Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Momo Inc. Earnings Conference Call. At this time all participants are in a listen-only mode. After the management's prepared remarks, there will be a question-and-answer session. [Operator Instructions] Please note this conference call is being recorded today. I would now like to hand the conference over to our 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 2020 earnings conference call. The company's results were released earlier today and are available on the company 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 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 busy quarter for us. Although the economic impact from the pandemic still lingers, we have seen user engagements improving at a steady pace on Momo and Tantan. With things gradually coming back to normal on the traffic side, starting from Q2, our teams have stepped up the efforts to drive toward our strategic goals. Now, let me quickly walk you through the key operating and financial results for the quarter. We are also going to give you an update on the company's priorities for the year, and how we are going to approach them in the coming few quarters. Firstly, a brief overview of the financial performance. For the second quarter 2020, total revenue was RMB3.87 billion, down 7% year-on-year, but up 8% quarter-over-quarter. Adjusted operating income for the quarter was RMB1.04 billion, representing a 27% profit margin. Excluding Tantan’s loss, adjusted operating income for the core Momo was RMB1.1 billion, or a 33% profit margin. On Tantan’s side, I'm glad to see that our testing with the live broadcasting service started gaining traction in the second quarter. Although the membership service was struck hard by the COVID and the associated weak dating activities, total revenues at Tantan’s still grew 82% year-over-year and 35% sequentially, to RMB517 million for the second quarter, driven by the rapidly ramping up live broadcasting revenue. As topline improved, Tantan’s adjusted net loss also narrowed down to RMB70.79 million for the second quarter. Now a deeper dive into other aspects of the quarter, first on operating metric. As the COVID impact began to tail out in the second quarter, and the lockdown measures got substantially relaxed within China, the social sentiment also recovered gradually. The number of MAU…

Thanks. Now let me take you through the progresses we've made across key business lines. Firstly, our live broadcasting. Total revenue from live broadcasting business for the second quarter 2020 was RMB2.6 billion, down 16% from the same period last year, but up 12% from the previous quarter. The sequential increase was largely driven by the rapid growth from Tantan's driver live streaming service, and to a lesser degree, the gradual improvement in Momo core's live broadcasting business. As many of you know, Tantan has been accelerating the testing of its live broadcasting service since mid-April. The testing results have been very encouraging. Wang Yu we will share more details in his remarks later, so I will be mainly focused on the core Momo. Momo core's live broadcasting revenues totaled RMB2.41 billion for the second quarter, down 22% from the same period last year, but up 4% from last quarter. During the second quarter, as the traffic gradually recovered, we held a couple of events trying to test the water for the consumer sentiment, especially that among the top spenders. Although, we did see some incremental revenue contribution from those events, we could clearly see that the overall spending sentiment from the top remained weak. According to our survey, as well as anecdotal conversations from some of our high paying users, a significant portion of them own business in manufacturing and e-commerce industries, in coastal regions, such as Zhejiang and Fujian. It may take some time for these business to fully turn around due to the situation of the pandemic globalize. While it’s hard to predict, how the overall macro climate may develop in the coming few quarters, as the platform operator, we did take considerable efforts during the past couple of months to study what are some of the…

Thanks. So let me briefly review Tantan's operational and business relevance in the past quarter and our next step plans. First on user trends and related metrics. Tantan's domestic DAU showed robust growth momentum after Chinese New Year. In mid-February, the gross trend was disrupted by the escalation of the COVID-19 outbreak, and DAU started declining rapidly. By early May, the epidemic within China got largely under control and the social distancing measures were largely relaxed. After the May holiday, we were able to see dating sentiments and user engagements gradually coming back. By the end of June, Tantan's domestic DAU has rebounded by around 10% from the bottom seen in early April. Now briefly on user trends outside China. Since the beginning of 2020, we've been pulling back the resources from developing countries, such as Indonesia and India, and beefing up the efforts in developed regions instead. As I mentioned before, our overseas strategies primarily geared towards revenue and profit. Although developing countries can provide a large user base, the ARPU we can get under the subscription model from those regions is too low to scale the profit in a meaningful way. While in the developed markets where the ARPU is much higher, we see greater opportunities to obtain better ROI off a much smaller user base. As a result of the strategic shift, the overseas DAU turned it down in the first-half of 2020. But revenues from our overseas markets continue to grow at a healthy pace, despite the headwinds from the COVID-19 pandemic. Within our overseas development plan, we still see huge growth opportunities in the developing countries. However, based on our understanding of user behavior and psychology, we believe that as compared to the subscription model, pay per use value-added services should make much better sense…

