Hello Group Inc.

Ladies and gentlemen, thank you for standing by and welcome to second quarter 2023 Hello Group, Inc. earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. 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.

Good morning and good evening, everyone. Thank you for joining us today for Hello Group's second quarter 2023 earnings conference call. The company's results were released earlier today and available on the company's IR website. On the call today are Ms. 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 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 Security 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 and 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. So the information regarding this and other risks and certain design factors is included in the company's findings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information due to events or otherwise, except as required under law. Now, I'll pass the call over to our CEO, Mr. Tang Yan. Mr. Tang, please.

Hello, everyone. Thank you for attending today's conference. This is a record of outstanding performance. Whether from financial indicators or from the implementation of various strategic points of view, we have achieved very good progress. Before entering the agenda, First, I would like to introduce Ms. Zhang Shichuan, who was the COO of the Group last year, and Ms. Sik. Today, Sik will report on the performance review part of the press conference. I will accept questions from investors in the Q&A section. I will hand over the microphone to Sik.

Hello, everyone.

Thank you for joining our conference call. We delivered solid results in the second quarter with strong financial performance and good progress on execution of various strategic priorities. Before we go into details, I would like to introduce our COO, Ms. Jiangci Sichuan, who rejoined the company last year. She will be the one to review our quarterly performance today. With that, I'll turn the call over to her.

Hello, everyone. It is my pleasure to join today's conference call. We celebrated Momo's 12th anniversary in early August. As a founding team member, it is a great pleasure to see how Momo over the past 10 plus years has grown from a single function app to a multi-brand listed company with a presence in several countries and regions. It is a great honor to return to the Hello Group family and welcome the next decade of the social era with old and new colleagues. Next, I will walk you through the details of the second quarter. So I will start with a brief overview of our financial performance. For the second quarter of 2023, Hello Group revenue was 3.14 billion R&D, up 1% year over year. and 11% sequentially, exceeding our earlier guidance. In Q2, we delivered the first year-on-year growth since the beginning of the pandemic three years ago, mainly due to the stabilization and recovery of most cash cow business. Adjusted operating income with 709 million RMB, a substantial increase of 53% from Q2 last year and up 37% quarter-over-quarter, with a margin of 22.6% up to 8 percentage point year-over-year and 4 percentage point quarter-over-quarter. A significant year-on-year improvement in profitability was mainly due to time-time breaking even. The stable performance of Momo Cash Tile business and our effective cost control initiative and sequential improvement in profitability was mainly contributable to the increase in Momo's profit. Total revenues from the Momo app and standalone new apps was 2.82 billion RMB of 1% year-over-year and 12% sequentially. and adjusted operating income with 777 million RMB. Up 60% year-over-year and significant increase of 34% quarter-over-quarter with a margin of 24%. Up 3 percentage point year-over-year and 4 percentage point quarter-over-quarter. We are very pleased to see that Momo as our cash cow business has maintained stable and strong productivity after over a decade of operation. Total revenue from Tantan came in at 321 million RMB down 3% year-over-year, but up 4% quarter-over-quarter. Tantan delivered its first operating profit at the beginning of this year and managed to improve its profitability in the second quarter. Adjusted operating income for Tantan for the quarter was 31.89 million RMB, representing a margin of 10% compared with adjusted operating loss of 119 million RMB in Q2 last year and adjusted operating income of 14.48 million RMB in the previous quarter. Now, I will discuss our progress against our strategic priorities in this three business life, Momo, Tan-Tan, and the new endeavors. Starting with the Momo app, which is at a very mature stage, our goal for Momo This year is to keep the user at very little scale stable, continue to optimize cost structure, and maintain the productivity of cash cow business. Since the beginning of the year, our team has made good progress in optimizing product operations, introducing new monetization features, and improved cash unitization and staff efficiency. Better than expected financial performance and steady recovery in user scale after quantitative results. Now I will walk you through the details. Firstly, on the product and operational front, since the beginning of the year, our focus on product operation has been stabilized. The user base and improved monetization efficiency. The core of our efforts revolved around providing more timely social interactions and enriching content supply. On the channel front, we have strategically focused on assessing channel ROI as well as our user lifetime value, or LTV. Driven by the joint efforts of product and operations, The recovery chance of users and retention after the Chinese New Year continues in the second quarter. Momo's next day retention rate has returned to its pre-pidemic level, which is the main reason for the continued rapid in-use surpluses. The number of Momo paying users increased by 100,000 to 7.9 million. from the previous quarter. The study growth in paying users has proven that the core value of NOMO as a social product remains strong. With our focus on user acquisition tilted towards high-quality users, our overall user quality has been gradually improving, which lays a solid foundation for the cash cow business to maintain its productivity. As Tianyan mentioned last quarter, since Momo is a brand with a history of more than a decade, our current strategic priority is to stabilize user scale, optimize cost, and ensure its commercial productivity. To reflect such priority at the KPI level, our focus has shifted from driving the growth of normal user scales to pursuing profitable user growth. MAU, therefore, is no longer the most meaningful operational metric for investors. Therefore, we have decided to no longer disclose MAU data on a quarterly basis. unless there is a significant change in our user base. We believe that investors should rather focus on the number of paying users when evaluating Momo's overall scale and operating performance.

