Western Digital Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 6, 2023

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2023 HELLO Group Inc. Earnings Conference Call. Please note, the conference is being recorded today. I would now like to hand the conference over to your first speaker today, Ms. Ashley Jing.

Operator

Thank you. Please go ahead, ma'am.

Speaker 1

Thank you, operator. Good morning and good evening, everyone. Thank you for joining us today for Hello Group's The company's results were released earlier today and are available on the company's IR website. On the call today are Mr. Chang Yan, CEO of the company and Ms.

Speaker 1

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 both be available to answer your questions during the Q and 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.

Speaker 1

Further information regarding this and other risks, uncertainties Some 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'll now pass the call over to our CEO, Mr.

Speaker 1

Tang Yan. Hello, everyone. Thank you for joining our call. We delivered solid results in the Q1, laying a good foundation for our business development in the post pandemic era. Now, I'll review the progress we've made in each business line since the beginning of the year and our future development plans.

Speaker 1

I will start with a brief overview of our financial performance. For the Q1 of 2023, Total group revenue was RMB2.82 billion, down 10% from the same period last year and 12% sequentially. Top line performance came in better than our expectations as the year on year decline in revenue narrowed compared to the previous quarter. Adjusted operating income was RMB518 1,000,000, up 12% from Q1 last year and 4% sequentially, with a margin of 18%, up 4 percentage point year on year and 3 percentage quarter over quarter. Profitability improved despite the downward pressure on top line, mainly due to Tantan's breakeven, which relieve pressure on the group's profit level as well as the solid cost control on the cash cow business front.

Speaker 1

Total revenue from the Momo app and standalone new apps was RMB2.51 billion, down 10% year over year and 12% quarter over quarter. The adjusted operating income was RMB503 1,000,000, down 19% year over year or a slight decrease of 2% from the previous quarter, with a margin of 20%. Total revenue from Tantan came in at RMB309 1,000,000, down 12% year over year and 11% quarter over quarter In response to the many uncertainties surrounding the pandemic and its impact on the economy, we initiated a cost control strategy in the second half of last year to reduce low efficiency channel marketing spend in order to narrow Tantan's net loss. As a result, In Q1, Tantan delivered its 1st quarterly profit at the operating level since its inception, with an adjusted operating income of RMB14.48 million, representing a margin of 5%, compared with an adjusted operating loss of RMB158 1,000,000 in the same period of last year. I'm very pleased with Tantan's team's ability to execute and improve cost efficiency over the past few quarters.

Speaker 1

At the end of last year, we completed the alignment of our overall organizational structure and divided Momo, Tantan and the new endeavors into 3 relatively independent business segments. This lifecycle based management approach makes it easier for us to devise and execute different strategic priorities for products at different stage of their respective lifecycle, allowing our product teams to On the March earnings call, I outlined our strategic priorities for 2023 across our businesses. For the mature Momo app, our goal is to keep the user and revenue scale stable, continue to optimize cost structure and maintain the productivity of the cash cow business. For Tantan, our goal is to achieve overall breakeven for the year and develop products and modernization models that are suitable for the Asian dating culture in order to pursue sustainable growth on the back of a positive dating cycle. With respect to new products, we will enrich our product portfolio, push the boundaries beyond Momo and Tantan and develop long term growth engines.

Speaker 1

Now I'll walk you through the details. For the mature Momo app, in order to ensure that the cash cow business remains stable, we must optimize product operation and introduce new monetization features as well as improved cash utilization and personnel efficiency. Almost better than expected financial performance in the Q1 is a good demonstration of our team's execution of these capabilities on those strategic priorities. Although revenue from the Momo app declined year on year Due to multiple external pressures, new stand alone apps continued their rapid growth momentum, partially offsetting the pressure on HOMO app. The incremental revenue contributed by the new standalone apps to Momo's value added service line resulted in an increase in the revenue ratio of live streaming from an average of 87% last year to 93% in the Q1, which further optimized our revenue structure.

