Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter and Fiscal Year 2023 Hello Group Inc. Earnings Conference Call. [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. Ashley Jing. Thank you. Please go ahead, ma'am.

Thank you, operator. Good morning and good evening, everyone. Thank you for joining us today for Hello Group's fourth quarter and fiscal 2023 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. Tang Yan, CEO of the company; Ms. Zhang Sichuan, COO of the company; and Ms. Peng Hui, 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&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 provision 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 this 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 our COO, Ms. Zhang Sichuan. Ms. Zhang, please.

Thank you. Hello, everyone. Thank you for joining our call. 2023 was a busy year despite many changes and challenges in the external environment. Our team makes steady progress in implementing our strategic priorities and achieved solid financial results. I'd like to walk you through the details of our work across business line in the fourth quarter and fiscal year 2023, and then outline the strategic goal for fiscal 2024. I will start with a brief overview of our financial performance. For the fourth quarter of 2023, total group revenue was RMB3 billion, down 7% year-over-year and 1% sequentially, which is at the high end of our guidance. Adjusted operating income was RMB644 million -- sorry, RMB664 million, up significantly by 33% year-over-year. The profit margin was 22.1%, a significant improvement of 6.6 percentage point year-over-year. Total revenue from the Momo app and standalone new app was RMB2.73 billion, down 5% year-over-year. And adjusted operating income was RMB637 million, up 24% year-over-year with a margin of 23.3%, up 5.4 percentage points year-over-year. The year-over-year improvement in profit margin was primarily due to our team's excellent cost management and improved efficiency in resource utilization over the past year. Total revenue from Tantan came in at RMB272 million, down 21% year-over-year. Adjusted operating income was RMB27.04 million with a margin of 9.9% compared with an operating loss of RMB13.17 million in the same period of previous year. For fiscal 2023, total group revenue was RMB12 billion compared with RMB12.7 billion in 2022. Adjusted operating income was RMB2.57 billion, up significantly by 27 year-over-year with a margin of 21.4%, up significantly by 5.4 percentage points. The strong improvement in gross profit and margins despite lower revenue was mainly driven by our effective cost optimization and efficiency improvement initiatives across our businesses over the…

Thanks, Sic. Hello, everyone, thank you for joining our conference call today. Now let me briefly take you through the financial review. Total revenue for the fourth quarter 2023 was RMB3.0 billion, down 7% year-on-year and 1% quarter-on-quarter. Non-GAAP net income attributable to the company was RMB514.7 million, up 5% year-on-year but down 15% from the previous quarter. 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 which supported the stable productivity of the Momo cash cow business and turns Tantan profitable. Now let me walk you through the details. Looking into the key revenue line items for the quarter. Firstly, on live broadcasting. Total revenue from live broadcasting business for the fourth quarter of 2023 was RMB1.52 billion, down 12% year-over-year but flat quarter-over-quarter. The year-over-year decrease was mainly due to three factors. Number one, soft consumer sentiment in the current macro environment. Number two, our proactive operational adjustments to reduce competition events related revenue in order to better manage regulatory risk. Number three, Tantan pivoting away from the less dating-centric live streaming service. Momo application live broadcasting revenue totaled RMB1.42 billion for the quarter, down 9% year-over-year, but up 1% quarter-over-quarter. Tantan's live broadcasting revenue amounted to RMB100.2 million, down 39% year-over-year and 17% quarter-over-quarter. Revenue from the value-added service for the fourth quarter of 2023 was RMB1.42 billion, down 2% from Q4 last year and 3% sequentially. Revenue from value-added service on an ex-compound basis was RMB1.26 billion in the fourth quarter of 2023, same as Q4 last year, but down 3% from the previous quarter. Momo application value-added service revenue decreased both on a year-over-year basis and a quarter-over-quarter basis. This was due to a weak spending sentiment as well…

Just a quick reminder. Before we take the questions, for those who speak Chinese, please ask your questions in Chinese first and followed by English translations. And also please limit the number of questions to a maximum of two. So, operator, we're ready for questions.

[Operator Instructions] Your first question comes from Xueqing Zhang from CICC. Please go ahead.

Thanks, management, for taking my question. And my question is about overseas business. Could management share with us your business key strategy and any financial guidance for the next two years to three years? Thanks.