Now, let's go through the productivity of our Momo Cash Cow business.

In the second quarter, Momo's live streaming revenue was 1.44 billion RMB, up 3% year-over-year and 12% sequentially. The revenue growth was mainly due to a significant increase in the number of top cohort users driven by new operational events and gamified features. And the increase in high-paying users' growth overall our people grow. In the second quarter, the revenue sharing ratio of live streaming was lower than the previous quarter, mainly because in Q1, we offer a one-off incentive to broadcast and resume live shows after the Chinese New Year. As the supply side remains stable, we believe The current revenue-sharing policy is effective enough to incentivize forecasters. There is no significant structure adjustment if needed. In the second quarter, WAF revenue, excluding town-town, totaled 1.33 billion RMB, up 1% year-over-year and 11% sequentially. While revenue from the Momo app totaled 1.07 billion RMB, up 6% year-over-year, and up 10% quarter-over-quarter. While revenue from the standalone app was 262 million RMB, up 44% year-over-year, and 60% sequentially. The main reason for the year-on-year decline in MomoVax revenue is that the number of paying users had yet to recover to the level in the same periods of last year. Meanwhile, AppyPool improved significantly from a year ago, partially offset the revenue pressure from the decline in paying users. The sequential improvement in Momovas revenue was driven by the increase in both IP pool and paying user accounts. Since the beginning of the year, our team has been integrating user products with commercial products to improve monetization efficiency. For example, we added access to the chatroom experience in several features, such as nearby people and posts. This can not only improve our user experience, but also increase the penetration of paying features and simulate users' spending behavior. The expansion of new entry points combined with optimizing the recommendation algorithm drove studies, the credential growth, of audio- and video-based social entertainment experience, which enjoy higher RP groups. So let's review Tan-Tan's performance. Our strategic goal for Tan-Tan is to achieve overall break-evens for the year and develop products and monetization models that are suitable for the Asian dating culture. In order to pursue suitable and sustainable growth on the back of the positive business cycle, at the beginning of the year, we achieved the first step of our strategic goal, which is to break even. However, in terms of user growth, we still need to make a further breakthrough on both user and commercial product funds. As mentioned last quarter, Hantan's user base gradually recovered after the Chinese New Year draft. However, entering spring, with the recovery in user activity after the pandemic, as well as the adjustment of user registration process, Hantan was attacked by large-scale spamming activities, which became the main issue that us in the second quarter. In order to maintain a healthy and stable dating ecosystem, we launched a stringent anti-spam campaign, which resulted in an 11 percent decrease in MAUs to 17.3 million in June compared to March. As of the end of Q2, Pantone had 1.4 million paying users, a net decrease of 200,000 from the previous quarter. The decrease was due to the decline in user base, whereas paying conversion remains stable sequentially. So now moving on to Pantone's financials. Total revenue from the second quarter was 321 million RMB, down 3% year-over-year, but up 4% sequentially. During the last 18 months or so, although sometimes user base and number of paying users declined on a large scale due to the factors, such as the pandemic, marketing spend reduction, and anti-spam initiatives, the platform has experienced a quite limited decrease in revenue due to the team's efforts to improve Apple. In the second quarter, last revenue was 170 million RMB, up 1% sequentially. Live streaming revenue was 145 million RMB, up 4% quarter over quarter. At the same time, we continue to optimize cost and expenses related to staff and infrastructure, resulting in a sequential growth of operating income to 31.89 million RMB. Now, I would like to share our progress, again, time to time strategic priority during the quarter. Since the beginning of the year, our team has delivered good results with respect to our strategic priority of achieving break even. So, this is primarily due to our efforts in both marketing and monetization. So firstly, on the marketing front, in the second quarter, channel competition incentivized due to the impact of the e-commerce shopping festival in June, resulting in a quarter-on-quarter increase in unit acquisition costs. Our team tried to limit the increase in unit acquisition costs by adjusting the channel structure and avoiding channel competition during peak times. Thanks to our optimization of our channel strategy and the data feedback system, our new app will increase significantly from the previous quarter. The channel ROI remains stable despite the sequential increase in unit acquisition costs. On a year-over-year basis, in Q2 2023, unit user acquisition costs increased by almost 50 percent, and new users actually increased by almost 60 percent. In the second half of the year, we will continue to focus on improving user acquisition efficiency The plan is to continue to closely monitor channel ROI and adjust channel investments accordingly. In addition, we will further improve resource utilization by carefully selecting the KOLs we work with and optimizing advertising materials. On the monetization front, our commercial product team has delivered good results over the past years in optimizing the existing paying experience and launching new paying features, continuously driving Apple growth. The BlackBull membership service launched at the end of last year and played a positive role in driving ARPU growth. In the second quarter, our product team increased the exposure of the Black Gold privilege service and added a premium privilege package, which effectively drove further ARPU growth. In the past year, Tonton's ARPU pool has continued to increase significantly as we provided more new paying features that can effectively improve matching efficiency and enhance users' dating experience. Moving forward, we will follow the path by adding new use cases while increasing the exposure of commercial products. For example, introducing exclusives privilege for female members, providing female users with high-quality matches and non-interference options. Meanwhile, we will optimize the matching algorithm for members based on user feedback and improve the post-op experience for members to drive renewal rates. But overall, in the first half of the year, our team has made good progress in improving user acquisition, efficiency, and driving Apple growth. We are happy to see that the decrease in costs and increase in Apple able to achieve great even. However, we have to admit that we haven't made any substantial breakthrough in terms of user growth or any significant innovation in commercial products. Such breakthrough on product innovations is the key for TanTan to drive a positive business cycle and achieve sustainable growth. During the second quarter, the outbreak of spamming activities on Tantan created a serious negative impact on the ecosystem, so our product team had to focus its main efforts on the anti-spam campaign. In quarter two, we started testing some product experience to improve female user engagement and retention. However, based on our preliminary data, This product still needs further iterations. In the second half of the year, our product operation team will continue to optimize the and match mechanisms and explore other social experience to improve user time span and female user retention. Lastly, in terms of our new endeavors, the goal here is to enrich our product portfolio, push the boundaries beyond Momo and Tan Tan, and deliver long-term growth engine for the group. In the second quarter, the total revenues of the profit-oriented standalone apps, including domestic and overseas social in games product was 264 million RMB, up 33% year-over-year and 60% sequentially. Revenue of the mixed product was back on the sequential growth track after the Chinese New Year . Revenue growth in overseas social products temporarily slowed at the beginning of the year due to the earthquake impact in Turkey and the evaluation of Egyptian currency. In the second quarter, consumer sentiment in Turkey recovered. Our team shifts its market focus from Egypt to several affluent Middle Eastern markets. With the combined efforts of product and channel teams, the number of paying users of overseas social products increased rapidly, which led to a significant sequential increase in revenue. In addition, our team optimized the overall revenue sharing ratio and revised costs and expense items by fine-tuning operations. Thanks to operating leverage, the net margin improved sequentially. As a result, the net income grew much faster than revenue.

