Hello Group - Q4 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter and Fiscal Year 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, Miss 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 fourth quarter and fiscal 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; Miss Zhang Sichuan, COO of the company; and Miss 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 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, Miss Zhang Sichuan. Miss Zhang, please.

Sichuan Zhang (COO)

Thank you. Hello, everyone. Thank you for joining our call. 2023 was a busy year. Despite many changes and challenges in the internal environment, our team makes steady progress in implementing our strategic priorities and achieve solid financial results. I will walk you through the details of our work across business line in the fourth quarter and fiscal year 2023, and then outline the strategic goals for fiscal 2024. I will start with a brief overview of our financial performance. For the fourth quarter of 2023, total group revenue was RMB 3 billion, down 7% year-over-year and 1% sequentially, which is at the high end of our guidance. Adjusted Operating Income was RMB 664 million, up significantly by 33% year-over-year. The profit margin was 22.1%, a significant improvement of 6.6 percentage points year-over-year.

Total revenue from the Momo app and the Tantan app was RMB 2.73 billion, down 5% year-over-year, and adjusted operating income was RMB 637 million, up 24% year-over-year, with a margin of 23.3%, up 5.4 percentage points year-over-year. The year-over-year improvement in profit margin was primarily due to our team's excellent cost management and improved efficiency in resource utilization over the past year. Total revenue from Tantan came in at RMB 272 million, down 21% year-over-year. Adjusted operating income was RMB 27.04 million, with a margin of 9.9%, compared with an operating loss of RMB 3.17 million in the same period of previous year. For fiscal 2023, total group revenue was RMB 12 billion, compared with RMB 12.7 billion in 2022.

Adjusted operating income was RMB 2.57 billion, up significantly by 27% year-over-year, with a margin of 21.4%, up significantly by 5.4 percentage points. The strong improvements in gross profit and margin despite lower revenue were mainly driven by our effective cost optimization and efficiency improvement initiatives across our businesses over the past year. We've supported the stable productivities of the Momo cash cow business and made Tantan profitable. Total revenue from the Momo app and Tantan app was RMB 10.8 billion, down 5% from 2022, mainly due to the declines in revenue from the Momo app resulting from spending softness amid the weak macroeconomy and our proactive product and operational investments to maintain a healthy economic ecosystem. Tantan app maintains rapid growth momentum driven by our overseas business.

Adjusted operating income was RMB 2.5 billion, up 5% year-over-year, with a margin of 23.2%, up 2 percentage points from a year ago. At Tantan, we continue implementing cost optimization and efficiency improvement initiatives in the past year. We continue to reduce investment in low ROI channels and reallocated excess to human resources. In addition, we continue optimizing the paying experience to improve our ARPPU. As a result, with Tantan's revenue declines due to significantly reduced marketing spending, costs decrease more than revenue. Accordingly, we improve our cash use efficiency, delivering fourth consecutive quarter of profitability. For fiscal 2023, Tantan's total revenue was RMB 1.2 billion, down 30% year-over-year, and adjusted operating income was RMB 101 million, compared with a loss of RMB 330 million in 2022.

While we're very pleased with the team's execution in cost optimization and efficiency improvements, we must admit that we make a mistake in ecosystem management, which led to an outbreak of spamming activities in the first part of the year and negatively affected Tantan's user experience and retention. While the problem has been fully solved through our efforts in the second half, it has also caused our various product and operational work to lag significantly behind expectations. As a result, we were unable to make any meaningful breakthroughs in the new dating features. We remained committed to working hard towards this goal this year, which I will discuss and explain in more detail later.

Now, I'll walk you through the progress we made against our strategic priorities for Momo, Tantan, and the new ventures, as well as the challenges we are facing and our plans to deal with them respectively. For the Momo app, this is the main goal for 2023: to keep the user and revenue scale stable, continue to optimize cost structure, and maintain the productivity of this cash cow business. In the past year, despite the pressure from the macroeconomy and changes in regulatory policies, our team mitigated the external revenue pressures by continuously optimizing product operations and introducing new monetization features. Meanwhile, by improving cash utilization and staff efficiency, we increased operating profits and margins despite revenue pressure. On the channel marketing front, we have focused on improving channel ROI to pursue profitable user groups rather than blindly pursuing unprofitable user acquisition.

In fiscal year 2023, our unit acquisition costs decreased 25% year-over-year, and we acquired 20% more users while reducing channel investments by 10% year-over-year. The number of paying users remained stable in the first nine months of 2023 thanks to our product and channel efforts. However, at the end of the year, the number of active users fell temporarily due to the impact of external COVID and regulatory-driven product adjustments and community ecosystem optimization, which resulted in a short-term pressure on the number of long-term paying users. In the fourth quarter, the number of paying users of Momo app was 7.4 million, a decrease of 400,000 compared with the previous quarter. Now, let's go through the productivity of our Momo cash cow business. In the fourth quarter, Momo's live streaming revenue was RMB 1.42 billion, down 9% year-over-year.