Speaker 1

In the Q1, Momo's live streaming revenue was rmb1.29 billion, down 13% year over year and 17% sequentially. The year over year decrease was mainly due to the pandemic and product adjustments to complying with regulatory requirements in the Q2 last year. The quarter over quarter decline was due to the severe impact of COVID infection surge on the supply side at the end of last year, coupled with negative Chinese New Year seasonality. The financial performance of the live streaming business in Q1 turned out to be better than expected, With the lower sequential revenue decline than in the same period last year, mainly due to incremental revenue from operational events and a rebound in organic revenue brought about by product upgrades. In order to stimulate supply side recovery, We offered incentives to broadcasters to resume the live shows.

Speaker 1

The related incremental costs were offset by the reduction in competition event costs. The revenue sharing ratio in the Q1 was relatively stable compared to the previous quarter. By March, the supply side had almost recovered to its level before the COVID infection spike at the end of last year. In the Q3, VAS revenue excluding Tantan totaled RMB1.19 billion, down 5% year over year and 6% sequentially. VASP revenue from the Momo app totaled RMB969 1,000,000, down 14% year over year and 7% quarter over quarter, while revenue from the standalone app was RMB225 1,000,000, up 66% year over year and flat sequentially.

Speaker 1

The decline in Momo VAS was mainly due to the severe impact of COVID on traffic and users' propensity to pay for VAS combined with negative seasonality. In order to To mitigate the negative impact of external factors on the paying user account and ARPPU, we launched the same events around the Chinese New Year holiday in our traditional virtual gifting social use cases and try to maintain a stable revenue scale in the off season. In audio and video based social entertainment experiences, We optimized the supply side to bring revenue back to a growth track soon after the Chinese New Year. In late March, We introduced a new multiplayer interactive feature in the chat room and the initial data shows that it has a notable effect on improving ARPPU. In terms of our user base and operating metrics, After the removal of the 0 COVID policy in December last year, MAU was severely hit by the large scale infection surge over a short period of time.

Speaker 1

After COVID cases peaked in January, MAUs in various regions gradually picked up, but the recovery was negatively impacted by Chinese New Year. During the holiday, MAUs fell to an all time low for the same period. However, MAUs and user engagement rebounded rapidly after the holiday And the extent and duration of the recovery were better than previous years and the short recovery period before the holiday. In March, MAUs increased 13% sequentially to $106,500,000 close to the level in September last year. Channel marketing unit acquisition cost decreased by nearly 10% from a year ago.

Speaker 1

Thanks to our continuous efforts to optimize user strategy to enhance efficiency, which enabled us to obtain a relatively stable user scale with lower investment in channels. The improvement in capital utilization efficiency has played a positive role in holding up Momo's overall profit level. In Q1, Momo had 7,800,000 paying users, flat sequentially. The COVID spike at the and the Chinese New Year holiday had a severe negative impact, particularly on the demand from long tail WAF users. After the holiday, people's lives returned to normal and users consumption sentiment also began to recover.

Speaker 1

However, the relatively large decrease in the number of paying users in the first half of the quarter Drag down the average for the entire quarter. In terms of various users engagement metrics, The trends in users engagement and retention at the beginning of the year is consistent with that of MAUs. After entering the rebound period, Use cases with strong LBS attributes, which were hit hard by the pandemic, recovered particularly well. As a mature quarter with more than a decade of history, Momo earlier has experienced a period However, our current strategic priority is to control cost and maintain stability of the user scale. Our overall strategy for this cash cow in 2023 is to focus on ROI, reducing investments in low LTV channels to drive Profitable growth rather than blindly chasing unprofitable user growth.

