么以前在产品体验方面，我们的付费用户比非付费用户有着明显的优越感。那么现在我们要让认证用户与非认证用户之间在使用体验上也要拉开差距。到目前为止，我们在真实度方面取得了显著的进步，但是在提升这个聊天互动率方面，仍然需要有更长期的持续的探索。不过我们认为现在的方向是一个正确的方向。

So over the past two quarters and for the next quarter or two, we have focused and will continue to focus on addressing two user experience issues. One is users' uncertainty about the authenticity of their matches' identity, and the other is the lack of response to chat post-matching.

Our team encourages the users to enrich their profile information and guide them in choosing the proper style for their profile pictures, and these efforts significantly increased the proportion of high-quality profiles on our platform, and to effectively increase the overall real-person verification rate, we offered rewards such as extra swipes to users who completed the real-person verification process, and previously, paying users had a clear advantage over non-paying users in terms of product experience, and moving forward, our goal is to give verified users a distinct user experience advantage over those non-verified users and to encourage more users to complete the verification process. While we have made significant progress in terms of user identity authenticity, we still need to do more to improve chat interaction rates in the long term. Unfortunately, we feel that the current approach is on the right track.

关于改版时间周期的问题，我们计划在年内上线全部测试，并在2025年的上半年对本轮的改版进行总结。

We plan to have all testing underway by the end of the year and wrap up this round of upgrade in the first half of next year.

因为Tantan目前还尚未达成商业的一个正循环，因此用户和收入的下降在未来的两个季度还可能会持续。那么关于止跌回升，我们有几个想法。一是随着Tantan基础约会体验的改善，特别是真实感的提升，用户的下滑即便在不提升市场投入的情况下也会逐渐的平稳。二是在产品调整到位后，我们也会加强品牌的投入，提升自然量的一个增长。第三是我们会在产品体验上不断的探索创新，希望可以找到提升RPU的同时，然后加强用户体验的这个增值产品。中国的约会市场很大，有真实的未被满足的需求，我们会在这方面不断的尝试。

Since Tantan hasn't entered a positive business cycle yet, we expect the decline in users and revenue to continue for the next two quarters. And to drive Tantan's recovery, here are some thoughts. First, by improving Tantan's basic dating experience and especially user identity authenticity, we expect user base to gradually stabilize even without increasing marketing investment. And secondly, after essential product adjustments are made, we will invest more in branding initiatives to drive organic traffic. Third, we will continue to explore and develop innovative product features that improve user experience while identifying value-added products that increase RPU. China's dating market is very large with significant unmet needs.

We will continue to explore this space to capture growth opportunities.

那么利润方面，我们在Tantan达到商业正循环之前不会追求利润，但我们也不会让Tantan再次陷入持续的亏损。更详细的财务问题交给Cathy。

Regarding the bottom line, we will not pursue profits before Tantan enters a positive business cycle, but we will not let Tantan fall into continuous losses again. As for detailed financials, I will leave that to Cathy.

Hui Peng (CFO)

With regards to financial performance, the simple answer is that the top line is likely to continue to trend down sequentially due to two reasons. The first one is, as Tang Yan mentioned just now, Tantan has not reached a self-sustaining positive business cycle yet. User number is still trending down. The second reason is that although there is still room to pull up the RPU, the focus at this point is to get the dating experience right.

And therefore, we do not want to put too much pressure on the team so they won't let monetization get in the way when consumer experience is the most crucial priority. With regards to profits, this year Tantan is on track to achieve, I think, RMB 50 million± in terms of segment profits. However, the bottom line has also been trending down slightly throughout the year due to the top line pressure. So before we reach, I would say that before we reach the tipping point on top line performance, we do need to take some steps to cut down on the cost and expenses front so that Tantan won't slide back to loss. That's one of the key priorities for our financial planning for Tantan 2025.

I think on that, I'm going to have more details for you on our next earnings call when we finish planning for 2025. Now back to Ashley.

Ashley Jing (Head of Investor Relations)

In the interest of time, let's take one last question before we call it today. Operator, please.

Operator (participant)

Thank you. Your final question comes from Xueqing Zhang from CICC. Please go ahead.

Xueqing Zhang (Analyst)

谢谢管理层接受我的提问。我的问题是关于股东回报的。首先关于分红，公司历史上有过连续六年 special dividend track record，所以想请问今年的分红计划。此外的话，关于回购，公司年初至今已经回购了大约$150 million美金的股票。那现在执行中的回购计划2026年中就会到期，还剩不到$50 million美金的额度。如果按照目前的回购速度，我们预计这个额度在2025年可能很快就会用完。所以想请问公司后续在回购方面有什么计划。谢谢.

Thanks, management, for taking my question. My question is about shareholder returns. Firstly, regarding dividends, the company has a track record of six consecutive years of special dividends. So what's your dividend plan for this year? Additionally, regarding share buyback, the company has bought back nearly $150 million year to date. So the current buyback program, which will expire in the middle of 2026, has less than $50 million remaining.

At the current pace of repurchase, we expect that this program will be exhausted by early 2025. So what's your plan for further share buybacks? Thank you.

Sichuan Zhang (COO)

Okay. I'll take that question. As you correctly pointed out, during the past 12 months, we've bought back more than, I think, more than $150 million worth of Momo shares and paid around $100 million in cash dividends. For me, I really look at both approaches, meaning cash dividend and buyback, as ways to enhance shareholder value. But sometimes one works better than the other. If you take our Q3 balance sheet number and do a quick math, you will be looking at somewhere around $8.7 per share in net cash. And that's a growing number as we continue to make profit. And yet our stock is trading at, I believe, below $7 per share at this point.

I would say in view of such a significant undervaluation, we should give buyback bigger priority in comparison with cash dividends. However, how much we could buy back is limited to a number of factors, the biggest of which is the liquidity out there in the market. If you look at the past couple of quarters, our repurchase has been running from $30 million per quarter to around $60 million per quarter. With the limited liquidity we have, it's hard to exceed that kind of run rate in terms of how much we buy back. That means it's quite likely that we may continue to have excess cash on top of buyback. If that continues to be the case, we will certainly continue to consider cash dividend as an additional way to return cash to the shareholders so we can share our prosperity.

The other question you have is, at the current run rate, we'll probably use up the repurchase already authorized by the board of directors. But I think we're not limited to that cap. If the current program is used up, I'm sure that the board of directors will continue to make decisions that make sense in terms of enhancing the shareholder value. So that's what I can say at this point. Maybe back to Ashley to conclude the call.

Ashley Jing (Head of Investor Relations)

Okay. Well, thank you, everyone, for participating in the call. And I think that's going to be the end of it. And we will see you next year. Thank you.

Operator (participant)

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.