For fiscal year 2023, Momo's live streaming revenue totaled RMB 5.57 billion, down 7% year-over-year. With the pandemic over in early 2023, Momo's live streaming delivered positive year-over-year revenue growth in quarter two, a quarter earlier than we expected thanks to the economy recovery and our product and operational efforts. However, as we entered the year's second half, the economy recovery became weaker than expected. At the same time, to better manage regulatory risk, our operational team proactively reduced revenue-oriented competition events, resulting in a decline in revenue in the second half of the year compared with the same period of 2022. The combination of spending softness and decreased revenue from the competition events is the main reason for the decline in Momo's live streaming revenue in 2023.

On the product front, our team continued to enrich interactive gamified features to improve paying conversion and ARPPU of users in different cohorts. Against the backdrop of spending softness, introducing new gamified features not only helps stabilize the engagement of live streaming users in the mid and long-term cohort but also plays a positive role on the supply side of live streaming. Regarding VAS revenue from value-added services, excluding Tantan, totaled RMB 1.26 billion for the fourth quarter, flat year-over-year. VAS revenue from the Momo app totaled RMB 940 million, down 10% year-over-year. Revenue from the Tantan app was RMB 320 million, up 44% year-over-year. For fiscal year 2023, VAS revenue excluding Tantan totaled RMB 5.09 billion, down 3% year-over-year. VAS revenue from the Momo app was RMB 3.98 billion, down 10% year-over-year.

Gross revenue from the standalone app was RMB 1.11 billion, up 50% year-over-year. The incremental revenue contributed by standalone app largely offsets the revenue decrease from the Momo app. The rate of declines in VAS revenue from the Momo app was higher than we expected at the beginning of the year, mainly for two reasons. First, the economic recovery was weaker than expected. The user spending remained soft. Second, the product adjustments to maintain a healthy community ecosystem in the year's second half resulted in a decline in paying users. On the product front, integrating audio and video-based live experience with the non-paying features on the homepage positively improved the efficiency of live monetization. On the operational front, we focused on user-oriented operational efforts to drive organic revenue growth, resulting in steady ARPPU improvements. Now, moving to Tantan.

Our strategic goal for Tantan was to achieve overall break-even for the year and develop product and monetization models that are suitable for Asian dating cultures to pursue sustainable growth on the back of the positive business cycle. Driven by our efforts on both product and channel fronts, Tantan hit the first milestone of its strategic goals at the beginning of this year: achieving operating break-even and maintaining a small profit throughout the year despite the pressure on revenue. The success of our cost optimization and efficiency improvement initiatives was primarily due to our continued improvement in channel efficiency and personal cost optimization. However, as I mentioned at the beginning, due to some missteps in execution and efficiency innovation, Tantan has yet to make breakthroughs in achieving its strategic goal of sustainable growth.

As the pandemic subsided at the beginning of 2023, our user base and engagement level quickly recovered from the trough around Chinese New Year holidays. However, due to the overly aggressive adjustments to our user screening standards, our platform experienced significant spammer attacks starting at the spring, impacting our user experience and leading to a decline in user retention that threatened the health of our dating ecosystem. To improve the user experience and ensure the stable of our ecosystem, our team launched a rigorous six-month anti-spam campaign. However, the missteps I just mentioned, combined with our reduced investments in channels, had a significantly negative impact on our user experience and retention, putting significant pressure on our user base. With further reduction in channel spending and the impact of COVID, our MAU in December was down 30% from December to 13.7 million.

As of the end of the fourth quarter, Tantan had 1.2 million paying users, a net decrease of 200,000 sequentially. Turning to Tantan's financials, total revenue for the fourth quarter was RMB 272 million, down 21% year-over-year and 8% sequentially. The decrease was solely attributed to a reduced number of paying users. For fiscal year 2023, total revenue was RMB 1.2 billion, down 30% year-over-year. The decrease was due to the declines in paying users that resulted from reduced channel investments, the anti-spam campaign, and the adjustment to subscription renewals. In terms of business line, VAS revenue was RMB 667 million, down 90% year-over-year, while live streaming revenue was RMB 505 million, down 7% year-over-year. Tantan's adjusted operating income for fiscal year 2023 was RMB 101 million, compared to an adjusted operating loss of RMB 330 million in 2022.

Tantan turned profitable despite the pressure on revenue. This was primarily driven by significant reduction in unproductive channel investments as part of our cost optimization strategy and staff allocation optimization. Meanwhile, the continued improvement in ARPPU resulted in revenue declining much less than the user count. Now, I would like to walk you through the details of Tantan's progress on the channel and product fronts. First, on the channel front, our user acquisition team continued to reduce marketing expenses that couldn't generate positive ROI, and total channel investment declined by over 60% compared to 2022. We avoided seasonal costs caused by external competition by seasonably allocating budget ratio to different channels and flexibly adjusted marketing windows. By fiscal year 2023, our unit acquisition costs were significantly reduced by 45% compared to 2022.

