Ladies and gentlemen, thank you for standing by and welcome to Second Quarter 2018 Momo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] Please note this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Ms. Cathy Peng. Thank you. Please go ahead, ma'am.

Thank you, operator. Hello everyone and thank you for joining us today for Momo's second quarter 2018 earnings conference call. The company's results were released earlier today and are available on the company's IR website. On the call today from Momo are Mr. Tang Yan, Co-Founder, Chairman, and Chief Executive Officer; Mr. Wang Li, President and Chief Operating Officer; Mr. Wang Yu, Founder and Chief Executive Officer of Tantan; and Mr. Jonathan Zhang, Chief Financial Officer. 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&A session that follows. Before we begin, I would like to remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to the 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 and achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties, and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, further events or otherwise, except as required under law. I will now pass the call over to Mr. Tang. I will translate for him. Mr. Tang, please.

[Foreign Language] Good morning and good evening everyone. Thanks for joining our conference call today. I'm glad to be delivering another solid quarter with impressive financial results and progresses across different strategic priorities outlined at the beginning of the year. Before getting into the results of the quarter, I'd like to introduce Mr. Wang Yu, Founder and CEO of Tantan to the investor community. Starting from this quarter, we -- he will be joining our team and the earnings call -- on the earnings call to speak with investors. Now together, we will take you through the specifics of our quarterly results. Firstly, from a high level, total revenue reached $494.3 million for the quarter, up 58% year-on-year. Adjusted operating income for the quarter was $163.4 million, up 88% from the same period last year and representing a 33% operating margin. Again, the continuing topline strength and the operating leverage we are gaining leave ample room for us to invest in a meaningful way to build our future. Now a deep dive into the quarter. Firstly, our community continues to get larger and stronger. The core Momo app reached 108 million in monthly access for the second quarter, up 18% year-on-year and representing a 4.7 million net addition from the previous quarter. More importantly, the engagement of the core Momo application continued to improve. Per user time spent per day for the core Momo app grew 11% on a year-over-year basis. I'm proud that we are able to continue to drive steady growth of our community in both size and engagement in a very competitive market environment. This achievement can be attributable to three key factors; the enrichment of social features, the optimization of the algorithm. as well as the improvement in the content quality and diversity. Now, let me…

[Foreign Language] Thanks. Now, let me take you through the key things that we've done as well as the future directions for our major business lines. Firstly, on live streaming, total revenue from live broadcasting business for the quarter was $411 million, an increase of 58% from the same period last year. The total incentive plan we rolled out toward end of last year continue to drive the expansion of the content ecosystem. The number of professional broadcasters continue to grow healthily on a quarter-over-quarter basis. Moreover, an increasing number of quality agencies are beginning to appreciate the uniqueness and social attributes of Momo platform. All of these are building a solid foundation for the continuous improvement of our content quality. In the second quarter, our operational efforts were still largely leaning toward driving engagements and paying activities of the middle and long-tail users as well as promoting quality new talent. For example, in April, we organized a competition event called [Indiscernible] team battle. The rules of that game were purposely formulated to give the long-tail fans of the broadcasters better sense of participation and contribution. In a quarterly tournament that was held in May, we also introduced a new competition mechanism whereby the top performers need to pick new broadcasters as their apprentices and compete together. Such arrangement can help the new talent grow and gain traffic more effectively. We also added something new to keep the tournament experience fresh and the users engaged. Q2 2018 was also the first time we had a World Cup event after live broadcasting business took off. As the World Cup matches happened from 8:00 P.M. till 2:00 A.M. to 3:00 A.M. in the next morning -- the next morning, which is also the peak time for the live streaming shows, we saw…