As we dive deeper into the overseas market,

we realized that the Middle East and emerging North Africa markets do have much room for growth. Therefore, in second quarter, while we increased our investment in assistive products to dive rabbit revenues and profit growth, we also tested several new ROI-oriented products in the MENA area. We'll try to replicate our success so far in our overseas expansion to grow our user base further. With our expertise in attracting users through social attributes and monetizing through value added service, we are hopeful that this new product will contribute sizable revenue and profit to the group in a foreseeable future. This concludes my remarks. Now I will pass the call over to Cathy for the financial review. Cathy, please.

Thank you, Vic. 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 2023 came in better than our previous expectation at 3.14 billion RMB, up 1% year-on-year and 11% quarter-over-quarter. Non-GAAP net income attributable to the company was 632.1 million RMB, up 36% year-on-year and 34% from the previous quarter. The better-than-expected bottom-line performance was attributable to the outperformance of the top line, as well as our continuous cost control efforts, which led to improvement in both mobile and compound profitability. We are proud that after three years of pandemic, we emerged on the other side with a very healthy and solid cash cow business, and at the same time, stronger capability of managing new business endeavors to drive future growth while delivering decent profits to the shareholders. Now let me walk you through the details. Looking into the key revenue line items for the quarter, firstly, live broadcasting. Total revenue from live broadcasting business for the second quarter of 2023 was 1.59 billion RMB. up 5% year-over-year, and 11% quarter-over-quarter. MoMo App live broadcasting revenue totaled 1.44 billion RMB for the quarter, up 3% year-over-year, and 12% quarter-over-quarter. The increase was driven by an increase in the number of high-paying users, which in turn drove overall RPP growth. Compound's live broadcasting revenue amounted to $148 of 5.2 million RMB, up 25% from Q2 last year and 4% from the previous quarter. Revenue from salary added service for the second quarter of 2023 was 1.50 billion RMB, down 2% from Q2 last year, but up 10% sequentially. Revenue from VAS on an ex-tom-tom basis was 1.33 billion RMB in the second quarter of 2023 of 1% year-on-year and 11% sequentially. 1.1F VAS revenue decreased from the year ago due to a decrease of paying user count. However, the downward pressure was completely offset by the growth of standalone new applications which led to a slight year-over-year increase in value-added service revenue on an X-time-time basis. The sequential growth was primarily attributable to the seasonal recovery of MomoApp's value-added service business, as well as the continuous growth of the new applications. X-time-time value-added service revenue amounted to $170.2 million, down 21% from Q2 last year, but up 1% from the previous quarter. The year-on-year decrease was due to the decline in paying users. However, the downward pressure on value-added service revenue was partially offset by the growth in RPPOO driven by commercial product efforts. Now turning to cost and expenses. Non-GAAP cost of revenue for the second quarter of 2023 was 1.82 billion RMB, compared to 1.79 billion for the same period last year. Non-GAAP gross margin for the quarter was 42.1%, down slightly by 0.4% from the year-ago period, but up 1.1% from the last quarter. The sequential increase was due to the discontinuation of one-off incentives in Q1 provided to live streamers after the Chinese New Year to speed up supply-side recovery. Non-GAAP R&D expenses for the second quarter was 200.8 million RMB compared to 214.3 million RMB for the same period last year, or a 6% decrease year-over-year. The decrease was due to the continuous optimization in personnel costs. Non-GAAP R&D expenses as a percentage of revenue was 6.4% compared with 6.9% due to last year. We ended the quarter with 1,470 total employees of which 339 are from Tantan compared to 1,825 total employees of which 516 from Tantan a year ago. The R&D personnel as a percentage of total employee for the group was 63% compared with 61% due to last year. Non-GAAP sales and marketing expenses for the second quarter was 349.7 million RMB or 11.1% of total revenue