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

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

Peng Hui, CFO of the company, who 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 related events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are 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 or 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'll now pass the call to Mr. Wang, I'll translate for him. Mr. Wang..

first, the continuous improvement of algorithm; second, building a product model that is more suitable for Asian culture than the swipe and match mechanism through product innovation. In the past 6 months, the improvement of algorithm and the initial success of the chat room experience have given us opportunities to tackle these issues.

This will be the direction we continue to focus on going forward. [Foreign Language] Next, I will review the progress we made with our new endeavours. As I mentioned on our previous calls, we undertake different approaches to managing ROI-oriented and DAU-oriented new products.

In the second quarter, the total revenue of the profit-driven ROI-oriented standalone app was RMB 199 million, up 184% year-over-year and 24% quarter-over-quarter.

As the product experience of these apps gradually stabilized, we started adopting an operational strategy to reduce costs and improve efficiency in the second half of last year, and stepped up monetization efforts to improve paying conversion and ARPU.

With the continued expansion of revenue scale and branding influence, we have had enough leverage to lower the payout ratio, thereby improving profitability. Our overseas social app expanded into new regions on top of deepened operation in established markets.

We continue to improve user acquisition efficiency and user base expanded rapidly with a flattish budget. Revenue growth of the overseas app accelerated from the previous quarter, while achieving full quarter profitability. In Q2, ROI-oriented standalone apps as a whole have started to contribute positively to the group's bottom line.

We expect these products that target vertical user groups in each markets to simultaneously pursue steady growth and ensure profitability this year. On the product front, we will continue to explore innovative features suitable for new markets to pave the way for long-term growth.

[Foreign Language] In addition to ROI-oriented products, I introduced our new DAU-oriented product Tietie, on our last conference call. is a picture and video-based social app for users to interact with intimate friends and family members through documenting the daily lives in photo and video format.

This company is automatically pushed to the mobile phone homepage of the predefined intimate friends on Tietie so that users can think with authentic life status of their Tietie friends without loading up the app. This product accurately captures the demand of Gen Z and Gen Alpha like to express their in a fun way with amusing selfies.

Such needs cannot be well satisfied on the existing large and ubiquity social media platform, where everybody is watching, and therefore, you need to worry about your perceived image. Therefore, Tietie’s organic user base grew rapidly since its launch of the Chinese New Year.

Following that, our team stepped up marketing efforts in the second quarter and user scale increased rapidly, while unit costs remained within a controllable range and retention maintained a high level. Meanwhile, user scale has reached a very considerable point.

The growth rate and overall user scale that Tietie has delivered is an achievement well-received in today’s consumer Internet market. This was also the first time that we have made a breakthrough in DAU-oriented social app after our exploration over the past few years.

We believe this is a reward for accurately capturing the new social preferences of younger generations. In the third quarter, our team will accelerate product iteration to enrich features and functionalities.

We will introduce more [and more brand] and Chinese pop features and interactive mechanism to enhance product experience and retention and encourage users to share the Tietie content by other social media apps, thereby expanding our branding influence.

The initial success of Tietie shows that, while in the long run, new opportunities for social model and experience mainly depend on technological breakthroughs. Generational transition can still bring new opportunities to the social industry for large DAU products before user’s screen time shifts from mobile to elsewhere.

Our strength and long-standing leadership in the social space is the advantage we can leverage to discover new markets and tap the new opportunities. Going forward, will move in a bolder and more determined way to expand our territory and explore deeper in our vertical markets. [Foreign Language] This is what I would like to cover today.

Now I'll pass the call over to Cathy for financial review. Cathy, please..

Thanks, Wang and Ashley. Hello, everyone. Thank you for joining our conference call today. Now let me briefly take you through the financial review. Total revenue for the second quarter of 2022 was RMB 3.11 billion, down 15% year-on-year and 1% quarter-on-quarter.

