Ladies and gentlemen, thank you for standing by and welcome to Fourth Quarter and Full Year 2018 Momo Incorporated 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 fourth quarter and fiscal 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 or 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 US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law. I will now pass the call over to Mr. Tang. I will translate for him. Mr. Tang, please.

Good morning and good evening everyone. Thank you for joining our conference call today. Q4 was a solid quarter, closing out a fruitful year of 2018. Now my team and I will take you through the details. Firstly, a brief overview of the financial performance. For the fourth quarter 2018, total revenue reached RMB3.84 billion, up 50% year-on-year. Adjusted operating income for the quarter was RMB1.03 billion, up 30% from the same period last year. For fiscal 2018, total revenue came in RMB13.4 billion, up 51% year-over-year. Adjusted operating income reached RMB3.9 billion, up 42% year-on-year. Excluding Tantan’s financial impact, our adjusted operating income for the year would have been RMB4.2 billion or a 32% adjusted operating margin, compared to 31% last year. During the year 2018, we have made significant investment in strengthening the content ecosystem and expanding the talent pool to better support our research and development efforts. These investments have laid a solid foundation for us to drive further product innovation as well as revenue growth in the year 2019. Even with these significant investments that we've made, I'm pleased to see that on a ex-Tantan basis, we were still able to deliver an improvement in bottom line margins as compared to the prior year. Now a deeper dive into the quarter. Firstly, our community continued to grow. The core Momo app had 113.3 million monthly actives for the fourth quarter, up 14% year-on-year and representing a 2.8 million net addition from the previous quarter. Last year, we mentioned that we had a major cleanup of the spending activities starting from September. The campaign had a peak of its impact well into September and October. Since then, we’ve seen a gradual rebound in different engagement metrics. Per user time spent reached an all-time high since the beginning…

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 RMB2.96 billion, an increase of 36% from the same period last year. I’ve pointed out on the November earnings call, the macro headwind and overall consumption weakness have caused us to have a soft October and November. In December, we held a year-end competition event. In the face of the macro uncertainty, we have refrained from utilizing the extreme stimulating measures as we did in 2017. Instead, we focused on the efforts -- we focused the efforts on designing the competition structure, as well as innovating the key features to enhance the overall tournament experience. The enthusiasm we saw from the users in December tournament exceeded our expectations giving us a 7% quarter-over-quarter growth in live broadcasting revenue for Q4, despite a high revenue base in Q3 and a softness in October and November. As we put the year-end tournament behind, we can now shift the focus towards driving much longer -- longer-term structural changes to our system. Last quarter, Tang Yan mentioned that we would like to better cultivate or paying potential of the middle cohort paying users by introducing more interactive tools into the showroom. In January, we rolled out an interactive gift card Penguin Hitting. When a user sends a traditional gift, it is simply a virtual gift with certain special screen effect. An interactive gift such as the Penguin Hitting comes with a game that allows the users to have fun and compete with other users in the same live channel. That way, the users can enjoy themselves even with a limited amount of spending. Data shows that…

Thanks. So let me briefly review Tantan's operational and business developments in the year 2018 and our plans for 2019. First, an overview of the key metrics for the quarter. In Q4, the Tantan community continued to grow rapidly. Total paying users reached 3.9 million in the fourth quarter, or a quarterly net addition of 300,000, largely driven by the overall user base growth. Total revenue was RMB223 million for the quarter, up 36% sequentially, driven by both paying user growth and the rapid increase in ARPPU, which was in turn due to the greater adoption of the See Who Likes Me feature. Now, let me briefly review the achievements made in the year. First of all, user growth was a number one priority for Tantan in 2018. I'm glad that we delivered very well on that front. The users grew significantly faster in 2018 compared to 2017. The accelerated growth was driven by both an increase in retention and an acceleration in growth of new users. The increase in retention came from the launch in paid users, growth optimizations and algorithm improvements. While the acceleration in growth in new users came from proactive talent strategies and an increase in organic growth as we become more widespread. I'm especially happy that we were able to make the value added service as the big driving factor in the growth formula and aligned improvements of user experience will increase the commercial value of our platforms. Next on monetization. 2018 was the first year of Tantan’s monetization. I'm glad that we delivered beyond target on that front. In January 2018, we launched the VIP subscription service. Because of the high quality of Tantan’s user base as well as the rightsizing strategy of our business, we were able to quickly grow the paying subscribers…