Speaker 1

Consequently, in comparison with PayNews account, MAU will no longer be the most meaningful operational metrics for investors and thus does not need to be tracked on a quarterly basis. Therefore, we have decided to stop disclosing MAU data on a quarterly basis from Q2 onwards, unless there are significant changes in our user base. We suggest that investors focus on the trend in paying user when looking at Momo's user Now let's review Tantan's performance. At the beginning of the year, our user base was severely affected by internal and external factors such as the pandemic, Chinese New Year and the continued reduction in channel investment. Traffic started to recover gradually after the Chinese New Year.

Speaker 1

In March, MAUs increased 6% sequentially to $19,500,000 The growth was mainly due to the continued recovery in organic traffic after the Internal crashes eased off. In terms of stream, as user's dating sentiment came back rapidly, we've been seeing an outbreak in spending activities on Tantan, threatening the health of the dating ecosystem. Therefore, we've launched a heavy fisted anti spam campaign, which has caused the users count to go down from the March level. However, overall speaking, We believe that the past more than 3 years downward trend in MAU caused by the pandemic and scale back in marketing has gradually bottomed out. We may see some small fluctuations from the current level.

Speaker 1

But overall speaking, if marketing spend stays at the Q1 level, Our user base should remain stable around 18,000,000. Our next step plan is to further improve channel efficiency while increasing ARPU and retention through product innovation in order to sustainably improve ROI and drive Tantan into a stable positive business cycle and pursue user growth from that. As of the end of Q1, Tantan's paying user count was 1,600,000, a decrease of $100,000 from the previous quarter, mainly due to the pandemic and Chinese New Year, which led to soft consumer demand in the first half of the quarter. Now, I'll briefly review Tantan's financial performance. Total revenue for the Q1 was RMB309 million, down 12% year over year and 11% sequentially.

Speaker 1

Although the pandemic and reduction in channel investments caused a significant year over year decline in MAU and paying users by 24% and 33%, respectively, The increase in ARPU brought about by product and paying experience upgrades have partially offset the impact of the decline in the paying user count on revenue. The sequential decline in revenue was due to the suppressed user demand caused by the COVID infection surge at the beginning of the year and Chinese New Year. Both the number of Ping users and ARPU declined compared with Q4 last year. VAS revenue was RMB168 million, down 9% sequentially. Live streaming revenue was RMB140 million, Down 14% quarter over quarter.

Speaker 1

However, it's good to see that our efforts to reduce cost and increase ROI are paying off. The efficiency of capital utilization in terms of personnel and marketing was substantially improved And unit acquisition costs continued to decrease significantly with the improvement in capital utilization efficiency and further optimization in channel investments, Even though revenue fell temporarily due to external factors, Tantan achieved its 1st ever quarterly profit at the operating level, a good start to achieving strategic goal for the year. For Tantan, our strategic goal is to achieve breakeven for the year and develop product and monetization models that are suitable for the Asian dating culture in order to pursue sustainable growth on the back of a positive business cycle. To achieve this, we will be pursuing hard on both marketing and product fronts. Now, let me brief you on the specific work our team has done in these areas and our execution plan going forward.

Speaker 1

Firstly, on the channel front, one of our strategic priorities in the second half of last year was to cut down investments in low ROI marketing channels and improve user acquisition efficiency. This was the key factor for Tantan to achieve operating profit this quarter. Given the multiple external challenges at the beginning of the year, which had a significant impact on the user's dating sentiment and willingness to pay. We further reduced Tantan's channel marketing spend and focus our efforts on refining our operations such as adjusting channel strategies to reach high quality users more efficiently and optimizing our onboarding experience to lower entry level barrier for new users. Our data shows that this new initiatives have contributed to the improvement in DAU.

Speaker 1

In the Q1, unit acquisition costs decreased significantly both year on year and sequentially. Channel ROI improved significantly after the low point in December last year and formed a self sustaining cycle. MAU also stabilized after a period of decline. In other words, Tantan has become a sustainably profitable business based on its current user base. However, our expectations for Momo goes far beyond this, despite the strategic adjustments we have made over the past year.

