Ladies and gentlemen, thank you for standing by, and welcome to Hello Group Inc.'s First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded conference is being recorded today. I'd now like to hand the conference over to your first speaker today, Ms. Ashley Jing. Thank you.

Please go ahead, ma'am..

Thank you, operator. Good morning and good evening, everyone. Thank you for joining us today for Hello Group's First Quarter 2022 Earnings Conference Call. The company's results were released earlier today and available on the company's IR website. On the call today are Mr. Wang Li, CEO of the company; and Mr. Jonathan Zhang, CFO of the company.

We will discuss the company's business operations and highlights as well as the financials and guidance. They will both 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 and involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding this and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law.

I will now pass the call to Mr. Wang. I'll translate for him. Mr. Wang, please..

to pursue profitable growth. Our approach to achieve that goal has 2 important components. One is that we need to improve our ARPU by introducing audio and video services and, on the back of that, non-subscription-based revenue models in developing countries.

The other component is lowering marketing costs in areas that are not currently making any sense from an ROI perspective. As I mentioned in the previous quarters, after the management transition, we made a foray back into the Indonesian market.

One of our biggest progress made since then was that we successfully improved the ARPU and ROI in that market by leveraging live streaming and the non-membership value-add service monetization model. With an increase in ARPU and improvement in ROI, we stepped up channel investment to drive users and revenue growth.

At the same time, we scaled back marketing efforts in some of the loss-making regions. As the number of overseas users and the scale of live streaming business grows, we have enough leverage to lower the payout ratio of the nonsubscription business.

As a result of all of the improved ARPPU lowered marketing costs and optimized payout structure, Tantan's overseas business turned profitable in Q1 on an ex-payroll basis. Tantan will continue to execute such a strategy for the rest of the year in overseas markets. [Foreign Language] Lastly, I'll review the progress we made with our new endeavors.

In 2018, we launched a brand portfolio strategy through the acquisition of Tantan. This marked our first step in meeting the social needs of different target groups more effectively through different apps.

Starting from 2019, our incubator continued to launch new apps, enabling us to reach a broader group of users and cater to the different social preferences through a multi-brand and multi-platform approach.

This strategy helped us quickly and effectively penetrate niche areas within the social space, explore opportunities in overseas markets and solidify our industry-leading position. [Foreign Language] Revenue from the new bucket in the first quarter was RMB 160 million, up 184% year-over-year and 43% quarter-over-quarter.

Revenue from the new bucket includes ROI-oriented social apps, [indiscernible], [indiscernible] and [indiscernible], revenues of which were recorded in the VAS line as well as [ferritin], a simulation game focusing on the western markets, revenue of which was recorded in the game line.

For Heart and [indiscernible], the 2 social apps targeting domestic markets, we continue to focus on cost reduction and efficiency improvement as we did in the second half of 2021, optimizing costs and expenses while moderately ramping up the monetization level.

Driven by an increase in ARPPU, revenue rapidly increased quarter-over-quarter, and both apps achieved full quarter of profitability and made incremental contribution to the group's bottom line in Q1.

In particular, for [indiscernible], a video matchmaking targeting lower-tier markets, our team leveraged the rich product and operational experience accumulated in our other projects and achieved breakeven in less than 2 years after its launch in 2020.

On top of that, the app has also shown the potential to sustain top line growth and profit expansion. Our strategy for domestic market new endeavours this year is to simultaneously pursue steady growth and ensure profitability.

[Foreign Language] Among overseas ROI-oriented products, we ramped up efforts to drive revenue growth of Sochio, a social app targeting the MENA area. As a result, in Q1, both the paying user count and revenue showed rapid growth from the previous quarter. We adopted the same strategy to lower the payout ratio as users and revenues continue to scale.

As a result, net loss significantly narrowed compared with the previous quarter. Our plan for Sochio this year is to achieve profitable growth in its core market in the MENA region and, at the same time, to develop a product mode suitable for the Southeast Asian and South American markets.

This will lay the groundwork for Sochio’s long-term user and revenue growth. [Foreign Language] In addition to ROI-oriented products, we launched a DAU-oriented product [indiscernible] 38.18 after the Chinese New Year.

[indiscernible] is a [indiscernible] based social app, which mainly targets GenZ and Gen Alpha users who prefer to share content with a few intimate friends. Users can document their daily lives in photo and video format and this content will be automatically pushed to the cellphone homepages of their predefined intimate friends on [indiscernible].

