Hello Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 28, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2024 HELLO Group Incorporated Earnings Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer Please note this 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 Q1 2024 earnings conference call. The company's results were released earlier today and are available on the company's IR website. On the call today are Mr.

Speaker 1

Tang Yan, CEO of the company Ms. Zhang Sichuan, CEO of the company and Ms. Tong Huiy, CFO of the company. They will discuss the company's business operations and highlights as well as the financials and guidance. They will all be available to answer your questions during the Q and A session that follows.

Speaker 1

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 19 5. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward looking statements. Further information regarding this and other risks, uncertainties and factors is included in the company's filings with the U. S. Securities and Exchange Commission.

Speaker 1

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 over to our COO, Ms. Jiangsu Quan. Ms. Jiangxi?

Speaker 2

Hello, everyone. Thank you for joining our call. Since the beginning of the year, we have made steady progress in implementing our strategic priorities across all business lines. I will now walk you through the details. I will start with a brief overview of our financial performance.

Speaker 2

For the Q1 of 2024, total revenue was RMB2.56 billion, down 9% year over year and 17% sequentially, but slightly exceeding the high end of our revenue guidance. Adjusted operating income was RMB550 1,000,000, a slight decrease of 0.5% year over year and down 22% sequentially. Profit margin was 20.1%, up 1.8 percentage point year over year, but down 2 percentage points sequentially. The year over year margin improvement despite lower revenue was primarily due to our continued efforts to improve cost efficiency across all business lines, offsetting the revenue decline impact. Specifically, we drove continued efficiency improvement in personnel and cash utilization by reducing inefficient channel investments and optimizing share allocation.

Speaker 2

As a result, cost declined more than revenue. And the cost optimization initiatives drove margin improvement. The sequential decline in margin was primarily due to negative operating leverage resulting from the seasonal decline in revenue. Total revenue from the LOMO app and PENOLOMO app was RMB 2,320,000,000, down 8% year over year, mainly due to the decline in revenue from the Momo app, resulting from spending softness amidst the market economy and our proactive product and operational adjustments to maintain a healthy community ecosystem. Standalone new apps, especially overseas, continue to grow rapidly year over year.

Speaker 2

Adjusted operating income was RMB487 1,000,000, down 3% year over year with a margin of 21%, up most percentage points from a year ago. For Tantan, total revenues decreased 22% year over year to RMB241 1,000,000, mainly due to the reduced number of paying users. Our commercial product team continued to optimize the paying experience to improve IP food, which partially mitigated the revenue pressure. Tantan's adjusted operating income was RMB28 1,000,000, up 92% year over year, with a margin of 11.6%, up 6.9 percentage points from a year ago. Now I walk you through the progress we have made against our strategic priorities for Momo, Tantan and new endeavors since the beginning of the year.

Speaker 2

As I highlighted on the Q4 20 23 earning call in March, the main goal for the normal act this year is to maintain the productivity of this hedgehog business with a healthy ecosystem. The Tanzan's goal is to continue to improve the core dating experience and build an efficient business model that drives profitable growth. As for our new endeavors, our plan is to enrich the brand portfolio further, push the business boundaries beyond normal and contact and build a long term growth engine. I will now go into the details of our execution. First, on the product and operational front of the Momo app.

Speaker 2

Since the beginning of the year, our product team has been focused on continuously enriching use cases and gamified features as well as shortening Momo's social contributors. To help users improve their interactive experience, we apply AI technology to assist with chatting and image generation features. For example, AI Greeting provides chatting assistance service for users who want to make new friends from the nearby people. In another word, AI can suggest ice looking topics to users by analyzing the image and text information on the potential candidate's profile page. Data from the test script shows that this feature plays a positive role in increasing the screening response rate.

