Cathy Peng - VP, IR Tang Yan - Co-Founder, Chairman & CEO Jonathan Zhang - CFO.
Zoe Jau - Credit Suisse Claire Chow - Morgan Stanley.
Welcome to the Fourth Quarter 2016 Momo Incorporated Earnings Conference Call. [Operator Instructions]. I must advice you that this call is being recorded today November 8, 2016. I would now like to hand the conference over to your first speaker today, Ms. Cathy Peng. Thank you, please go ahead..
Thank you, operator. Hello everyone, and thank you for joining us today for Momo’s fourth quarter and fiscal 2016 earnings conference call. The Company’s results were released earlier today and are available on the Company’s IR website. On the call today from Momo are Mr. Tang Yan, Co-Founder, Chairman and Chief Executive Officer; and Mr.
Jonathan Zhang, Chief Financial Officer. Mr. Tang will discuss Momo’s business operations, company highlights followed by Mr. Zhang who will go through 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 provisions 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 these 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 Mr. Tang. I would translate for him. Mr. Tang, please..
Good morning and good evening everyone. Thanks for joining our conference call today. Q4 was another remarkable quarter for us in almost every major aspect and execution. Total revenues for the quarter reached another record high as $246.1 million up 524% year-over-year and far exceeded our regional revenue guidance range.
Again the outstanding top line performance came in together with significant bottom-line expansion powered by the strong operating leverage based on our efficient business model. For the fourth quarter of 2016 non-GAAP net income reached $91.5 million up 675% from the same period last year.
Now quickly on the operating metrics, total MAUs on the Momo platform reached 81.1 million for the quarter, compared with 69.8 million a year ago, and representing a 3.7 million net addition from the previous quarter.
Same as before, the total MAUs we are disclosing here does not include the active users on our stand-alone live-streaming application Hani. I would like to highlight here that after four consecutive quarters of steady rebound our MAU has already exceeded our historical peak level back in early 2015.
We view that as an important milestone for our platform as a testament that we have the right strategy, a solid execution capability to penetrate deeper into our addressable market and drive continuous expansion in our user base. In addition to the growth in user scale 2016 was also a year where we saw meaningful improvement in user engagements.
Time span for DAU in Q4 2016 increased more than 10% as compared to the year ago period. Over that same period of time, the number of relationships formed on the platform reached an important reflection of the stability and stickiness of our social platform also increased by 48%.
All of these shows that by optimizing the existing social experience and introducing new social and entertainment use cases, Momo is on the right track to become a larger and stronger community for users to socialize and have fun.
Now I would like to dig in deeper on the product and operational front to review what we did in the past year with a particular focus in Q4 to enable those achievements we made. On top of that I will also discuss the directions we are pushing toward in the year 2017 in order to drive further expansion in user scale and engagement.
In the year 2016 live streaming took off as a major success on our platform.
Although live streaming is turning into a powerful profit engine for us what makes us extremely excited about the success of his business is the synergies that we can drive out of the convergence of video and social activities and the huge opportunities to expand our user base by introducing entertaining content to the platform.
It is fair to say that live video is a forerunner in our series as coherent efforts to driving being [indiscernible] of video into various social activities on our platform. Of this success of the live streaming business we piloted our interactive short media service in late August 2016.
During the fourth quarter we rolled out several updates to the service in order to optimize user experience around it, based on a positive feedback we had seen from the initial stats we made another major upgrade in December to put short video service as a prominent page on the nearby tab [ph] just one swipe away from the home page nearby people.
At the same time we also stepped up our operational efforts in order to drive more quality content into the system. In addition to the organic video sharing from nearby people we started to build the recommendation mechanics to push more professionally curated user generated content aka PUGC for our users to consume.
We believe we have very unique competitive advantage in this area as we can leverage the talented performance in our live streaming business to kick start the content ecosystem here.
As you see elsewhere in the video industry many professional live streamers have been building and maintaining their fan base through creating and sharing short videos, having both services on the same platform here at the edge to build the synergy whereby the life broadcasters contribute quality content to the short video service and the short video service in turn delivers traffic to the live streaming business.
