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spk04: Ladies and gentlemen, thank you for standing by and welcome to second quarter 2021 Hello Group in Earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please note this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Ms. Ashley Jeng. Head of Investor Relations. Thank you. Please go ahead, Ma'am. Thank you, Afrika. Good morning and good evening, everyone. Thank you for joining us today for Hello Group's second quarter 2021 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. Wang Li, CEO of the company, Mr. Jonathan Zhang, CFO of the company, They will discuss the company's business operations and highlights, as well as the financials and guidance. They will both be available to answer your questions during the Q&A session that follows. Before I 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 Act of 1995. Such statements are based on management's current expectation 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, and 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 to Mr. Wang. I will translate for him. Mr. Wang, please.
spk01: Hello, everyone. Thank you for attending today's call. Good morning and good evening, everyone.
spk04: Thank you for joining our conference call today. I'm glad to be delivering a solid quarter with decent financial results and progress on the strategic priorities outlined at the beginning of the year. Now, I'll walk you through the specifics of our future results.
spk01: First of all, let me briefly introduce the financial performance. In the second quarter of 2021, the total revenue of RMB36.7 billion decreased by 5% and rose by 6%. After the adjustment of this quarter, the operating profit is RMB7.82 billion, corresponding to a operating profit of RMB21 billion. In the short term, the total revenue of RMB31.6 billion decreased from 10% in the first quarter to 6% in the second quarter, and increased by 9% in the second quarter, not including losses. First of all, a brief overview of the financial performance.
spk04: For the second quarter of 2021, total revenue at the group level was 3.67 billion RMB, down 5% year-over-year, up 6% quarter-over-quarter. Adjusted operating income for the quarter was 782 million RMB, representing a 21% profit margin. For the core business, total revenue was 3.16 billion RMB. The year-over-year decrease rate continues to narrow from 10% in Q1 to 6% in Q2. On a sequential basis, revenue from the core business was up 9%. Excluding 10% loss, adjusted operating income for the core model was 823 million RMB or a 26% profit margin. 10% total revenue came in 514 million RMB for the second quarter, down 1% year-over-year and 10% sequentially. Adjusted net loss from Tantan was 44.52 million RMB for the quarter, compared to 70.79 million RMB for the year-ago period. The revenue mix of the group remained healthy, with VAST representing 72% the size of live streaming.
spk01: Next, I will introduce the current situation. I will first introduce the operation and business progress of Menglu's main app, and then talk about Tantan. Now, a deeper dive into the quarter. I'm going to focus on core moments operational and business updates for now, and move on to Tantan later.
spk04: First thing first, the growth of the CoreMOMO community. CoreMOMO had 115.6 million monthly active for the second quarter of 2021, up 4% year-on-year, and a slight natter from Q1. The user acquisition environment was not ideal in Q2 due to aggressive channel marketing investments from e-commerce companies in June. We therefore lowered the marketing spend for ROI considerations. leading to the limited quota of in-app apps for MAU.
spk01: Although the second wave of MAU needs to be protected, the group has made good progress in improving the basic social experience of the platform. From the promotion of the platform, the quality of the existing users' activity has been improved, and the number of users using it every day has been high since the outbreak of the epidemic. The number of people nearby has reached the highest level since 2019. The number of people nearby has also reached a new high since the outbreak of the epidemic. During the second quarter, despite the conservative approach at the top of the funnel, our team made good progress within the funnel by improving the basic social experience on the platform.
spk04: The user time span reached its peak since the beginning of the pandemic. The number of daily impressions of the nearby people reached an all-time high since the homepage suspension in 2019. The number of daily impressions of the nearby posts also hit a new record high. The improvements in engagement metrics show that the fundamentals of CallMormor as a social platform continue to be solid. Number of paying users for the quarter was 9.3 million compared to 8.9 million a year ago. The increase in the number of paying users was primarily driven by the growth of VAR business on the core.
spk01: Before we review the revenue and financial results of this quarter, I would like to reiterate the goal of the company's growth since the beginning of the year. There are three goals for Mojo App this year. First, to use limited marketing budget to achieve a stable growth of group business users and achieve a better ROI than last year. Before I get into the operational and business review, I'd like to reiterate the strategic priorities the team has been pushing against since the beginning of the year.
spk04: On the CodeMOMO side, the three goals for this year are, number one, further grow the core user base with limited marketing budget and improved ROI versus last year. Number two, bring the business back on the growth track. And number three, continue to enrich our product portfolio and push the boundaries beyond MOMO and Tantan. On the Tantan side, the single most important goal for the year is to deliver a solid user growth by substantially improving the marketing efficiency and the call-dating experience. Now, let me walk you through what we've done in the past quarter in order to push forward to each of the priorities.
