Momo (MOMO) Q1 2016 Results - Earnings Call Transcript

| About: Momo (MOMO)

Momo Inc. (NASDAQ:MOMO)

Q1 2016 Earnings Conference Call

May 17, 2016 8:00 AM ET

Executives

Cathy Peng - Vice President of Investor Relations

Jonathan Zhang - Chief Financial Officer

Analysts

Operator

Ladies and gentlemen, thank you for standing by and welcome to Momo's First Quarter 2016 Earnings Conference Call. [Operator Instructions] All participants are in a listen-only mode. I must advice you that this conference is being recorded today, Tuesday 17 May, 2016.

I’ll now like to hand the conference over to your first speaker today, Ms. Cathy Peng, Vice President of Investor Relations. Thank you madam, please go ahead.

Cathy Peng

Thank you, operator. Hello everyone, and thank you for joining us today for Momo's first quarter 2016 earnings conference call. The company’s results were released earlier today and are available on the company's IR website. Joining me today is our Chief Financial Officer, Mr. Jonathan Zhang. Mr. Zhang will discuss Momo's business operations followed by financial review. Due to the pending going-private transaction, we will not be hosting a Q&A session following the end of the call. If you have any additional questions, please contact us at ir@immomo.com or 861-057-310-538.

Before we begin, I would like to remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those contained in the forward-looking statements. Further information regarding these and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

With that, I would like to pass the call over to Mr. Zhang, who will now go over the business and financial highlights for the quarter. Mr. Zhang, please.

Jonathan Zhang

Thank you, Cathy. Good morning and good evening everyone. Thanks for joining our conference call today. In the absence of our CEO, Mr. Tang Yen, I will walk you through an operational update followed by a financial review.

From a very high level in Q1 2016, we recorded beyond expectation financial results with the total revenues for the quarter reaching $50.9 million, up 93.4% year-over-year and non-GAAP net income reaching $12.7 million, up 34.5% year-over-year. The strong financial results came together with the progresses on the operational front, monthly active users or MAUs, was back on track during the first quarter totaling 72.3 million in March. We view this as a considerable achievement for our team, especially given that Q1 tends to be the seasonally weakest quarter for user activities due to the linear year effect.

Such achievement was on the back of a series of considerate efforts on the product development, operational side and as well on the marketing side. Let me first talk about some of the key product initiatives that we took during the past few months. As mentioned during the last earnings call, we ran a red envelope campaign leveraging the unique future sets and user mentalities in an open social platform. The campaign was successful and helped drive incremental user activities to partially offset the negative effects linear year holiday. After the Chinese New Year, we released a couple of major upgrades that we have long planned it for.

In early March, we introduced a new feature NDA[ph], aiming to better connect people based on information not limited to physical proximity, but including the compatibility of profiles as well. NDA appears as a small overlay at the bottom right corner of the nearby people list.

When activated the system will push potential matches to user based on certain profile and behavioral data, such as interesting places the recommended user have travelled to, books he or she has read and what interest groups he or she might participate in et cetera. The NDA will then enable the users to switch left or right to show if he or she is interested in the recommendation.

Following the launch of NDA, we also added a new feature called Marks, or [indiscernible] in Chinese to issue such profile page. Marks, pulls and summarizes the profile data and the behavioral information mentioned above for our users to easily check out and discover connections between each other.

The NDA and Marks represent our ongoing efforts to adding new dimensions for people to more effectively establish new social relationships on our platform. We’re happy to see that after the introduction of these two functions, there has been an increase in the number of viewers on personal profile pages as well as the number of greeting messages sent on a daily basis. In addition to making it easier or more fun for users to find a new friend, in Q1 we also expanded our services in video and live broadcasts, which we believe are becoming an increasingly crucial part of how people communicate, share and socialize via internet. Last December, we started to connect talented broadcasters in a large scale and have seen all the key performance indicators growing in quote.

During the past few months, the momentum is getting stronger. In the first quarter, live broadcasts have already surpassed mobile marketing, becoming our largest revenue source. Nowadays, live broadcasts already cover a significant portion of our monthly active users. In early April, we released an upgraded version, in which the live broadcasting service to replace discovery function as a standalone tab next to the default page nearby. This change reflects the increasing strategic importance of live broadcasting to our platform.

Almost concurrently with that operates, we launched an independent application called Hani, to feature the live broadcasting service. Now every individual can broadcast live music performance at any time anywhere either with a Momo or via Hani. With this effort we are hoping that our live broadcasting service will be able to race on a separate track while still leveraging some of the unique competitiveness of our Momo platform.

Now, I’d like to take a few seconds sharing some of the strategic thoughts about live broadcasting service. As our CEO, Tang Yen stated in our press release, we’ve been seeing a great deal of synergies between the core Momo business and the live broadcasting business. First of all Momo has tens of millions of users connected to the platform, looking for fun and excitement as well as making new friends and interacting with them.