Although cost cutting put pressure on the user base, reducing investments in channel with negative ROI is essential for Tantan to remain profitable. On the product and operational side in 2023, our user product team mainly focused on product adjustments and strategy upgrades to fight against the spamming activities that broke out in the spring. Our commercial product team launched a variety of premium membership products and pay-as-you-go privileges on top of the basic membership services, which, combined with appropriate guidance on paying experience, led to a significant sequential increase in live ARPPU in every single quarter of 2023 to mitigate the impact of reduced user base and the Ministry of Industry and Information Technology regulations on server renewal. We improved the product experience for paying users, which plays a positive role in the continuity and steady increase in paying ratios and ARPPU throughout the year.

By the end of 2023, spamming activities were under control, and the dating ecosystem had also recovered. Beyond the dating-centric value-added service, since live streaming and chat room services are not the focus on the dating cloud, we began to de-emphasize live streaming in the second half of the year and reallocated excess human resources to innovative projects. Although Tantan achieved overall break-even in 2023 thanks to our effective cost optimization and efficiency improvement initiatives as well as the continuous improvements in ARPPU, we failed to achieve the strategic goals of sustainable growth on the back of the positive business cycle due to our missteps in ecosystem management and the lack of breakthrough in product innovation. Therefore, the biggest priority for Tantan in 2024 is to continue focusing on product innovation and improving the monetization experience to ultimately achieve profitable growth.

Lastly, in terms of new endeavors, our goal is to enrich our product portfolio, expand beyond Momo and Tantan, and develop long-term growth engines. In the fourth quarter, the total revenues of the new apps, including social in-game products, were RMB 328 million, up 43% year-over-year. For fiscal year 2023, revenue from the standalone app was RMB 1.12 billion, up 42% year-over-year. Driven by rapid growth of our overseas business, standalone apps remained rapid growth momentum from a high base in 2022. As for the domestic apps, given their relatively mature life cycle, our team's operational focus on 2023 was to control costs and expenses while continuing to tap monetization potential. As a result, the profit growth rate of the domestic app was higher than the revenues due to the improved operating profit margin.

Compared with domestic products, our overseas product is at a relatively early stage of its life cycle with a broader market size, and the team has accumulated more experience from previous endeavors. Even though the overseas business was affected by negative factors such as the earthquake in Turkey and the devaluations of currencies in several countries in 2023, its revenues still maintain rapid growth with the combined effort of our product and channel teams. On the product front, we continue to enrich localized experience and operation for users in different cohorts. On the channel front, our team focused on acquiring paying users, strictly adjusted channel investments according to change the revenue and ROI. As a result, our product efforts, coupled with an increase in channel investments, have supported the continued improvement in ARPPU and the number of paying users.

Operating profit margins significantly improved year-over-year thanks to operating leverage. Our overseas business profits increased significantly from a few million RMB in 2022 to close to 100 million RMB in 2023. In addition to revenue and profit-oriented products, we have also made remarkable progress in exploring new opportunities in social sectors by leveraging technological product development. In 2023, we developed inSpace, a brand new social app for Apple Vision Pro. As one of the 600 native apps, it was launched simultaneously with Apple Vision Pro in February this year. The product is still in a very early stage, and we will continue to enrich its use cases and gameplays for social interactions and emotional connections. This is all about our business review. As this is the first call with our investors in 2024, I would like to spend some time talking about management priorities for this year.

First of all, our goal for the Momo app is to maintain the productivity of this cash cow business with a healthy social ecosystem. In order to maintain an excellent social ecosystem and limit the radical monetization approaches adopted by broadcasters and agencies in order to obtain competition event-related bonuses, we plan to further reduce revenue-oriented large-scale competition events. Instead, we will leverage Momo's social content to increase non-event-driven revenue through new gamified features and user-oriented operational activities. We will use part of the event bonus savings to increase daily revenue sharing. As the declines in competition event-related revenue will put some pressure on live streaming and live revenue, we will continue to look for ways to optimize our cost efficiency to mitigate the impact of lower revenue on our profits.

For Tantan, our strategic goal for Tantan this year is to improve the core dating experience and, on top of that, build an efficient business model that drives profitable growth. Regarding our new endeavors, we plan to continue enriching the brand portfolio, pushing the business boundary beyond Momo and Tantan, and build a long-term growth engine. Based on our experience in the MENA region over the past three years, we believe that the social entertainment industry still has a great room for growth in the overseas market. However, Hello Group has a unique advantage in social space and monetization built on the social ecosystem. We know how to help users find new friends and interact effectively with each other, and we know how to build value-added services on top of that to create value for the company and our shareholders.