spk01: First of all, let me introduce the progress we've made in promoting user growth by providing better service and user demand. In the past few months, we have made significant improvements in the way we help users around nearby functions, establish relationships, and achieve interaction. As we all know, the nearby people and the nearby dynamics have been a symbolic function of our platform for many years. It has played an important role in connecting users. Over the past few years, the local people and the dynamics have been separated by a single geographic location. It has become a multi-dimensional connection driven by complex algorithms. In the form of presentation, we are gradually adding more and more personal information, so that users can more intuitively find interesting elements in the nearby people. The data shows that these changes have played a very active role in improving the efficiency of recommendation and user-based social experience. In the second quarter, we continued this logic and tested a new recommendation system, using a single-card full-screen recommendation model to replace the list of nearby people. The new system and its changeable form can present more comprehensive user information to other users in a more prominent way. Such a browser can understand and assess the people they may be interested in from many aspects, rather than a fast and mechanical slide down a long list of users. More importantly, the new system-type built-in engine provides more room for development, and can provide more exposure to those who do not seem to be strong in the nearby people who are already in the supply chain. But in fact, it is very likely that there is a social effect of R1 for you. First, regarding the progress we've made in better serving the user's need and driving user growth.
spk04: During the past few months, we've taken a major step in renovating the way we help our users to discover new relationships and build interactions around our nearby features and functionalities. As many of you know, nearby people and posts are our signature features that have been around for many years. They have been playing a pivotal role in how we connect people. Over the past few years, nearby people and nearby posts have evolved from connecting people based on a single dimension of physical proximity to a much more sophisticated algorithm, incorporating a wide diversity of connecting elements. In terms of presentation, we've also been adding more personal information so that users could find more funding elements right on the nearby people list. Data has shown that these changes have played very positive roles in driving the efficiency of recommendation and improving the basic social experience of normal users. In Q2, we pushed further on that front by experimenting on a new recommendation system, which replaces the nearby people list with a sequence of full screen single user profile cards. The new system and display format allows more comprehensive user profile information to be presented to other viewers in a much more prominent way, so that they can focus on each individual from multiple aspects, rather than just quickly, and in many cases, callously, scroll down the list with numerous profile pictures. More importantly, the new system also gives the recommendation engine more leverage to allocate higher exposure to the users who potentially can be a good match but are not necessarily accessible or eye-catching enough on the crowded invite people list. Such mechanism gives us much more room to decentralize the attentions received by a relatively small portion of female users to a wider range of female users, which can further improve the rate of response and the quality of interactions. We've been two months into the A-B testing, and the results are consistent with our expectation. We will continue to optimize this new version and gradually make it available to more users in Q3.
spk01: In addition to Momo's group of apps, the team has also achieved a steady development in the field of brand correction. SoChill is a video exchange product focused on the lower-end market, with a drop of nearly three times the number of paid users. SoChill is a social product facing the online market. The second group has also made good progress in terms of user growth. These new products, such as Hezi, SoChill, and SoChill, are currently in a relatively early stage of development. From the point of view of these products, they may not develop into large products like Momo or Tantan.
spk04: In addition to the core MoMo, our team has also been making solid progress with enriching our brand portfolio for the company. ZuiZhui, a video matchmaking application targeting lower tier cities, almost doubled its DAU and paying users from Q1. Socio, a social product targeting overseas markets, also made impressive progress in user growth during the second quarter. These new experiences, such as HUD, SuiDui, and Socio, are still at a relatively early stage of development. On each individual basis, they may not grow up to be something as ubiquitous as MoMo or CanCan. However, it can help the company expand our market share in specific niche markets and collectively can also make meaningful bottom line contributions to the group. Next, let me review the progress that we've made against our priorities of bringing the cash cow business back onto the growth track.
spk01: Firstly, on live broadcasting, HomoCost's live broadcasting revenue totalled 1.88 billion RMB for the second quarter, down 22% from the same year last year, up 10% from last quarter.
spk04: Live streaming revenue came in better than our original expectation. The year-over-year decrease continued to narrow from the previous quarter. The better-than-expected spending recovery can be attributable to three factors. Number one, the steady improvement in the overall content ecosystem. Number two, introduction of long-term oriented features and operational events. And number three, revival of the supply side boosted by the new incentive program.
spk01: Next, let me introduce our subsidiary business. Thanks to the unwavering commitment of the team to create and operate the product, Lens has maintained a strong trend in the second quarter. Its revenue increased by 38% from last year's total growth to RMB1.2 billion. The chat room is still the most important driving factor in Lens's business. In the second quarter, the team launched a new game in the chat room to maintain the attractiveness of new products and users. For example, we introduced the 8-person microphone experience. It can be used to encourage performers to connect to the mic at the same time. Users can send virtual gifts to the performers and ask them to sing or read the script. Users can also assign scripts to join the team or participate in other types of game play. The experience has reduced the threshold for long-term users to enjoy high-quality interaction and has been widely welcomed.
spk04: Now turning to Vaas, driven by the team's resounding focus on product innovation and operational efforts, value added service maintained its strong momentum in Q2, growing 38% from the same period last year to 1.21 billion yuan. Chatroom continued to be the most significant growth driver for Vaas. In Q2, the team introduced some new experiences to the chatroom to keep it fresh and engaging for the users. For example, we brought in experience, where eight grassroots talents are concurrently available on open mics, and users can send virtual gifts to request performances ranging from singing to script reading. Users can always join the talents for role play or participate in other kinds of gamified activities as they wish. This experience lowered the entry barrier for long-tail users to enjoy high-quality interactions and gained immediate popularity.
