Ladies and gentlemen, thank you for standing by and welcome to Second Quarter 2019 Momo Inc. Earnings Conference Call. Please note, this conference is being recorded today. I’d now like 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 2019 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 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 U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law. I 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, Q2 was a good quarter, despite the challenges caused by the homepage suspension, the team was able to navigate through them with solid executions and came out stronger and poised for further growth in a healthier shape. At that the same time, I'm proud that we still delivered strong financial results amid those challenges. Now, my team and I will take you through the details. Firstly, an overview of the financial performance. For the second of 2019 total revenue reached RMB4.15 billion, up 32% year-over-year. Adjusted operating income for the quarter was RMB1.45 billion, representing a 35% adjusted operating margin. Excluding Tantan's financial impact, core Momo's adjusted operating income for the quarter was RMB1.5 billion, representing a 39% adjusted operating margin, up from 35% from the same period last year. The consistent record of profit growth, coupled with a strong operating cash flow from the core Momo business positions the company well to continue to deliver return to our shareholders while making investments to build long-term growth drivers. Now, a deeper look into the quarter. Firstly, the growth of our community, the core Momo app had 113.5 million monthly actives for the second quarter, up 5% year-on-year, but down by 1% from the previous quarter. Due to the suspension of the user posting and the homepage news feed update since the beginning of May, the number of active users on core Momo saw a downward trend in May and in the first half of June. User posting and the new feeds are basic social infrastructures on the platform. Many users rely on these features to make discoveries of new relationships and build interactions with their connections. Therefore, the suspension of the posting function and the news…

Thanks. Now, let me review the progresses we've made across our priorities on the monetization side: number one, drive steady and healthy growth from live broadcasting business through product innovations and operational efforts; number two, cultivate a paying potential from the middle cohort and long-tail users through richer VAS experience; number three, drive monetization growth of Tantan through optimization of existing premium features and the introduction of new paying experiences. Wang Yu will elaborate on the third one later in his remarks. So next, I'm going to take you through what we've done and the future plans regarding the first two priorities. Firstly, our live broadcasting business. Total revenue from live broadcasting business for the quarter was RMB3.1 billion, an increase of 18% from the same period last year. Unlike in the previous quarter, were most of the year-over-year growth came from the middle cohort of users, the second quarter saw the growth coming pretty much across the board from both the middle and the top spenders. The re-acceleration in live streaming business growth shows the effectiveness of our strategy to apply different product and operational efforts to drive spending from different cohorts of users. For the middle layers, we continue to leverage the interactive gifts to drive the spending. In the second quarter, we launched a couple of new interactive gifts experiences, similar to the Penguin, which have been well received by the users. A few weeks ago, we launched a new interactive gift called Snowball Fight. This new experience is fully integrated with the [landing] PK feature, which means one-to-one broadcaster knockout match with connected channels. The broadcasters can organize the team offense to battle against the enemy camp in a snowball fight. Unlike the Penguin like experience, whereby the users pretty much play on standalone basis, the…

Thanks. So, let me briefly review Tantan's operational and business development in the past quarter and our next steps ahead. First, on user growth. Due to the removal of the download service from all the China app stores since late April, in the second quarter, we experienced a substantial decline in the number of monthly and daily active users. In addition, from the 1st of May to 13th July, ioS suspended the payment service for all iPhone users in China as an extended measure to download suspension. As a result, the number of paying users decreased more than the number of active users did, because the majority of the existing iPhone paying users were unable to renew their subscription due to the in-app purchase suspension. As a result, in the second quarter, we had 3.2 million paying users compared to 5 million a quarter ago. By mid-July, Tantan's download and payment service had been fully restored at all application stores in China. After the resumption, we have significantly stepped up the marketing efforts to make up for the losses during the inspection period. I am happy to see a rapid recovery to trajectory across all the major operating and revenue metrics. By August 25th, the number of paying users has already rebounded to approximately 4.1 million. So briefly on financials, total revenue for the second quarter was RMB284.8 million, a 4% decrease from previous quarter. Due to the deferred revenue in connection with the subscriptions from multiple arms, there is a lag between the change in total grossing trajectory and the change in revenue trajectory. For the second quarter, the 4% sequential decrease in revenue was a result of 24% decrease in total grossing and the revenue grossing from deferred revenues of prior periods. The decline in total grossing in…