Speaker 1

Tantan's long term goal remains unchanged as we face a big market that consists of 100 of millions of users with genuine dating demand that are currently underserved. At its peak, Tantan's user base was almost half the size of Momo's. However, in recent years, due to the impact of COVID and our overly conservative product development strategy, Tantan's user base declined substantially. The whole point of adjusting our strategic goal is to resume Tantan's user and revenue growth without incurring losses. In the Q1, we achieved the first step of our strategic goal, which is to achieve breakeven.

Speaker 1

The next step for us is to address the under deserved user needs through product innovations and leverage new product experience to improve ARPU and drive user and revenue growth. This is what we mean by driving sustainable growth on the back of a positive business cycle. We have clarified 2 important directions on this front. 1st, for user products, we need to create social experiences beyond the swipe and match features. 2nd, for commercial products, we need to introduce new bus paying models with more flexibility to improve ARPU.

Speaker 1

In the Q1, we tried to prioritize diverting users who are reluctant to swipe to contemplate the use cases, such as the post. This helps those who are not very good at talking to strangers out of nowhere to get more timely interactive opportunities By commenting on posts, thereby increasing the positive social feedback in terms of monetization, We believe there is a lot of room for ARPU improvement, but we don't think ARPU growth should come from building excessive paywalls for memberships or live streaming as we did a couple of years ago. Since last year, we have taken a new approach to monetization that can Yihang's dating experience. In January, we upgraded our and repriced our high end Black Gold membership service, which we launched at the end of last year. Since then, we've attracted a group of high paying users that we couldn't reach before.

Speaker 1

The adjustment of the Black Own membership service drove our ARPU to a record high during the Chinese New Year holiday period, which normally is a low season for our business and supported our daily revenue against the seasonality, which is incremental revenue. In terms of non membership VAS features, we continued to increase the penetration ratio of our chat room experience through continued product refinement. If the Blackbaud membership service, chat room and other new VAS products can deliver significant ARPU growth and effectively improve channel ROI, Then we will invest our profit in user acquisition to drive further user growth and revenue. Lastly, I will review the progress we've made against our strategic priorities of enriching product portfolio and developing long term growth engines. Our plan for ROI oriented stand alone apps is to continue to scale our profit and to contribute additional incremental revenue and profit to the group.

Speaker 1

In the Q1, total revenue of the profit oriented stand alone apps was CNY228 1,000,000, up 42% year over year And flat sequentially, the deceleration in growth was mainly due to a slight quarter over quarter decline in revenue of the relatively mature domestic apps, which were negatively impacted by the pandemic and Chinese New Year. Overseas social app with The largest revenue scale and at the stage of rapid growth experienced a temporary revenue growth slowdown due to multiple short term negative Factors such as the reduction of social entertainment activities during Ramadan, the earthquake in Turkey and the devaluation of Egyptian currency. Our team responded quickly by adjusting marketing plans to reduce operating expenses in order to protect profitability. We've also shifted market focus to countries that are less affected by the above mentioned factors. The proportion of revenue from these markets increased steadily, while channel ROI trended upward, laying a good foundation for Revenue and profit growth this year.

Speaker 1

With continuous product iteration and cost optimization, we expect both domestic and overseas apps to contribute more incremental profit to the group this year. This concludes my remarks. Now let me pass the call over to Kathy for financial review.

Speaker 2

Thanks, Tanjong 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 Q1 of 20 RMB23 came in better than our previous expectation at RMB2.82 billion, down 10% year on year and 12% quarter on quarter.

Speaker 2

Non GAAP net income attributable to the company was RMB471.9 million, up 18% from the year ago period despite the top line decrease were down 3% from the previous quarter. The better than expected bottom line performance was attributable to our continuous cost efforts, which led to Tantan's breakeven and improvement in Momo's profitability. Looking into the key revenue line items for the quarter. Firstly, on the live broadcasting. Total revenue from live broadcasting business for the Q1 of 2023 was RMB1.43 billion, down 11% year on year and 17% quarter over quarter.