We leverage and replicate our successful experience to explore new products, not limited to SoulChill and new markets beyond the MENA market. We believe that if we are doing a good job in localization, we can succeed in the broader market with a more diversified product. In 2024, we plan to invest more resources and take bigger strides to explore this area. Lastly, I would like to conclude by announcing that our board has declared a special cash dividend in the amount of $0.54 per ADS, which will amount to a total cash payment of approximately $102 million or one-third of Adjusted Net Income attributable to Hello Group Inc. in 2023.

This is the sixth consecutive year that the company has paid a cash dividend, and together with the revised repurchase program, it demonstrates the management's confidence in the fundamentals of the business and our commitment to creating long-term value for shareholders. Thank you for your confidence and trusting us. Now I will pass the call over to Cathy for the financial review. Cathy, please.

Hui Peng (CFO)

Thanks, Sic. Hello, everyone. Thank you for joining our conference call today. Now let me briefly take you through the financial review. Total revenue for the fourth quarter 2023 was RMB 3.0 billion, down 7% year-over-year and 1% quarter-over-quarter. Non-GAAP net income attributable to the company was RMB 514.7 million, up 5% year-over-year but down 15% from the previous quarter. Net income continued to grow on a year-over-year basis despite lower revenue.

This was mainly attributable to our effective cost optimization and efficiency improvement initiatives, which supported the stable productivity of the Momo cash cow business and turned Tantan profitable. Now let me walk you through the details. Looking into the key revenue line items for the quarter, firstly, on the live broadcasting, total revenue from live broadcasting business for the fourth quarter of 2023 was RMB 1.52 billion, down 12% year-over-year but flat quarter-over-quarter. The year-over-year decrease was mainly due to three factors. Number one, soft consumer sentiment in the current macro environment. Number two, our proactive operational adjustments to reduce competition events-related revenue in order to better manage regulatory risk. Number three, Tantan pivoting away from the less dating-centric live streaming service.

Momo application live broadcasting revenue totaled RMB 1.42 billion for the quarter, down 9% year-over-year but up 1% quarter-over-quarter. Tantan's live broadcasting revenue amounted to RMB 100.2 million, down 39% year-over-year and 17% quarter-over-quarter. Revenue from the value-added service for the fourth quarter of 2023 was RMB 1.42 billion, down 2% from Q4 last year and 3% sequentially. Revenue from value-added service on an ex-Tantan basis was RMB 1.26 billion in the fourth quarter of 2023, same as Q4 last year but down 3% from the previous quarter. Momo application value-added service revenue decreased both on a year-over-year basis and a quarter-over-quarter basis. This was due to a weak spending sentiment as well as our proactive product adjustments.

On the other hand, revenue from the standalone new apps continued to show strong growth momentum, partially offsetting the revenue pressure from Momo value-added service. Tantan's VAS revenue amounted to RMB 160.5 million, down 13% year-over-year and 5% sequentially. The decrease was due to a decline in paying users, which was in turn due to a reduction in channel investments, the anti-spam campaign, and the adjustments to membership subscription renewal. However, the continued improvement in our ARPPU resulted in revenue declining much less than user counts. Now turning to costs and expenses. Non-GAAP cost of revenue for the fourth quarter of 2023 was RMB 1.77 billion compared to RMB 1.91 billion for the same period last year. Non-GAAP gross margin for the quarter was 41.1%, up 0.7 percentage points from the year-ago period but down 0.7 percentage points from the last quarter.

The year-over-year increase was due to an improvement in Tantan's margin that resulted from a shift in its revenue mix. The quarter-over-quarter decline was mainly due to incremental expenses in connection with various year-end events in live streaming. However, as you can notice, the sequential decrease in GP margin in this Q4 was much less than in previous years as we de-emphasized revenue-oriented competition events to better manage regulatory risk. Non-GAAP R&D expenses for the fourth quarter was RMB 218.1 million compared to RMB 250.5 million for the same period last year, or a 13% decrease year-over-year. The decrease was due to the continuous optimization in personnel costs. Non-GAAP R&D expenses, as a percentage of revenue, were 7% compared with 8% from the year-ago period.

We ended the quarter with 1,382 total employees, of which 301 are from Tantan, compared with 1,705 total employees, of which 459 from Tantan a year ago. The R&D personnel, as a percentage of total employees for the group, remained stable at 63% from Q4 last year. Non-GAAP sales and marketing expenses for the fourth quarter were RMB 296.0 million, or 10% of total revenue, compared to RMB 398.6 million, or 12% of 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 Momo's strategy to cut lower efficiency channel marketing spend and, to a lesser degree, Tantan continuing to control costs and focus on channel ROI.