Thank you. Hello everyone. Thank you for joining our conference call today. Now, let me briefly take you through the financial review. Our total revenue for the second quarter of 2019 was RMB4.15 billion, up 32% year-over-year and exceeding the high-end of our revenue guidance. Non-GAAP net income executable to Momo was RMB1.24 billion, compared to RMB893.2 million for the same period 2018 or 39% increased year-over-year. Let me directly jump into the review of cost and the expense items. As revenue line items have been covered comprehensively by Wang Li and Wang Yu earlier, our non-GAAP cost of revenue for the second quarter 2019 was RMB2.04 billion compared to RMB1.71 billion for the same period last year. The non-GAAP cost of revenue as a percentage of total revenue was 49.1%, a decrease from 54.2% for the second quarter 2018. Non-GAAP cost of revenue for the second quarter 2018 included the production cost of Phanta City, which was a RMB158 million. Excluding the Phanta City, the impact non-GAAP gross margin for the second quarter of 2019 remained stable over the same period last year. On a quarter-over-quarter basis, the non-GAAP gross margin for the quarter improved slightly by 1 percentage due to the lower payout ratio from both live broadcasting and the VAS businesses. The lower payout ratio for live broadcasting business was from the fact that there was no quarter and term event in the second quarter and some savings on the promotional costs. In the second quarter of 2019, the VAS service team continues to scale back from the promotional efforts around the virtual gifting business. Therefore, the margins for VAS business also improved on a sequential basis. Non-GAAP R&D expenses for the second quarter was RMB204.8 million compared to RMB116.1 million for the same period last year,…

Yes, actually, just one quick reminder. For those who can speak Chinese, please ask your question in Chinese first, followed by English translation by yourself. Operator, ready for questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Your first question comes from the line of Thomas Chong of Jefferies. Please go ahead.

Thanks management for taking my questions and congratulations on a solid set of results. My question is about Tantan. Can management give us some color about the revenue and the bottom line outlook for Tantan in the second half and also if there is any timing on profitability? Thank you.

Okay. So I've spoken quite a lot about second half monetization strategies already. The growth will be driven by both optimization of existing premium features and the intro of new ones. Our quarter-on-quarter grossing increase is actually better than our expectations. It's around 30% to 40% as we can see right now, but since there is a lagging effect between grossing and revenue that we talked about earlier, the revenue guidance assumes a sequential growth of around 10%. Now, this positive momentum we expect it to extend into Q4. In terms of profitability, we expect to reach a domestic breakeven on a monthly basis somewhere around mid next year. If we manage to do it on a whole Company basis, including domestic and overseas market depends on how aggressive we will be in overseas expansion during this year.

Thank you.

Actually, just a quick reminder before we take next person in. Given the time constraint, we may need to limit one question to one analyst. Please be mindful of that. Operator, ready for next.

Yes. The next question is from the line of Jialong Shi of Nomura. Please go ahead.

So I would translate my questions. My questions is about the industry outlook. From time to time, we were told by some of Momo's Chinese Internet peers that China's Internet population is already saturated and therefore, it is increasingly difficult to acquire new users. As a result, we thought some of your peers are turning their attention to lower-tier markets where the Internet penetration is relatively lower. So I just wonder what will be Momo's strategies to cope with these industry-wide challenges and what will be your MAU target for Momo app by end of this year, and where do you think is the sealing for Momo MAU in the long term? And also, I have a quick follow-up on Tantan. I just wonder what are the key overseas markets for Tantan? Thank you.

Okay. So this is Yu Wang, I'll first quickly answer the question on Tantan. So, our primary user base overseas are in Southeast Asia and India. And we are doing quite well in terms of all the markets we have tried out overseas. We meet the primary competitors in all of these markets, but the dating market has an appetite for multiple apps, so we don't think that established players in new markets for us actually affect us that much in terms of our expansion potential. Thank you.

Okay. Now, we are ready to answer the question about the MAU outlook and the TAM question.