Speaker 2

Another example is AI Magic Mirror or AI Moretz, an image generation tool that allows users to synthesize photos with other users or landmarks, increasing users' social capital to provide new ways to interact. In addition, last year we piloted a Finding Partners or SAWSAS program for our online to offline interest groups in several major cities, which was well received by young users. The number of times outdoor activity groups represented by City Walk grew quite strongly in the Q1. Product innovation and our ability to keep pace with the time in technology has enabled Momo a mature social brand with a 30 year history to play an essential role in helping users discover new relationship and build meaningful interaction. This has laid a solid foundation for our mobile apps to maintain user and revenue scale over the long term.

Speaker 2

On the channel front, about a year ago, we shifted our focus from general user growth to ROI OEMs profitable user growth. This model is more pragmatic and better suited to normal current stage of development as well as the overall economic environment. Our adjusted purchase allocation for various channels according to the traffic at the beginning of the year optimize potential channels, cut spending in channels and apps with core ROI and explore new ways to bring incremental traffic, while further reducing user acquisition costs through collaboration with KOL. We also focused on improving paying conversion, acquiring more high paying users and improving our ability to better accommodate a group of people with more digital features on our mobile app. In the Q1, the mobile app has 7,100,000 paying users, a decrease of 300 heads during the previous quarter, mainly due to 2 reasons.

Speaker 2

1st, our product and operational adjustments should reduce competition events resulting in declining paying users. 2nd, in order to improve profitability and pursue profitable growth, our channel team reduced investments in acquiring low paying users with negative channel ROI, We're starting in a decrease in long term paying users. Now let's talk about the productivity of our Momo Cash App business. In the Q1, Momo's live streaming revenue was RMB1.15 billion, down 11% year over year and 90% sequentially. The year over year decrease was mainly due to our strategy and proactively reduced revenue OEMs at large scale competition events in order to maintain a good social ecosystem and limited and healthy monetization approaches adopted by broadcasters and agencies to obtain competition events related bonuses.

Speaker 2

Funding softness amidst the weak macro economy was another reason for the year over year decrease in revenue. The sequential revenue decrease was due to the Chinese New Year seasonality. On the product operations side, we fully leverage Momo's social contributor to achieve the transition from revenue oriented competition events to user oriented content focused operational activities. We managed to drive non events related, in another word, organic revenue growth by threatening support for high quality content and adding new gaming by features. Cost savings from reduction in operational activities during Chinese New Year resulted in a slight sequential decrease in the revenue sharing ratio.

Speaker 2

Revenue from value added services, excluding Tantan, grew to RMB1.5 billion for the Q1, down 4% year over year and 9% sequentially. RAS revenue from the Momo app was RMB806 1,000,000, down 17% year over year and 14% sequentially. Revenue from the standalone app was RMB343 1,000,000, up 52% year over year and six percent sequentially. The year over year decline in RAS revenue from the lower average was mainly due to our proactive product and operational adjustments to mitigate the regulatory risk as well as the spending softness amidst the weak market economy. The sequential decline was due to Chinese New Year seasonality.

Speaker 2

On the product front, the user scale of the audio and video based WAF experience gradually recovered after the Chinese New Year, thanks to our efforts to drive the penetration rate. Our team make a smooth transition from competition event driven to non event focused operations by enriching interaction features and upgrading core gamified plays. The study increased in organic revenue, partially offset the reception in competition events. The group's revenue for the quarter was slightly better than expected, mainly due to the smooth transition of the normal app Glass business, which has strong social contributor. The overall revenue sharing ratio decreased slightly compared to the previous quarter due to the seasonal cost savings.

Speaker 2

Now moving to the Tantan. 1st, regarding user trends and financial performance, as COVID at the beginning of the year and Chinese New Year holiday reduced Tantan's user demand, Our team reduced channel investments and our user base fell to a local. In March, with the gradual easing of external unfavorable factors and the improvement in user experience brought about by continuously ecosystem improvement and recommendation strategy optimization. Our user base and retention started to recover gradually. Tenant MAU was 13,700,000 in March, flat sequentially.