spk01: Virtual gifting within the traditional use case, in particular the interest group, grew meaningfully in Q2, driven by operational events such as the last battle, 520 Lian Ai Dazhuozhan,
spk04: On the product side, the newly launched customized gifts were well-received by users, driving growth in the number of paying users and our pool.
spk01: In addition to the maturity of the market, fate exchanges have also continued to show good performance. The team has adjusted the business policy to provide better training opportunities for entry-level brides and bridesmaids. The number of bridesmaids has increased rapidly, leading to a continuous increase in the flow of water. According to the fate exchange, in the second half of the year, the growth will continue to increase and the revenue will generate more significant contributions.
spk04: In addition to the established experiences, the matchmaking experience, , continues to gain traction. We have adjusted our operational policies to provide better training opportunities for the entry-level matchmakers. As a result, total number of quality matchmakers increased significantly, which in turn drives revenue growth from this experience. We expect the matchmaking experience to accelerate its growth and contribute in a more meaningful way heading into the second half of the year.
spk01: Next, I will quickly introduce the new business. In the second quarter, the growth of independent CNX revenue is very strong. It is the second largest business to contribute to this growth. The growth of revenue is mainly due to the growth of users, not the improvement of RP2. The company has been taking a relatively decisive attitude in RP2, focusing on building better user experience and improving DAU and flow rate. In the second half of the year, we will continue to do so.
spk04: Now briefly on the new endeavors. Revenue from the new apps showed robust growth momentum in Q2. Collectively, the new bucket was the second biggest incremental revenue contributor to the bus top line. The organic revenue growth was driven by user-based expansion instead of pulling up RP pool. Our team has been operating these apps at a controlled pace on the RP pool front, focusing primarily on building better user experience to drive the growth of DAU and retention ratio. Heading into the second half, such approach will continue to be guiding our execution in the new bucket.
spk01: In general, we are happy to see the performance of the team's performance in implementing several key business points. As a social platform, FOMO Group has been continuously growing. At the same time, the performance and income structure of revenue are also steadily advancing towards the goals set for the beginning of the year. This is why we are confident that FOMO Group will continue to be a healthy and high-end cash business, which will open up new areas for us and provide solid security for the long-term growth of the group.
spk04: All in all, I'm glad to see that the team has been doing a good job in executing against all of our strategic priorities. The fundamentals of the core model as a social platform continue to strengthen. At the same time, the revenue performance and structure are seeing solid improvements towards the targets set at the beginning of the year. These give us the confidence that the core platform will continue to be a healthy and productive cash-to-house, which gives us important leverage to plow new ground and build longer-term drivers for the group.
spk01: Now let's talk about Tantan. First of all, it is the user trend and overall financial performance. We made adjustments to Tantan's management team in mid-May and began to invest in remote work. In addition, it took some time to find the key problem, redesign the back-end system, and build a team. Now turning to Tantan. Firstly, on user trend and overall financials. We made adjustments to Tantan's management team and started making deployments on various product and operational fronts in mid-May.
spk04: It took us some time to lock down the key issues, rework the backend system, and put together a functioning team. The transition has caused some temporary disruptions, which have put some pressure on average DAU in the second quarter. As a result, average DAU in domestic market for Q2 was slightly lower than that for Q1. However, total DAU remained sluggish on the sequential basis. due to the growth in other markets in Asia as we resume our efforts in overseas development.
spk01: However, the recent increase in female pay increases have caused a negative impact on the pay transfer rate, because female users are less likely to pay for their personal services than men. Thirdly, it is affected by the adjustment factor of the group. The second quarter of the poverty crisis has temporarily returned, and the pressure will be transferred to the paid users.
spk04: Tencent's paying use account came in 3.1 million end of Q2 2021, down from 3.5 million from last quarter. The 400,000 net decrease was due to the combination of three factors. Number one, the spin-off of certain business in May had around 400,000 negative impact on paying user count. Number two, the improvement in the female percentage in new users acquired in the recent months adversely impacted paying conversion, as women are much less likely to pay for baths in comparison with men. Number three, the lower average DAU in Q2 caused by the transition and related operational disruptions were translated into the paying user count. We're happy to see that both DAU and the number of paying users have started ramping up since early July as we move forward with our efforts in reforming the user acquisition approach.
spk01: Next, I would like to briefly review the financial performance of Tantan. Tantan's total revenue of 5.14 billion RMB in 2021-2022 decreased by 1% in total, and decreased by 10% in total. WAN's revenue decreased by 6% to 2.97 billion RMB, mainly due to the decrease in the number of subcontractors. The reasons for this are not explained here. On the other hand, the transfer of members to higher-priced services has pushed the growth of WAN's business, ABPU. The revenue of live broadcasts decreased by 14% to 2.17 billion RMB, Now, let me briefly review Tencent's financial performance. Total revenue for the second quarter was 514 million RMB, about 1% year-on-year and 10% quarter-on-quarter. Mass revenue decreased 6% sequentially to 297 million RMB.
spk04: The sequential decrease was due to the decrease in paying user accounts. reason of which already explained in the previous part. RP pool of us on the other hand increased slightly quarter over quarter as users shifted towards higher price membership service. Live streaming revenue decreased 14% sequentially to 217 million RMB. The decrease in RP pool was due to our strategic decision to de-emphasize live streaming as a supplementary experience to dating.