compared to 601 million RMB or 19.3% of total revenue for the same period last year. The significant year-over-year decrease, both in terms of absolute remuneration amount and as a percentage of revenue, was primarily attributable to Tantan's shift in marketing strategy to control cost and focus on channel ROI, and to a lesser degree, MoMA's strategy to trim low-efficiency channel marketing spend. Non-GAAP G&A expenses was 83%. million RMB for the second quarter 2023, compared to 82.6 million RMB for the same quarter last year. GNA expenses as a percentage of total revenue remained stable at 2.7% from the year-ago period. Non-GAAP operating income was 708.8 million RMB. a significant increase of 53% from Q2 2022, and up 37% from the previous quarter. Non-GAAP operating margin for the quarter was 22.6%, up 7.7 percentage points from the same period last year, and 4.2 percentage points from the previous quarter. Non-GAAP operating expenses as a percentage of total revenue was 20.2%. a decrease from 28.8% in Q2 2022 and down from 23.9% in Q1 this year. Non-GAAP expenses in absolute remuneration amount decreased 29.3% year-on-year. This was mainly due to a reduction in sales and marketing expenses and to a lesser degree optimization in personnel and infrastructure costs. Now briefly on income tax expenses. Total income tax expense was 166.0 million RMB for the quarter, with an effective tax rate of 20%. In Q2, the company accrued withholding income tax of 48.1 million RMB, which is 10% of undistributed profit generated by our wealth fee. Without withholding tax, our estimated non-GAAP effective tax rate was around 14% in the second quarter. Now turning to balance sheet and cash flow items. As of June 30, 2023, total group's cash, cash equivalents, short-term deposits, long-term deposits, short-term investments, and restricted cash totaled 11.27 billion RMB compared to 17.40 billion RMB as of December 31, 2022. In Q2, we paid an equivalent of 937 million renminbi cash dividends to our shareholders. And in late June, we prepaid an equivalent of 2.26 billion renminbi cash to repurchase our convertible senior notes, which was settled in early July. Net cash provided by operating activities in the second quarter of 2023 was 828 million renminbi. Lastly, on business outlook. Before we give out the numbers, let me spend a few minutes talking about a few things that are expected to have impacts on our top line performance in the near term. For the second quarter of 2023, revenues from MOMO segments or on an external basis totaled 2.82 billion RMB, up 1.3% year-over-year. This was the first positive quarter for MoMo on a YY basis since the beginning of COVID in early 2020. On the one hand, we are happy to see that the cash cow business showed remarkable resilience on the back of strong platform fundamentals. On the other hand, we remain cautious about the operating environment we are in. As you guys can probably feel, macro rebound is not turning out as promising as we had hoped at the beginning of the year. Especially as we entered into Q3, we've got a clear sense that the spending sentiment is softening. In addition, starting mid Q3, we have also been making product adjustments to make sure that our ecosystem stays healthy. Some of the adjustments have negative impacts on the top-line performance of MoMA's matter-added service in the short run. All of these factors are expected to cause revenues for MoMA segments for Q3 to decrease on a sequential basis. For Tantan, in June, we made some product adjustments to comply with a new policy rolled out by MIIT in Q2, which poses a negative impact on the renewal rate of the membership service. This will likely cause Tantan's revenue to see a sequential decrease from Q2 as well. To be more specific, we estimated the group's third quarter revenue to come in the range from 2.9 billion RMB to 3.0 billion RMB, representing a decrease of 10.3% to 7.2% year-on-year, or a decrease of 7.6% to 4.4% quarter-over-quarter. At segment level, for Q3 2023, on a sequential basis, we expect normal revenue to decrease around mid-single digit, and time-to-time revenue to decrease in teens. Please be mindful that this forecast represents the company's current and preliminary view on the market and operational conditions, which are subject to changes. That concluded the prepared portion of today's discussion. With that, let me turn the call back to Ashley to start Q&A. Ashley, please.