Non-GAAP net income attributable to the company was RMB 463.5 million compared to RMB 551.0 million from the same period of 2021 or a 16% decrease year-over-year. Looking into the key revenue line items for the quarter. Firstly, on live broadcasting.

Total revenue from live broadcasting business for the second quarter 2022 was RMB 1.52 billion, down 28% year-over-year and 6% quarter-on-quarter. Core Momo's live broadcasting revenue totaled RMB 1.40 billion for the second quarter, down 26% year-on-year and 5% quarter-over-quarter.

The decrease was mainly due to pressure caused by the consumption softness and regulatory changes. Tantan’s live broadcasting revenue amounted to RMB 116.4 million, down 46% from Q2 last year and 7% from the previous quarter. The decrease was due to our strategic decision to deemphasize live streaming as a supplementary experience to dating.

A few months ago, we made a decision to reform Tantan’s live streaming business to lean more towards facilitating social interactions rather than the traditional show biz. Based on the data that we've seen so far, such strategy is bearing fruit.

Therefore, we expect content live streaming to exit the period of decline and stabilize at the current level as we head into the second half. Revenue from value-added service reached RMB 1.54 billion, up 2% year-on-year and 4% quarter-over-quarter.

Revenue from value-added service on an ex-Tantan basis reached RMB 1.32 billion in the second quarter of 2022, a 9% increase year-over-year and 5% increase sequentially. The growth in value-added service on an ex-Tantan basis was primarily driven by incremental revenue contributed by the fast-growing new applications.

Tantan's value-added service revenue amounted to RMB 214.4 million, down 28% from Q2 last year and 4% from the previous quarter.

The year-on-year decrease was due to the demonetization process to improve user experience and retention in the latter half of 2021 as well as the pressure on Tantan's MAUs and paying conversion caused by the COVID resurgence. The sequential decrease in Tantan's value-added service was largely attributable to the latter factor.

Non-GAAP cost of revenue for the second quarter of 2022 was RMB 1.79 billion, compared to RMB 2.05 billion for the same period last year. Non-GAAP gross margin for the quarter was 42.5%, down 1.7 percentage points from a year ago.

The decrease was mainly attributable to the higher payout ratio to the content providers as we put more money back to the system for helping agencies as well as broadcasters navigate through the tough time. On a sequential basis, non-GAAP gross margin remained stable with a slight uptick.

Non-GAAP R&D expenses for the second quarter was RMB 214.3 million compared to RMB 232.9 million for the same period last year or an 8% decrease year-over-year, which was due to continuous optimization in personnel costs since the beginning of the year.

We ended the quarter with 1,825 total employees, of which 516 are from Tantan, compared to 2,092 total employees, of which 617 from Tantan a year ago. The R&D personnel as a percentage of total employees for the group was 61% compared with 57% Q2 last year.

Non-GAAP sales and marketing expenses for the second quarter was RMB 600.1 million compared to RMB 619.5 million for the same period last year. As Wang Li mentioned, improving marketing efficiency has been one of the top operational priorities of the company.

Since the beginning of the year, we've been cutting down on low efficiency in marketing plans across different business lines, which grows negative ROI. For the second quarter, marketing spend for Momo and Tantan decreased RMB 74 million or 15% from the same period last year.

We shifted part of the savings to promote the new application Tietie following its initial success in Q1. Reallocating resources from low ROI to higher ROI ones will continue to be an important strategy for us for the coming few quarters. On a sequential basis, non-GAAP sales and marketing increased 4% from RMB 578.0 million in Q1 this year.

The increase was primarily due to Tietie’s marketing, partially offset by the reduction in other low efficiency marketing channels. Non-GAAP G&A expenses was RMB 82.6 million for the second quarter of 2022 compared to RMB 78.8 million for the same period last year.

Non-GAAP operating income was RMB 464.1 million, a decrease of 41% from Q2 2021, but up 1% from the previous quarter. Non-GAAP operating margin for the quarter was 15%, down 6 percentage points from the same period last year. Non-GAAP operating expenses as a percentage of total revenue was 29%, an increase from 25% from Q2 2021.