spk01: Now, turning to the most important part of my speech today, our plan and effective execution on how to drive Tantan's user growth and unleash its full potential going forward. After the second stage of team adjustment, we have sorted out the public sector and developed a target implementation plan. The plan includes the following three sub-projects. First, to increase the impact rate. Second, to create a core social enterprise that attracts people by means of tools. Third, to build an effective recommendation engine.
spk04: Tantan encountered many challenges in the past couple of years. The single most important goal for Tantan this year is to deliver a solid user growth by substantially improving the marketing efficiency and the quality experience. We spent the rest of Q2 coping through the key areas of focus and coming up with an execution plan for that goal. There are three pillars supporting the plan. Number one, improving marketing efficiency. Number two, making the core dating experience more appealing. And number three, having an effective recommendation engine.
spk01: In terms of the engine, we found that a key problem is that the new user structure from the channel is very unreasonable. In the past, in order to control the cost of unit delivery, the cost of delivery has been increased. In order to achieve the goals of revenue and paid users, part of the demand for new users has been sacrificed in the delivery section. This has led to the gradual deterioration of the user structure, the loss of gender ratio, and the rapid rise of average age. The consistent user structure is important for the overall user experience and the long-term health development of the dating environment. Therefore, before discussing the growth of users, we must first solve the structural problems of new users. I put this as the work focus of Team 2. We are very happy to see that the group has achieved preliminary but effective progress in the past few months. The number of new female users increased from 20% last year to 45% in August. The average age of new female users decreased by 7 years before the group was adjusted. However, due to the relatively higher cost of women and young users, the average cost of customers increased by a higher level in June. Our main goal is to reduce the cost of customers by continuously utilizing advertising materials and data systems based on the current better user structure.
spk04: On the marketing front, one of the key broken windows was identified, like in the new user structure. What happened here was that in order to control the unit acquisition cost and improving paying conversion to meet quarterly numbers in revenue and paying user count, Tantan had been compromising the quality of new users acquired through channels. It had led to a gradual deterioration in the user structure, evidenced by the proportional gender ratio and a rapidly increasing average age of the new users. Having a balanced demographic is crucial for user experience and a long-term healthiness of the dating ecosystem. Therefore, we have to fix the structure in new registration before we can even talk about user growth. I made it the key focus for the team in Q2. I'm glad to see that we've had some initial but very impressive progress during the past few months. Female ratio in the newly acquired users increased to 45% in August from around 20% last year. The average age of new female users has dropped seven years from the period before we took over. However, because it's relatively expensive to acquire female and younger users, the average user acquisition cost went up to a pretty high level during June. Our main goal in Q3 is to bring down the unit acquisition cost based on the current user structure. Of course, this goal should be achieved through continuous optimization of app material and data management system. After we reach a reasonable level of the cost front, we will increase the marketing plans to drive top of the funnel activities. So far into Q3, we've been progressing well against our goal, and the domestic DVU count also been seeing gradual and healthy ramp up since July.
spk01: Another thing on the marketing front that can contribute to overall user growth is brand advertising.
spk04: We believe that Tantan, as a relatively young brand, has huge opportunity to improve user awareness and enhance brand equity if we can spread the core value of Tantan to those who potentially need our service. We will start looking at branding options once we complete our next major product upgrade.
spk01: We need to improve the second aspect, which is to enhance core social experience. 2G's product team has done detailed processing and research on Tantan's product experience and user behavior. There are two things we found. First, Asian women's social media is very common. There are a lot of women who are very active on social media. Some of them don't even slide. The second area we need to improve is to enhance the codating experience.
spk04: In the second quarter, our product team conducted a thorough walk-through of Tantan's product experience and made an in-depth study of user behavior. The study brought two things to our attention. Number one, Asian women tend to be quite passive when it comes to dating. For example, a considerable portion of female users on Tantan right swipe in an extremely selective way, and some may not right swipe at all, resulting in a large number of female users getting no matches or interactions based on the current product mechanism. This is one of the key reasons why female users retention ratio is significantly lower than that of men on Tantan. And the second issue is about 30% of newly acquired users are marked as fake users by Tantan. Fake users refers to those who fail to provide qualified profile photo and are therefore denied full access to the swipe and match system. The retention of fake users tend to be extremely low because of the inability to get any matches or interactions.
spk01: From a product point of view, we want to improve the experience of women and sex users in order to improve the flow of the group. Because of the current product mechanism, the effect of the group of two users is not good. We realize that we need to be more creative at the product level, rather than simply adjust or repair the current sliding system. We want to provide users with additional links other than the current product mechanism, and use non-face-to-face link elements to stimulate those introverted or slow users to understand each other. The most important near-term priority for our product team is to improve female users' and fake users' experience so that we can better retain them.
spk04: Because the current product mechanism tends to be less effective for these two groups of users, we realized that we need to get more innovative and just making minor tweaks or adding patches to the current swipe and match system. Instead, we need to build supplementary experience around it, providing additional ways for people to bond. The goal is that through these additional, more subtle funding elements, more introverted, slow-to-act users can get attracted to each other and gradually open up to others with their real identities, and ultimately build offline relationships based on authentic information. You will see our first step into this problem unfolding at our next upgrade.