We're happy to see that virtual cycle is starting to take shape on our platform. Other than taking advantage of the live broadcasters we're also working with third party content partners to improve the quality and variety of our content offerings.
As a result of all these efforts we saw that the number of average daily video viewed grew eight folds during the fourth quarter and continued to ramp up rapidly as we had deeper into the first quarter of 2017. Other than the new short video service in Q4 we also rolled out video experience in the group chatting environment.
We are happy to see that the group video chat function has been well-received by our users as a visual way to interact and communicate in a group setting.
After we introduced the service in November the adoption rate and usage of good video chat [indiscernible] and by the end of December more than 10% of the active group users chat via video and on average each of them spent 20 minutes during group video chatting on daily basis.
In December the number of monthly active groups increased by 20% compared to three months ago. These stats show that by introducing video features into the existing social scenarios scene we can revive the traditional social experiences and increase user engagements around them.
We find to push this initiative forward in 2017 and further integrate video experience with other product module on our platform. During the fourth quarter we continue to work hard to enhance the user experience around the live stream service.
On the product side we introduce more features and functionalities for the broadcasters and the viewers to better interact and has greater fun. For example on the back AR technology we launched gesture animations to allow the performer to create certain special effects by making gestures.
We also continue to upgrade and optimize the backend tools to enable multi-screen interactions on our platform and build more identifications around it.
Capitalizing on the emerging technologies in the mobile video space, we see great opportunities to drive a diversified content pool as well as new ways for the live streamers and the viewers to interact with each other. We're finding to explore more in those areas in the coming quarters and we'll keep bringing new things to the table for our users.
In addition to the initiatives on the product front throughout the second half of 2016 we have been stepping up our operational efforts to strengthen the eco-system around the live streaming business.
Last quarter we discussed how we put in place a traffic dispatching system to make sure all the talented performers no matter whether you are already a top web celebrity with a sizeable fanbase or a new talent who want to start a career path here can all searches on our platform and achieve their respective growth by bringing quality content for our audience.
In Q4 we continue to refine that system and started to establish our service program to take better care of the paying users. We are still early in these endeavours and will continue to work hard to keep everyone in our community motivated and engaged.
On the content operation front, in Q4 we ran our year-end competition events and held a reward ceremony at [indiscernible], a landmark architecture and also one of the key stadiums for the Beijing Olympics.
At that celebration event we invited the winning broadcasters to perform on the same stage with the first year celebrities in front of a live audience of thousands. At the same time we also work with [indiscernible] music to produce and publish an album with 12 original songs from some of our top broadcasters.
We are hoping that through these expansions into the entertainment industry we can help our top performers to expand their career path and provide motivation for the whole celebrity community to drive more quality content onto our platform.
In addition these efforts would also help us extend our footprint along the industry value chain and upgrade our brand equity at the same time. As a platform operator our goal is to maximize the value we can deliver to the performers as well as the users through our product offerings and operational effort.
By doing that we can form a virtuous cycle where the best content creators keep coming onto the platform and bring in more users, enrol more users in turn attract a bigger talent pool to offer better content.
I think one of the most competitive advantage in that regard will become increasingly evident to the performers as well as the users as we head deeper into 2017. As said earlier, our push into video and entertaining content offering has been driving positive impact on user scale and engagement growth.
In 2017 we plan to sustainably step up our marketing efforts to increase consumer awareness of these new offerings and use cases based on video and entertaining content you in order to further expand our user base. Now let me walk you through the key business volumes.
Live streaming business are number one revenue engine continued to gain traction in the fourth quarter with revenues reaching a $194.8 million up 79% sequentially. Now we will be discussing the numbers more in detail later. So I will be pointing to a few trends we saw in Q4 and how we plan to continue to drive the growth of this business in 2017.
A large part of the growth we saw in Q4 still came from the organic momentum of the business. However the year-end competition event we run contributes incrementally to the top line growth particularly by driving up the RP2 from the top performers and high paying users.