Thanks. And thank you for joining our conference call today, let me briefly take you through the financial review. Total revenue for the second quarter 2020 was RMB3.87 billion, down 7% year-on-year, up 8% quarter-over-quarter. Non-GAAP net income attributable to Momo was RMB669.8 million, compared to RMB1.24 billion from the same period 2019 or a 46% decrease year-over-year. During the second quarter, the company repatriated RMB2.2 billion from the WFOE, legal entity in China, and incurred RMB220 million in income tax expenses. Excluding this special item, non-GAAP net income for the quarter would have been RMB889.8 million. Let me jump directly into the review of costs and expenses items, as revenue on line items covered comprehensively by Wang Li and Wang Yu. Our non-GAAP cost of revenue for the second quarter of 2020 was RMB2.01 billion, compared to RMB2.04 billion for the same period last year. Non-GAAP cost of revenue as a percentage of total revenue was 52%, increased from 49% in Q2, 2019. Non-GAAP gross profit margin for Q2, 2020 was down by 3 percentage points year-on-year. The decrease was attributed to the following four factors; number one, higher payout ratio from live broadcasting business on Momo due to higher revenue contribution from agencies represented broadcasters. Number two, higher payout ratios from VAS business due to the strong momentum coming from the audio and video social entertainment business, a bigger part of which involve third-party professional hosts. Number three, lower gross margin from Tantan as its live broadcasting business is becoming sizable during the quarter. And lastly, certain fixed nature cost items, such as headcount and depreciation of fixed assets related impacted the gross margin negatively as total revenue declined. And those items represented a higher percentage of total revenue. Non-GAAP R&D expenses for the second quarter was RMB226.6…

Yes, just a quick reminder before we take the questions. For those who can speak Chinese please ask your question in Chinese first, followed by English translation by yourself. And also please limit the number of questions to maximum two, so that everybody gets an opportunity to ask questions. Operator ready for Q&A. Please?

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

That's my first question. And my second question is about the second-half outlook on Tantan, especially along the key metrics, such as paying users and revenue. On top of that, if there's any separate color for live streaming and fast line would be appreciated. Thank you.

Let me take couple of minutes to translate the first question. I think Thomas wanted to understand how exactly the overall adjustment plan is going to impact the revenue in the second-half of the year. And also would appreciate management to provide some quantitative guidance regarding this specific impact from the adjustments. And also what's management's view about the longer-term revenue trends from a Momo core's live broadcasting business as well as the overall topline at the company level.

Let me translate the first part. As we mentioned in the prepared remarks, the adjustment plan that we are currently implementing is touching many different areas on the product side and on the operational side. Some of the measures when initially implemented are going to have some negative impacts on some of the top users and some of the top broadcasters as well. In addition, we are also making adjustments to the KPI system of the agencies, as well as restructuring the way we build the competition events. And the principle here is to gear these systems more toward content improvements rather than purely focused on meeting revenue targets. So as you can see the adjustments on those fronts are going to put some short-term pressure on revenues. And there's this third direction that we are moving toward, which involves holding a series of promotional events in order to revive the long tail content ecosystem. For these events, the company is going to put in respective investments, which is going to have some negative impact on gross margins. In terms of quantifying the short-term financial impact, among the different measures that we are deploying, the ones with relatively bigger short-term impacts are already in the system. We sort of put them in early August timeframe. And the bulk of the impacts should be seen during the first several weeks after implementation, which is to say that most likely the worst of the impact is already behind us. In the guidance that we give, we are modeling in a more than 10% sequential decline in the live broadcasting revenue on the core. Since the middle of August, we have started seeing some initial signs for improvement in the content ecosystem, and the revenue has also been showing some initial signs for…

I think the second question was for Mr. Wang Yu.

Okay. So paying users has already resumed growth. And like I said, up until end of August, it has gone back to RMB4.1 million with a continuous upward trend. But there's one thing that I'd like to call out here. We're currently testing a differentiated pricing strategy for the membership business to maximize the revenue. But according to the testing results, this could slow down the growth of the number of subscribers in Q3, due to the higher average pricing of the bundled packaging. For the live broadcasting business, our focus for now is on user experience. This would include improving content and recommendation engine, as well as better integrating live broadcasting into the overall app. Revenue is not top priority this year. Run rate wise, ideally we would like to keep within RMB5 million grossing per day during Q4. Now that the traffic is coming back, I want the rest of the year to be more about new VAS features than live broadcasting revenue. As for VAS membership business has resumed growth in Q3. For the rest of the year, we're looking at several drivers for the VAS line. So overall, DAU growth that's number one. Number two, we will be launching a new SVIP package towards the end of Q3, the one I just mentioned, which is supposed to be a driver of the membership business according to lab results. Number three, currently we also have a few other new VAS features that we're testing, which could come out either this year or next. Some of them are subscription-based and some might be other part features. Value-added services based on the core dating experience is crucial to experience of Tantan. So VAS will continue to be an extremely important piece in our revenue mix. Thank you.

Thank you.

Operator, ready for next.