spk01: SPEAKER 1 In the past ten years in the field of open-source social media, I believe that the core of a social media scene is whether it has a precise individualized development capability. In other words, the customer needs to feel that this is a product that they need to know or at least try to understand what kind of product they need to look for. Obviously, what we are doing in this regard is not enough. We are building a suitable team to speed up the progress in this regard. This is a problem that we need to solve as soon as possible.
spk04: The third area we need to improve in order to drive user growth is the recommendation algorithm. In the open social space for more than 10 years, I believe the core thing that makes a social product stand out is its ability to make its recommendation more relevant. Users need to feel that this is a product that understands, or at least is trying to understand, what kind of people they're looking for. Obviously, Tantan is not doing a good enough job in this area. We are getting the right team aboard so we can move faster on that front. This is a roadblock that we are determined to crack down as soon as possible.
spk01: to see the growth of the global market in the overseas market. Our team has a lot of experience in social media innovation, member business, and non-member central service. With a team like us, we have three comprehensive strengths. We believe that in the Asian market, we will create a scale-up and ultimately realize a sustainable social platform. The experience of these three aspects is extremely important. This is also one of our future development priorities.
spk04: Beyond the China opportunities, we are also getting prepared to resume the pursuit of Tantan's overseas expansion. We believe there is still a lot of growth opportunity penetrating deeper into overseas Chinese, Southeast Asia, as well as expanding our reach to East Asia and many countries. Our team has rich experience in social product innovation, membership business, and non-membership value-added services. Very few teams have as comprehensive experience on all those three fronts as we do. We believe that in Asia, such experience is very crucial in building up a scalable social platform that can ultimately reap profits. This is an important competitive advantage that we are going to leverage. we would like to see Tantan becoming an indispensable part of people's dating life in Asia. It is a very important constituent of our growth strategy for the company.
spk01: These are the things I'd like to cover on this call. Now, let me pass the call over to Mr. Jonathan Zhang for financial review. Zhang, please. Thanks.
spk07: Hello everyone, thank you for joining our conference call today. Now let me briefly take you through the financial review. Total revenue for the second quarter 2021 was 3.67 billion RMB, down 5% year-on-year, up 6% quarter-over-quarter. Net income attributable to Momo was 551 million RMB compared to 670 million RMB from the same period of 2020 or an 18% decrease year-over-year. Looking into the key revenue items for the quarter. First, on live broadcasting, total revenue from live broadcasting business for the second quarter 2021 was 2.1 billion RMB, down 19% from the same period last year. up 7% from last quarter. Cuomo's live forecasting revenue totalled $1.88 billion for the second quarter, down 22% from the same period last year, but up 10% from last quarter. The year-over-year decrease caused by the structural reform in late August last year continued to narrow down from Q1. Content live broadcasting revenue amounted 416.5 million RMB, down 14% from previous quarter. The sequential decrease was due to our strategic decision to de-emphasize live streaming as a supplementary experience to dating. as well as overall decrease in paying users on Tantan platform. Moving on to VAST, revenue from value added service reached 1.51 billion RMB up 25% year-on-year, 4% quarter-over-quarter. Revenue from VAST excluding 297 million RMB from Tantan reached 1.21 billion RMB in the second quarter of 2021, a 38% increase year-on-year, 6% increase sequentially. A solid performance of Momo's core mass business was primarily driven by the team's focus on product innovation and operational efforts, as Wang Li mentioned. Let me briefly review the cost and expenses items for the quarter. Our non-GAAP cost of revenue for the second quarter of 2021 was 2.05 billion RMB compared to 2.01 billion for the same period last year. The non-GAAP cost of revenue as a percentage of total revenue was 55.8%, an increase from 52.1% from Q2 2020. The non-GAAP profit margin, gross profit margin for the quarter was down 3.7% from a year ago. The decrease was attributed to the following factors. Number one, higher payout ratio from Cuomo's live broadcasting business on a year-over-year basis. The lower gross margin from Tantan, its live broadcasting business has become sizable compared to a year ago. Number three, certain fixed nature cost items, such as headcounts, impacted the gross margin negatively as total revenue declined, and this item represents a higher percentage of total revenue. On a sequential basis, the non-GAAP gross margin was down by 0.6%. Gross margin for Momo Core remained flattish compared to the previous quarter. A slight decrease in the group's non-GAAP gross margin was due to 2% of GP margin decline on Tantan, a certain fixed cost having a negative impact on content scores margin due to the sequential decrease in revenue. It's worth mentioning here our wholly owned subsidiaries, Cool Media and Momo Pictures, produced a variety show, The Honorable Chef, and a film, Like a Friend, respectively. A small portion of the related product cost was recorded in Q2. And the vast majority of the cost is going to be recognized in Q3. We expect the cost incurred in connection with these media productions to have a close to 2% drag on the GP margin in Q3. Non-GAAP R&D expenses for the second quarter was 432.9 million RMB compared to 226.6 million RMB for the same period last year, representing 6.3% and 5.9% of total revenue respectively. The increase mainly due to the increase in employee salaries and social welfare. We ended the quarter with 2,092 total employees, of which 617 are from Tantan. R&D personnel as a percentage of total employees for the group was 57% compared to 60% Q2 last year. Non-GAAP sales marketing expenses for the second quarter 619.5 million RMB or 16.9% of total revenue compared to 590.7 million RMB or 15.3% of total revenue for the same period last year. The year-over-year increase in sales and marketing expense both in terms of