Thank you. Hello, everyone. Thank you for joining our conference call today. Before getting into the financials, starting from this quarter, we changed our reporting currency from the US dollar to renminbi to reduce the impact of foreign exchange changes on the company's reported results. Our operation is mainly conducted in China, and all of our revenue is generated locally. Based on the significant fluctuations in currency exchange rates during the past recent periods, we believe financial results presented in RMB better reflect the fundamental performance of our businesses. The press release issued earlier today contains US dollar translated from RMB amounts using spot rate on December 31, [2008] just for reference purposes. In the interest of time, let me go direct into costs and expenses as revenue line items have been covered pretty comprehensively by Mr. Tang Yan and Wang Li. Our non-GAAP cost of revenue was RMB2.08 billion compared to RMB1.32 billion for the same period last year. Non-GAAP cost of revenue as a percentage of total revenue was 54%, an increase of 2% from Q4 2017. The higher cost base for Q4 2018 was mainly caused by costs incurred in connection with Phanta City TV variety show and higher payouts from our live streaming business and fast ramping virtual gifting business under VAS. On a sequential basis, non-GAAP costs decreased around -- as a percentage -- non-GAAP costs as a percentage of revenue decreased around 1 percentage point from 55% to 54% in Q4. The improvement was mainly due to lag from -- a lag dragged from Phanta City Show and positive contribution from Tantan revenue partially offset by higher payout ratios from our live streaming business and fast ramping virtual gifting business under VAS. Non-GAAP R&D expenses for the fourth quarter was RMB193.9 million, compared to…

Yes, actually just a quick reminder. First, we appreciate if the analyst limits the number of questions to two each person so that we can take more people in. And number two is that for the Chinese speakers, please ask the question in Chinese first, followed by the English translation by yourself. Operator, we are ready. Please take the first person in.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Thomas Chong from Credit Suisse. You may ask your question.

Thanks management for taking my question and congratulations on the strong set of results. I have two questions. My first question is about any update on the macro impact to the live broadcasting business. How should we think about the 2019 revenue outlook, as well as the monetization strategy? And my second question is about our thoughts on overseas expansion? Thank you.

Firstly, I'm going to talk about our view on the macro impact. Our current view is that macro is probably still going to stand out as a risk factor to the pace of revenue growth this year. However, right now we are seeing some favorable policy getting rolled out at a macro level. So we'll see how it goes as we move deeper into the year. As a company, we tend to focus on the things that we have control on and these are the product and operational levers that we have in hand. By pulling these levers in a right way, we still see a lot of growth opportunities here. For example, the operational efforts that we put into the year-end gala event had a clear impacting driving the tipping consumption from the top users immediately. And also immediately after that competition event, we also quickly rolled out the interactive gifts to stimulate the middle cohort. And we were able to see almost immediate positive impact in that cohort in January and also during the Chinese New Year period. If you look at the Q4 revenues on the ex-Phanta basis, the revenue in Q4 grew 10% on a sequential basis. And if you look at our Q1 guidance, although, we are making relative prudent assumptions on the performance from the top users, our guidance is still indicating a year-on-year growth -- a pretty satisfactory year-over-year growth rate. For the whole year 2019 there are several directional stuff that I can -- I’d like to share with you guys here. Number one, for our live broadcasting business the team needs to focus on cultivating new demand through product and operational efforts. At the same time we are also looking to do a better job in converting the platform traffic into…

Okay. So regarding Tantan's overseas strategy. So while China is still our focus, we do in facdt already have a pretty sizable overseas user base. We do see the overseas market, especially in Eastern market as a big growth opportunity for Tantan down the road. We believe Tantan has a significant competitive advantage in our operational fit for Eastern cultures.

Okay. Operator?

Alright. Your next question comes from the line of Jialong Shi from Nomura. You may ask your question.

Thanks very much for taking my call. And I have two questions here. First, I will first ask my question in Chinese and translate it into English. [Foreign Language] I have two questions here. My first question is a follow up question on live broadcasting. And management mentioned on the -- during the prepared remarks, Momo actually has a few new features to be added into the live broadcasting service, which are similar to the Penguin Hitting feature added last quarter. So I just wondered if management can provide more details on those upcoming new features? And my second question is about Tantan. We understand Tantan's revenue in 2018 was mainly driven by premium membership. So I just wonder how we should assess the monetization level for this premium membership model? And management mentioned during the prepared remarks, Tantan is currently testing few new monetization models. And I just wonder if management can provide more colors on those upcoming monetization models. And also when those models are likely to be rolled out? Thank you.

