Momo's (MOMO) CEO Tang Yan on Q4 2017 Results - Earnings Call Transcript

Momo (NASDAQ:MOMO) Q4 2017 Results Earnings Conference Call March 7, 2018 8:00 AM ET

Executives

Cathy Peng - IR

Tang Yan - Co-Founder, Chairman and CEO

Wang Li - Co-President and COO

Jonathan Zhang - CFO

Analysts

Jialong Shi - Nomura

Greg Zhu - Credit Suisse

Tian Hou - TH Capital

Operator

Ladies and gentlemen thank you for standing by. Welcome to Fourth Quarter and Full Year 2017 Momo Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please note this conference is being recorded today.

I would now like to hand the conference over to your first speaker today Ms. Cathy Peng. Thank you. Please go-ahead ma’am.

Cathy Peng

Thank you, operator. Hello everyone and thank for joining us today for Momo’s fourth quarter and fiscal 2017 earnings conference call. The company’s results were released earlier today and are available on the company’s IR website.

On the call today from Momo are Mr. Tang Yan, Co-Founder, Chairman and Chief Executive Officer; Mr. Wang Li, Co-President and Chief Operating Officer; and Mr. Jonathan Zhang, Chief Financial Officer. Mr. Tang and Mr. Wang will discuss Momo’s business operations and company highlights followed by Mr. Jon, who will go through the financials and guidance. They will all be available to answer your questions during the Q&A session that follows.

Before we begin, I would like to remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and current market and operating conditions and relate to the events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company’s control, which may cause the company’s actual results, performance, or achievements to differ materially from those in the forward-looking statements.

Furthermore I would like to remind you that the company’s proposed acquisition of Tantan Limited has not been completed and is subject to course and conditions. While we expect to close that acquisition in the second quarter of 2018, we cannot assure you that such closing will take place during such quarter or at all.

For the information regarding these and other risks, uncertainties, and factors is included in the company’s filings with the US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

I will now pass the call over to Mr. Tang. I will translate for him. Mr. Tang, please.

Tang Yan

[Foreign Language]

Good morning and good evening everyone. Thanks for joining our conference call today. Q4 was a good quarter closing out a remarkable year of 2017. Some of the initiatives that we took in prior quarters started to bear early fruits in Q4. At today’s call, our Co-President, Wang Li and I will review these progresses and achievements with you and lay out our plans for the future.

[Foreign Language]

Firstly from a high level, total revenues reached $1.318 billion for the year 2017, up a 138% from last year. Adjusted net income for the year was $368.2 million up a 108% from the year 2016. I’m glad to see that we achieved a 28% adjusted net profit margin for the year, showing our commitment and ability to not only drive topline growth, but also maintain a healthy rate of profitability growth, while making significant investment for our future.

[Foreign Language]

Now a deeper dive in to the quarter, firstly our community continued to grow. Total MAUs on Momo platform reached 99.1 million for the quarter, up 22% year-over-year and representing a 4.7 million net addition from the previous quarter. On the engagement side, per user time spent continued to see steady improvement during the quarter. Average per user time spent per day in Q4 was up 14% from the same period last year.

[Foreign Language]

The improvement in the quarterly net addition to MAU and the engagement metric can be attributed to two key factors. Number one is the continuous product and content enrichment on the platform, which we will elaborate a bit later and number two is the contribution from the new user acquisition system.

At last earnings call, I mentioned that we had a new user growth team in place and they have been reshuffling our channel marketing strategy and putting in place a new system to drive more efficient top of the funnel efforts. In mid-November, we put a system in to testing and have proven to be effective. We have seen gradual ramp up in new registration, reactivation as well as steady improvement in user retention ratio.

In addition to the impact from the new user acquisition system, the initiative that we took on the product and content front also contributed to the improvement in user retention.

[Foreign Language]

As I’ve said many times before, as a social platform we are focused on distributing not just any type of content, but a type of content that facilitates interactions and relationship building. In Q4, we rolled out a new recommendation engine to power the nearby proceeds on the homepage. On top of the original location and recent fee dimensions, the new algorithm also considers the interactive quality score of the content and different preferences of the users.

The new algorithm is based on machine learning that helps us to understand the interactive behavior of different users and how likely they are to interact with certain piece of content so that we are able to deliver a more personalized content experience to the users with a goal of encouraging more interactions around the fees that we push.