Non-GAAP G&A expenses were RMB 87.2 million for the fourth quarter 2023, compared to RMB 84.9 million for the same quarter last year, both representing 3% of their respective total revenues. Non-GAAP operating income was RMB 664.2 million, an increase of 33% from Q4 2022 but down 2% from the previous quarter. Non-GAAP operating margin for the quarter was 22.1%, up 6.6 percentage points from the same period last year but slightly down 0.3 percentage points from the previous quarter. Non-GAAP operating expenses, as a percentage of total revenue, were 20%, a decrease from 23% from Q4 2022 and 21% from last quarter. Non-GAAP operating expenses, on a year-on-year basis, decreased 18%. The decrease in both absolute RMB amount and as a percentage of revenue of OpEx was mainly due to a reduction in sales and marketing expenses and, to a lesser degree, optimization in personnel costs.

Non-GAAP operating expenses decreased 5% sequentially. This is attributable to the decrease in marketing expenses, which offset the increase in seasonal expenses such as year-end bonus. Now briefly on income tax expenses. Total income tax expenses were RMB 183.8 million for the quarter, with an effective tax rate of 25%. In Q4, the company accrued withholding income tax of RMB 53.5 million, which is 10% of undistributed profit generated by our royalty. Without a withholding tax, our estimated Non-GAAP effective tax rate was around 18% in the fourth quarter. Now turning to balance sheet and cash flow items. As of December 31st, 2023, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits, short-term investments, and restricted cash totaled RMB 13.48 billion compared to RMB 13.40 billion as of December 31st, 2022. Net cash provided by operating activities in the fourth quarter 2023 was RMB 415.9 million.

Lastly, on business outlook, we estimated our first quarter revenue to come in the range from RMB 2.45 billion-RMB 2.55 billion, representing a decrease of 13.1%-9.5% year-on-year, or a decrease of 18.4%-15.1% quarter-over-quarter. At segment level for Q1 2024, on a year-over-year basis, we expect Momo revenue to decrease around 10% due to our operational plan to further reduce revenue-oriented competition events in order to better manage regulatory risks and, to a lesser degree, the continuous macro headwind. On the Tantan side, we expect revenue to decrease mid-20s% due to our operational adjustment to de-emphasize less dating-centric live streaming service and, to a lesser degree, VAS revenue decrease caused by decline in user base. 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 preparation of today's discussion. With that, let me turn the call back to Ashley to start Q&A. Ashley, please. Just a quick reminder before we take the questions. For those who can't speak Chinese, please ask your questions in Chinese first and followed by English translations. Also, please limit the number of questions to a maximum of two. Our presenter will be ready for questions.

Ashley Jing (Director of Investor Relations)

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 Xueqing Zhang from CICC. Please go ahead.

Xueqing Zhang (Analyst)

[Foreign language]

Thanks, management, for taking my question. My question is about overseas business. Could management share with us your overseas business key strategy and any financial guidance for the next two to three years? Thanks.

Yan Tang (CEO)

[Foreign language]

I think our team's main competitive advantage in the overseas market lies in the social space and value-added services based on social and pan-entertainment products. Our domestic team has very comprehensive capabilities in social product innovation, monetization, and profitability. SoulChill is a good example of how these capabilities can be replicated overseas.

[Foreign language]

At present, SoulChill still has a visible room for improvement in three aspects. Number one, tap deeper into the monetization potentials in its existing market. Number two, add video-based social experiences. And number three, expand into new markets. Based on the current trend, we believe SoulChill will continue to deliver decent revenue and profit growth this year. The growth will come from several directions. First, considering we're not doing a very good job in terms of localization, especially compared to our peers who have been in the overseas pan-entertainment industry for many years, we're still far from good. Currently, we're accelerating our localization process, which is crucial for user experience and continued growth. Second, with limited staff and other resources, SoulChill's entire growth in the past came from audio-based social experiences. However, Momo has strong capabilities in building video-based interactive features that can be replicated in overseas products.

We will invest more resources in this area this year. Third, we will expand our services to the GCC countries in the Middle East and other countries. In addition to SoulChill, we also launched several new products in the past year, one of which is doing quite well. We will try to ramp up its investment in the second half of this year.

[Foreign language]

In addition, we believe that dating services have a lot of room for growth in Asia and overseas Chinese communities. In the past, we have been trying to explore effective ways to drive growth but encountered many pitfalls. We lacked sustained and effective resource investments. Most importantly, we didn't do much in terms of localization. Nevertheless, Tantan is still a very mainstream and important dating product in Asia, especially in the Chinese communities. Momo also has established a solid foundation among overseas Chinese. We should better make use of this asset to tap its growth potential. This year, we will step up our efforts in the dating space to enhance overseas user experience and increase our overseas market share.