The growth of the VAS business has largely been driven by the virtual gifting service in the past few years, which mainly involved users sending each other virtual gifts in a non-live webcasting use cases enhance the overall social experience. In terms of DAU penetration, the order of ranking among different standalone use cases on the platform goes like this: the biggest one is Nearby People and then it's live broadcasting and then the chat room experience and interest group. Quick Chat and Parties, Werewolf, these are relatively smaller use cases in terms of DAU penetration. Quantitatively live broadcasting represents a bit less than 30% of total DAU and the rest of the social experiences represent 70% collectively. That's why we actually think that the non-live broadcasting use cases provide a long runway to ramp up your virtual gifting service. Virtual gifting is a model that has been proven by multiple consumer experiences like Nearby People interest group, Werewolf, Quick Chat and Parties. Right now based on the existing use cases VAS is still ramping up -- the VAS revenue is still ramping up very fast. And this year we do have the plan to start testing monetization features in the chat room experience. And chat room experience I said before is a relatively bigger use case in terms of total time spent. It’s already half as big as the live broadcasting service. And which, live audio interactions and the karaoke feature within the chat room experience also provides pretty rich channels to build diversified paying use cases. So we do believe that it has the potential to become a pretty meaningful driver for VAS down the road. However, because we really haven't monetized the chat room experience in any big way in the past this year, we may need to allow the team some time for trial and error. And Tantan?

Okay. So generally, we believe that our potential for dating in China is as high, if not higher than the West. But we probably need to use some -- besides subscription based models use some non-subscription based models to fully unleash the -- our potential. With that said, so far into Q1, we have been outperforming our own expectations on user growth by quite a lot. As an indication, we expect that the quarterly add-on in paying users to increase very significantly from 300,000 net add that we saw in Q4 and even surpass that of the net add of Q3. We are testing a number of different new premium features, some of them are subscription based and others are not. When we feel that we're ready, we'll do an official launch. But we will take our time in testing the features to make sure we do the things right.

Okay, operator. Operator, we're ready for next.

Your next question comes from the line of Daniel Chen from JPMorgan. You may ask your question.

[Foreign Language] I will translate it myself. So my question is for Jonathan. So how should we look at Momo's margin profile in 2019? So -- and any place that we can -- we are going to see the operating leverage for the whole company? Thank you.

Thank you. Actually as a public company, we don't provide specific margin guidance for the coming year. But, however, based on the -- what Tang Yan just discussed, we feel confident that our revenue will continue to grow from live streaming, faster pace of revenue ramp from our VAS business and also Tantan business. So definitely we are going to be very carefully to manage our cost structure. As we communicated in the past, we feel that the current level of revenue sharing is adequate to the agencies and broadcasters. We do not have a plan to significantly increase the payout ratio. That’s probably we are going to continue on in 2019. And then, there are other factors that are in the cost component. Since the virtual gifting business under VAS ramps up quickly, it could provide additional drag on the gross margin side. And also Tantan’s business will -- as the revenue ramps is going to positively impact the gross margin. So we're going to carefully manage that. In 2019, with no Phanta impact, which is a positive factor, so do see there is a potential. We hope that our gross margin will improve based on the 2018 level. And based on the current macro condition, as I said during the earnings call -- during the prepared remarks we are going to be very disciplined in terms of headcount control, mainly focusing on optimizing the talent pool quality. And the only incremental area would be the selling and marketing expense to support Tantan's user growth. On the core Momo side, we're going to continue on the discipline side to generate operating leverage. So overall for 2019, on the operating margin side, we definitely hope that we can achieve similar level of profitability compared to 2019 on a consolidated basis.

Operator, maybe we can take the last question. And come back to me for closing in the interest of time.

Your next question comes from the line of Tian Hou from TH Capital. You may ask your questions.

[Foreign Language] Okay. So I am going to translate it, okay. So Momo has been proven, has a deep understanding of China's social connection markets and proven by the successful acquisition, integration, monetization of time Tantan and its own Momo app. So if we can -- if we Match Group in US as a company and we see Match Group has many apps, each app targeting one particularly social connection desire and particular group. So I wonder what's the future strategy for Momo? You want to do the [APP] internally or externally. You want to have just existing 2 apps or you’ll more apps. So what's the future strategy? That's my question. Thank you.

Well, first of all, thank you for your compliment on Momo's management team and specific open social space. My view towards your strategic question in that specific space is that in the open social territory, it's hard to find one type fit all kind of solution to satisfy all the specific vertical demand in some specific demographic or form of interaction or in some specific markets. So we probably need multiple solutions to keep penetrating deeper into the market. As a matter of fact, since last year, we’ve actually already stepped up our efforts in self-developing new products to satisfy new demand and new demographics. And we've actually launched a few projects and new applications last year. But -- and we will continue to try to go in deeper on that front this year. We also have some plans for standalone application developments down the road. However, because that is a new area for the company, so we probably also need to allow some trial and error time for the team. And lastly, other than self-development of new products, we also do not want to rule out the possibility of getting into new areas through M&A or partnering with other people in some new projects. That was also an area that we've already got into in the year 2018, that's still one of the -- one of our strategies in the coming year as well. So that's the answer to your question.

Operator, I think that will conclude our call today. We are ready to close. Maybe you can take it over for the closing remarks?

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.