As a result of that change, around the nearby post function, the average number of interactions including light, comment and number of greetings increased more than 20% in December from September.

[Foreign Language]

Another big focus of ours in the fourth quarter was on optimizing this thing and developing new form of interactions for the users. Since [late] Q4 we have been introducing a series of new video and audio product and service offerings including various forms of video and audio chatrooms as well as the trivia social games. Moreover Momo Radio, the audio (inaudible) experience that was launched earlier in the year continued to perform well during the fourth quarter.

In December, the team brought to the radio experience some new used cases, where multiple parties can be connected in to one channel and engage in different gamified activities organized by the channel moderators. Compared to the traditional video public broadcasting model, these new used cases bring down a barrier for ordinary users to build social activities utilizing the streaming technology and thus can make the service appeal to a broader set of users.

Our plan is to continue to rollout tools and service offering for the users to have greater fun over such kind of social activities.

[Foreign Language]

Other than the new interactive experiences that we rolled out on the product front, in November we also started to take some major steps to improve our constant ecosystem build around the live video services. As a result of these efforts, I’m proud to see that a constant ecosystem around live streaming service is being substantial development as we enter in to the New Year providing a solid foundation for us to continue to drive content improvement and business growth for live streaming business going forward.

Wang Li will have more details later about these achievements and the long lasting impact of these efforts.

[Foreign Language]

As we entered in to the New Year, I would like to share a few thoughts on our user growth and product strategy. First of all, user growth remains on top of our priority list. I have said before that our overall user growth strategy has two underpinning pillars; continuous product innovation to drive long term user retention and effective marketing activities to increase top of the funnel efficiency.

Obviously among these two factors, product innovation is always going to be the core; therefore I’m going to elaborate a bit more about our product fund for 2018.

[Foreign Language]

During the past two years, we have made a lot of progresses in expanding the social youth cases and the entertaining content offerings on our platform, which is one of the most fundamental drivers for our user growth. Looking out to the future, one of the crucial areas that we have to succeed is to keep introducing new ways for interaction in order to better satisfy new user demands emerging with technological development.

For example, six to seven years ago, when people used to socialize and have fun on our platform what they could do was pretty much limited to chatting via instant messages and checking out post in text and picture format. Today, because of the advancement in technology an increasing number of people are connecting and interacting via live and short videos as well as other recreational activities that used to happen offline.

We believe that these trends are only beginning to emerge and are seeing many opportunities coming up in this space. Many of our endeavors in providing new ways to interact would involve exploration in the areas of audio and video base, interactive experiences, social games and augmented reality, as well as other emerging technologies.

[Foreign Language]

In addition to the introduction of new ways for interactions in terms of how we help the users to discover new connections, previously we have been pretty much focused on the single dimension and that is the physical location of our users. While that is a very effective bonding element that connects people, it can also be in many ways quite limiting.

So this year, we intend to branch out from the vocational element to other dimensions in order to help the users to make more relevant and effective connection. Many of our efforts in that area will be based on the improvement of our recommendation algorithm which in turn would involve big data mining and machine learning. We intend to step up our investment in those areas going forward.

[Foreign Language]

Certainly entertaining content remains the center piece of our product strategy. Our plan here is to build on our success in the live video space and continue to drive content improvement both in terms of quality and in terms of adversity. Wang Li will share more details on that front in his comments.

[Foreign Language]

Lastly, while we believe the name Momo application has a great deal of potential to grow through continuous used case expansion, this year we will consider serving new demographics and user demand in the social and entertainment space by innovating our product line and brand portfolio. Our announced investment in Tantan is an example of that strategy. We will continue to incubate new projects to serve our strategic priorities.

[Foreign Language]

Overall, 2017 was a transformative year for Momo. I am proud that the team has demonstrated their strong execution capabilities by navigating through the challenges and continuing to deliver against our strategic priorities around user based expansion, revenue growth and healthy profitability levels. We’re walking in to 2018 with fewer goals and a solid roadmap to explore and capture the many opportunities that we see ahead.

Now I’m passing the call over to Mr. Wang Li, our Co-President and COO for business review. Mr. Wang please?

Wang Li

[Foreign Language]

Thanks. Now let me take you through the key things that we’ve done as well as the future directions for our major business lines.