RMB amount and in terms of as a percentage of the total revenue was primarily due to higher marketing spending in association with our live streaming dialogue party, which was delayed from Q1 to Q2 due to the pandemic. The increase was partially offset by lower user acquisition investment for content during the management transition period. while our team focused on fixing the structural issues on the content user acquisition system. Nungap G&A expenses was 78.8 million RMB for the second quarter 2021 compared to 91.9 million RMB for the same quarter last year, representing 2.1% and 2.4% of total net revenue respectively. The decrease was largely due to a recovery of that debt previously written off. NAMGAP operating income was 781.9 million RMB as a decrease of 24.5% from Q2 2020 representing 21% 23% non-GAAP operating margin for the quarter, down 5.5% from the same period last year. Non-GAAP OPEX as a percentage of total revenue was 25.4%, an increase of 23.5% from Q2 2020. The increase was mainly due to negative operating leverage as a result of a decrease in revenue. Now briefly on income tax expenses. The company repatriated 1.3 billion RMB from our in China to our offshore entity in Q2 in order to replenish our U.S. solar funding. In accordance with the respective taxation law of China, the company paid 10% or 130 million RMB withholding tax to Chinese tax authorities. This tax payment was recorded as income tax expenses for the company for the second quarter of 2021. Excluding this withholding tax payment, our non-GAAP effective tax rate was around 20% in Q2 2021. Turning to the balance sheet and cash flow items, as of June 30, 2021, our cash cash equivalents, short-term deposits, long-term deposits, restricted cash, and long-term restricted cash, totaled 15.45 billion RMB compared to 16.48 billion RMB as of December 31st, 2020. In Q2, we paid an equivalent of 853 million RMB cash dividends to our shareholders, excluding an equivalent of 678.2 million RMB cash payments to content funders to redeem vested share options upon their departures in Q2. The net cash provided by operating activities in the second quarter was 510.4 million RMB Lastly, on business outlook, we estimated our third quarter revenue to come in the range from 3.65 billion RMB to 3.75 billion RMB, representing a decrease of 3.1% to 0.4% year on year, or a decrease of 0.6% to an increase of 2.1% quarter-over-quarter. For the third quarter of 2021, we expect the total revenue from Core Momo to turn positive on the increase of single-digit percentage year-on-year, or up low single-digit percentage sequentially. On the content side, we expect the user recovery to drive organic revenue growth, but as Wang Yi mentioned earlier, in pursuit to our strategic goal in user growth, we are planning to remove some of the extremely short-term oriented efforts to emphasize live streaming to take care of our user experience and the dating ecosystem. we expect our pool to decrease while we step down, we step back in terms of how deep we monetize Tantan. Overall, we expect Tantan revenue to three, a slight downtick on a sequential basis. Please be mindful that this forecast represents the company's current and preliminary view on the market and operational conditions. which are subject to change. That concluded our prepared remarks. With that, let me turn the call back to Cathy to start Q&A. Cathy, please.
spk03: Yeah, just a quick reminder before Q&A. For those who can speak Chinese, please ask your questions in Chinese first. Follow that English translation by yourself. And also please limit the number of questions to two at maximum so that more people get the opportunity to ask questions. Operator, ready for questions. Thank you.
spk04: As a reminder, to ask a question, you will need to press star one on the telephone. To withdraw a question, please press the pound or hash key. Once again, to ask a question, it's star one on the telephone.
spk02: The first question comes from the line of Thomas Chong from Jeff, please go ahead. Good evening.
spk05: Thank you for accepting my question. I have two questions. The first question is about Tantan. Can you share Tantan's KPI in terms of users? And in the next half year, can you share our KPI from Tantan's revenue and profit? Thanks management for taking my questions. I have two questions. The first question is on Tantan. Can management comment about Tantan's user growth target? And also in the second half, can management share about the Tantan revenue as well as earnings expectation? My second question is on Coa Momo. Can management share any updates about the user and the monetization trend as we come to the second half? In particular, on the live streaming side, can management share about the outlook as well as the strategies for VAS in the next couple of years? Thank you.
spk01: I remember that on our June learning conference call, I said that we expected Tantan's user base to grow
spk03: from 20% to 35% by the end of the year. That's against the June number. That expectation remains unchanged. And as you guys can see, since July, we've already gotten onto the right track to achieve that target at a steady pace.
spk01: As for income, as I said last time, the only important goal this year is user growth and financial experience. All other goals must serve and obey this goal. So in the second half of the year, we have to develop a positive income goal. There are two factors that will affect income. The first is user growth, which will have a positive effect on income. On the revenue side,
spk03: Like I said before, the single most important goal for this year, our content team, is to grow the users and improve product experience. Anything else should be subservient to that key goal. So we actually haven't set a rigid revenue target for the second half of the year. But I can see two things happening down the path. which should have different sorts of impact on revenue. One is user growth. That is obviously gonna have a positive effect on revenues. And given that there is a time lag between user growth and the translation into membership revenue, I feel that that positive impact should be felt in a bigger way in Q4 this year. And the second factor is that starting from Q3, we are already taking, trying to take a few steps back in terms of how deep we monetize in order to protect user experience. That would involve unwinding some of the extremely short-term oriented measures to drive underpaying conversion. That would also involve continuing to de-emphasize live streaming in terms of product design. That will be an ongoing process as we move deeper into the year.