Speaker 2

Momo app live broadcasting revenue totaled RMB29 1,000,000,000 for the quarter, down 13% year over year and 17% quarter over quarter. The year over year decrease was due to the pressure caused by the COVID infection surge and regulatory factors. The sequential decrease was mainly due to COVID coupled with negative seasonality. Tantan's live broadcasting revenue amounted to RMB 139 point of rmb6 million, up 12% from Q1 last year, but down 14% from the previous quarter. The year over year growth was mainly due to a low base in Q1 2022 when we adopted a demonetization strategy to focus on user experience and retention.

Speaker 2

The sequential decrease was due to the pandemic and negative seasonality. Revenue from value added service for the Q1 of quarter of 2023 was rmb1.36 billion, down 8% from Q1 last year and 6% sequentially. Revenue from value added service on an ex Tantan basis was RMB1.19 billion in the Q1 of 2023, a 5% decrease year on year and down 6% sequentially. The decrease was due to pressure on the Momo application caused by the pandemic and Chinese New Year negative seasonality, which put pressure on both traffic and users' propensity to pay for value added service. The year over year decrease was largely offset by Incremental revenue contributed by the standalone new applications.

Speaker 2

Tantan's value added service revenue amounted to RMB160 RMB7,900,000, down 25 percent from Q1 last year and 9% from previous quarter. The Decrease was mainly due to the COVID related factors as well as the reduction on marketing spend. Non GAAP Cost of revenue for the Q1 of 2023 was rmb1.66 billion, compared to rmb1.82 billion for the same period last year. Non GAAP gross margin for the quarter was 40.0 percent, down 1.2% from the year ago period, but up 0.6% from last quarter. The year on year decrease was mainly due to the one off incentives that we provided to live streaming broadcasters to stimulate supply side recovery after the pandemic surge.

Speaker 2

The sequential increase in non GAAP gross margin was attributable to the reduction in the costs related to the year end competition event in the previous quarter. Non GAAP R and D expenses for the Q1 was RMB214.4 million compared to RMB229.2 million for the same period last year or a 6% decrease year over year. The decrease was due to the continuous optimization in personnel costs. Non GAAP R and D expenses as a Percentage of revenue remained relatively stable at below 8%. We ended the quarter with 1533 total employees, of which 374 are from Tantan compared to 19 36 total employees, of which 563 from Tantan a year ago.

Speaker 2

The R and D personnel as a percentage of total employees for the group was 63% compared with 61% Q1 last year. Non GAAP sales and marketing expenses for the Q1 was rmb 372.0 million or 17 percent of total revenue compared to rmb578 rmb.0 million or 18 percent of total revenue for the same period last year. This significant year over year both in terms of absolute RMB amount and as a percentage of revenue was primarily attributable to Tantan's shift in marketing strategy to control costs and focus on channel ROI. Momo sales and marketing expenses remained stable from the year ago period. However, with Momo's marketing spend, our team trimmed low efficiency channel marketing spend and used the savings for Momo live streaming year end Gala, which did not happen last year due to COVID control measures.

Speaker 2

Non GAAP G and A expenses was RMB88.4 million for the Q1 of 2023 compared to RMB85.9 million for the same period last year. G and A expenses as a percentage of total revenue remained stable at 3% from the year ago period. Non GAAP operating income was of rmb517.8 million, an increase of 12% from Q1 2022 and up 4% from the previous quarter. Non GAAP operating margin for the quarter was 18.4%, up 4 percentage points from the same period last year and 3 percentage points from the previous quarter. Non GAAP operating expenses as a percentage of total revenue was 24%, a decrease from 28% in Q1 2022, but slightly up from 23% in Q4 last year, largely due to the sequential decrease at top line level due to seasonality.