[Foreign Language]

First of all on live streaming, at our last earnings call I mentioned that we will drive further growth from the live streaming business and increase our market share by expanding towards two key directions. Number one is to improve the constant offerings both in terms of quality and in terms of diversity. The other focus is that for the large amount of the long-tail chatroom users who take live streaming simply as a better way to socialize, we will keep rolling out new form of interaction beyond the broadcasting models.

[Foreign Language]

On the content improvement front, we believe that the most crucial thing for us as the platform operator is to set up the right policy and effective incentive system so that increasing number of quality agencies and professional performers can feel motivated and driven enough to offer higher quality and more differentiated content through our platform.

In November, we rolled out a trial incentive fund and started to work more closely with the professional talent agencies on talent development and management front. In addition, as part of our effort to drive diversification of content offerings, we introduced a new competition mechanism that separates the performers to different talent verticals so we can service and promote more diversified performing talent.

Furthermore, we brought in additional ramification in to the showroom to increase the interactivities between the performers and the viewers. Not just the high-paying ones but also the long-tail talents to enhance their interactive experience. As a result of all these efforts our year-end tournament event turned out to be a great success.

We are seeing plenty of agencies willing to work with us to build and grow their business within our ecosystem. A broader set of the performers and their fans have enjoyed the fund and the scent of glory coming out of the event. The success of the year-end tournament and the compelling community effect also build a strong showcase providing significant encouragement for more professional agencies performers and their supporting viewers to work harder in order to outperform on our platform.

Driven by this effect and the efforts from the agency, the number of professional performers including the entry and neat level performers as well as the top [grossing] ones have experienced meaningful increase since the beginning of 2018. All of these trends that we are seeing within the agencies and professional performers showed that the ecosystem is getting more mature, providing a good foundation for us to drive further growth for the business in 2018.

[Foreign Language]

For the long-tail chatroom users, as Tang Yan mentioned earlier in his comments, in Q4 we further broaden the used cases for the audio based live streaming service as compared to the public broadcasting models. These new used cases can make live streaming appeal to a broader set of users from a monetization perspective. It also brought in opportunities to build more paying used cases with a moderate ARPU so that more users can get the fun from paying activities which will in turn drive the increase in the number of paying users.

[Foreign Language]

The other focus for the live video team this year is on growing the user base of the live video service. Previously, we have been focusing on converting existing mobile users to live video service. This year while we will continue to optimize the traffic dispatching system to increase the conversion efficiency, the team is taking initiative to explore opportunities in traffic acquisition beyond the main Momo platform.

For example, we are encouraging the top performers to acquire fans outside of our ecosystem by rewarding the all performers with promotional resources. As we move deeper in to 2018, we will also consider working with other third party partners on the traffic acquisition front directly for the live video business.

[Foreign Language]

Now turning to (inaudible) and games; in the third quarter, we started to building more virtual gifting features to the Werewolf game. And interesting observation is that our users started to engage in casual group chatting and other identified activities in the Werewolf game channels and started to send each other virtual gifts to enhance the interactive experience. This shows that on our platform there is high demand for live interactive experience over recreational activities.

Therefore in Q1 we branched out from Werewolf and introduced a bunch other [trivia] social games where users can engage in live audio chat over recreational activities. As Tang Yan mentioned, optimizing existing product experiences and new social used cases will be one of the key priorities this year.

Consistent with that priority, the focus of that business will be exploring different monetization models based on these new used cases that we are building around the audio and video based interactions.

[Foreign Language]

Lastly, mobile marketing business bottomed out in the fourth quarter, both the effective CPM and the number of that in question sold increased meaningfully from the third quarter. While we think there is still potential in driving further growth in eCPMs and increasing the ad world. We won’t get aggressive in doing so as the focus in 2018 is on building user engagement.

[Foreign Language]

Overall speaking, I’m happy that our team has been able to rise up to the challenges and continues to drive outstanding business and financial performance out of the opportunities that we saw. As we look out in to the year of 2018, I’m confident that we will continue to execute against our strategic priorities and deliver greater value to our shareholders.

Now I’m passing the call over to our CFO, Jonathan for the financial. Mr. Zhang please.

Jonathan Zhang

Thanks Tang Yan, Wang Li and Cathey. Hello everyone, thank you for joining our conference call today. We are very pleased to conclude fiscal year 2017 with a strong fourth quarter performance both operationally and financially.