Thank you. Hi everyone. It's pleasure to join the Momo family here and share Tantan's progress with the investor community. I'm going to talk mainly about two things today: the strategic focus for Tantan this year and the initiatives that we're taking to achieve those goals. So, the strategic focus for 2018. Our primary objective is still user growth. Tantan is a young brand and we're still growing fast and at an early stage in penetrating into the market. We believe we have very significant room to further grow the user base through product and marketing efforts. With that said, we're also committed to building effective paid features in order to enhance user experience and drive the number of matches. Our observation is that retention levels of paying users tend to be much higher than that of non-paying users. Therefore, although monetization is not our number one priority this year, we do believe that enriching the paid features will make the overall user experience more enjoyable and improve the long-term intention of the platform. Of course, developing and optimizing paid features will also contribute to revenue growth and narrow down the losses. Next, I'm going to talk about some of the recent initiatives that we're taking. First, on the product side, improving the recommendation algorithm is our big focus for this year. Although we made good progress in optimizing our recommendation engine during the past few years, the logic of the algorithm is still quite basic. By applying machine learning, we see a great potential for us to improve the matching efficiency. We started to build up our artificial intelligence team who will be focusing on improving the matching efficiency and post-match interactions. Early testing results are encouraging, and we'll continue to push hard on that front. Other than product…

Thanks. Hello everyone. Thank you for joining our conference call today. I'm very delighted that we had a strong second quarter financial performance, with a better-than-expected topline and bottom-line results. In the interest of time, I will skip the review of revenue line items, which have been covered pretty comprehensively by Mr. Wang Li. Please also refer to our press release for more detailed information and analysis. Let me briefly review the paying user metrics first here. Paying users for live streaming services was 4.6 million, up from 4.4 million last quarter. Paying user for VAS on an ex-Tantan basis was 5.3 million, up from 5.1 million from last quarter. The total number of paying users from live streaming services and VAS service, excluding Tantan, without double-counting the overlap, was 8.5 million for the second quarter of 2018, up from 8.1 million a quarter ago. Once again, as the line between live streaming and the live chat experience within VAS gets increasingly blurred, we encourage investors to attract the total number of paying users across the Momo platform going forward. As of June 30, Tantan had 3.1 million subscribers. Now, on the cost and expenses items. Our non-GAAP cost of revenue as a percentage of revenues was 54.2%, an increase of 6.1% from last quarter. The blended payout ratio for live streaming business for the quarter increased slightly by approximately 1% due to continued incentive programs for agencies and various operational events that we ran during the second quarter. The rest of the sequential increase in cost of revenue as a percentage of revenue was mainly due to the production cost incurred up to June 30 related to the Phanta City TV show. Even the show runs from July to October, we expensed the production cost as incurred from prudent…

Yes. Just one quick reminder before we get people in for questions. For those who can speak Chinese, please ask the questions in Chinese first, followed by English translation by yourself. And also please try to limit the number of questions to two maximum for each person so that more people get to ask questions. Operator, we're ready. Please take people in.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Jialong Shi from Nomura. Please ask your question.

Hi. Thanks for taking my question. Good evening Yan Tang, Jonathan, Cathy. Congratulations on a solid quarter. Let me first ask my question in Chinese. [Foreign Language] I have two questions. My first question is about the MAU for Tantan. We noted that the reported MAU of 108 million for 2Q does not include the MAU from Tantan. So, we were wondering what is the trend for Tantan's MAU in the second quarter and the second half. And how should we look at its revenue growth trajectory in second half? And my second question is about the overall growth strategy. The size of Momo's live broadcasting revenue is already quite big. So, just wondering what are the company's strategies to further grow the live broadcasting revenue from current levels. And for the VAS business, how should we look at its growth potential -- revenue potential and what are the growth drivers? Thank you.

Okay. So, this Yu. Regarding the first question. So, since the announcement of the acquisition in February, our MAU has seen significant increase and is continuously increasing. The thing is that we have a much stricter definition of MAU than the industry. So, if we disclose the number, you guys will be comparing apples-to-oranges. And similar companies, like Match Group, do not disclose MAU either. So, we think for now, paying users reflects the trend of growth. In terms of revenue projections, like Jonathan said, we have seen a significant increase in revenues after the release of See Who Likes You and Super Exposure. And we expect a 60% to 70% increase in our guidance for the average monthly revenues per month in Q3 over Q2 -- over June actually. So, -- and with continuous increase of the active users, we believe that this trend will continue.