Speaker 2

As of the end of the first quarter, Tantan had 1,100,000 paying users, down 100,000 sequentially, primarily due to the redesign of the auto renewal page as required by the regulators. Our commercial product team has improved user propensity to pay by optimizing guidance on the paying experience and highlighting differentiated member experience, thereby mitigating the negative impact on paying users from the renewal page redesign. Turning to Tantan Financials. Total revenue for the Q1 was RMB241 1,000,000, down 22% year over year and 11% sequentially. The year over year decrease was mainly due to a reduced number of paying users.

Speaker 2

The increase in the revenue contributions of relatively high end black gold and SVIP membership products drove overall RPD growth, partially mitigated the revenue pressure caused by reduction in paying users. The sequential decline was mainly due to the change in auto renewal policy as well as seasonality, which put pressure on paying users and app people. In terms of business lines, VAS revenue was RMB145 1,000,000, down 40% year over year and 10% sequentially, while live streaming revenue was RMB 87.7 million, down 37% year over year and 12% sequentially. The significant year over year decrease was mainly due to the ongoing operational strategy to de emphasize live streaming. Tantan's adjusted operating income for the Q1 was RMB28 1,000,000, nearly doubling year over year despite lower revenue and slightly up 4% sequentially.

Speaker 2

Profit growth was mainly driven by continued improvements in channel efficiency and personnel cost optimization. Now I would like to walk you through the details of Tantan's total progress on channel and product brands. First, on channel front, over the past 2 years, our user acquisition team has continuously cut in efficient channel and marketing approaches and further reduced marketing investments in negative ROI. Laying a solid foundation for Tantan to achieve profitable despite revenue pressure. In the Q1, thanks to the effective controls of admin activity and continuous improvements in Apple over the past year.

Speaker 2

New user ROI meaningfully improved over the previous year. While our channel strategy optimization has yielded promising results over the past 2 years, The space for continuous optimization of unit acquisition costs is relatively limited. Meanwhile, a major problem facing Tantan's user growth model is relying too much on user acquisition through paid channels and too little on adding users organically through brand recognition. As a result, although the overall user acquisition cost has continued to decline over the past year also, The reduction in overall average cost of new users was quite limited due to the continuous decline in number of new organic users. To explore new growth models and more importantly, to increase the portion of new users acquire outside pay channels, Our user acquisition team plans to wrap up spending on KOL advertising, which is both ROI focused and brand oriented.

Speaker 2

Preliminary data in March shows that the popularity of new user acquired through offline branding activity is a little higher than the overall average. We believe that improving brand image will contribute to sustainable and stable organic user growth over the long term, thereby effectively reducing the overall user acquisition cost in the long run and helping to achieve a positive business cycle. We are now moving to Tantan's progress on product and operational side. To achieve our strategic goals of improving the core dating experience and building an efficient business model, Our user product team focused on 2 things in the Q1. 1st, we continue our anti spend campaign with the updated strategy to enhance MG spend capabilities to improve user experience.

Speaker 2

2nd, we are working on an upgraded version to improve the dating experience. Our new version focuses on guiding users to enrich their personalities by adding more information to their profile page, thereby increasing their rich and matching performance and improving the efficiency of matching and in deep interaction thereafter. Meanwhile, in terms of UI design, we have decided to emphasize the slight move and encourage users to pull down and check out the details of each candidate. We started testing the new version at the end of April. We are currently iterating and emphasizing the version based on our user feedback and gradually expand the texting scale.

Speaker 2

In terms of monetization, we're adding a short term VAS membership packages to lower the threshold for new paying users. In addition, we have built a paying model in core swipe and match mechanisms specifically for users without qualified folders to improve long term retention and paying conversion of this group of users. We firmly believe that our efforts continue to focus on product innovation and improving paying experience to drive ARPU growth is the only effective way for Tantan to achieve the strategic growth of profitable growth in the long term. Lastly, in terms of new endeavors, in the Q1, the total revenue of the new app included social and game products was RMB344 1,000,000, up 51% year over year and 5% sequentially. The year over year increase was mainly driven by the rapid growth in our overseas business.