The increase was mainly due to the negative operating leverage resulted from the decrease in revenues. Non-GAAP operating expenses decreased 4% year-over-year due to the cost control we've been exercising since the beginning of the year.

We expect to continue to exercise cost discipline for the rest of the year in order to improve cost efficiency to navigate through the uncertain macro environment. Now, briefly on below the line items.

During the second quarter, the company repurchased $161.8 million aggregate principal amount of our convertible senior notes from certain bondholders for an aggregate repurchase price of approximately $161.6 million. [CB rate] 00:48:50 purchase resulted in a gain of RMB 66.3 million. Now briefly on income tax expenses.

Total income tax expense was RMB 146.0 million for the quarter with an effective tax rate of 24.5%. In Q2, the company accrued withholding income tax of RMB 37.7 million, which is 10% of undistributed profits generated by our WFOE. Without withholding tax, our estimated non-GAAP effective tax rate was around 18% in the second quarter.

Now turning to balance sheet and cash flow items. As of June 30, 2022, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits and restricted cash totaled RMB 13.95 billion compared to RMB 15.71 billion as of December 31, 2021.

In Q2, we paid an equivalent of RMB 841 million cash dividend to our shareholders and repurchased an equivalent of RMB 1 billion of the company's convertible notes.

Excluding the RMB 100 million cash payment to Chinese tax authorities to repatriate RMB 1 billion from our WFOE in China, our offshore entity, net cash provided by operating activities in the second quarter of 2022 was RMB 300 million. Lastly, on business outlook.

We estimated our third quarter revenue to come in the range from RMB 3.1 billion to RMB 3.2 billion, representing a decrease of 17.5% to 14.9% year-on-year, or a decrease of 0.3% to an increase of 2.9% quarter-over-quarter.

For Q3 2022 on a sequential basis, we expect -- we expect the total revenue from the core Momo to increase low single digits driven by the recovery of live streaming business, thanks to the product and operational efforts of the team. On the Tantan side, we expect revenue to be flattish towards a slight decrease on a sequential basis.

Tantan's membership revenue decreased quarter-over-quarter due to the temporary decline in user base as we cut down on the low efficiency marketing channels. The decrease will be offset by the sequential growth of live streaming driven by the initial success in the shift of strategy as mentioned in the earlier part of my remarks.

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

Ashley, please?.

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

[Operator Instructions] Our first question comes from Thomas Chong from Jefferies..

[Foreign Language] My first question is on Tantan.

Can management comment about the user trend in second half as well as related revenue as well as bottom line? And my second question is about the development of our new apps as well as our overseas strategies?.

[Foreign Language] On the last conference call, I mentioned that Tantan's user growth depends on 2 factors. One is an internal factor, which is the enhancement of user experience and the improvement of channel efficiency driven by product efforts.

And the second factor is about external reasons, namely the extent of COVID control policy and related users’ offline dating sentiment.

[Foreign Language] As for internal factors, our biggest progress made after the management changes last year, was that we determined that the key in enhancing user experience and improving channel efficiency is to improve retention of female users and those without qualified photos.

And we have found an initial solutions through algorithm and new product features. We will continue to make steady progress in this regard, and I have full confidence in this aspect.

[Foreign Language] In terms of external factors, the continuous resurgence of COVID in various regions in China and its related control measures has brought about quite a bit of challenges. In addition, there are still many uncertainties in the overall macro environment.

Consequently, we've decided to adopt a strategy to reduce marketing investment control cost and improve efficiency.

Our plan is to reduce spending in low efficiency channels, while improving retention of female users and those without qualified photos as well as driving ARPU growth with the new chat room experience in order to turn Tantan channel ROI positive as soon as possible, so that we can pursue profit book growth based on a positive business cycle.