A product like [indiscernible], which supports more convenient real-time sharing of authentic life moments with their closes friend, is highly complementary to the Momo app in terms of feature and intended users.

As it accurately fulfills unique and untapped demands from GenZ and Gen alpha users, [indiscernible] delivered rapid growth in organic users and retention of this launch. We immediately stepped up our product iteration and marketing efforts.

At the moment, [indiscernible] has already reached a pretty sizeable user scale and is still showing strong growth momentum. We believe this is an app that will open the door to many future opportunities. It also marks the first milestone for the company in the area of new app development and a large deal base with a brand-new category of user demand.

This is a new front that we will continue to explore. In the second quarter, we have a plan to further escalate -- accelerate the product iteration and step up the marketing efforts around it to drive bigger growth.

[Foreign Language] Lastly, I'm pleased to announce that today our board approved a $200 million share repurchase plan during a 24-month period. This program will allow the company to significantly enhance shareholders' value, capitalizing on undervalued share price that obviously is failing to reflect the fundamentals of the company.

This share buyback plan demonstrates our long-term commitment to maximizing shareholders' value as well as management's confidence in the future of the business. [Foreign Language] This is what I'd like to cover today. Now I'll pass the call over to Mr. Jonathan Zhang for the financial review.

Jon, please?.

number one, lower marketing spend for new apps as a result of our focus on cost reduction and efficiency improvement; number two, lower user acquisition investment on Tantan as we adopted a conservative marketing approach during the pandemic resurgence; number three, in Q4 last year, core Momo had a quarterly-specific branding expense item.

Non-GAAP G&A expenses was RMB 85.9 million for the first quarter 2022 compared to RMB 94.2 million for the same quarter last year, representing 2.7% of total net revenue, same in both periods. Same as in the R&D line, the decrease was mainly a result from optimization in personnel costs.

Non-GAAP operating income was RMB 460.6 million, a decrease of 30% from Q1 2021, representing 14.6% non-GAAP operating margin for the quarter, down 4.4% from the same period last year. Non-GAAP OpEx as a percentage of total revenue was 28.4%, an increase from 26.5% from Q1 last year.

The increase [Technical Difficulty] Going forward, we expect to continue to exercise cost discipline for the rest of the year in order to improve cost efficiencies in a difficult macro environment. Now briefly on income tax expenses.

The total income tax expense was RMB 150.8 million for the quarter compared to RMB 100.3 million for the same period last year. Effective tax rate for the quarter was 27.4%. In Q1, the company accrued withholding income tax of RMB 44 million, which is 10% of undistributed profit generated by our WOFE.

Without withholding income tax, our estimated non-GAAP effective tax rate was around 19% in the first quarter. Now turning to balance sheet and cash flow items.

As of March 31, 2022, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits and restricted cash totaled RMB 15.6 billion compared to RMB 15.71 billion as of December 31, 2021.

Excluding the RMB 140 million cash payment to Chinese tax authorities to repatriate RMB 1.4 billion from our WOFE in China for our offshore entity, net cash provided by operating activities in the first quarter 2022 was RMB 183 million compared to RMB 502 million in the first quarter 2021.

In addition, during the first quarter of 2022, we paid a greater portion of revenue share to the content providers accrued in the previous quarter. We made such payments during the same period in previous years.

It caused the operating cash flow from operating activities to decrease to a greater extent on a year-over-year basis than the non-GAAP net income of the company in Q1 '22.

Lastly, on business outlook, we estimated our second quarter revenue to come in the range from RMB 3.05 billion to RMB 3.15 billion, representing a decrease of 16.9% to 14.2% year-on-year or a decrease of 3.1% to an increase of 0.1% quarter-over-quarter.

For Q2, 2022 on a sequential basis, we expect the total revenue from core Momo to decline slightly due to negative impact on live streaming business from new regulation and live streaming rule out in May. Continued macro headwind and intensified COVID control measures, we expect the VAS best growth to partially offset the decline in live streaming.

The total revenue from Tantan is expected to decrease in mid-single digits due to the increased level of pressure from COVID control on Tantan's user and membership business. We expect Tantan's user and revenue to come back to the growth track after the large-scale lockdown is lifted and the dating sentiment improves.