Speaker 2

On a sequential basis, consumer sentiment in average speaking vision experienced a seasonal decline due to the impact of Ramadan. At the beginning of the year, our user acquisition team increased investments in overseas channels and enhanced collaboration with local KOLs, resulting in a significant year over year increase in numbers of users and paying users. Launching new gift giving features and rapid growth in Turkish speaking market led to a slight sequential increase in overseas revenue during the off season. Contributing in portion incremental revenue for the turnaround new app. At present, we are accelerating the localization process of our overseas business.

Speaker 2

On the product side, we are introducing more interactive game devices in line with local user preferences and setting up the testing of live streaming. On the operational side, we are improving customer experience and product experience specifically for high paying users. At the same time, we are strengthening collaboration with local agencies and broadcasters to improve content quality. And thirdly, making rapid progress in multiple regions in the Middle East means we will face more uncertainty and challenges due to the geo diversification. For example, the sharp depreciation of the Egyptian pounds in March caused significant foreign exchange losses.

Speaker 2

In addition, as we gradually brief up our local operational team and start entering new markets, We could put more pressures on the progress of our overseas business in the short term. However, these upfront investments have laid a necessary foundation for future revenue and profit growth. This concludes my remarks. Now let me pass the call to Kathy for the financial review. Kathy, please.

Speaker 3

Thank you, Dick. Hello, everyone. Thank you for joining our conference call today. Now let

Speaker 2

me briefly take you through the financial review. Total revenue for

Speaker 3

the Q1 2024 was RMB 2,560,000,000, down 9% year on year and 15% quarter on quarter. Non GAAP net income attributable to the company was RMB59.9 million compared to RMB471.9 million for the same period of 2023. In the Q1, we accrued a withholding income tax of RMB448.6 million associated with our historical undistributed earnings generated by our royalty. I will elaborate a bit later on such accounting treatment. This tax expense item is on accrual basis, meaning that it did not result in an actual cash outflow in that amount during the current quarter.

Speaker 3

In addition, it was one off in nature and did not reflect the fundamental performance of the current quarter, nor is it indicative of future profit prospects. Excluding this special item, non GAAP net income for the quarter would have been RMB 50 and 8,500,000, up 8% from the same period from the same quarter last year, but slightly down 1% sequentially. I'm glad to see that net income attributed net income continued to grow on a year over year basis despite lower revenue. This was mainly attributable to our effective cost optimization and efficiency improvement initiatives. Now let me walk you through the details.

Speaker 3

Looking into the key revenue items for the quarter. Firstly, on live broadcasting, Total revenue from live broadcasting business for the Q1 of 2024 is RMB1.24 billion, down 13% year over year and 19% quarter over quarter. The year over year decrease was mainly due to 3 factors. Number 1, our proactive product and operational adjustments to deemphasize revenue oriented competition events for the sake of maintaining a healthy ecosystem. Number 2, soft consumer sentiment amid the weak macro economy.

Speaker 3

Number 3, content strategically pivoting away from the live dating centric live streaming service. The sequential decrease was due to CNY's negative seasonality. Momo app live broadcasting revenue totaled RMB1.15 billion for the quarter, down 11% year over year and 19% quarter over quarter. Tantan's live broadcasting revenue amounted to RMB87.7 million, down 37% year over year and 12% quarter on quarter. Revenue from value added services for the Q1 of 2024 was RMB1.29 billion, down 5% from Q1 last year and 9% sequentially.