I think our team's main competitive advantage in the overseas market lies in the social space and value added services based on social and entertainment products. Our domestic team has very comprehensive capabilities in social product innovation, monetization and profitability, SoulChill is a good example of how these capabilities can be replicated overseas. At present, SoulChill still has a visible room for improvement in three aspects. Number one, tap deeper into the monetization potential in its existing market. Number two, add video-based SoulChill experiences. And number three, expand into new market. Based on the current trend, we believe SoulChill will continue to deliver decent revenue and profit growth this year and the growth will come from several directors. First, considering we're not doing a very good job in terms of localization, especially compared to our peers who have been in the overseas entertainment industry for many years, we're still far from good. Currently, we are accelerating our localization process, which is crucial for user experience and continued growth. Second, with limited staff and other resources, SoulChill's entire growth in the past came from audio-based SoulChill experiences. However, Momo has strong capabilities in building video-based interactive features that can be replicated in overseas products, and we will invest more resources in this area this year. And third, we will expand our services to the GCC countries in the Middle East and other countries. And in addition to SoulChill, we also launched several new products in the past year. One of which is doing quite well. We will try to ramp up its investment in the second half of this year. In addition, we believe that dating services have a lot of room for growth in Asia and overseas Chinese communities. In the past, we have been trying to explore effective ways to drive growth, but encountered many pitfalls. We lacked sustained and effective resource investment and most importantly, we didn't do much in terms of localization. Nevertheless, Tantan is still a very mainstream and important dating product in Asia, especially in the Chinese communities. And Momo also has established a solid foundation among overseas Chinese. We should better make use of this asset to tap its growth potential. This year, we will step up our efforts in the dating space to enhance overseas user experience and increase our overseas market share. Regarding our results allocation, for 2024 we plan to greatly feel overseas in terms of human resources and capital allocation so as to accelerate localization. Around the end of last year, we adjusted staff in each business line and transferred some top product operations and technical talent to new endeavors in order to strengthen the support for overseas team. And the budget allocation was also tilted towards overseas businesses. This approach will enable us to back root in the Middle East market while accelerating our efforts to explore new regions and new products. As for the revenue and profit guidance, I will leave it to Cathy.

Okay. Revenue and profit expectations, I'll try to look at this. If we do a decent job in the three areas that Tang Yan mentioned, namely beefing up local operations, expanding to video service, and diversifying to other regions, we should be able to maintain similar growth rate as we saw in 2023 in terms of top line. Profit-wise, I think we're still going to be growing pretty meaningfully. However, because SoulChill is still at an early stage of development and we're currently seeing a lot of growth opportunities. If ROI makes sense, we're going to be very flexible in terms of how much of the incremental revenue we would invest back to pursue higher growth. In other words, I think we're going to continue to see steady growth at bottom line, but in terms of magnitude of the profit growth in 2024. It is secondary to top line and user growth. Now, for a more longer term point of view, if we take a three years perspective, we have an internal goal that we would like overseas revenue to take up a very sizable portion of Hello Group's top line. Obviously, to get there, SoulChill needs to be able to continue to grow that needless to say. In addition to SoulChill, we have to achieve decent level of success in building other products and in other parts of the world. Tang Yan and Sic already laid out a few areas we're going to be pushing very hard to grow organically. I would like to stress that over the past few years, we have also built up a very strong balance sheet. If we see good opportunities out there, we can certainly leverage our cash position to supplement the growth that we can achieve organically. So hopefully, that addresses your question. With that, back to Ashley for next question.

Operator, next question, please.

Thank you. The next question is from Henry Chen from JPMorgan. Please go ahead.

Thanks management for taking my question. The question is about shareholder value return. We noticed that the dividend payout ratio has decreased from 50% last year to 30% this year despite the solid profit growth. So could management shed some light on the rationale behind the dividend payout reduction? Is there any consideration for a regular dividend plan in the future? And lastly, could management share your perspective on the buyback execution plan moving forward? Thanks a lot.

Okay. I guess that's a question -- I will take that question. So, first on the payout ratio question. When we think about how much profit we're going to pay out, we compare our offshore cash reserve and the potential offshore capital demand. As Tang Yan and Sic mentioned earlier, the biggest investment area for the coming couple of years is overseas expansion whether we invest organically or through M&As, it might consume more offshore cash than the past few years. With the foreign exchange controls, I guess it makes more sense to try to be more conservative in terms of returning cash to shareholders through dividend payments. So that's the first reason. The other factor that led to the decision to lower the payout ratio a little bit this year is that we consider our stock significantly undervalued at this point. With the stock trading below the net cash value, I believe it's more efficient to buyback versus paying cash dividend. So that's my response to payout ratio. Is there a question about why not paying a regular dividend and why not -- regular dividend. So, why not a regular dividend plan? We've been paying cash dividend for -- against the past six years or seven years in a row. And we've said many times that if we continue to generate more excess cash than what we can effectively deploy, we will continue to return them to the shareholders either through dividend or share repurchase. So whether or not we have a more regular plan or not, we've already get the expectation right. At the same time, we're still seeing -- like we said before, we are still seeing any growth opportunities and investment areas. And without 100% flexibility in foreign exchange, it may not be too wise to be pinned down by a regular dividend payout ratio every year. I think I heard a question on how we plan to manage the repurchase program. I think from today's earnings release, you can see that we announced an extension of the share repurchase plan. That extension of the plan would allow us to purchase up to RMB200 million for the two years period from now onwards. So like I said, we consider our stock at this point significantly undervalued and it's trading at net cash value. We're going to utilize that cash and take the opportunity to create more shareholder value. That's for sure. Hopefully, that answers your question. Back to Ashley.