Okay. After the homepage suspension on the core Momo was lifted up to now all the user and engagement metrics have been showing a very positive trajectory, and that gave us the confidence that the MAU for the Momo core should see continuous growth in the future. At the same time, we do see pretty ample -- we do see huge growth in the open social space and the broader entertainment space. Right now, we are seeing many newly emerging growth opportunities in China and also in oversea markets. Based on our rough estimation specifically in the open social space, China plus Asia should give us a total addressable market of somewhere around 600 million people for us to penetrate. And if you look at the MAU of Momo and Tantan combined together, we probably represent somewhere around one-fourth of that TAM. At this point, Tantan is going through a phase where its users and paying users are ascending very, very rapidly. We believe that such hyper growth phase for Tantan is going to continue in the coming couple of years. On top of the core Momo app and Tantan, we also have other deployments, either through internal incubation or external co-operations to continue to penetrate into that addressable market. So that's kind of my basic view on how Momo as a Company is going to continue to drive user growth in the future. Operator, next.

Yes. Thank you. And next question comes from the line of Lei Zhang of Bank of America Merrill Lynch. Please go ahead.

My question is mainly about Tantan. We saw that ARPPU growth in second quarter is very strong, any key feature to drive this and how should we think about ARPPU trend in the second half? And in second half, Tantan's revenue is mainly driven by paying user or ARPPU and any color on the new features, you will launch, such as the timing you can share with us? Thank you.

Okay. Thank you. So the thing is that, we have increased ARPPU somewhat with our optimizations. But the primary reason Q2's revenue was reasonably high was because there is a lagging effect between grossing and revenues. So grossing actually decreased quiet a lot while revenues did not. So, revenues actually will be affected quite significantly in Q3 even though grossing increased, like I said, 30% to 40%. And in terms of the total bottom line, in Q2, we actually spent much less than we planned. So even though revenues decreased, we ended up with a much smaller net loss in Q2 than we projected, and because of this, we are making up for it by increasing marketing spending significantly in Q3. So the three factors of us spending less in Q2, us spending more in Q3, and also the negative impact on revenues will make the net loss in Q3 widen significantly from Q2, but this is the short-term factor. So moving into Q4, as revenues continue to increase and marketing cost domestically come down significantly, we expect net loss to decrease significantly from Q3

Operator, next.

Yes. Thank you. And next question is from Tian Hou of TH Capital. Please go ahead.

So in the market this year, password is TikTok, Toutiao or all of its apps, they have many apps. So ByteDance Group has already caused a negative impact on some verticals like advertising, short radio, et cetera. But from Momo's second quarter results, we saw no impact whatsoever. So I wonder can management give us, how to say it, insights, what is exactly the uniqueness of Momo, enable you to avoid this content kind of a titanic how much give you pressure? So, going forward if the ByteDance in your vision is going to give you any negative impact? And what's your strategy to cope from the potential -- if there is any potential pressure? Thank you.

Okay. Let me quickly translate. That question, I remember I've answered like countless times in the past. Every single time from the investor point of view things may seem a little bit different. But actually, from our standpoint, we really haven't seen any substantial change in the competitive environment lately. Our observation is that the live broadcasting business from Toutiao and whole Kuaishou system has been growing very rapidly for quite some time, but we really haven't seen any serious threat by these two players. With regards to what kind of uniqueness about the products or the ecosystem really help us to achieve that, I guess, it's important that a lot of those live streaming platforms for these platforms live streaming is really just a monetization future attached their respective core use case. If you want to understand what makes us unique, what makes us different from those traffic platforms, you have to understand what's the difference between the core use case of Momo, which is a social use case and the core use case on Kuaishou and Toutiao, I guess that's very crucial for investors to understand what makes the live streaming service on Momo different from the live streaming services from all the big traffic. And about my view that the bigger players have not posted any threats to our ecosystem, I think it's supported by hard data. If you look at the second quarter data from paying user side, you saw pretty good growth. And on the lives broadcasting and the agencies, during the past few quarters Momo's content supply ecosystem has been strengthening. For example, if you look at the number of professional broadcasters and compare the second quarter of 2019 with toward end of 2017, before we rolled out the talent incentive program, the number of professional broadcasters during that period of time grew by 80%. And if you look at the number of quality agencies who can bring in sizable monthly grossings, In the second quarter, that number also grew somewhere around 50%. On the revenue side in the second quarter, we also saw a reacceleration in the live broadcasting worldwide growth rate, and we achieved that during a time where there was a homepage suspension on the core Momo platform. So I really don't think that investors need to worry much about the competitive environment that we're in at this point.

So, given the time, we will make this the last question of this earnings call. Thank you for joining us. We will see you next quarter. Operator, we're ready to close.

Thank you. Ladies and gentlemen, this does conclude the conference for today and thank you for participating. You may now all disconnect.