As we go into 2017 and look at the different contributing factors to the growth of the life streaming business we believe we are so early in the monetization process and have many opportunities to drive further growth here.
Firstly on the growth of usage of the live streaming service, in the year 2016 we have been primarily relying on converting existing Momo users on to the live streaming service and we did a pretty good job on that thanks to the high level of matching user mentalities.
In December 2016 the service covered around 23% of the daily active users for the main application. In 2017 we're planning to expand the user acquisition effort beyond the Momo platform. Live streaming is a new form of entertainment that represents future trend of constant consumption.
There is a big market for it in China and our share is currently only a fraction of that market.
As we continue to establish our leadership in the live streaming market and with our marketing efforts soon kicking in to grow consumer awareness we believe we have plenty of opportunities to gain market share and expand the usage of our live streaming business.
With regards to paying ratio and the ARPPU we believe the organic momentum is going to continue and we will be tactfully planning our operational efforts to press more gas into the engine wherever needed.
Moving on to mobile marketing business, as we make video the center piece of our strategic framework we would like to drive that change on the commercial front as well. In the year 2016 we made ourselves ready on the product side to run video ads on our platform.
As a matter of fact revenues from video ads has been ramping up steadily in Q4 and as we speak now video ads revenue as a percentage of total mobile marketing revenues has already become pretty evident.
That coupled with a number of other optimizations we made to the apps since then [ph] has driven the average clickthrough rate of our performance based app to go up substantially during Q4 four and because a big majority of our performance base as our sold on CPC basis these days the improvement in clickthrough allows us to grow the effective CPM while improving the ROI for our marketing customers at the same time.
We expect the shifting towards video ad to continue in the coming quarters and that will help us continue to drive the growth in effective CPM. On top of that we also plan to capitalize on the new use cases around media to create marketing opportunities for businesses.
In the fourth quarter we worked with [indiscernible] to run a customized campaign with our year end competition event. The campaign which primarily took the video format integrated a variety of ad inventory including loading pages ads, in feed ad units as well as sponsorship of the year-end live streaming events.
The integrated marketing package reached an audience in the tens of millions and generated hundreds of millions of impressions which [indiscernible]. Benefited from Momo's social attributes the campaign also brought [indiscernible] a considerable amount of direct user interaction as well as transactional conversion.
We will have more of these type of exploration this year. Moving on to mobile gaming business, 2016 was a year where we scaled back from the game publishing and joint operations to refocus on in-house developed games. In 2017 we will continue to execute against that strategy and make gaming an integral hard of our social and entertainment eco-system.
Now briefly on our membership and other value added service business. As said during our previous earnings call we won't be pursuing the growth of membership subscription revenues aggressively and would rather leave some premium features to the non-paying members to improve the overall user experience.
However as an open social platform we do see the user demand and opportunities to grow other types of value added services in a broader sense and more flexible manner. In the fourth quarter, we rolled out virtual gifting service outside of the live streaming business.
These are usually smaller ticket items that could help users to interact with each other in a more effective and fun way. For example a key use case we are seeing for now is that users send virtual gifts in an ice breaking occasion in order to improve [indiscernible].
The service was pretty well received by the users in Q4 and contributing meaningfully to the growth of this revenue subset. To wrap up my prepared remarks for today Q4 was another good quarter and concluded the year 2016 with outstanding achievements in both products and business development as well as financial performances.
Looking out to 2017 we're seeing more exciting opportunities around our strategic priorities in social and entertainment spaces. I'm confident that we will continue to deliver against these priorities and drive value for our shareholders. With that I would like to turn the call over to Jonathan for financial review. Jon please go ahead..
Thanks, Cathy. Thanks, Tang Yan. Hi everyone, thanks for joining our conference call today. We concluded fiscal year 2016 with a very solid fourth quarter performance operationally and financially.