[Foreign language]

Regarding resource allocation for 2024, we plan to greatly tilt overseas in terms of human resources and capital allocation so as to accelerate localization. Around the end of last year, we adjusted staff in each business line and transferred some top product operations and technical talents to new endeavors in order to strengthen the support for overseas teams. The budget allocation was also tilted towards overseas businesses. This approach will enable us to best root in the Middle East market while accelerating our efforts to explore new regions and new products. As for the revenue and profit guidance, I will leave it to Cathy.

Hui Peng (CFO)

Okay. Revenue and profit expectations. I'll try to look at this both from a near-term perspective and a longer-term perspective. If you look at the near-term for 2024, as Tang Yan said, Social is still going to be the primary driver of our overseas revenues and profit growth. If we do a decent job in the three areas that Tang Yan mentioned, namely beefing up local operations, expanding to video service, and diversifying to other regions, we should be able to maintain similar growth rates as we saw in 2023 in terms of top line. Profit-wise, I think we're still going to be growing pretty meaningfully.

However, because SoulChill is still at an early stage of development and we are currently seeing a lot of growth opportunities, if ROI makes sense, we're going to be very flexible in terms of how much of the incremental revenue we would invest back to pursue higher growth. In other words, I think we're going to continue to see steady growth at bottom line. But in terms of magnitude of the profit growth in 2024, it is secondary to top line and user growth. Now, for a more longer-term point of view, if we take a three-year perspective, we have an internal goal that we would like overseas revenue to take up a very sizable portion of Hello Group's top line. Obviously, to get there, SoulChill needs to be able to continue to grow. That's needless to say.

In addition to SoulChill, we have to achieve a decent level of success in building other products and in other parts of the world. Tang Yan and Sic already laid out a few areas we're going to be pushing very hard to grow organically. I would like to stress that over the past few years, we have also built up a very strong balance sheet. If we see good opportunities out there, we can certainly leverage our cash position to supplement the growth that we can achieve organically. So hopefully, that addresses your question. With that, back to Ashley for the next question.

Ashley Jing (Director of Investor Relations)

Operator, next question, please. Thank you. The next question is from Henry Chen from JPMorgan. Please go ahead.

Henry Chen (Executive Director)

[Foreign language] Thanks, management, for taking my question. The question is about shareholder value return. We noticed that the dividend payout ratio has decreased from 50% last year to around 30% this year, despite the solid profit growth. So could management shed some light on the rationale behind the dividend payout reduction? Is there any consideration for a regular dividend plan in the future? And lastly, could management share your perspective on the buyback execution plan moving forward? Thanks a lot.

Hui Peng (CFO)

Okay. I guess that's a question. I will take that question. So first, on the payout ratio question, when we think about how much profit we're going to pay out, we compare our offshore cash reserve and the potential offshore capital demand. As Tang Yan and Sic mentioned earlier, the biggest investment area for the coming couple of years is overseas expansion. Whether we invest organically or through M&As, it might consume more offshore cash than the past few years. With the foreign exchange controls, I guess it makes more sense to try to be more conservative in terms of returning cash to shareholders through dividend payments. So that's the first reason. The other factor that led to the decision to lower the payout ratio a little bit this year is that we considered our stock significantly undervalued at this point.

With the stock trading below the net cash value, I believe it's more efficient to buy back versus paying cash dividends. So that's my response to payout ratio. Is there a question about why not paying a regular dividend or not?

Ashley Jing (Director of Investor Relations)

Huh?

Hui Peng (CFO)

You mean the regular dividend?

Ashley Jing (Director of Investor Relations)

Do you mean the regular?

Hui Peng (CFO)

Okay. So as for why not a regular dividend plan, we've been paying cash dividends for, I guess, the past six or seven years in a row. We've said many times that if we continue to generate more excess cash than what we can effectively deploy, we will continue to return them to the shareholders either through dividend or share repurchase. Whether or not we have a more regular plan or not, we've already got the expectation right. At the same time, we are still seeing, like we said before, we are still seeing many growth opportunities and investment areas. Without 100% flexibility in foreign exchange, it may not be too wise to be pinned down by a regular dividend payout ratio every year. I think I heard a sort of question on how we plan to manage the repurchase program.

I think from today's earnings release, you can see that we announced an extension of the share repurchase plan. That extension of the plan would allow us to purchase up to $200 million for the two-year period from now onwards. So like I said, we consider our stock at this point significantly undervalued and it's trading at net cash value. We're going to utilize that cash and take the opportunity to create more shareholder value, that's for sure. Hopefully, that answers your question. Back to Ashley.

Ashley Jing (Director of Investor Relations)

Operator, next question, please. Thank you. The next question is from Leo Chiang from Deutsche Bank. Please go ahead.