Speaker 3

Revenue from value added service on an ex Tantan basis was RMB1 point 15,000,000,000 in the Q1 of 2024, down 4% from Q1 last year and 9% from the previous quarter. Mobile app VAS revenue decreased both on a year over year and quarter over quarter basis. This was due to our proactive product adjustments to manage regulatory risk as well as a weak spending sentiment coupled with negative seasonality. On the other hand, revenue from the standalone new apps continue to grow steadily, partially offsetting the revenue pressure from Momo value added service. Tantan's value added service revenue amounted to RMB145,100,000, down 14% year over year and 10% sequentially.

Speaker 3

The Y o Y decrease was due to a decline in paying users, which was in turn due to a reduction in channel investment, the anti spam campaign and the adjustments to subscription renewal policy. The sequential decrease was due to the CNY seasonality, which had a negative impact on both paying users and R2. Now turning to costs and expenses. Non GAAP cost of revenue for the Q1 of 2024 was RMB1.50 billion compared to RMB1.66 billion for the same period last year. Non GAAP gross margin for the quarter was 41.4%, up 0.4 percentage points from the year ago period and 0.3 percentage points from last quarter.

Speaker 3

The increase was due to an improvement in Tata's margin that resulted from a shift in its revenue mix. Non GAAP R and D expenses for the Q1 was RMB183.4 million compared to RMB214.4 million for the same period last year or a 14% decrease year over year. The decrease was due to the continuous optimization in personnel and infrastructure costs. Non GAAP R and D expenses as a percentage of revenue was 7% compared with 8% from the year ago period. We ended the quarter with 13 75 employees, of which 294 are from Tantan, compared to 1533 total employees, of which 374 from Tantan a year ago.

Speaker 3

The R and D personnel as a percentage of total employees for the group was 62% compared with 63% Q1 last year. Non GAAP sales and marketing expenses for the Q1 was rmb287.3 million or 11 percent of total revenue compared to rmb300 and RMB372.0 million or 13% of total revenue for the same period last year. The significant year over year decrease both in terms of absolute renminbi amount and as a percentage of revenue was primarily attributable to two reasons. 1, in Q1 last year, we hosted an offline year end gala for Momo live streaming. Number 2, our strategy to train inefficient channel marketing spend and focus on channel ROI.

Speaker 3

It's worth calling out that offline annual gala for Momo live streaming is scheduled to happen in June 2024. Therefore, we expect the marketing costs in the Q2 this year to see a spike due to that event. Non GAAP G and A expenses was RMB93.5 million for the Q1 of 2024 compared to RMB88.4 million for the same quarter last year, representing a 4% and 3% of total revenue, respectively. Non GAAP operating income was RMB 5 RMB515.0 million, a slight decrease of 0.6% from Q1 2023, down 22% from the previous quarter. Non GAAP operating margin for the quarter was 20.1%, up 1.7 percentage points from the same period last year, but down 2.0 percentage points from the previous quarter.

Speaker 3

Non GAAP OpEx as a percentage of total revenue was 22%, a decrease from 24% from Q1 2023, but up from 20% in Q4 last year. Non GAAP operating expenses on a year on year basis decreased 16%. The decrease in both absolute renminbi amount and as a percentage of revenue for OpEx was mainly due to a reduction in sales and marketing expenses and to a lesser degree optimization in personnel costs. Non GAAP operating expenses decreased 6% sequentially. This was attributable to a decrease in year end bonus as well as double pay.

Speaker 3

Now briefly on income tax expenses. Total income tax expense was RMB 5.50 7,600,000 for the quarter. In Q1, the company repatriated RMB 2,000,000 from our Wolfie in China to our offshore entity in order to replenish our U. S. Dollar funding.