Operator, next question, please.

Thank you. The next question is from Leo Chiang from Deutsche Bank. Please go ahead.

Thank you management for taking my question. My question is about core Momo. Could management share the business outlook of core Momo on both live broadcasting and VAS in 2024? How the current macro environment has impacted the spending for core users? And lastly, how to view the profit stability of the core Momo in 2024? Thank you.

As Sic mentioned earlier, our goal for the Momo app is to maintain the productivity of the cash cow business within a healthy social ecosystem. Given the uncertainties in the current market environment and consumer spending sentiment. In order to ensure users' social experience and prevent broadcasters and agencies from adopting a radical modernization approach to obtain competition event-related bonuses, we plan to reduce the scale of bonuses to deemphasize our large-scale competition events in live streaming and value-added services that may lead to periodic revenue search. Such an arrangement will undoubtedly cause a decline in competition-related revenue, but we believe it will play a positive role in ensuring the social experience, engagement and retention of paying users, especially of those high-paying users. On the product and operation front, we will better leverage monetization opportunities brought by more and more social attributes, and enrich gamified features and interactive tools for the top and middle cohort users to drive organic revenue growth. Momo is a mature brand with a 12-year history, but our product team has always been passionate about product innovation. As a result, over the past few years, Momo has demonstrated outstanding stability in terms of user traffic and profitability. Although the challenges in the current external environment are still tough, we believe that as long as we stabilize our basic social fundamentals and continue to make efforts to progress with time, Momo will continue to be a healthy and stable cash cow for the foreseeable future. providing a solid foundation for the group's future expansion. As for the specific financial related guidance for '24, Cathy will answer.

Okay. I guess, in her prepared remarks, Sic has already spelled out the priorities on management's agenda for 2024. Let me try to translate them into the impact on financials. When we say Momo segment, that segment actually includes the cash cow business of the old Momo app and also the revenue generated by the new applications, mainly SoulChill. For the cash cow business, one of the key themes is to this year is significantly deemphasized on the promotional events and the competition for regulatory reasons. And that would involve changing the operational strategies and bonus structure for both live streaming and value-added service business. And that could significantly lower the event a cash competition-driven tipping revenue. However, the non-event and more organic part of the revenue will increase. In the near term, though, it's difficult for the organic part to make up for the event-driven revenue that we're going to lose. So I guess the top line for the cash cow business will continue to see some pressure on a Y-o-Y basis for the coming few quarters because of that operational that strategy changing operational policies. With regards to social and other new applications, we continue to see pretty strong growth momentum, which is going to partially offset the decline of the cash cow business. So if you put the different pieces together and try to get a more quantitative outlook, this is probably what I can say at this point. We've already given our Q1 guidance, as you can see, at midpoint, we're seeing a -- somewhere around 10% year-over-year decrease for Momo segment. In it, I guess, the cash cow is declining mid-teens percentage, offset by a 40%-something Y-o-Y growth from the new applications. I don't have enough visibility to pin down the rest of the year with very reliable numbers. But I guess we can use Q1 as a good basis for the projection into the last few quarters of the year. And how do we move from Q1 will heavily hinder upon several factors, namely the macro, the regulatory environment and how well we execute our overseas strategy. So I guess that's what I can say at this point. I will keep you updated as the year progresses. Now back to Ashley for more questions.

Operator. Just in the interest of time, let's just take one last person for today's call.

Thank you. The final question is from Raphael Chen from BOCI Research. Please go ahead.

I will translate myself. I have two questions. First one is regarding Tantan. Could management share the latest user trend, marketing and monetization strategies in 2024? And any guidance on its revenue and profit this year? Secondly, could management mention -- I see management mentioned new products related to Apple Vision Pro in the prepared remarks. Could you have -- could we have more insights on the product details? Also considering company plans to ramp up exploring new business opportunities. How do we evaluate the margin trend in 2024? Thank you.