This user mentality and associated social contest makes a perfect formula to nurture the live broadcasting business. In turn, the live broadcasting service as said in our previous calls creates a brand new way for our users to socialize and to have fun on our platform. It not only make it possible for us to push the boundaries beyond our core user case and appear to a new cohort of users, but also gives a gateway for us to enter into other emerging sectors such as China’s booming entertainment industry. We have various initiatives built around it and plan to carry them out step by step.

On top of the product innovations started from March 2016, we have also become more proactive in working with paid marketing channels to acquire new users for our platform. Such marketing efforts have thus far proven effective. We will carefully monitor the cost of our channel marketing efforts and make sure this makes sense in terms of ROI.

Now moving to the monetization, in Q1 revenues from live broadcasting rocketed reaching $15.6 million and making it the largest revenue source for the quarter, therefore we broke it out from other revenue line as we did in the past and started to report it as a separate revenue line from this quarter onwards. As more and more players are packing into the live broadcasting market, we expect the competition in the sector to get tougher heading deeper into the year. However, we remain cautiously optimistic about our growth prospect due to Momo’s unique social attributes as an open social platform as well as our team’s proven execution capabilities.

Revenue from mobile marketing were $12.4 million, up 104.5% year-over-year, the growth came broadly across all segments of marketers including brand owners, local merchants, app publishers as well as other small and medium sized businesses. In terms of ad formats, both self-serving in feed ads and brand oriented display ads have grown substantially on a year-over-year basis.

Looking at marketing of product side, in Q1 we’ve highlighted industry review and units with a couple of brand owners and received initial positive feedbacks. We have also started to build out our pyramid marketing solutions in order to connect more quality marketers and improve to add effectiveness on our platform. We believe these efforts on the back end would allow us to build long term competitive advantages for our mobile marketing business and elevate Momo further up the ladder as a leading native mobile marketing platform in China.

Membership subscription revenue for the quarter was $14.9 million, up from 13 million a year ago. Paying members totaled 3.2 million as of March 31, 2016. The year-over-year growth in membership subscriptions revenue was driven largely by the growth in our pool and to a less extent a slight increase in the number of paying members.

Mobile games revenue was $7.4 million in the first quarter of 2016, up 21.2% year-over-year. Although, the growth rate of our gaming revenue slows down, we still have high convictions at the gaming business because it’s synergetic with the Momo platform and is of a long term strategic importance for us. We will continue to develop our expertise and explore various opportunities in this area in the quarters ahead.

Revenues from other services, which mainly consist of revenues from paid emoticons and gift malls, were $0.7 million in Q1 2016, down from $1.1 million a year ago. The decrease was primarily due to the fact that we are offering an increasing number of emoticons for free in order to enhance user experience. For gift malls, we are downsizing the physical gifting business and trying to explore other use cases, where virtual gifts are more involved, are also involved. Due to these transitions, revenue from other services could further go down in the near future.

Now turning to the cost and expenditures, for the first quarter of 2016, our cost and expenses on a non-GAAP basis totaled $40.5 million, compared to $18.7 million for the same period last year. The year-over-year increase in cost and expenses was primarily due to the continuing expansion of our business especially the writing live broadcasting business. We booked the revenues from virtual gifts sent to the broadcasters on a gross basis and record revenues shared to them as a cost of revenue.

In Q1 2016, the revenue shared with our broadcasters made the largest cost driver as revenue from the live broadcasting business boomed. Although, live broadcasting business currently is profitable in Q1, it burned a lower margin in relative to the average of our other businesses. As the business is in such an early stage of development, its margins may fluctuate as revenue continues to ramp. Key factors that may impact the margin trend include, but not limited to changes in shares with our broadcasters, size and timing of our marketing campaigns et cetera. We will focus on optimizing the cost structure of these new businesses to balance the top-line growth and the bottom-line results.

The second largest cost driver is still personnel related spending. By the end of March 2016, our total number of employees was 775 compared to 547 a year ago. Further down the list, the increased marketing spending also contributed to the year-over-year growth in cost and expenses. That was in connection with our stepped up efforts including the marketing channels to acquire new users. Non-GAAP net income attributable to Momo Inc. was 12.7 million in the first quarter of 2016, compared to $9.4 million in the same period last year.

Quickly on the balance sheet and cash flow items, as of March 31, 2016, Momo’s cash, cash equivalents and time deposits totaled $466 million, compared to $469.5 million as of December 31, 2015. Over 81.3% of our cash balance are deposited offshore in U.S. Dollars and thus we don’t expect the volatility in foreign exchange rate in the future to have material negative impact on the value of our cash assets.

In the first quarter of 2016, we generated an operating cash flow of $5.6 million, compared to $8.7 million for the same period last year. Capital expenditures and cash use in investing activities were around $1.8 million for the quarter.

In summary, we kicked off 2016 with a solid quarter in terms of user growth, business development and financial performance. We’re encouraged by what we’ve achieved and we’ll continue to work hard to further unleash the potential of our platform.

With that I’d like to conclude our conference call today. Once again thank you very much. Good bye. Thank you.

Question-and-Answer Session

Q -

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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