Leo Chiang (Equity Research Analyst)

[Foreign language] Thank you, management, for taking my question. My question is about Core Momo. Could management share the business outlook of Core Momo on both live broadcasting and VAS in 2024? How the current macro environment has impacted the spending for core users? And lastly, how to view the profitability of the Core Momo in 2024? Thank you.

Yan Tang (CEO)

[Foreign language]

As Sic mentioned earlier, our goal for the Momo app is to maintain the productivity of the cash cow business within a healthy social ecosystem, given the uncertainties in the current market environment and consumer spending sentiment. In order to ensure users' social experience and prevent broadcasters and agencies from adopting a radical monetization approach to obtain competition event-related bonuses, we plan to reduce the scale of bonuses to de-emphasize large-scale competition events in live streaming and value-added services that may lead to periodic revenue surge. Such an arrangement will undoubtedly cause a decline in competition-related revenue, but we believe it will play a positive role in ensuring the social experience, engagement, and retention of paying users, especially of those high-paying users.

On the product and operation front, we will better leverage monetization opportunities brought by more and more social attributes and enrich gamified features and interactive tools for the top and middle cohort users to drive organic revenue growth.

[Foreign language]

Momo is a mature brand with a 12-year history, but our product team has always been passionate about product innovation. As a result, over the past few years, Momo has demonstrated outstanding stability in terms of user traffic and profitability. Although the challenges in the current external environment are still tough, we believe that as long as we stabilize our basic social fundamentals and continue to make efforts to progress with time, Momo will continue to be a healthy and stable cash cow for the foreseeable future, providing a solid foundation for the group's future expansion. As for the specific financial-related guidance for 2024, Cathy wants to ask.

Hui Peng (CFO)

Okay. I guess in her prepared remarks, Sic has already spelled out the priorities on management's agenda for 2024. Let me try to translate them into the impact on financials. When we say Momo segment, that segment actually includes the cash cow business of the old Momo and also the revenue generated by the new applications, mainly SoulChill. For the cash cow business, one of the key themes this year is to significantly de-emphasize the promotional events and the competitions for regulatory reasons. And that would involve changing the operational strategies and bonus structure for both live streaming and value-added service business. And that could significantly lower the event/competition-driven tipping revenues. However, the non-event and more organic part of the revenue will increase. In the near term, though, it's difficult for the organic part to make up for the event-driven revenue that we're going to lose.

So I guess the top line for the cash cow business will continue to see some pressure on a YoY basis for the coming few quarters because of that strategy change in operational policies. With regards to social and other new applications, we continue to see pretty strong growth momentum, which is going to partially offset the decline of the cash cow business. So if you put these different pieces together and try to get a more quantitative outlook, this is probably what I can say at this point. We've already given our Q1 guidance. As you can see, at midpoint, we're seeing somewhere around 10% year-over-year decrease for Momo segment. Within it, I guess the cash cow is declining mid-teens percentage, offset by a 40% something YoY growth from the new applications.

I don't have enough visibility to pin down the rest of the year with very reliable numbers, but I guess we can use Q1 as a good basis for the projection into the rest few quarters of the year. How we move from Q1 will heavily depend upon several factors, namely the macro, the regulatory environment, and how well we execute our overseas strategies. I guess that's what I can say at this point. We'll keep you updated as the year progresses. Now back to Ashley for more questions.

Ashley Jing (Director of Investor Relations)

Okay. Operator, just in the interest of time, let's just take one last person for today's call.

Operator (participant)

Thank you.

Ashley Jing (Director of Investor Relations)

Please go ahead.

Operator (participant)

Thank you. The final question is from Raphael Chen from BOCI Research. Please go ahead.

Raphael Chen (Associate)

[Foreign language] I will translate myself. I have two questions. First one is regarding Tantan. Could management share the latest user trend, marketing, and monetization strategies in 2024, and any guidance on its revenue and profit this year? Secondly, could management mention I see management mention new products related to Apple Vision Pro in the prepared remark. Could we have more insights on the product details? Also, considering company plans to ramp up exporting new business opportunities, how do we evaluate margin trend in 2024? Thank you.

Yan Tang (CEO)

[Foreign langauge]

At the beginning of this year, our user base continued to be under pressure from factors such as the COVID wave, the reduction in channel investment, and the Chinese New Year holiday. After the holiday, as the external negative factors subsided, Tantan's new user engagement and new user paying ratio started to bottom out and stabilize. Our goal for Tantan this year is to improve the core dating experience and, on top of that, build an efficient business model that drives profitable growth. In order to improve the core dating experience, we need to constantly innovate use cases and explore dating scenarios around the core dating theme, provide more tailor-made services for users in different markets, and maintain a healthy, stable ecosystem. Achieving profitable growth depends on business model innovation and channel ROI improvements. Last year, we achieved good results in reducing unit acquisition costs.