Speaker 2

Non GAAP operating expenses on a year on year basis decreased 24%. The decrease in absolute rmb amount was primarily due to reduction in sales and marketing expenses and to a lesser degree optimization in personnel costs. Now briefly on income tax expenses. Total income tax expenses was rmb122.6 million for the quarter with an effective tax rate of 20%. In Q1, the company accrued withholding tax withholding income tax of RMB34.5 million, which is 10% of undistributed profit generated by our royalty.

Speaker 2

Without the withholding tax, our estimated non GAAP effective tax rate was around 15% in the Q1. Now turning to balance sheet and cash flow items. As of March 31, 2023, Hello Group's cash, cash equivalents, short term deposits, long term deposits, short term investments and restricted cash totaled RMB 13.35 rmb1000000000 compared to rmb13.40 billion as of December 31, 2022. Net cash provided by operating activities in the Q1 of 2023 was RMB451 1,000,000, which was in line with net profit. Lastly, on business outlook.

Speaker 2

We estimated our 2nd quarter revenue to come in the range from rmb3.0 billion to rmb3.1 billion, representing a decrease of 3.5% to 0.3% year over year or an increase of 6.4% to 10% quarter on quarter. At segment level, for Q1 2023, on a sequential basis, we expect Momo revenue to grow high single digit and Tantan revenue to grow low single digit. Please be mindful that this forecast represents the company's That concluded the prepared portion of today's discussion. With that, let me turn the call back to Ashley to start Q and A. Ashley, please?

Speaker 1

Hi, operator. We are ready to take questions. And just a quick reminder for those who are taking questions, please ask your questions in Chinese and followed by English translation by yourself. Thanks.

Operator

Your first question comes from Zhejiang Jiang with CICC. Please go ahead.

Speaker 2

Thanks management for taking my question. My question is about Penta. We noticed that the MAU and Penta have recovered in the Q1. Could management share about the latest user trends and also what's the progress on VAS and Chatroom? In terms of financials,

Speaker 1

Tantan's biggest achievement since the beginning of the year is that it delivered its 1st ever quarterly profit at the operating level. Channel ROI turned positive and user scale has bottomed out. We need to further improve the marginal contribution rate of the new users In order to achieve effective user growth from the current level onwards. And therefore, our next That is to increase ARPU through new VAS features and at the same time further reduce unit acquisition costs through In terms of our goal to increase ARPU, we have actually made some pretty good progress, Except for the low seasonality in the Q1, Tantan's ARPU has actually been trending up sequentially since the beginning of 2022. The drivers behind this include improvements in the basic paying experience and the launch of new paying features such as the Black Gold membership service and the chat room and so on.

Speaker 1

Regarding the chat room, we have also made some pretty good progress on the product front since the beginning of the year. We do not want to get too aggressive on the monetization for the time being because the product is not quite yet where we want it to be. And we're not limiting ourselves to this specific paying experience. In addition to the chat room, we are also testing other new product features to drive our ARPU growth that will be launched in the second half of the year.

Speaker 2

Yes. So for Tantan's revenue, I guess, Tantan's revenue will be driven by both user growth and, ARPU growth. As Tang Yan mentioned, just now we expect Tantan's ARPU to keep improving as we rolled out more value added service in the second half of the year. And if we can get to a satisfactory level in terms of marketing ROI, we are going to Push the marketing button a bit harder, then we're going to see user growth kicking in as another leg of the growth engine. But before we actually see that second leg kicking in, I would lean on the conservative end and Zoom mid to high single digit quarter over quarter growth top line growth for Tantan from Q2 onwards.

Speaker 2

So that's Revenue, I guess the question covers the profitability outlook as we move deeper into the year as well. On that front, I guess, I would say, the bottom line will stay Relatively stable around Q1's level as well. Like I said, if marketing ROI improves in a Significant way top line and gross profit obviously would be higher. But instead of letting it flow straight to the bottom line, We would likely invest a good portion of that into marketing to build future driver and expand market share. So I hope that answers your question.

Speaker 1

Yes, that's it. Operator, next question please.