As Tang Yan mentioned, our MAU reaccelerated in the past quarter and achieved 99.1 million at the end of 2017, up 22% from a year ago. This demonstrated that the initiatives we took to enrich product and content offerings are heading to the right direction. And the new user acquisition approach is proven to be effective.

Now turning to the financial highlights; total net revenues for the fourth quarter reached $386.4 million, up 57% year-over-year exceeding the high end of our revenue guidance. Non-GAAP net income attributable to Momo was $110 million, up 20% from the same period last year.

With a solid fourth quarter financial performance, our total revenues for the fiscal year 2017 was 1.318 billion compared to 553 million for 2016, a 138% growth year-over-year. Non-GAAP net income attributable to Momo for 2017 was 368 million compared to a 177 million for 2016, an increase of 108% year-over-year.

Looking to the key revenue items; in the fourth quarter of 2017, revenue from live video services reached $328 million up 68% year-over-year. The number of live streaming paying users for the quarter was 4.3 million, 26% higher from the same period last year. The quarterly ARPPU was RMB539 before excluding value added tax in the fourth quarter 2017, compared to the RMB408 from a year ago.

Moving on to VAS and mobile games revenues; revenue from VAS which includes membership subscriptions and virtual gifting services together was $29.4 million, an increase of 54% from the same period last year, largely driven by the continued strengthening in our virtual gifting business. The number of paying users of VAS business was 5 million for the quarter, up 34% from the same quarter last year.

Mobile game revenue decreased by 39% year-on-year to $6.9 million. This was within our expectation as the decline concurred with our strategically focused and jointly operated gains. Although Werewolf performed very well during the fourth quarter, after we introduced more paying used cases, most of the revenues came from virtual gifting instead of in-game item sales.

As mentioned at our last earnings call, the virtual gifting revenue generated from social gains including Werewolf are booked under VAS on a growth basis with a payout to the gift recipient. While the revenue from the in-game virtual item sales that the users purchased within the games are booked as a mobile game revenue.

Once again, we expected the mobile game revenue were continuously under pressure until our self-developed games would become successful after launch in the future period. Revenues from mobile marketing was $21.8 million, up 11% year-over-year and it bottomed out by 25% from Q3 2017.

The year-over-year increase in the mobile marketing revenues was largely driven by the growth of brand ad revenues, while the sequential growth was from both performance ad and brand ad services.

Now a quick review of the cost and expenses item for the fourth quarter 2017. Our cost of revenue on a non-GAAP basis totaled $199.6 million, up 81.6% from $109.9 million from the same period last year. This was mainly attributable to the increase in the revenue sharing with our live streaming broadcasters and agencies in connections with our growth of live video service revenue. In addition to a lesser degree, bandwidth related cost also increased significantly to support our efforts in reaching video-audio base content and used case developments.

On a sequential basis, the non-GAAP cost of revenue trended up by 1.7% to 51.7% of total revenues. This is largely because we’ve provided an additional incentives to certain qualified agencies during the period from November to December of 2017 as we communicated during the previous quarter earning conference call.

Non-GAAP sales marketing expenses for the quarter was $53.5 million compared to $26.7 million for the same quarter last year. The year-over-year increase in the sales and marketing expenses was mainly due to our stepped up efforts in marketing spending to drive user and business growth.

On a sequential basis though, the non-GAAP sales and marketing expenses during the fourth quarter of 2017 decreased from 15.3% of revenue in previous quarter to 13.8% of revenue as we scaled back from the branding efforts from previous quarter’s level.

Non-GAAP R&D expenses for the fourth quarter 2017 was $16.2 million compared to $6.6 million for the same quarter last year, representing 4.2% and 2.7% of total net revenue respectively. That reflected our strategy to continuously step up our investment efforts in R&D area, mainly our additions of R&D talent to support our product innovation initiatives.

We ended the quarter with 1,244 total employees, up from 924 a year ago. Of which, 44% and 40% are R&D personnel respectively.

Non-GAAP G&A expenses for the fourth quarter was $11.6 million compared to $6.8 million for the same period last year consistently representing 3% of net revenues. Non-GAAP operating income was $119.6 million, up 24% year-over-year from $96.1 million. We are happy to see that we will be able to achieve a 30.9% non-GAAP operating margin while making significant investment in our future.