Just a quick reminder before we take questions, for those who can't speak Chinese, please ask your questions in Chinese first, followed by English translation by yourself. Operator, we're ready for questions, please.

Thank you. If you wish to ask a question, please press star 1 on your telephone and let your name be announced. If you wish to cancel your request, please press star 2. If you are on a speakerphone, please pick up the handset before asking your question. The first question today comes from Thomas Chong with Jefferies. Please go ahead.

Good evening. Thank you for accepting my question. My question is about Koa MoMo. Can you share about the recovery of the Koa MoMo users and the trend of future development? In addition, you just mentioned the situation in Hong Kong, the impact of Koa MoMo's live broadcast and VAS. The last one is about Thanks, management, for taking my question. My question is on Coa Momo. The first part is about the user recovery trend as well as the outlook. And the second is regarding the macro, how is it going to impact live streaming and BAS? And the third part is about our second half, core MoMo revenue expectation. Thank you.

Thank you. Let me answer. As I mentioned in the speech, MoMo's strategic focus this year is to maintain a stable market economy and increase overall commercial efficiency. This is the core basis of the team's product strategy and channel plan. In terms of the product, we have opened the door for users and commercial products, and we have also launched a new emphasis on timely social experiences and interaction scenarios, to enhance the efficiency of relationships, and to allow users to receive better social feedback through payment. We will continue to optimize the content promotion strategy on the back stage to create a better community atmosphere for women and people with weak hormones, and to show emotional protection value. The improvement of these product experiences will improve the flow and have a very good incentive effect. As I mentioned in my prepared remarks, the strategic priority for the Momo app this year is to keep the user base stable and increase the productivity of the cash cow business.

The team's mandate is to devise and execute product and channel strategies with the idea to accomplish this goal. On the product front, we integrated user products with commercial products to continue to introduce new features that facilitate timely social interactions and improve relationship building. Users can further enhance their social experience by paying for value-added services. On the back end, we continue to optimize the content recommendation algorithm so we can create a better community atmosphere and deliver more value for female users and those who are seeking for emotional companionship. And the enhancement in product experience has played a positive role in improving user retention, and therefore, Even with reduction in China investment versus a year ago, the user base continued to grow steadily after the Chinese New Year trial. 虽然今年以来默默的用户增长和大量活跃表现不错,

Although Momo's user growth and engagement level performed pretty well so far this year, we will remain our operational focus on keeping the number of paying users at a healthy and stable level.

rather than the excessive pursuit of MAUs, because the paying users are the fundamental basis for maintaining the high productivity of the cash cow business.

From a consumer perspective, after the Spring Festival, we felt that the social and consumer enthusiasm of the users was warm. In the first half of the year, it was the best proof that the customer data and financial performance exceeded the expected. Then, after entering the third quarter,

In terms of consumer sentiment, we found that the users' social and consumption demands started to pick up after the Chinese New Year. Our better-than-expected user matrix and financial performance in the first half of the year are solid evidence of this. However, since entering Q3, Walmart's core revenue started to soften compared with the second quarter. There are two reasons for this. One is the weakening of consumer sentiment caused by the overall macro environment. And the other is that we took the initiative to make a round of relatively large production adjustments in late August to further ensure a healthy ecosystem. And for the questions related to revenues, Cassie will take that.