Operator

Thank you. Your next question comes from Rafael Chen with BOCI. Please go ahead.

Speaker 3

I will translate myself. Thanks management for taking my questions. Congrats on a strong quarter. Firstly, could management share some latest updates on the development of Tantan Overseas Business? Secondly, could management share insights on the latest updates of our new initiatives, including ROI oriented apps and DAU oriented apps, TPA?

Speaker 3

Thank you.

Speaker 1

Our most promising overseas product currently is social. Since we decided on the Product direction, which is to focus on social and targeted the Middle East market in 2021. So, Xiaohua has been experiencing rapid growth in terms of users, revenue and profit. And despite encountered some unexpected events In the Q1, such as the Turkish earthquake and the Egyptian currency devaluation, SoTL has actually shown Good resilience and continued growth. Revenue in the Turkish market has actually started to recover.

Speaker 1

And as we temporarily shifted marketing dollars away from the above mentioned affected markets, we saw good potentials for growth in emerging markets, such as North Africa and also in the Middle East, which is Xochitl's traditional stronghold. Therefore, we will focus our resources on marketing Xochitl overseas and hope that it can achieve better revenue performance in the second half of this year. As for Tantan's overseas development, We have been making some experiments in Indonesia and some other Southeast Asian countries for over a year, Maybe because our localized operation is not quite good enough yet, we haven't found a way to scale up profit and we need more time to figure this out. However, we will stick to our current strategy of pursuing profitable growth. In other words, we will not rush to increase marketing investments without a significant positive ROI And instead, we will continue to explore ways to scale our profit while maintaining breakeven.

Speaker 1

The most promising app amongst our new endeavors is actually our overseas social product, SoCeo. In the recent years, many Chinese Internet companies have launched products overseas and the success of social has actually shown that Social apps has quite considerable advantage in the overseas market. As a company that started with social products, Our team has actually accumulated very intensive experiences in terms of user products and monetization. Attracting users through social attributes and monetizing the traffic through value added service is actually a very profitable business model. And currently, there are many other potential markets in the MENA regions and also in some other Asian countries that we haven't got a chance to enter yet.

Speaker 1

And given that SoCeo has contributed significant revenue and profits to our group in just 2 years period of time, We plan to replicate the social model in this potential market to expand our users' coverage and generate more substantial profits. We have recently been actually experimenting with several new products And we'll update you in the due Since the end of last year, we tightened our channel budget for tier tier and focused on campus marketing. And this is because we found that this product is particularly suitable to enhance intimacy and fun interactions amongst young people in universities. Our current thinking is that, if we can find a new model that can attract new users group and expand the overall user base, We will continue to invest in marketing. Otherwise, we will prepare to start monetizing TTM.

Speaker 1

We have several other DAU oriented products in our pipeline, but they're still at a quite early stage and we will update you when we have more data. I think that answers your questions, Ralph. Maybe let's move to the next question, operator.

Operator

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

Speaker 3

Thanks management for taking my questions. I have two questions. My first question is about Momo app. How should we think about the user scale since Q2 and also the engagement? And on the other hand, talking about the outlook, can management talk about the full year revenue Trend, as well as from a group level perspective, how should we think about the profitability?

Speaker 3

Thank you.

Speaker 1

Momo DAU and user engagement rebounded rapidly after the Chinese New Year holiday And the growth momentum was stronger than in previous years. Although the growth rate slowed down in May, But it still is showing a slight upward trend. And we are very pleased to see that Momo as a mature brand can achieve this current users trend and driven by the recovery of the organic users and despite the reduction in our channel investment. I think the reason behind this is that, on the one hand, Momo is benefiting From the recovery in social sentiment after pandemic. And on the other hand, our product team has made many innovations this year, such as providing users with more timely interactive experiences, the penetration ratio of our Content and emotional sharing use cases such as The Post and the Mini verse has actually increased significantly.