Now turning to balance sheet and cash flow items; as of December 31, 2017, Momo’s cash, cash equivalent and term deposits totaled $1.6 billion compared to $661 million as of December 31, 2016. Net cash provided by operating activities in the fourth quarter was $119.6 million compared to $107.2 million for the same quarter of 2016.

The strong operating cash flow put us in a good position to fund our future investments in our user growth and business expansions.

Now turning to our first quarter 2018 revenue guidance; we estimated our first quarter revenue to come in the range from $387 million to $402 million, which translates in to a year-over-year growth rate from 46% to 52%. Please be mindful that this forecast represents the company’s current and preliminary review on the market and operational conditions which are subject to change.

In summary, we are very happy to close out 2017 with a strong top line and bottom line performances, as well as margin profiles achieved. Once again as Tang Yan and Wang Li mentioned, looking in to the year 2018, we will continue to focus on user and the engagement growth through used case expansion and content upgrade.

It is also of a great strategic importance to drive continuous revenue growth, while maintaining a healthy profit margin.

That concluded our prepared portion of today’s discussion. With that I would like to turn the call over to Cathy to start the Q&A session.

Cathy Peng

Just a quick reminder before the Q&A. For the Chinese speakers please ask the question in Chinese first and followed by English translation by yourself. Operator we are ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] We have the first question from the line of Jialong Shi. Please ask you question.

Jialong Shi

[Foreign Language]

First of all congratulations on a very solid quarter, I have three questions. My first question is about your 1Q revenue guidance. You 1Q revenue guidance implies a flattish to 4% sequential growth. So I just wonder if there were any particular drivers for this impressive 1Q revenue growth, did you see any negative or positive seasonality impact on your live broadcasting business in 1Q.

My second question is about the paying users for your live broadcasting business, can you give you give us some colors why the live broadcasting paying users resume to growth in Q4 after remaining stable for the two preceding quarters. How should we look at the trend for this metric over the next few quarters? Lastly, I was wondering what is the trend of Momo’s gross and operating margins in 2018. Thank you.

Tang Yan

[Foreign Language]

First question on our Q1 guidance, I think the strength showing by our Q1 guidance still mainly comes from the live streaming business. After some adjustments in Q4, we are currently seeing pretty healthy and strong growth trends from the live streaming service and that to a large extent offset the negative seasonality around the Lunar Year holiday.

If you look at the underlying driving forces for that strength from live streaming business, basically we are looking at several key reasons here.

[Foreign Language]

Number one is that because of our incentive plan to the agencies as well as our collaborations with them on the talent upon the management side and also the show case impact from the year-end (inaudible) experience, we are now in a much better position in terms of having a developed and mature content costing them to drive the growth of the live streaming business and that is directly reflected in the increased number of professional broadcaster from the entry level, mid-level towards the top grossing ones as well as the validation capabilities improvement for each of these cohort as professional broadcasters.

[Foreign Language]

And number two is that we have been taking initiatives to improve the non-tournament days revenues and that could provide new stimulations to the paying activities from our users. Things that we’ve done included the introduction of routine knockout matches between the performers as well as the introduction of new features and gamifications in to the showrooms.

For some of these initiatives, we are already seeing them taking effect in Q1. So far, although we had the negative impact from the Lunar Year holiday, if you look at the revenue trend from the non-tournament days so far, there has been very, very strong. I think that’s the fundamental reason why we give a pretty strong Q1 guidance.

Other than the live streaming business especially for advertising and gaming, we are probably still going to see some negative seasonality from the Chinese New Year. \

[Foreign Language]

For the second question on the reason for the increase in the live streaming users, I think we are looking at several reasons here. Number one is that in the Q4 year-end tournament experience we introduced some new gamifications and new features in to the store rooms. For example, the fans have other type of interactive social games. And the second reason is that we wrote out a new group audio channel in to the radio experience and that also helped us to bring some new monetization features with a lower level of ARPU and that helped to mitigate the diverting impact previously coming from the new used cases under VAS.

[Foreign Language]

I think going forward; the continuous growth in the live streaming paying users will ultimately be coming from the overall expansion of the user base for live streaming service. I think this year as compared with last year; we are pretty more emphasis on acquiring users directly for live streaming service from outside of the Momo platform.

And the other thing is that we will continue to introduce new gamifications and other type of trivia social games in to the live channels in order for us to build new monetization features with a moderate ARPU level and that will in turn will help us to keep driving the growth in the number of paying users.