As Tang Yan talked to you earlier we achieved user base recovery for the fourth consecutive quarter, our monthly active users or MAU was over 81 million at the end of the year which surpassed our 78 million historical level at second quarter 2015.
That demonstrated our video social focus product development initiatives is heading to the right direction and gave us the confidence to further expand our user base in the year of 2017 and beyond. We are extremely excited that total revenue for the fourth quarter grew by 524% year-over-year to $246 million.
Continued from previous quarters with the benefit from continued growth in our revenues our highly skilled efficient business model resulted in another record level profitability for the fourth quarter. Non-GAAP net income was $91.5 million for the quarter representing 37.2% non-GAAP net margin.
Compared to $11.8 million were 29.9% in the same quarter last year respectively. With the solid fourth quarter financial performance our total revenues for the fiscal year 2016 was $553 million compared to 134 million for 2015, 313% growth year-on-year. Non-GAAP net income for 2016 was a 177 million compared to 31 million for 2015, a 469% growth.
Non-GAAP net margin were 32% and 23.2% for 2016 and 2015 respectively. Now looking into the key revenue line items. In the fourth quarter of 2016 revenue from live streaming service continued its strong growth momentum reaching a $194.8 million up 79% sequentially.
The growth of live streaming revenues were driven by both paying user growth as well as an increase in ARPPU. Paying users for the fourth quarter of 2016 reached 3.5 million compared to 2.6 million for the previous quarter.
Average revenue per paying user per quarter or quarterly ARPPU before excluding value added tax for the quarter was RMB408 increased from RMB296 for the 2016. As Tang Yan mentioned earlier the year-end competition expense acted as a key driver for the significant increase in ARPPU.
We started the live streaming services with the intention of adding a form on entertaining content to promote user engagement on our platform.
In 2016 we harvested from live streaming business in great deal which made us believe that as an open social platform our existing user base, user mentality and our unique traffic dispatching methodology are the key for us to establish the market leading position we achieved in such a short period of time.
Looking into 2017 we will focus more on breaking [ph] efforts to optimize user experience including viewers, paying users, broadcasters as well as agencies working with us. We are confident that there is plenty of room for us to maintain the growth momentum of this business in the year of 2017.
Revenue from mobile marketing service was $19.7 million up from $15.3 million for the fourth quarter of 2015. The year-over-year 29% growth was mainly powered by the increased and the effective CPMs as well as better sell-through of our existing ad inventories.
Started in Q4 2016 we launched newly designed video format in-feed at service which was warmly welcomed by our customers and we expect a wider adoption by our customers in 2017. This factors continued to be the driving force of our mobile marketing revenues growth in the year of 2017.
Mobile games revenue was $11.3 million in the fourth quarter 2016, a 45% increase from the same period last year. The year-over-year increase in mobile games revenue was primarily due to revenue contributions from one-self developed game. In Chinese [indiscernible] which was launched in the third quarter and its revenue is recognized on a gross basis.
Once again it has been our decision to scale back the jointly operating and publishing business models to focus on self-developed and tailor made gains. Therefore in short term downward trend in games revenue could be expected in the coming quarters and our new gaming strategies start taking effect.
From this quarter onwards we start to report revenue from membership subscription and other value added services together as value added services or VAS. We introduced virtual gifting service in November 2016 and has seen a positive momentum since launch. We believe in the future it will become a significant component in the VAS category.
VAS revenue for the fourth quarter 2016 was $19.1 million up 31% from the same quarter last year. The growth came largely from increase in membership subscription revenue driven by both increase in number of paying members as well as increase in our people due to higher percentage of SVIP members.
Paying members totalled 3.5 million as of December 31, 2016 up from 2.9 million a year ago. The new launched virtual gifting service also contributed meaningfully to the growth of overall value added service revenues. Now some quick highlights on the cost and the expenses.
For the fourth quarter 2016 our cost and expenses on a non-GAAP basis totalled $150 million compared to $30.5 million for the same period last year. The year-over-year increase in cost was primarily attributed by our continuous business expansion.