At the beginning of this year, our user base continued to be under pressure from factors such as the COVID wave further reduction in channel investment, and the Chinese New Year holiday. After the holiday, as the external negative factors subsided, Tantan's new user engagement and new user paying ratio started to bottom out and stabilize. Our goal for Tantan this year is to improve the core dating experience. And on top of that, build an effective -- an efficient business model that drives some profitable growth. In order to improve the core dating experience, we need to constantly innovate use cases and explore dating scenarios around the core dating theme, provide more tailor-made services for users in different markets, and maintain a healthy, stable ecosystem. Achieving profitable growth depends on business model innovation and channel OI improvement. Last year, we achieved good results in reducing unit acquisition costs. And this year, we'll continue to improve our monetization capability based on the core dating experience. For example, around the Chinese New Year holiday, we launched a pilot campaign for our membership product that is higher than the Black Gold membership. I received a very positive feedback from the first batch of high-paying users. Through this new premium membership, we hope to, first, unleash the spending power of the existing high-end members. And second, capture the dating needs of the top cohort paying users from live streaming. Meanwhile, we will also leverage our algorithm to improve the basic member experience and drive paying ratio growth. If through these efforts, ARPU can continue to improve without compromising user experience and retention, we will truly realize a positive business cycle and achieve profitable growth by increasing marketing investment. For other financial-related questions, Cathy will answer them.

Sure. So as Sic and Tang Yan mentioned, the focus of Tantan this year can be really broken down into two priorities. One is to continue to improve the core dating experience. In the past couple of years, we try to diversify into live streaming and the more community-driven entertainment experience, such as chatroom experience. Now we can conclude that although these efforts did contribute meaningfully to ARPU, they are not very compatible to saving experience at this point. And therefore, we will increasingly pivot away from these more entertainment-oriented experiences. And the other focus for Tantan this year is, of course, to continue to improve paying user experience so we can drive a higher ARPU. If ARPU and user retention continue to improve to the point where ROI turns positive, we will definitely ramp up marketing to drive user and top line growth. That's when we are going to see what we call a profitable growth cycle. However, before we hit that tipping point, it's possible that we will continue to see top line trending either flat or slightly under a bit of pressure as we continue to scale back from live streaming and the chat room experience. However, if we are successful in reaching that tipping point and enter into a positive business cycle, as we described, we can see growth in both top line and bottom line. At this point, I would say investors probably still need to have more patience as we work our way to get there.

With the continuous iteration of XR hardware, more and more new users are joining the XR virtual space. The development of hardware has broken through the limitations of social models in the mobile Internet era and has also brought new opportunity to us who are dedicated to the social space for the past decade. inspace users can create their own avatars and personalized space and invite Apple Vision Pro users around the world to have parties, play, chat and have fun together. And inspace built in real-time translation function allows users of 12 major languages to communicate without barriers. Checking over social or dinner-party games makes getting together more fun for acquaintances who are thousands of miles apart. And it also helps break the eyes for strangers in the open social space. We plan to roll out more use cases and gamified features based on localized users preference in different regions, and to make better use of technological innovation to break through the traditional social experience. For the investment budget for new endeavors and our overall margin trend, I will leave them to Cathy. Cathy, please.

Investment budget for new endeavors. Internally, we do have a budget for new endeavors. But at this point, we hesitate we will probably defer until later to answer that question with a more definite number because we want to keep the budget flexible at this point in time. If we see really good opportunities, we will invest a little bit more. If the RI doesn't trend good, we will probably invest a little bit less. So it's really a quite flexible number that we're trying to put in there at the beginning of the year. On the margin question, I guess, this is a question about -- at the whole group level, I think for gross margin, it has remained relatively stable throughout 2023, with the largest cost driver which is the payout ratio being stable, I'm currently not seeing any factor that could potentially change that trend one way or another in a very meaningful way. But there is this one thing that I would like to call out here, which might cause the margin to fluctuate a little bit. And that is that as revenue decreases, there could be some negative leverage on the infrastructure cost and also the personnel cost charging to the cost of sales line, which is going to pressure the gross margin a little bit, but we do not expect that to be very significant. So that's what we're seeing on the gross margin line. Operating expenses wise, although we plan to substantially increase our investment in the new business, part of the increase will come at the expense of the old business which won't be consuming as much resources. Now if we try to think about the operating margin on an ex-compound basis, last year, I believe we delivered close to 23% adjusted…

Yes. I think that's it for today. Operator, we're ready to close.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.