Okay, now briefly on the revenue outlook for MoMA. As you guys can see, we had a pretty good first half of the year due to the post-COVID recovery, as well as the fact that the team has been doing a good job on the product and operational side. However, as Sik mentioned, as we move deeper into the year, By monitoring the daily grossing and also from some of the anecdotal conversations with our VIPs, we can feel that a consumer sentiment is obviously weakening, possibly due to the macro not turning out to be as promising as people had hoped earlier in the year. And the other factor that we have to take into consideration is that we've been making some product adjustments on the value-added service side to make sure that Momo's social ecosystem stays healthy. And such adjustments involve temporary suspension of some of the products and services we previously offered on the Momo platform. And such suspension is suspected to have partial impact on Q3 and full impact from Q4 onwards because the adjustments and suspension took place toward late August timeframe. And due to those two factors, one at the macro level and the other one on the product front, our previous view that I remember saying on our last earnings call that the second half of the year is likely to see continuous improvement from the first half, that view at this point of time obviously seemed a little bit too optimistic. As you guys can see from our guidance, we are seeing 2.3 to show a sequential decline by mid-single digits. 2.4 is at this point of time still a little bit far out to see because a lot of it will depend on how micro eventually is going to play out. But if the macro stays the way it is, I think it is possible that, you know, we can see a flattish quarter, you know, from in Q4, from Q3. As you guys know, Q4 is usually a very strong season due to the year-end competition events. But the full quarter impact from the product adjustments that I just mentioned on the last side could eat in some of the incremental revenue from the year-end competitions. Also, we think it's possible that the October long holiday this year could have a bigger negative impact on us because more people could be traveling due to the reopen instead of hanging out online using the social entertainment services that we offer. So, again... At this point of time, I do not really have enough visibility to be very prescriptive about Q4, but if you ask our view at this point of time, we'd rather stay on the conservative side for the whole second half of the year. I hope that helps. Next question, please.

The next question comes from Rafael Chen with BOCI Research. Please go ahead.

Hi. 然後最後能否給我們分享一下對新業務下半年和明年的一個收入的預期? 我自己翻譯一下。 Thanks, management, for taking my question. My question is regarding our new apps. Firstly, could management share some latest updates, especially social? Also, could we have some insight on whether if company has other new apps or products to share? Lastly, could we have any revenue guidance of new apps in the second half of this year or 2024? Thank you.

Thank you. Let me answer.

In the new business, the domestic app has started relatively early. The size of the product model users has entered a relatively mature stage. Currently, the team's experience is mainly in deepening the potential of commercialization, optimizing costs, to promote the growth of this profit scale. And the strongest overseas business with the largest development potential, I just mentioned and introduced to you, although some external factors affected the growth in the beginning of the year, it was a bit slow, but due to the team's timely adjustment of the market direction, users and financial data in the second quarter have recovered to a relatively satisfactory growth trend. While the team is digging deep into the market and expanding new revenue areas, the impact of our brand is getting bigger and bigger. The power of the industry is getting stronger and stronger. There is also a policy based on supply and demand relationship change to actually diversify and divide. So we see that the rate of profit growth of SO2 will be more visible than the increase in income.

In terms of new endeavors, our domestic apps, which launched relatively early, have now entered a rather mature stage in terms of product format and user scale. For these apps, our team's current focus is on continuously exploring monetization opportunities, optimizing the cost structure, and promoting the steady growth of our profit scale. And as for the overseas business, with the greatest and most promising potential, as I mentioned earlier, although user and revenue growth temporarily slowed down at the beginning of the year due to some external factors, the overseas business operational and financial matrix actually resumed a satisfactory growth trend in Q2, thanks to the timely adjustment our team made in shifting market focus While digging deeper into mature markets and exploring opportunities for revenue expansions in new markets, we also optimized the revenue sharing policy in favor of our GP margin as we build on our brand power and industry influence. And that is why, if you look at social's profit growth rate, it went much faster than its revenue growth rate level.

In recent years, we have established an overseas business department to test new products overseas. The goal is to continue to develop new products, and at the same time, to replicate overseas successful experiences more effectively into new products. We will start market placement after user data reaches a certain internal standard. In fact, we have started some investment testing in some areas, and we expect that the main focus of the team within the year will be based on customer feedback and optimization of the product, rather than large-scale supply and demand and commercialization. However, in the Middle East, several new products are all products on the ROI island. We have recently set up an Overseas Business Unit and has launched several new products overseas.