And thirdly, we are working to bring in big data mining technology to optimizes the matching algorithm. Right now we are already seeing some initial positive impact from the improved algorithm on user conversion as well as paying user conversion. We do believe that we still have a lot of potential on that front.

Jonathan will be answering the question on growth and up margin trends.

Jonathan Zhang

Hi Jialong, this is Jonathan. Regarding your margin question, actually as I mentioned earlier in the prepared remarks, our cost of revenue as a percentage of total net revenue trended up by 1.7% during the fourth quarter 2017. That’s mainly because of the additional incentives that we provided to certain qualified professional agencies.

Tang Yan and Wang Li reported based on the actual results, we have seen a big success not only for the Q4, but also it helped us to build a healthy ecosystem in our live streaming business. And so we are going to continue to – based on the Q4 trial plan to further optimize on a quarterly basis, we are going to continue to rollout new incentive programs to motivate agencies to work with us even more closely to achieve our business target.

But based on the financial performance, the actual cost level, we don’t feel like we have a significant margin pressure away from further down from the Q4 level, that’s the gross margin aspect. And also we do see we have operating leverages in other cost components in our cost of revenue category.

And secondly on the operating margin, net margin perspective, you can see from Q4 we experienced a leveraged benefit from selling and marketing expenses, even though we are going to step up our investments in the R&D area and we would be able to balance the investments by leveraging the scale efficiency business model mainly from the selling and marketing area, because based on our current outlook in terms of the dollar amount we would like to invest higher dollar amount compared to 2017 in terms of branding, user acquisition and promotional events for our various business units.

But however as a percentage of revenue, it’s going to be further lower comparing to 2017 levels. So we’d like to achieve a balanced growth strategy to leverage the scale efficiency to absorb most of the cost and expenses ramp. So that’s the general direction and however, because we do have seasonal factors that will impact us quarterly depending on the timing we’ll make the investments.

There will be margin fluctuations on a quarterly basis. So in summary, as I said, we will balance our investments versus our revenue and profit profile.

Cathy Peng

Operator before taking the question, I’d like to remind everyone that please limit the number of question that you ask so we can take in more people to want to our maximum. Operator ready for the next.

Operator

We have the next question from the line of Greg Zhu. Please ask you question.

Greg Zhu

[Foreign Language]

I have two question, the first question is I noticed there has been a sudden increase in different revenues on balance sheet this quarter which is up 40% quarter-over-quarter, is there any specific reason for that. The second question is that, I noticed that Quick Chat feature was taken out around the Chinese New Year, any particular reasons behind it, any relations towards the recent (inaudible) changes in live streaming. And also what’s the plan for Quick Chat as well as other social products in 2018.

Jonathan Zhang

This is Jonathan Greg, let me address your first question and Tang Yan will answer your second question. Regarding the deferred revenue increase in Q4 on a sequential basis, actually under the deferred revenue category, there are three major components. One is the membership subscription revenue particularly for quarterly, semi-annual, annual playing members. Actually we defer, we amortize the membership fees based on the period each paying user subscribes. So that’s number one.

Number two is, a deposit made by the advertising agencies and also a regional distributor to us in advance of the placements that really takes place. And then the third piece is from the live streaming business. Normally a paying user pays certain dollar amount to purchase Momo currency and then they will during the - when they purchase a virtual – when they stand up at the virtual gifts and then they will consume the Momo currency.

So before the Momo currency is actually consumed that payment was reported as a deferred revenue for Q4. Actually a large portion of the increase was from the live streaming business. So, during the future period once the paying user consumes the Momo currency they purchase, the revenue will get recognized.

Tang Yan

[Foreign Language]

On the question about managing the regulatory risk, I think basically there are three considerations that we would generally point investors towards here. Number one is that we have acquired all the licenses and relevant permits required by respective regulatory bodies including staffs and Ministry of Culture.

And number two is that we’ve also build up a very comprehensive customer monitoring system as well as professional risk management team. And thirdly, we have also built up an open dialog window as well as a pretty much kind of communication mechanism with various government agencies to manage the regulatory risk.

On those three fronts, we are – wanted that very few companies out there in this industry that have really been doing pretty well and that’s also the reason why during the past two years, we have been navigating pretty smoothly in several round of policy changes as well as government inspections.