Speaker 3

As such repatriation already partly involved our historical undistributed earnings for prior years And since we might continue to distribute the Wolfie's retained earnings to fund overseas business operations, shareholder return and potential investments Based on the principle of conservatism, in Q1, we accrued withholding tax of rmb448.6 million, which is 5% of the historical undistributed earnings of our royalty. As said at the beginning of my remarks, this tax expense item is on accrual basis, meaning that it did not result in an actual cash outflow in that amount during the quarter. In addition, it was one off in nature and did not reflect the fundamental performance of the current quarter nor is it indicative of future profit prospects. Without withholding tax, our estimated non GAAP effective tax rate was around 15% in the Q1. Now turning to balance sheet and cash flow items.

Speaker 3

As of March 31, 2024, HELLO Group's cash, cash equivalents, short term deposits, long term deposits, short term investments and restricted cash totaled RMB15.12 1,000,000,000 compared to RMB13.48 billion as of December 31, 2023. Net cash provided by operating activities in the Q1 of 2024 was RMB400.2 million. Lastly, on business outlook. We estimated our Q1 revenue to come in the range from RMB2.65 billion to RMB2 point 7 5,000,000,000, representing a decrease of 15.5 percent to 12.4% year on year or an increase of 3.5% to 7.4% quarter on quarter. At segment level, for Q1 2024, on a sequential basis, we expect Momo revenue to increase around mid single digit.

Speaker 3

On the Tantan side, we expect revenue to decrease mid single digit. 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 and A. Ashley, please?

Speaker 2

Thank you. Just a quick reminder before we take any questions. For those Thank

Operator

Your first question comes from Xueqing Zhang with CICC. Please go ahead.

Speaker 1

Thanks management for taking my question. My question is about Momo. And considering adjustments due to microenvironment regulation and other reasons, what's your strategy for VAS in the future? Also, you mentioned in the prepared remarks, Momo reduced the competition events. Does it improve the revenue sharing ratio of live streaming and VAS?

Speaker 1

And lastly, how to view the revenue and profit of the Pro Momo in 2024? Thank you. Okay. Given the uncertainties in the macro environment in the end of last year, our team proactively reduced the revenue oriented competition events in the live streaming and audio and video based VAS experiences in order to protect user experience and limit the unhealthy monetization approaches adopted by broadcasters and agencies to obtain more revenue from competition events. The year over year revenue changes in the past two quarters reflected the impact of this operational adjustments on the Momo app revenue.

Speaker 1

And since the beginning of the year, our team has introduced a new interactive gamify features and fostered the supply of high quality content and leveraged more and more strong social attribute to drive organic revenue growth, partially offsetting the decrease in competition events related revenue. I'm very pleased with the team's ability to flexibly respond to changes in the external environment and make a smooth transition from competition events driven to non event focused operations. This year, we plan to further pursue this strategy of fully leveraging Momo's core value proposition and develop more immersive interactive unified features in the audio and video based experiences and explore incremental revenue opportunities. In terms of revenue sharing, our basic revenue sharing policy has remained stable over the past few years. Due to the reduction in competition events in the past 6 months, we have saved some bonus costs.

Speaker 1

However, the decrease in revenue caused by these operational adjustments has resulted in lower income for broadcasters and lower profits for agencies. As a result, we believe that it makes strategic sense to use a portion of the saved bonuses to increase the revenue sharing for non event operations and to enhance agency engagement and motivation through moderate profit concession. And consequently, our overall revenue sharing ratio will remain basically stable compared to the previous period. And as for revenue and profit guidance, I'll leave it to Cassie.

Speaker 2

Okay.

Speaker 3

Before talking about the revenue outlook, I would like to remind the analysts and investors that the Momo segment revenue actually includes both the revenues from the core Momo application and the revenues from the new applications including Social, Hertz and Direto, etcetera. That's something you may want to bear in mind when taking our comments into your modeling. Now on the core Momo application, as in the past few quarters, future revenue trajectory will continue to hinge upon the development on 2 major fronts. 1 is macro and the other one is regulatory environment. For macro, which in turn dictates the consumer sentiment, we're seeing some positive policy changes at the top.