Our goal here is to further develop existing products while more effectively replicating our successful overseas experience in new vertical markets. We will start making channel investments once user metrics reach a satisfactory level. In fact, we have started trial marketing in selective regions. Our focus this year will be on optimizing products from product form according to user feedback, rather than engaging in large-scale user acquisition and monetization. However, given that all of new products in the Middle East are ROI-oriented apps, so we have strict requirements for the financial return or financial performance of the product iteration and operations. Hopefully, these apps can make some real contribution to our top line next year.

As for other new products, in fact, after returning to the group in Tangyuan, we have made more investments in new products and new business development. Although the demand for the consumer Internet industry is very high, we believe that every generation of young people in the social industry will have different needs and preferences. This is our company's biggest challenge and our biggest opportunity. Our company has been in this field for more than 12 years. We have accumulated a lot of success and failure cases. At the same time, we have a huge amount of funds. As for other new products, after Tang Yan returned to the management team, our investment in research and development of new products and businesses has greatly increased.

Although the current demand in the consumer Internet industry is very saturated, we believe that each generation of young people will have different social needs and preferences. This is our challenge and also our greatest opportunity. We have been working in this field for more than 12 years, and we have accumulated a lot of successful experiences and lessons learned. With our strong capital and talent pool, I'm confident that through self-research and investment, we will continue to consolidate our leading position in the social field and explore new growth opportunities.

Okay, this is Kathy. Let me give you some color on the size of the revenue from the new apps. To be clear, the revenues from the new applications is currently reported within the Validated Service Line. under more and more segments. For example, in the second quarter of 2023, matter-added service revenue on an ex-content basis was 1.3, around 1.3 billion RMB, roughly 20% of which came from the new applications. As SoChill continues to gain momentum, this year that 20% new piece within the matter-added service line could grow I think around 50% on a year-over-year basis. Such top line, the other thing worth noting is the top line growth that I just mentioned also comes with margin improvement. So bottom line is growing even faster than top line. With regards to the outlook about next year, next year I think in late August this year is still a little bit too far for me to see. But trend-wise, I guess social is going to continue to grow at a decent pace, driven mainly by new product launches and also some of the new regions that we're pushing into at this point of time. And the other growth driver, potential growth driver for this new piece with the embedded service is the new applications that we launched this year, as just mentioned. Hopefully next year some of these new endeavors is going to start bearing fruits on the frontline front. So that's my answer to all the questions.

So let's move on to the next question. Please, operator.

The next question comes from with CICC. Please go ahead. .

然後是我們關於產品和商業化方面有沒有一些新思路可以跟大家分享? 那最後也想看一下,看看這邊下半年的收入和利潤一致是怎麼樣的? 謝謝。 Thanks, management, for taking my question. My question is asked to Tanta. Firstly, could management share about the latest user trends? Secondly, do you have some initiatives on the product elementization? And lastly, what's your outlook for Tantan's revenue and profitability in the second half of this year? Thank you.

Thank you. Tantan has been improving its ROI and R-Proof channels in the past year.

Both sides have made good progress, and we have achieved a profit-loss balance in the first half of the year. And our next goal is to further reduce the increase in ARP and storage, further to form a commercialized political circle, and achieve sustainable growth. However, it is not easy to achieve this goal. This requires us to achieve more practical improvements in terms of user products and commercial products. Although we haven't found a breakthrough point yet, since the team has achieved a balance, we have enough patience and confidence to continue exploring in terms of products, making Tantan more effective for users, and at the same time, a dating product that can earn more money for shareholders. As for Tantan's financial part in the second half of the year, Cathy will answer it.

Tandem has made good progress in improving channel ROI and ARPU over the past year, achieving breakeven ahead of schedule at the beginning of the year. Our next goal is to drive significant growth in ARPU and retention in order to create a positive business cycle and deliver sustainable growth. However, it's not that easy to get that as it requires us to make more substantial progress in both user and commercial products. Although we haven't yet found a breakthrough point for this, as the team has achieved a breakeven, we have enough patience and confidence to continue exploring products and making Tantan a more effective dating app for users and creating more value to shareholders. And for the financial questions, I will leave it to Peggy.