And based on the current test data on the reduction of channel investment and the chat room experience, we believe we are very much likely to achieve this goal next year. [Foreign Language] I will leave it to Cathy for the financial outlook..

Okay, sure. Let me give you guys more color on the top line and also the bottom line of Tantan. Firstly, on the revenues, it seems like the zero COVID policy is going to sustain for a while. Actually, the recent few days are seeing a new round of tightening lockdowns in some of the big cities due to the resurgence in confirmed cases.

And as you guys know, Tantan's users are pretty concentrated in bigger, wealthier cities in China. This is obviously going to have a negative impact on the dating sentiment and paying conversion, which would continue to pressure the marketing ROI.

As Wang Li mentioned in -- earlier in his speech, under the principle to prioritize growth with profit over growth at cost, we are prepared to cut down the marketing cost in order to take care of the ROI and bottom line. As we cut low efficiency channel marketing in the second half, we should expect user count to trend down.

As Wang Li said, I think around 20% from the June level, plus/minus 5% and then perhaps hit a bounce point around there. The plus/minus 5% really depends on how the COVID factor spins in the second half of the year.

Subscription revenue should decrease as the user count does, probably with a time lag because of the deferrals, but it should ultimately catch up through the same magnitude of user decline.

However, we do see a countering factor here for Tantan and that is that as the year progresses, we expect the ramp-up of non-subscription revenues to materialize and offset part of the decrease in subscription as a result of the cost cutting.

So if you piece all these different, pretty dynamic factors together, I would say that for Tantan, revenue would trend down a little bit in the second half versus the first, but it would be a slight trend down before it picks up again.

The other thing I would like to sort of reiterate here a little bit is that despite the small sacrifice on the top line as we cut down the low efficiency marketing channels in the back half of the year, bottom line should see pretty significant improvement from Q2 onwards for Tantan.

I think in earlier part of Wang Li's prepared remarks, we mentioned that we expect Q3, the non-GAAP net loss for Tantan to narrow to within RMB 50 million.

I think for Q4, excluding some of the Q4 specific expenses such as double pay and bonus at the end of the year, we should continue to see -- we should continue to see a narrow now in Tantan's net loss on a monthly basis. So that's the overall sort of financial picture of Tantan in the back half of the year.

Given where we are in terms of zero COVID policy and given the macro uncertainties, we believe it's definitely a wise choice for Tantan to perhaps sacrifice some top line growth short term wise, so we can get into a positive business cycle and grow with profit down the path. I hope that answers your question..

[Foreign Language] I've been pretty comprehensive about the new business in my prepared remarks. Here, I can briefly discuss Tantan's overseas development.

And since we made our way into the overseas market about a year ago, we have been adopting an ROI oriented management approach and striving to achieve profitable growth, thereby overcoming the previous predicament of growth without profit or profit without growth. [Foreign Language] Our execution plan consists of 3 parts.

First, the original live streaming and non-membership VAS monetization model to significantly increase ARPU and ROI in the Indonesian market. Currently, our team is working on replicating this business model in other markets.

Second, adopting a strategy that focuses on reducing costs and improving efficiency, we are reducing channel investments in markets such as Japan and South Korea with a low ROI and redeploying our limited budget to regions with higher profit potentials; and third, lowering the payout ratio to increase profit level in markets with larger scale revenue.

We believe that in the second half of the year, investors will see a clear growth trajectory in Tantan's overseas business on the back of a positive business cycle. I hope that answers your question, Thomas. .

Operator, we're ready for the next question..

Our next question comes from Daniel Chen from JPMorgan..

[Foreign Language] This is Henry speaking on behalf of Daniel.

My question is about core Momo, can management share more color on the second half revenue expectation for live streaming or VAS?.

Sure. Let me take these 2 different lines 1 by 1 because they have -- I think they have very different dynamics behind them. For Momo's live streaming business, June and August have been tracking better than what we thought 3 months ago, and obviously, that has been reflected in our Q3 guidance. Originally, we thought Q3 would see a down tick from Q2.