Speaker 1

I must say that the user engagement and financial performance of the Momo app has positively surprised me in 2023. This proves the strong vitality of Momo's brand influence and product form and social ecosystem, which also gives our team more confidence to maintain the steady productivity of this cash cow business.

Speaker 2

This is Kathy. I guess I'll take the financial part of the question. I believe the first part of the question is on revenue outlook for The cash cow for the ex Tantan part and then the profitability outlook for the whole group. For Momo's top line outlook or more broadly the ex Tantan part, As you can see from our Q2 guidance, the 2nd quarter top line is showing a pretty nice and healthy quarter over quarter growth. The driving forces here came mainly from 2 directions.

Speaker 2

1 is the overall post COVID recovery, both in terms of social sentiment And in terms of the consumer spending, the other driving factor is, of course, the growth momentum from the new applications with the overseas market being particularly strong and resilient. So that's Q2. Looking beyond that into The rest of the year, I believe top line performance will continue to be dependent on these two driving forces. Currently, we are still gaining pretty strong traction in the MENA area and there are a number of Other markets that we are trying that we are eyeing on and may try expanding into as the year progresses. So That part should continue to drive the overall top line.

Speaker 2

The other factor, which is China's macro, I guess we're seeing more of a mixed picture here. A lot of it will depend on consumer Confidence, especially the financial condition of the wealthier private business owners, How they may perceive their future economic how they may perceive the future economic trends. Now it looks like that Chinese government is pretty determined to make things work on that front. So we remain cautiously optimistic on the macro side as well. And the other factor that we should Consider as far as modeling is concerned is that as we head into the second half of this year, the con It's going to become much easier.

Speaker 2

So if you consider all those factors, we have a good level of optimism that We should exit the year with a mid to high single digit year over year growth for the ex Tantan part And that should lay a pretty good foundation for the year 2024. So that's the top line outlook For the ex Tantan part, bottom line wise, I would I think this is a question for the whole group. We don't really have a very prescriptive outlook for or guideline for bottom line, But I would generally break down that question between our view on the gross profit margins and the OpEx. Gross margin at the gross margin level, our view remains the same as what I said at the beginning of the year, which is that Revenue share with the broadcasters and agencies should remain relatively stable in the foreseeable future. And with payout being the biggest Cost driver, if that's going to remain stable, it means gross margin gross profit margin will also stay relatively stable.

Speaker 2

So, I guess What investors can do is to use Q1's gross profit margin to model out the rest of the year. Revenue mix may move the change in revenue mix quarter over quarter may move the margin within a narrow range, but I would say that roughly Speaking, Q1 is a good reference point to use. With respect to operating expenses, Q1, we did a pretty good job. As you can see, we did a Pretty good job in cost control. We expect operating expenses to further decrease in the second quarter as some of our optimization efforts continue to bear fruit.

Speaker 2

As the year progresses into the back half, we would like to keep some flexibility There, so that if we see good spending opportunities, we can spend a little bit more. So it's possible that you're going to see a slight trend up in both R and D and marketing expenses. But again, if that does happen as the year progresses, it should come with good ROI And that's bigger profit as well. And maybe just a bit more color on the operating Margin, I think on a non GAAP basis, we were at 18 something percent in Q1 on non GAAP basis. Q2 onwards with revenue ramping up and cost control on the right track, we would start seeing operating leverage Probably for the first time in the recent couple of years as I can remember.

Speaker 2

It looks like that we can get back there's a Good chance that we can get back to the 20 something percent range in the second half in terms of non GAAP operating margin at a group level. I think that's a Healthy bottom line margin range for the business profile that we currently have. So that's The thing that I can share at this point based on the visibility that we have, and I'll get back to Ashley for more questions if we still have time.

Speaker 1

I think that's all the time we have for today's session. Maybe let's just And thank you everyone for participating, and we will see you next quarter.

Speaker 2

Thank you. Operator, ready to close.

Operator

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

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Earnings Conference Call
Western Digital Q1 2023
00:00 / 00:00