Okay. Before I talk about the financial outlook for Tantan, maybe just one quick point to add to what Sig just said about users. I believe a big part of Tantan team's effort for the rest of the year will be cleaning up spammers and putting in a more comprehensive system to make sure we keep these ad actors off the platform. This is crucial for us to deliver the right kind of user experience for a dating platform. Other than that, the team is also going to be pushing harder on new product experiments. By pushing harder, what I mean is it's probably time to try out whatever that we believe is worth trying without worrying too much about short-term fluctuations in user count. With that in mind, it's hard for me at this point to put down a definitive number for Tantan's MAU for the coming couple of months. I think Q3 is going to be a period where the team allows bigger room for trial and error. So I think that's the reason why we would rather defer that question on user target to next quarter. By then we should have enough visibility to give you guys a user target for the near term. So that's the question on the user front for Tan Tan. With respect to financial outlook for the back half for Tan Tan, I think for Q3 guidance, we are modeling in sequential decrease from high single digit to low teens. That's largely reflecting the macro impact on live streaming and to a lesser degree, the product adjustment as directed by MIIT, which I mentioned in my prepared remarks. And that's going to have a negative impact on the renewal rate of content membership service. On the other hand, the team is also working on new features to continue to drive the ARPU, which will be able to counter some of those negative factors. So overall, we do see some downward pressure in the second half of the year on top line, but how exactly Tantan's revenue may trend, especially as we enter into Q4, will depend on how good a job our team can deliver in driving the ARPU. Is there a question about bottom line or no? Is there a question about kind of bottom line? Okay, with regards to kind of bottom line, we're still seeing opportunities to continue to optimize on important line items such as personnel and marketing. depending on the pace of such optimization, bottom line in the second half should stay around breaking even level or slightly better than that. I'll hand back to Ashley.

Next question, please, Alfreda. The next question comes from with .

Please go ahead.

Thanks, management, for taking the questions. My questions are about profit margins. On the gross profit side, is there room for reducing the live streaming revenue share? On the OT side, is there potential for further narrowing the OPACs? Lastly, could you give us an idea of the expected scale of the investment for the new apps and oversee business expansion? Thank you.

Yeah, I'm hearing several pieces of the question. Firstly, on growth margin and overall payout structure, I think on the prior earnings calls, we've said that currently we're seeing the supply side of the live streaming ecosystem at a pretty stable state, meaning that, yes, there is still competition for the high-quality performers, but overall, We think market is much more stable compared to a year ago or two years ago where some of the bigger platforms were very aggressive in competing with us for high-quality performance. With that in mind, I think right now the overall payout structure that we offer our mobile platform should stay relatively stable, meaning that the payout ratio should also stay at a relatively stable level as well. I think the question, if I get it correctly, is asking about whether there is room to maybe the payout ratio to the broadcasters, although we do not see competition as intense as it was like two years ago. I do not think it's appropriate to lower the payout to agencies or broadcasters either because it's true that you know from the press sometimes we hear stories about some broadcasters you know making a lot of money there are such outliers like some of the top of the pyramid streamers making a huge sum of money but these are not the average these are the outliers you can look at the average level of income that broadcasters make if you look at the margins of some of our even some of our top you know, performer agencies, it's very low. So, you know, if you want them to work hard in the ecosystem, if you want them to earn enough money to care about improving the content, this is probably not the right time for us to lower the payout ratio. So that's my answer to the payout question. I think right now we would rather, you know, let the status quo continue. So that's gross margin, my answer to the gross margin. For this year, I think it would stay more or less the same as we saw in last year. Maybe it could swing a little bit. because of the change in revenue mix, but, you know, more or less it would stay quite stable versus last year. For operating margin, I think in Q2 for the, for X-Ten-Ten part operating margin on adjusted basis go back to 20, 20, 24, 25% on non-GAAP basis. I think as we move into the second half of the year with some pressure on top line, it's possible that we could see non-GAAP operating margin on an X-time basis to dip a little bit from Q2's level, but as I said, we're also working very hard to continue to optimize you know, the personnel cost as well as the marketing. And we're still seeing pretty decent room for us to continue to improve on those optimizations front. So I think, you know, in any case, we're going to exit 2023, you know, with an adjusted operating margin safely above 20%. That's my view for the X-time part. Tantan already talked about the overall bottom line. I'll look for Tantan, so I won't repeat here. I think the last question is perhaps on management thinking about the expenditures needed for overseas expansion. As Sig mentioned, the new endeavors that we just launched in the Middle East, North Africa area, all of these are ROI-oriented sort of initiatives. this year I think the focus will be on you know getting the product right getting the user experience right and building up the infrastructures and back and needed to you know grow the business and when time is right we're going to put in some you know marketing dollars to build the initial user base so overall I would say the rest of the year would be an investment period for these new applications. But all in all, I think we're talking about, if you count personnel and marketing dollars all in, we're talking about maybe 20 to 30 million renminbi in total for the rest of the year for these new applications. And next year, they should start to see, we should start to see revenue coming in from these new applications. For SoChill, like I said, you know, it's already... in a state where it's generating bottom line profit faster than it's generating revenues. So you don't have to worry about the growth of social creating a drag on the bottom line. And so that's my overall answer to your question about margins.

So I think that's it for today and thank you guys for participating and we'll see you next quarter.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may now disconnect.