Consistent with the previous quarter the biggest cost driver for the fourth quarter of 2016 was still the revenue sharing with live broadcasters then followed by the payment channel costs. This items were proportionate to the revenue growth of our revenue generated by our live streaming service.
The third and largest component in cost is bandwidth related cost including IDC, CDN, messaging services. It continued to decline as a percentage of revenue both year on year and sequentially.
In the fourth quarter of 2016, our sales and marketing efforts focused on expansion of marketing channels for new user acquisition as promotional efforts on live streaming business part of which was in connection with the year-end live streaming festival.
Non-GAAP selling and marketing expenses as a percentage of revenue dropped to 10.9% in the fourth quarter from 28.7% a year ago and 17.9% in the previous quarter.
We continued to gain substantial operating leverage which is also evidenced by significant decline as a percentage revenue in non-GAAP R&D and G&A expenses we had 924 full time employees as the end of 2016 up from 779 a year ago. One highlight I would like to make is that our effective tax rate on a non-GAAP basis for 2016 was 2.9%.
The income tax exemption holiday of our major profit generating legal entity ended at the end of 2016 [ph]. Starting from Q1 2017 we will be subject to 50% reduction on income tax. We expect our effective income tax rate on a non-GAAP basis to go up to approximately 15% for the three year period from 2017 to 2019.
It obviously has negative impacts on this net profit margins going forward. Our non-GAAP net income attribute to Momo, Inc. was $91.5 million in the fourth quarter 2016 representing a net profit margin of 37.2% compared to $11.8 million or a 29.9% in the same period last year.
Again I would like to remind our investors that our margin profile may fluctuate from period to periods as our product and business are still at the developing stage, future investments in product developments, user expansion and content enrichment along with the seasonality in our business may have significant impact on our financial metrics more especially for 2017 as Tang Yan mentioned earlier we plan to expand our marketing efforts including both branding and channel marketing campaigns to educate the market about positive changes on our platform.
If this marketing campaign proves to be effective in driving user growth we could allow our margins to fluctuate within an acceptable range. Now quickly on our key balance sheet and cash flow items, as of December 31, 2016 we had cash, cash equivalents and term deposit totalled $651.3 million compared to $469.5 million at the end of 2015.
Net cash provided by operating activities in the fourth quarter of 2016 was a $107.2 million compared to $31.7 million for the same quarter 2015. Our improved cash position gave us a great capability to fund our future user growth and business expansion which has been the number one priority for the company.
Turning to our first quarter 2017 guidance, based on the current momentum we are seeing in the life streaming business plus seasonality we expect in other business lines especially in mobile marketing business we estimate our first quarter revenue to come in the range from $238 million to $243 million for the first quarter 2017 which translate into a year-on-year growth rate from 367% to 377%.
With that I would like to conclude the prepared remarks for this conference call and turn the call over to Cathy to start the Q&A..
Actually just one quick reminder before the Q&A, for those who can speak Chinese please ask the question in Chinese followed by English translation that would help us to ensure the quality of the translation to the maximum extent and we will also appreciate if you could limit the number of question to one per person. Thank you.
Operator, please go ahead. We're ready for questions..
[Operator Instructions]. Our first question comes from the line of Zoe Jau from Credit Suisse. Please ask the question..
[Foreign Language].
Our users growth trajectory during the past year has been steadily rebound since the beginning of 2016 and the quarterly net additions has been somewhere around 2 million to three million per quarter.
If you look at our current retention rate the newly required users as well as the resurrected users trend that kind of trajectory in terms of a quarterly net addition can be safely maintained.
Of course on top of that the team has bigger ambitions to drive and acceleration in MAU growth and there are two areas that we are working hard on in order to make that happen.
Number one on the products side the initiatives that we have been taking around the video efforts as well as adding more entertaining content has been having a very positive impact on the user growth as well as the user engagement growth.
That proves that the whole video transition as well as providing more entertaining content consumption use cases on the platform are really synergetic to the activities in an open social environment.