This year, we will continue to improve our monetization capability based on the core dating experience. For example, around the Chinese New Year holiday, we launched a pilot campaign for a membership product that is higher than the Black Gold membership and received very positive feedback from the first batch of high-paying users. Through this new premium membership, we hope to, first, unleash the spending power of the existing high-end members and, second, capture the dating needs of the top cohort paying users from live streaming. Meanwhile, we will also leverage an algorithm to improve the basic member experience and drive paying ratio growth. If, through these efforts, ARPPU can continue to improve without compromising user experience and retention, we will truly realize a positive business cycle and achieve profitable growth by increasing marketing investment. For other financial-related questions, Cathy will answer them.

Hui Peng (CFO)

Sure. So as Sic and Tang Yan mentioned, the focus of Tantan this year can be really broken down into two priorities. One is to continue to improve the core dating experience. In the past couple of years, we tried to diversify into live streaming and the more community-driven entertainment experience, such as chat room experience. Now we can conclude that although these efforts did contribute meaningfully to ARPU, they are not very compatible to dating experience at this point. And therefore, we will increasingly pivot away from these more entertainment-oriented experiences. And the other focus for Tantan this year is, of course, to continue to improve paying user experience so we can drive a higher ARPU. If ARPU and user retention continue to improve to the point where ROI turns positive, we will definitely ramp up marketing to drive user and top-line growth.

That's when we're going to see what we call a profitable growth cycle. However, before we hit that tipping point, it's possible that we will continue to see top-line trending either flat or slightly under a bit of a pressure as we continue to scale back from live streaming and the chat room experience. However, if we are successful in reaching that tipping point and enter into a positive business cycle, as we described, we can see growth in both top-line and bottom line. At this point, I would say investors probably still need to have more patience as we work our way to get there.

Yan Tang (CEO)

[Foreign language]

With the continuous iteration of XR hardware, more and more new users are joining the XR virtual space. The development of hardware has broken through the limitations of social models in the mobile internet era and has also brought new opportunities to us who were dedicated to the social space for the past decade. inSpace users can create their own avatars and personalized space and invite Apple Vision Pro users around the world to have parties, play chess, and have fun together. inSpace built-in real-time translation function allows users of 12 major languages to communicate without barriers. Chatting over social or dinner party games makes getting together more fun for acquaintances who are thousands of miles apart. It also helps break the ice for strangers in the open social space.

We plan to roll out more use cases and gamified features based on localized users' preference in different regions and to make better use of technological innovation to break through the traditional social experience. For the investment budget for new endeavors and our overall margin trend, I will leave them to Cathy. Cathy, please.

Hui Peng (CFO)

Investment budget for new endeavors. Internally, we do have a budget for new endeavors. But at this point, we hesitate. We will probably defer till later to answer that question with a more definite number because we want to keep the budget flexible at this point in time. If we see really good opportunities, we will invest a little bit more. If the ROI doesn't trend good, we will probably invest a little bit less. So it's really a quite flexible number that we're trying to put in there at the beginning of the year. On the margin question, I guess if this is a question about at the whole group level, I think for gross margin, it has remained relatively stable throughout 2023.

With the largest cost driver, which is the payout ratio being stable, I'm currently not seeing any factor that could potentially change that trend one way or another in a very meaningful way. There is this one thing that I would like to call out here, which might cause the margin to fluctuate a little bit. That is that as revenue decreases, there could be some negative leverage on the infrastructure costs and also the personnel costs charging to the cost of sales line, which is going to pressure the gross margin a little bit. We do not expect that to be very significant. That's what we're seeing on the gross margin line.

Operating expenses-wise, although we plan to substantially increase our investment in the new business, part of the increase will come at the expense of the old business, which won't be consuming as much resources. Now, if we try to think about the operating margin on an ex-Tantan basis, last year, I believe we delivered, of course, to 23% adjusted operating margin. In Q1, the ex-Tantan part is going to see a 9%-10% year-over-year decrease at top line. And that level of top line decrease is obviously going to pressure the operating margin a little bit. But I would say from 19%-20% is still a quite achievable range of adjusted operating margin for the ex-Tantan part of the business.

I do not really have a margin number for the whole year because of that flexibility that we talk about that we would like to maintain, especially for the new business. But in terms of how the operating margin is going to trend from Q1 onwards, I would say there are several factors to consider here. One is the overall top line improvement from Q1 onwards. Of course, that is heavily dependent on the overall macro and regulatory environment. And the second factor is how aggressive we are to cut down on cost. At this point, I do see some headroom to continue to cut on the old business part. But we do want to, like I said, maintain the flexibility to move the spending to new business if we see good ROI. So basically, that's my current thought on how the margin may play out for the whole year.

I think with that, heading back to Ashley for closing.

Ashley Jing (Director of Investor Relations)

Yeah. I think that's it for today, Operator. We're ready to close.

Operator (participant)

Thank you. That does conclude our conference for today. Thank you.