Your next question comes from the line of Tian Hou of T.H. Capital. Please ask your question.

So, as of the ecosystem had adjustments, operation wise, there can be a lot of trial and error process. So what are some kind of metrics that management used to measure the outcome or effectiveness of the ecosystem at adjustments? That's the first question. The second question, as last June in Tantan starting to take off. So in the future, what's the revenue mixture is going to look like? So how the live broadcasting and subscription going to be in terms of their proportion in the revenue composition? Thank you.

The adjustment measures that we are currently implementing are going into several key areas. In the area of reducing the concentration, here we will be looking at the revenue contribution from the super top of the pyramid users as well as some of the super top of the pyramid performers. And we will of course, also be looking at the number of paying users of the live broadcasting business on core. In terms of content improvement, here we'll be looking at the number of DAUs in the live broadcasting channels and their respective viewing time, and also the number of active broadcasters on daily basis and their respective broadcasting time. For some of the deeper level product adjustments we're going to be looking at different gauging factors at different stages. I think this is an area where we can probably further the discussion after the call when we have more time. Other than the quantitative measures, some of the more qualitative gauging factors are also extremely important, and it's important for us to make sure that we are on the right track and move toward the right direction with the adjustment plan. And these factors include, whether it's fun to stay in the live broadcasting channels, whether the daily PK events and other form of competition events are intensive and compelling to watch, the overall experience of the consumers, how do they feel, and the overall experience of the broadcasters and agencies, how do they feel, whether they can build up a reasonably good level of revenue and profits, all of these are important things that we're going to be looking at. The other thing that I'd like to point out here is that the changes to the content ecosystem is not going to happen overnight. It requires the commitment and patience from the management also the focus on long-termism. And the changes will happen over a progressive basis. We're hoping that we could use six months period of time to drive gradual changes to these above mentioned quantitative and qualitative measures around the content ecosystem. And the second question.

Yes. So, total ARPU wise, I think Tantan will be similar to Momo, and it could even be higher than Momo over time, given the rising consumption power of the new generation. But in terms of revenue mix, I think it will be different, because Tantan users are much more focused on the coordinating experience. So, I believe that ultimately, the VAS will very likely be a higher percentage of the total revenue than live broadcasting? Thank you.

Thank you. Quite clear.

Sorry, Tian. Operator, given time we're ready to take one last question and then please come back to me for closing. Thank you.

Your last question comes from the line of Lei Zhang of Bank of America. Please ask your question.

Thanks management for taking my question. Two quick questions. One on the competition of dating area, Can you give us some update on the competitive landscape here? And secondly on the bottom line of Tantan and the change of our guidance in terms of breakeven in May next year? Thank you.

So in terms of competitors, we've never been too focused on competition. And we don't really feel any strong or direct competition that we should be worried about. I think that in terms of connecting young singles that could potentially have romantic connections to meet offline. We are by far the market leader currently. So that's for question number one. In terms of question number two, in Q3, we're going to spend a bit more to grow the user base, because usually the summer holiday time presents a good opportunity for marketing. Therefore, net income could be pretty flattish versus Q2. Moving to Q4, revenue will continue to grow meaningfully from both VAS and live streaming. So, even if we continue to spend heavily on marketing, we're still likely to see the breakeven point by the end of the year, but that’s not most happening for us. The strong topline growth should continue into next year, which means that 2021 will most likely be a profit making year for Tantan, unless which is the huge investment opportunities that we have to pursue at the expense of profitability, which we are not seeing at this point. Thank you.

Okay, so just quickly several points to the first question regarding the competition. I think any sort of competition within the open social space will ultimately boil down to one question, and that the single most important question is, who can build the right product to help the users better discover new relationships and build meaningful interactions. On that front, Momo’s team has over nine years of experience and Tantan has around six years of experience. And during that multiple years time, we've seen user behavioral changes and we've gone through multiple rounds of direct and indirect competitions. Some of the competitions came from more focused players in the open social space, and some of the competitions came from ubiquitous application trying to much bigger ubiquitous application, trying to expand into our territory. But I'm happy to see that after all these years, that all these changes, Momo is still -- today Momo is still the dominant player in the respective territory that we are in. That speaks to the capabilities of Momo’s team and also Tantan’s team in the open social space. We are very confident that this is the area where we will continue to be leading down the path. And the other thing is that, the company has built up a comprehensive system and also has a professional team to follow and analyze the competitive landscape on a regular basis. And this is to make sure that the company always -- that we always remain vigilant about what's coming up around the corner. And also this is also to make sure that the company stays at a leading position in the territory that we are in. So, I think this is an area where investors do not need to be too concerned about.

That concludes the conference call today. Thanks for joining the conference call. We'll see you next quarter. Operator, we're ready to close.

Ladies and gentlemen, this concludes our conference, so thank you for participating. You may now all disconnect.