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 the Q&A. Ashley, please..

Just a quick reminder before we take the questions. For those who can speak Chinese, please ask few questions in Chinese first, followed by English translation by yourself. Operator, we're ready for questions, please..

[Operator Instructions] Our first question comes from the line of Daniel Chen from JPMorgan..

[Foreign Language] I'll translate for myself. This is [Henry] speaking on behalf of Daniel Chen. I have two questions. The first one is about regulation. Can management share more color on the regulation impacts on your financials and the overall China live streaming industry? The second question is about Tantan user trend.

Can management comment about the Tantan user trend this year?.

[Foreign Language] With regards to regulations, the opinions on regulating keeping in live streaming and strengthening the protection of minors published in May, we should finalize the requirements on ranking systems as well as PK competition during evening peak hours that stimulate positive high spending behavior among users with relatively clear implementation guidelines and detailed rules.

That's blessing for the live streaming industry because it helps to level the playing field and ensure that the industry as a whole develops in a healthy and sustainable manner. In the month since the opinion was issued, our team -- operational adjustments.

In the coming weeks, we will follow up with and fine-tune our product plan in line with regulatory requirements. The new product plan officially took effect in early June so its impact on revenues will mainly be reflected in the second half of the year.

Our assessment of the revenue impact may not be accurate at the moment because we only have a few days of adjusted operating income from the late May that can be used as for reference.

However, according to our estimated -- our estimates are based on such limited data, the impact of the new product plan on the full year of live streaming revenue should be less than 10%, which is within a reasonably manageable range. [Foreign Language] So Tantan's user growth depends on both internal and external factors.

As for external factors, as previously mentioned, the new wave of COVID-19 started at the end of last year spread further since in during Q2. Consequently, related control measures continue to intensify, whereby the speed, the scope and extent of the escalation exceeded our expectations back in March.

Our data in April showed us the new user growth retention and paying conversion were largely affected in major pandemic regions where prevention and control measures were severe. This is very much consistent with the trend that we saw in early 2020.

Considering the decrease in retention and paying conversion which resulted in low ROI, we have decided to reduce Tantan's marketing budget in Q2. We will maintain this practice until the pandemic situation improves.

Currently, the pandemic in Beijing and Shanghai has been initially brought under control, but the containment measures are still relatively strict and it will take time for users' social sentiment to recover. However, we remain optimistic about the outlook in the second half. And hopefully, we'll see some substantial improvement by then.

Regarding internal factors, user growth is driven by both user acquisition and product offers. We have been making steady progress on those 2 fronts since the beginning of the year.

And that's why from a geographical perspective, MAU declined significantly in regions where severe pandemic and a high level of control measures whereas users showed an upward trend in areas that was not affected by the pandemic.

We plan to expand continuous efforts in improving retention and lay a solid foundation for steady user growth in the post-pandemic era. I think that answers your question..

Our next question comes from Thomas Chong from Jefferies..

[Foreign Language] My question is really about the overall macro and the consumption environment in China.

How should we think about the impact to live streaming and VAS as well as our -- for the full year revenue and the earnings assumptions?.

Thanks, Thomas and this is Jonathan. Let me try to address your question. First of all, in terms of revenues, let me begin with the live streaming business. In contrast to regulation, the macro uncertainties and spending softness has brought more severe challenges to the live streaming business. And this situation has become clearer in Q2 than in Q1.

Our Q2 guidance implies that Momo app live streaming business will see a year-on-year decline of high 20 percentage points.

Since the visibility of the macro environment in the second half is quite low at this moment, to be conservative, I suggest investors to use Q2 as a baseline to think about or to predict the situation in the second half of the year.

Strategically, we take active measures to enhance user experience and ensure stability of the supply side content ecosystem in the context of a year-over-year decline in revenue. Based on the situation in Q1, we are quite confident that in this regard. In that way, our live streaming business can recover as soon as the macro environment improves.

With respect to the VAS business, although VAS has discretionary consumption, is also being affected by the macro environment and the pandemic, it is more resilient to economic cycles compared with live streaming.

In addition, with the rapid growth of new apps, we expect the VAS revenue on ex-Tantan business can still achieve double-digit growth target set at the beginning of the year. Tantan has been more severely affected by pandemic-related lockdowns in the first half of the year than we expected at the beginning of the year.