Speaker 3

However, how effectively and quickly those policy changes will get filtered down into the consumer behavior in general and more specifically into user spending on our platform. That at this point, it's I think it's still too early to tell. We'll see as the year progresses. So that's for macro. On the regulatory front, as investors can see, we have always been very disciplined and prudent in terms of managing risks and making sure our ecosystem is healthy and safe in the regulatory regard.

Speaker 3

In Q1, we undertook very important adjustments to the operational policy as described by Sik and Tang Zhong in their remarks. The impact on the ecosystem is positive and the financial impact so far are pretty in line with our earlier expectations as communicated in last quarter's call. So that's the core business. The overseas piece will obviously continue to grow pretty robustly and thus help mitigate the decrease from the core. Overall, if you look at our Q2 guidance at midpoint, I think we are seeing 13% decrease on a year over year basis in Momo segment.

Speaker 3

That Y o Y decrease is higher than what we saw in Q1 mainly because Q2 2023, if you remember, that was the best quarter of that year forming a higher base for Y o Y comparison. As we head into the second half, the Y o Y comparison should get a little bit easier. But overall, because the biggest impact factor, which is the operational adjustments, That adjustment was fully in the system by Q1. And the other two elements, the macro and regulatory risk currently seem to be pretty stable. So if you put all these together, I would say first half is a pretty good basis for us to think about the back half.

Speaker 3

With regards to profit, while we continue to try to optimize the cost structure for the core Momo business, we're also going to put a very significant portion of the savings from the core into building the new applications. And thus, we won't have as much room to cut on operating expenses in 2024 as in the past couple of years. This means we're probably going to get some negative leverage from the decrease on top line. Overall, for Momo segment, we'll try to hit a range between hit a range in the high teens for the adjusted operating margin, but we won't pin ourselves down to that range. I guess that's several points to address the question on top line and bottom line outlook.

Speaker 3

Back to Ashley for next question.

Speaker 2

Operator, next question please.

Operator

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

Speaker 4

I will translate myself. Thank you for taking my question. I want to follow-up on our overseas business. Could management share the latest strategy? Any updates on operational metrics or the localization progress?

Speaker 4

And lastly, could we have any quantitative outlook regarding the total revenue and the profit of our overseas business this year? Thank you.

Speaker 1

I think Sikak has covered this topic quite comprehensively in her prepared remarks earlier. And at the beginning of the year, our business in the Middle East temporarily slowed down sequentially due to the restrictions on entertainment activities during Ramadan. But year over year, it remained a rapid growth momentum. This was mainly because we have attached a great strategic importance to the overseas business in recent years. And we have provided strong support to our overseas teams in terms of talent and capital allocation over the past years.

Speaker 1

On the last earnings call, I outlined 3 directions for overseas business growth: localization, new features and new regions. In terms of localization, we have set up an office in the Middle East and this enables us to connect with and select local high quality partners in a more efficient manner, therefore reducing communication and management costs. And in terms of products, we have engaged with high paying users from different language and cultural backgrounds and optimized the product design and adjusted our practice based on user feedback and thereby improving user experience and boosting overall consumer sentiment. In addition to upgrading the existing voice based GameFi play, we also ramped up our testing of live streaming by increasing its penetration. In terms of new market expansion, we have begun to gradually increase investment in richer countries in the Gulf region, And we expect our products and operations in the Middle East to improve significantly this year compared to last year and laying a solid foundation for continued growth in this region.

Speaker 1

As for financial related matters, I will leave it to Cassie.

Speaker 3

Okay. For revenue outlook for the overseas piece, in Q1, Sochill grew, I think, over 60% year over year. Moving deeper into the year, the Y o Y growth may slow down a little bit due to the higher comp last year. If we can move faster in implementing our product and operational strategies, the slowdown could be mitigated to a large extent. If some of the growth initiatives takes time to bear fruit, then the slowdown could be more evident.