[Foreign Language] Over a longer-term horizon, we do believe that live streaming represents a new form of entertainment. As the content continues to improve and as Chinese consumers step up their spending in entertainment, we do believe that there should be plenty of headroom for us to continue to drive the growth of paying users as well as our people. As far as our own operation is concerned, we're basically looking at several key drivers here. Well, first of all, Momo's overall user base is going to continue to grow, and we're working on things to improve the conversion ratio from Momo user to live streaming paying user. For example, on Android, we just launched a new version where we push Nearby live broadcasting onto the homepage, and the paying conversion from the Nearby live broadcasting on the homepage is much better than previously when we pushed live streamers into the Nearby People list. ARPPU is the last thing that we're going to worry about because from the beginning of the year up till now, we have been very disciplined in terms of putting in different operational efforts to drive the ARPPU growth, and that can be reflected in several aspects. Number one, we've been cutting back on the bonus that we put into different competition events. That can be reflected in the fact that the average payout ratio saw a pretty meaningful decrease in the first half of 2018 versus the second half of 2017. And number two, in terms of the operational policies around the competition events, we've been leaning towards the long-tail paying users. For example, the events such as fence team battle that we won in April is the reflection of such operational policy. And for some of the operational methodology targeting the whale user with…

Operator, we're ready for next.

Thank you. Our next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question.

[Foreign Language] I have two questions. My first question is that we see the [Indiscernible] and other short video has been rising very rapidly recently. What are takes about the impact to Momo, if there's any? And my second question is about the macro impact to monetization in live streaming. And so maybe another question to Jonathan is about how should we think about the margin outlook in 2019, if there's any? Thank you.

[Foreign Language] Considering that I get to answer the same question almost every quarter, I remember in the past, people asked about Kuaishou and Tantan. Last quarter somebody asked about Douyin as well. However, if you look at the -- if you look at our operational and financial data since the beginning of the year, they have been showing some very positive trends, and we've also given our Q3 guidance. If you take out Phanta City and Tantan, the core Momo business is still growing very nicely. So, I don't think investors need to worry about the competition overall. With regards to the specific question on Douyin and its impact on our live streaming business, our live streaming team has remained very vigilant about the competitive environment, especially what the bigger guys are doing out there in the market and our live streaming and short video and that, of course, includes Douyin. We did notice that since the second quarter this year, Douyin has made its live streaming service more prominent from -- both from a product perspective and from an operational perspective. However, up till now, we are not really seeing any meaningful impact from Douyin either from a traffic standpoint or from a revenue standpoint. One thing that, I think, it's worth sharing here is that as a short video content consumption platform. Douyin is very, very different from Momo in its user portrait. The core user demand is trying to surge as well as the usage behavior on Douyin. For example, our user base -- if you look at our user base, it's, obviously, more skewed toward male users and people -- what people are primarily looking for on our platform is to look for someone new to interact with. And the usage behavior of live streaming…

Okay. Let me answer your third question on the margin trend. Firstly, let me answer your question in two aspects. One is on the core Momo business, then the Tantan business. Because we are a very skill-efficient business model and as we continue to expand our revenue base, we'd like to maintain a flexibility room for the company to balance the bottom-line profitability versus adequate resources to invest in the company's future growth. So, the company actually manage the financial target on an annual basis, even though we see quarterly net margin fluctuations. But on an annual basis, as I communicated with the investors that we'd like to maintain similar level of non-GAAP net profitability compared to last year. And at this stage, we still confident we can achieve that financial target. And going forward, I don't believe we're going to change that mentality because we still believe we have a lot of arrears of innovative ideas to grow the business further. So, as we continue to grow the business, we'd like to keep similar level of profitability. Of course, this is on a constant-currency basis. And now on Tantan, because it's for 2018, as Mr. Wang Yu discussed with you, it's still under investment period. For 2018, as we communicated previously, it's going to be a loss position. But -- however, as the monetization efforts continue to expand, we do expect the revenue will ramp at a fast pace. The net loss will -- on a quarterly basis will decline. So, going to the longer term, we expect the Tantan's business will turn into profitability and then that will actually help to improve the overall net margin.