Cooked with the demonetization process in the second half of 2021, the year-on-year increase in VAS revenue in the first half of the year will be relatively big, at somewhere between a high 20% to 30% range. Once the pandemic subsides, the revenue will resume its growth track as dating sentiment comes back and user numbers start to uptick.

However, we have to wait for the situation to improve before making specific estimates. Tantan's live streaming business is no longer our strategic focus. We will transform it into something that fits better with its social atmosphere. Lastly, I'd like to place emphasis on one crucial point in terms of revenue structure.

With the continuous sequential growth of VAS business at the group level, VAS revenue will reach or even exceed the scale of live streaming in the second half of the year. This is a stable and more resilient revenue structure which will make future development of the whole group's more balanced.

It is also a safer revenue structure for our shareholders. With respect to the gross margin, the biggest factor causing the margin fluctuation is our live streaming revenue-sharing ratio.

The revenue sharing ratio in Q1 was 2 percentage points lower than that in Q4 last year as we didn't host large-scale competition events which led to a decrease in bonus-related revenue sharing cost.

On a year-over-year basis, the revenue sharing ratio was up 2% as a result of our smaller scale events we hosted helped agencies to navigate through the challenging environment.

As we continue to invest in this kind of event throughout the year, the overall impact of the revenue sharing ratio of live streaming on gross margin will be around 2% for the whole year.

However, due to the continuous increase in revenue contribution from VAS, which bears a relatively higher margin from the gross profit on the bill, the shift in revenue mix is conducive to improve in gross margin. Therefore, for 2022, at the group level, the gross profit margin decline should be between 1% to 2%.

On the cost and expense side, we have been optimizing Momo's costs and expenses. The marketing expenses for Momo app will remain stable compared with last year.

However, given the development of new apps, especially for [indiscernible], which is currently showing strong growth momentum with outstanding performance in various indicators, including unit acquisition costs, user retention and engagement, we will step up our marketing efforts in the coming quarters and its MAU will continue to deliver rapid growth.

Although the marketing expenses of new apps have increased, thanks to cost optimization of Momo app, we expect that our operating margin and ex-Tantan basis will still be around high teens percent to 20%. For Tantan, we expect its net loss to be between RMB 500 million to RMB 600 million..

Okay. Maybe in the interest of time, let's just take one last question, operator. Next one, please..

Our last question comes from Leo Chiang from Deutsche Bank..

[Foreign Language] My question is about the new adds in Tantan overseas.

As these 2 new business gradually become our new growth drivers, can management share with us the longer-term potential of these 2 initiatives and the difference of user spending behaviors between the new initiative and our elder business?.

[Foreign Language] Thank you for your questions. We have different methodologies and expectations when managing ROI-oriented and DAU-oriented apps. For ROI-oriented apps, which include [indiscernible], Sochio and [indiscernible], strategically, these apps focus on profitable growth and scaling back from nonprofitable users and revenue growth.

We plan to achieve this goal by improving ARPU, reducing user acquisition cost and the revenue sharing ratio. Total revenues from the bucket of new apps was slightly over RMB 300 million last year.

And this year, revenue is expected to be somewhere between RMB 700 million to RMB 800 million, while the net loss continues to narrow and the profitable trend as a whole is starting to emerge. For DAU-oriented apps, [indiscernible], our main goal this year is to deliver rapid product and user growth with no revenue planned for now.

And for Tantan overseas business, our main goal is to improve our ARPPU in developing regions by leveraging our non-subscription monetization model while reducing user appreciation costs in order to pursue profitable growth. Our first pilot was Indonesia market.

And so over the past 6 months period of time, user scale in Indonesian market grew 27% and the ARPPU doubled with revenue growth 2.5x. So basically, in order to ensure profit and avoid multifront operations with limited resources, we started to reduce investment in loss-making markets with low ROI, such as Japan and South Korea.

And although revenue from these markets declined accordingly, the revenue from the overseas market as a whole will still grow. And at the same time, profitability has also improved substantially. Our strategy is to initially replicate the Indonesia model in Asia and then focus our resources to develop appearance in other regions..

I think this is going to be the end of the conference. So thank you guys for participating, and we will see you next quarter. Back to you operator..

Thank you. So with that, we conclude our conference for today. Thank you for participating. You may now disconnect..