Speaker 3

We'll get more clarity as we head into the second half. Profit wise, there is still going to be pretty impressive Y o Y growth. But as we are still seeing many growth opportunities in the region, we'll try to strike a balance between profit growth and investment in the future investment for the future.

Speaker 2

Operator, in the interest of time, let's take our one last question. Thank you.

Operator

Thank you. Your last question is from Henry Sun with JPMorgan. Please go ahead. Henry Sun, your line is now live. Please proceed with your question.

Speaker 2

Hello, Henry. Yes, we can hear you.

Speaker 4

I'll translate myself. Thanks management for taking the question. I have a few questions about Tantan. Management mentioned in the prepared remarks an improvement in Tantan's acquisition and efficiency. Does that mean we should expect an increase in marketing spend moving forward?

Speaker 4

And how much are we planning to invest in a brand marketing initiative? Does the change in strategy suggest that user numbers have bottomed out? And lastly, could management share your perspective on the user trend as well as the revenue and profit outlook this year? Thanks.

Speaker 1

Our continuous cost reduction and efficiency improvement strategies over the past 2 years have effectively brought Tantan to stable profitability. However, the continued reduction in channel investment has also put significant pressure on Tantan's user base. And we see that Tantan's users and revenue have not stabilized. And given the new user ARPU has improved significantly over the past year leading to an improvement in new user ROI. We plan to moderately increase our channel investment in the 2nd quarter, while maintaining the current ROI in order to stabilize the user base.

Speaker 1

In addition, we haven't invested in Tantan's brand marketing since 2019, which is one of the key reasons for the continuous decline in organic new users in the recent years. Therefore, based on our successful test in March, we plan to adopt more offline marketing strategies to raise brand awareness, improve brand image and user trust to drive download conversions and organic user growth. In terms of monetization, and Sigg just mentioned that we are working on upgraded version of Tantan. The new UI design will guide users to enrich their personal information and encourage users to spend more time learning about a candidate before deciding to swipe left or right. We had much debate internally about this design change because it involves changing a long standing user behavior based on which many of our premium features are built.

Speaker 1

Thus, such change in UI will likely to have a negative impact on monetization. However, we eventually concluded that this is the right course of action for long term improvement in user experience and was a sacrifice in short term monetization. Of course, our commercial product team will continue to optimize paying experience to improve new user ARPU to partially offset the negative impact of regulatory changes on membership renewal policy and product upgrade. And as for the financial part, I will leave that to Cassie, please.

Speaker 3

Sure. I think there are several questions here. On the marketing spend, although the R2 of Tata has significantly improved during the past year, We have not reached the tipping point where the return on investment is high enough to drive a positive business cycle yet. That means if we pull the marketing spend too high, we could slip back to loss. So the plan for the coming couple of quarters is to moderately increase the marketing spend.

Speaker 3

By moderately, I mean, ballpark probably between RMB10 1,000,000 to RMB20 1,000,000 incrementally per quarter. And most of that incremental spending will go into KOL marketing. At the same time, we will carefully monitor the ROI to make sure we get good return for the marketing investment. The goal for the Tantan team this year here I'm answering the question about the user plan. The goal for Tantan team this year is to keep the user base stable through effective marketing campaigns as well as product innovations to deliver better dating experiences.

Speaker 3

Whether we will be able to reach that target will depend on how efficient our product and marketing teams are. Revenue wise, we are likely still going to see a downtick as live streaming continue to shrink, But there is quite limited impact on profit because gross margin for live streaming is very, very low for Tantan's live broadcasting business. However, as we are investing part of the profit back to brand marketing, the bottom line will the bottom line this year will likely decrease from last year's level. So hopefully that addresses your question. Ashley, back to Ashley for closing remarks.

Speaker 2

Thank you. And I think that's it for today and thank you

Speaker 1

for participating and we'll see you guys next quarter.

Speaker 2

Thank you, operator. We're 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
Hello Group Q1 2024
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