Operator?

Thank you. Our next question comes from the line of Alex Poon from Morgan Stanley. Please ask your question.

[Foreign Language] My first question is about Tantan. As we're noting, there is a super successful brand in U.S. and international markets. And from the development point of view in China, what can Tantan do differently and -- or even better than Tinder in terms of the game play and the monetization? And second is about Tantan revenue growth guidance of 60% to 70% run rate versus June. But as we know, the new VIP growth program raised the price by five times. So, 60% to 70% growth seems a little bit low. Could you give us a breakdown of what you expect for ARPPU and pay user growth separately? And my second question is about a variety show. Should we expect MAU growth and the collaboration with talent agencies to further improve and accelerate in 2019? Thank you very much.

Okay. So, to answer your first question, what can we do better than Tinder, I don't think we are completely comparable to each other. But I'll try to answer the question. I think the model of double blind and mutual opt-in fits the Chinese market and Asian market much better than the Western market because Chinese people and Asian people tend to be more shy, right? So, they need more help. There is no -- especially in China, there is no flirting culture. So, there's a big lack of offline channels. Also, Chinese young people tend to be in different city than their hometown. So, they're extra lonely. They don't have friends and family to -- so they're lonely because of that, and there's no one to introduce people to them. So, what we can do for them is that they don't have to do the flirting stuff, right? When they like or dislike someone, that person doesn't know unless they like each other. So, this thing, we believe, is much more valuable in Asia than in the West. That's one. The second is that China, as a whole, is a larger unified market, we believe, especially for singles. We did a small analysis, and I think the total amount of singles in Asia is roughly 75% of all singles in the world because you have huge populations of China, India, Southeast Asia, Japan, and Korea, right? So we believe that we're targeting a much larger -- if we just talk about China, it's a huge unified market. And thirdly, we think that the revenues prospects of China and Asia is actually very lucrative. If you look at the ARPU for VAS, value-added services, in Asia and especially connected to dating and social, it can be much higher than in…

[Foreign Language] First of all, Phanta City is our first try in producing professional entertaining content. The fourth -- the four episodes that have already -- the first four episodes that have already been aired so far have triggered mass amount of discussions on social media and won very good reputation from the audience base, especially within people who are below 23 years old and with college degree or above. Up till the fourth episode was aired, the number of hashtag topic discussions has exceeded 3 million on Weibo, and number of impressions of such hashtag discussions has exceeded 1.8 billion, making it the most heavily discussed TV variety shows on the Internet at the time. The reason why Momo wants to get into the professional entertaining content production area is from a long-term strategic standpoint. Over a longer-term horizon, we think that's going to benefit the company in several different ways. Number one, it can promote Momo's overall brand equity. And number two, we are providing greater level of motivation to our top broadcasters by helping them expand their career success beyond the live streaming industry, so that more quality new talents will be attracted to the live streaming industry and to the Momo platform. Number three, by placing the broadcasters and other elements into the show; we are promoting live streaming as a new form of entertainment and building a positive image for live streaming industry as a whole. Actually, short-term user growth is not one of the key objectives that we're trying to achieve here, because we've seen cases before where variety shows brought in a surge in new users who came specifically for the show, but later on, after the show is over, it was difficult for the application to be able to retain this cohort of users. Alex, I'm not sure whether these address all of your questions or you have some additional one regarding Phanta City, we kind of missed the later part of your question.

I think that is all good. Thank you very much. [Foreign Language]

I think in the interest of time, that concludes our call today. Thank you for joining us. We'll see you next quarter. Thank you. Operator, we're ready to close.