spk01: We have more long-term ideas when it comes to commercialization. First, we have no doubt about the potential in commercialization. Based on our understanding of the consumer interest and energy of carbon users, I think Apo should be at the top of the list. However, in terms of commercialization, we need to break through the model of membership. We need to use the method of membership plus package use, which is the best way for users. This is the commercialization method suitable for Asian culture, and it can fully release the commercialization value of carbon users. And actually for Tantan's monetization, I have some longer term thoughts that maybe worth sharing here. Number one is we absolutely have no doubt in the long term monetization potential of Tantan.
spk03: Based on our understanding of the users, of our users, Tantan's users actually have stronger willingness as well as ability to pay for the dating service. That's why I believe that our peer of Tantan should actually be higher than Momo's. But in terms of monetization approach, we need to break through the singular membership model and try to add in the second pillar. And that second pillar, in my opinion, should be the pay-per-use model. And by having that dual pillar sort of structure, we can take better advantage of the user segmentation. That should be the right kind of monetization approach that fit better into the Asian culture that is also the right kind of monetization approach that could fully unleash Tantan's monetization value. So starting from the second half of the year, we're going to start some product experiments on that front, continuing to explore the non-membership value-added service is going to be the most important priority that we have on the revenue side in the near future. And now here's Johnson to talk about the bottom line for Tantan in the second half.
spk07: Yeah. As I remember, during the last earning conference call, I provided an update on the revised outlook for the Tantan's bottom line. Actually, that picture remains unchanged, still the same. Let me just repeat it again. Because we are going to focus on content's user growth, particularly during the second half of the year, with a lower revenue target, we're going to continue to invest in the paid marketing channels. to acquire new users to help us to achieve our targeted BAU with the growth target. Wang Li just mentioned 20 to 35% growth annually. So with that, we expect the Pantas net loss will widen sequentially, particularly starting from Q3 and Q4. The total annual net loss probably will be in the range of 350 million RMB to 450 million RMB. So that still is our target right now.
spk01: SPEAKER 1
spk03: For the more core business, I think what we're pursuing here is moderate growth on top of a stable and healthy user base. That principle applies to both user growth and revenue growth. For live streaming, I think it's pretty clear that since the beginning of the year, it's already in a state of steady recovery stage And the future growth of the company will be primarily driven by the value-added services. And the growth will be coming from several key areas.
spk01: The first area of growth is
spk03: continuous development of the audio slash video social entertainment category. On that front, the chat room experience as well as the video matchmaking experience on the core are still seeing plenty of growth opportunities.
spk01: The second area of growth is going to be the continuous generation on the interactive gifts. In the past, we had not focused too much on
spk03: being inventive on the skins of the virtual gifts themselves because we didn't realize that there could be a lot of revenue potential in doing so. But actually during the past few quarters, we've been seeing pretty considerable incremental revenue coming from the introduction of new, creative, interactive gifts. So I think there's going to be a lot of potential that we can cultivate in this area.
spk01: And thirdly, I think another key area of growth will be the continuous user growth from the standalone new applications that we're working on. The new bucket
spk03: as a whole are still going to see pretty decent growth both in terms of users and in terms of revenues. Next year, we're hoping that we could see more of these standalone new apps coming into creation.
spk01: With regards to the revenue expectation for the second half,
spk03: We had a previous target that the revenue on the Momo core is going to turn YY positive in the second half. I think in Q3 we're guiding core Momo's revenue to grow 5% year-over-year. In the fourth quarter, we're looking to further accelerate the YY growth rate from that level. More importantly, I think revenue structure-wise, we're going to be increasingly leaning toward a value-added services, which is much more flattish in terms of structure. I hope that addressed all of your questions, Thomas. With that, operator, we're ready for next. Thank you. The next question comes from the line of Tian Hao from TH Capital.
spk04: Please go ahead.
spk02: Good evening. I have a question. I know that the company's name has been changed from MoMo to Hello Group. I don't know if there is any change in the name. Do you have any new ideas about the company's strategy? And then MoMo, yes. I noticed that recently the company's name has been changed from Momo to Hello Group. I would like to know more about the thinking behind the change and also if the company can share any, you know, you know, strategic thinking behind the name change. That's number one. Number two is MoMo has been in the market for a long time. So what is the new growth driver that management think, you know, can be in the next several years to drive companies to drop MoMo's growth? Thank you.
spk01: 谢谢。 那我们这个集团的名字从 MoMo 更改为 Hello 主要是反映了这个公司层面 a multi-app product combination strategy. Momo, as a company, is already 10 years old. Momo has developed two large social platforms from a single function app. At the same time, we have cultivated several other unique apps in terms of social and entertainment. If the Momo app is the company's first engine, then Tantan and other new businesses will be the company's second and third engines. The name change from Momo to Holo Group is a reflection of our multi-application product portfolio approach. Momo as a company is already 10 years old, and we've developed from a single function application to a company that has Momo and Tantan.