But now it looks like we can expect an upward quarter on a sequential basis for Momo live streaming. I would say that at this point, it's still too early to call that we've exited the period of uncertainties for live streaming.

But based on what we're seeing on the macro and regulatory front, we have some reasons to remain cautiously optimistic about the stability of the live streaming business for the rest of the year. So that's for live streaming. For value added service on an ex-Tantan basis because we've already explained Tantan earlier.

For VAS ex-Tantan, we are also trying to optimize the marketing costs so that the new applications can achieve higher quality growth, which means -- by higher quality growth I actually mean growth with higher profit margins. That means that we may also cut down marketing spend for new applications if the ROI of certain channels isn't good enough.

In addition, the continuing zero COVID policy and the lingering outbreaks in different geo regions continue to weigh on the social sentiment, which could limit the growth pace of value-added services on the main application as well.

Previously, I think we communicated with investors that for VAS on an ex-Tantan basis, we expect it to grow double digits on a year-over-year basis.

Now due to the aforementioned factors, one being the optimization of marketing cost for the new applications and the other one being COVID lingering into Q4, we would allow that previous double-digit growth target to slow a couple of percentage points to maybe high single-digit range.

But overall, I would say that value-added service continue to be a pretty healthy growth engine for Momo for the back half of the year. So that's separately for Momo live streaming and value added service. I think in the interest of time, maybe let's just take 1 more question before we call it a day.

Ready for the next question, operator?.

The next question comes from Leo Chiang from Deutsche Bank..

[Foreign Language] My question is regarding to core Momo margin trend in the second half. What should we expect for core Momo's gross margin and OP margin, given the ongoing cost control initiative..

Yes. I guess, if there is reviewing core Momo maybe what I'll do is just go through the cost and expenses at the company level with some more color on Momo.

I think gross margin wise, as you guys can see in the numbers that we put out earlier today, we've been able to maintain a pretty stable trend during the first half of the year for the gross margin -- non-GAAP gross margin line.

Now it looks like for the core Momo business Q3 should continue to be relatively stable as the content supply system remains pretty solid. Q4 could -- I don't have full visibility into Q4, but I think Q4 could dip a little bit due to the year-end promotional events.

But that should be rather a one-off for the year end [indiscernible] and we do it every year in Q4. Tantan's gross margin in the second half will see some decrease from first half level as the subscription revenue trends down and revenue from non-subscription service starts ramping up.

With regards to operating expenses, we've been optimizing the key line items, including marketing, personnel and infrastructures, and we'll continue to do so as we look out into Q4 and next year. I guess, the biggest cost saving in OpEx in the second half will come from Tantan as we gradually cut all of the low efficiency channels.

And the other thing worth calling out here for operating expenses is that cutting marketing cost doesn't necessarily mean that we're sacrificing future growth opportunities as a -- sort of a defensive play in a tough macro environment, what we are really doing here is cutting down on the low ROI marketing plans and reallocating part of the savings to where marketing dollars could generate much higher yields.

For example, we increased marketing spend quite substantially on Tietie in Q2, and we'll keep spending if retention continues to be satisfactory for this new fast-growing application. But such spending will be absorbed by cost cutting other -- by cutting down other less efficient marketing plans.

So overall marketing will still see pretty significant decrease in the back half of the year. So to sum up, although at this point, it's sort of impossible to be very prescriptive about the bottom line for the second half of the year, but I think on an ex-Tantan basis, 2022 is still on track to deliver a non-GAAP operating margin north of 20%.

And for Tantan due to the focus on growth with profits, we expect net loss to shrink down to less than RMB 100 million for the second half of the year. Hopefully, that answers your question..

Okay. I think this is going to be the end of the Q&A session. Thank you for joining us today, and we will see you next quarter. Ready to close. Thank you, operator..

This concludes our conference for today. Thank you for participating. You may now disconnect..