I think going forward, we will continue to do well on all those trade front. With regards to what happened to Quick Chat, Quick Chat is actually a product that is still at an exploration phase. Currently we are making some changes in terms of product format as well as user interface and we’ve also made some adjustments in terms of the entry point on home page.

Our plan is that we will put it back on after these adjustments are done.

Operator

We have the next question from the line of Daniel Chang. Please ask your question.

Unidentified Analyst

[Foreign Language]

My question is regarding the Tantan acquisition. Could the management share some color on the strategic reason for the acquisition and what do we expect to see the synergy between the Momo and the Tantan platform in the future in both the user and the monetization front?

Tang Yan

[Foreign Language]

First of all, we are in the business of connecting people in an open environment. In that specific territory, Tantan is very complimentary to our user base. The complimentary nature is actually much greater than the overlapping of our user base. First of all the user tend to be younger and second of all Tantan is very focused on the one-to-one matching for romantic relationships, while we are more focused on connecting on helping people build social relationship over a variety of different social used cases. So the acquisition of Tantan, where hope is to unleash our product line and increase our penetration in the open social territory and strengthen our leadership in that specific space.

[Foreign Language]

And the secondary reason is that we have high level of recognition of Tantan management teams’ capabilities as well as the achievements it made during the past three years, and we also believe that there is great potential for them to keep driving the user world through product improvement as well as the optimization of their matching algorithm.

[Foreign Language]

After the acquisition process, Tantan will maintain its separate sets of strategies and product development, operations, branding as well as business development under the leadership of their existing management, and we will be providing full support and expertise in areas including human resources, technology as well as monetization.

[Foreign Language]

At the same time, I think both of us would have many opportunities down the road to work and explore together in areas including new acquisition and potentially on the advertising side somewhere down the road. I think in the future we would have other kinds of potential to have synergies in terms of business as well as monetization. But short term wise, we are not in a hurry do anything specific yet.

Cathy Peng

Probably in consideration of time we are ready to take the last one and you can come back to me for closing after this one.

Operator

We have the last question from the line of Tian Hou. Please ask you question.

Tian Hou

[Foreign Language]

With one section of the cash to invest or to buy Tantan, almost a management buyout, so how do you incentivize the funding management team to continue to work partly, that’s number one. Number two is Tantan working dependently, how is the potential synergy between Momo and Tantan can be realized? Third is, as we are going to invest in Tantan for 2018, what’s the potential impact to the Momo’s financials in 2018?

Tang Yan

[Foreign Language]

On your first question about the structure of the deal, I think the structure of the deal was based on mutual understanding and negotiation between the multiple parties. The reason why the deal was structured with the majority of consideration being cash was mainly because we didn’t want to dilute our shareholders by this price level.

[Foreign Language]

I think I’ve compared with other financial shareholders, Tantan’s management team actually voluntarily chose higher stock to cash ratio in terms of consideration and that shows the firm confidence from Tantan’s management in the process of the collaboration between the two entities.

[Foreign Language]

We’ve also kept the original option for Tantan. So in the future we will continue to provide incentives through share based compensation. We believe that the above mentioned initiative that we’re taking as well as the fact that Tantan’s management team chose higher stock to cash ratio as the consideration with guarantee that the team would have a very short commitment to the future development of the combined entity.

[Foreign Language]

I’ll be answering the second question as well. First of all, although Tantan has only started to monetize from the beginning of 2018, it has already achieved some very impressive progresses. And before going to the deal, we’ve actually conducted a very comprehensive and detailed business and financial due diligence, and we fully considered the impact of both near term and major longer term financial impact.

We do believe that this is very valuable asset for us to go in both from strategic level and from financial consideration. However for further details we’re not yet in a position make any further disclosure.

[Foreign Language]

I think a business model such as Tantan has a very clear roadmap to monetization. No matter if you look at Tinder-like model or the past that we’ve gone through in the past, such kind of model has very established and proven predecessor to follow and make reference to. And we know such kind of model has very strong operating leverage.

So in the future once the monetization reaches a matured level, we are really optimistic about the growth potential for its profitability level.

Cathy Peng

I think operator that is going to be the last question for this conference call. We are ready to close.

Operator

Thank you, ma’am. I’d like to hand the call back to you for any closing remarks.

Cathy Peng

I don’t have any special closing remarks. Thank you for joining us today.