spk03: two pretty big social platforms. At the same time, revolving around the social and entertainment services, we've also incubated a few other standalone applications. So if you view the Momo application as the first growth engine of the company, then Conta is the second, and the new stuff that we're working on are going to be the third engine. The growth of the company in the coming decade will be driven by these three different engines in a concerted way. So going back to the reason why we need this new name, I think we need this new company name as a carrier for the company's strategy to continue to diversify into new products and services.
spk01: In the next three years, the biggest and most certain growth point will definitely be carbon. But in addition to MoMo and carbon, there will also be other brands in our product range, such as Hexi, and so on. These products will have a very large value for money in terms of volume alone, but they can still have an objective profit contribution. In the next three to five years, we hope to cultivate a few products like this to serve the people in the industry.
spk03: More specifically, I think in the coming three years, the biggest and also the most definitive growth opportunity is definitely gonna be Tan Tan. Other than Momo and Tan Tan, Now, within our product portfolio, we also have some other newer brands, such as Hertz, Zui Zui. Things like Hertz and Zui Zui, these applications on individual basis may not, like I said, have the potential to grow up to be something as big as Tantan, as ubiquitous as Tantan is. But collectively, they can still make sizable contributions to the bottom line of the company. We're hoping that in the coming three to five years, we could incubate more of such applications in order to cover a broader range of people on the user spectrum.
spk01: In the field of social entertainment, there will be a lot of opportunities in the next 10 years. These opportunities may be driven by technological changes, or by the user's habit of changing. For example, the development of technology in the field of AI, VR, and smart power will inevitably lead to the biggest changes in the future of social platforms. For such changes, we must maintain enough beauty and seize the opportunity. SPEAKER 1
spk03: Lastly, I wanted to take this opportunity to share some of the longer term thinking that I have on the strategic side. I think that in the social and entertainment space, the coming decade will inevitably be seeing the emergence of new ubiquitous platforms or products that can build huge DAU base. Such kind of opportunity could either be driven technological advances or it could be driven by the changes in user behavior. For example, we are now seeing some pretty big stuff happening in AR, VR, smart devices space. The technological advances in this space will inevitably bring phenomenal changes in terms of how people socialize in the future. This is the kind of change that opportunity that we need to make sure we stay vigilant about and get prepared for so that when time comes, we have the capability of seizing these opportunities to grow to be something bigger. Our team has proven capabilities of product innovation in the social space. And our vision and decisiveness to seize the right kind of investment opportunity to grow the business is also proven by time. At the same time, the company is also sitting on huge cash balance and very strong operating cash flow. So I think investors can rest assured that we will continue to push very hard into new areas and growth opportunities, either via self-development or through investment opportunities. This is the area where we have full confidence as well as enough tenacity to carry through. Operator, I think we have time for one last question if there are still other people in the queue. Certainly.
spk04: The next question comes from the line of Daniel Chin from JP Morgan. Please go ahead.
spk06: Good evening, Mr. Guan. Thank you for answering my question. My question is about the monitoring of the live broadcast industry. We saw that last year and this year, the live broadcast industry has some new monitoring policies. And then the latest is this July for network performance institutions. I want to ask how to look at the future monitoring environment of the live broadcast industry. And then will it have any impact on our live broadcast income? Thanks for taking my question. My question is on the regulatory environment of live streaming industry in China. So we have been seeing that since last year there has been several new regulations on the live streaming industry. So the latest one is the July one targeting the online live streaming agency. So I want to know how should we look at the regulatory environment for the live streaming industry in the future, and what's the implication to our live streaming revenue trend? Thank you.
spk01: Thank you. As China's mobile Internet becomes more and more important, the government will definitely pay more attention to industry regulations and interesting developments. Thank you for your question. I think as China's mobile Internet space becomes increasingly important, it's inevitable that the policymakers and regulators are going to take it more and more seriously to make sure that the
spk03: industry develops in an orderly and regulated fashion. That's, in a sense, a very good thing for us because it's leveling the playing field and it's also going to make sure that the whole space moves forward in a healthy environment. So, as always, we are going to be cooperating with various regulatory bodies to make sure that we stay in full compliance.
spk01: As for the policy change in the live broadcast industry, we have been keeping a close eye on it since the beginning of 2020. You can see that since the second half of last year, we have made very important and practical changes in promoting the health of the platform and reducing the consumption of the head. Such changes have already started to play an active role from the beginning of this year. I believe that a new political environment can lead to a healthier and more stable development.
spk03: More specifically, with regards to the policy changes you mentioned in the live streaming space, as a matter of fact, that's something that we've been closely monitoring since the beginning of last year, since the beginning of 2020. As you guys can see, during the second half of last year, we've actually made very, very important and significant structural reform to make sure that our company ecosystem stays healthy and to reduce the reliance on the top spenders. Since the beginning of the year, such structural reform has already been showing positive effects to our ecosystem as well as our business. We believe that It is going to help our live streaming business to continue to develop in a healthy and steady way in the new policy environment. Operator, I think that concludes our conference call today. We're ready to close. Thanks, everyone, for joining our conference call today. We'll see you next quarter. Thank you. That concludes our conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.
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