In the year of 2017 we will further drive the video transition on our platform and try to provide more and better entertaining content to our users and by doing that it could help us very substantially deemphasize the totalitarian aspect of our application and expand our use case as well as our user base.
On the other hand Momo has been around for more than five years and if you look at the real registered user base on our platform it has already exceeded 300 million so that's a pretty large -- that's an application with a pretty large registered user base for such an application to see an acceleration in MAU growth of course the product innovation and the expansion in use case has to be there for other than those two I think we have to see a step up in terms of marketing spending in order to educate the market about the positive changes that are happening on the platform.
For example although we've already established our leadership in the live streaming market I think there is still a gap between where we are in the live streaming market and where the consumer awareness is, for example a lot of the users out there in the market actually don't know we have a pretty good life video service and short video service yet.
We expect that in Q2 this year we're going to very significant start our marketing efforts both on the branding side as well as on the China marketing side in order to give market a shout about the new use cases on the video side and on content consumption side.
We believe that with our efforts on the marketing side as well as on product integration we have a good level of optimism about our opportunities to an exaggeration in MAU growth in the year 2017. I believe Momo has always been pretty bold in terms of product innovations and product upgrades.
During the fourth quarter we brought out in aggregate five upgrades for our products. I think in the year 2017 in terms of the detail product upgrade plan for each versions we will take it in a step by step manner.
In terms of bigger direction, I think it has relatively long period of time down the role, the product efforts will revolve around the whole video transition.
On the technology side we will further integrate the video element into every product modules and social use case is currently on the platform, that would help us to revive some of the existing social experiences on the platform.
On the other hand we well based on the live streaming as well as the short video service drive more quality content in a bigger variety into the system and try to by providing more entertaining content try to push the boundaries of our use case and expand the user base.
More specifically our next version upgrade will be more about further integrating short video functionalities into one major existing social use case on the platform and that would allow our users to more conveniently be able to distribute their content within the Momo application through their existing social relationships..
Your next question comes from the line of Claire Chow from Morgan Stanley. Please ask your question..
My question is regarding the concentration level of the [indiscernible] income and management share as a percentage of revenue contribution from our top performer, top agencies as well as the top users..
Let me just briefly talk about the revenue concentration in our live streaming service. During the fourth quarter because of the competition event that we run the revenue concentration among the top performers as well as the top paying users have all gone not -- however the concentration went back down after the competition events.
On the broadcaster side in the month of December we had somewhere 540,000 revenue generated broadcasters and that number compared to 400,000 in the month of September among those revenue generators live broadcasters in the month of December if you look at the top layer of broadcasters who can bring in more than RMB30,000 per month per person, their revenue contribution represented a little bit over 50 percentage that you saw in September however that concentration went back down to the normal level after the year end event.
In terms of the concentration among the paying users same in the December months if you look at the high paying users who spend more than RMB5000 per person per month we had a good over 15,000 such kind of high paying users and that number was less than 10,000 in the month of September and the revenue contribution from these top layer of paying users their contribution was also a little bit over the 50% as you saw in the month of September and same as the concentration among the broadcasters, the concentration went back down after the event the year-end gala was over.
Overall because of the social attribute of the Momo platform and the fact that our traffic dispatching system really encourages the talent in new performers as opposed to the top [indiscernible] celebrities.
We believe if you compare our revenue concentration with other competitors out there in the market, our revenue distribution among the broadcasters should be more longtail oriented.
In terms of the revenue from the agency controlled broadcaster in the month of December we had somewhere around 70,000 broadcasters who were under certain type of agency organization and they contributed less than 50% of the total revenues from live streaming service.
We believe the concentration among different agencies tend to be very fragmented on the Momo platform. For example the number one agency in December only represented somewhere around 3% of the total revenues from live stream service and the Top 10 you know in aggregate represented somewhere around 16%..
Right. I think we're already running out of time maybe -- that concludes our call for today. Thank you for joining us. We will see you next quarter..
Ladies and gentleman that does conclude our conference for today. You may all disconnect..