Key Takeaways:

• Hello Group predicted its revenue will slide by at least 14.9% in the current quarter, extending a streak of declines dating back to early 2020
• The company’s retrenchment strategy involves a turnaround at its loss-making Tantan, which aims to break even by 2023 by cutting costs and rolling out new functions

By Trevor Mo

More than a year after kicking off a major overhaul at one of its two main units, dating app operator Hello Group (NASDAQ:MOMO), often called the “Tinder of China,” is saying it still needs time to return to a growth track.

That’s the big picture coming from the company’s latest quarterly earnings, which show its revenue continued to shrink in the second quarter, extending a streak dating back to early 2020. It predicted its third quarter revenue will continue sliding by at least 14.9%, similar to the 15.3% decline it posted for the three months through June, according to the announcement released last Thursday.

During an investor call after the results release, management also said the company would continue using its ongoing retrenchment strategy by “prioritizing growth with profit instead of growth (at any) cost.”. Under that strategy, the company has tightened its belt across business lines, while cautiously expanding into newer areas.

We’ll delve into that strategy shortly and analyze what it means for the company’s longer-term development. But first let’s review some of the details from its latest financial report, starting with a 26% decline in Hello Group’s net profit to 345.6 million yuan ($50.1 million) in the second quarter on revenues of 3.1 billion yuan. The company attributed its sluggish business partly to the resurgence of Covid-19 in China during the period, saying it “brought many challenges and uncertainties to the overall market environment and our execution of strategic goals.”

China’s tightening regulation of livestreaming businesses with new rules implemented early this year also dealt a heavy blow to the company. Its “live video service” revenue – responsible for about half of its total – fell nearly 30% to 1.5 billion yuan year-on-year during the latest quarter. Hello’s platforms allow broadcasters to accept virtual gifts from viewers, with Hello taking a cut. The regulation released in March contained strict guidelines on such gifting, including a cap on how much money a broadcaster can accept, thereby also limiting that revenue source for Hello.

Investors gave Hello’s latest earnings a muted thumbs-up, with its stock edging up slightly by 3% in the two trading days after the results were announced. But the company’s Friday’s closing price of $5.32 is just a fraction of the more than $50 it reached at its high in June 2018, and is well below its IPO price of $13.50 from 2014.

Hello’s downward trend follows a similar pattern for most U.S.-listed Chinese companies over the past year on delisting concerns and a series of regulatory crackdowns launched by the Chinese government targeting data-rich companies. But it’s also valid to say waning investor appetite for Hello owes to its own struggles over the past two years as its business fails to grow. 

In terms of valuation, Hello now trades at a price-to-earnings (P/E) ratio of just 4.5, which is quite cheap compared with peers both at home and abroad. Chinese social media giant Weibo Corp. (NASDAQ:WB) trades at 14.5 times and Match Group (NSDAQ:MTCH), owner of the original Tinder, trades at a whopping 157 times.

Retrenchment strategy

Before announcing a name change last August, Hello was known as Momo and has a history dating back to 2011 when its Tinder-style Momo app first took China’s dating scene by storm. In 2018, the company paid $760 million to add another “meet-up” app called Tantan to its portfolio.

While Tantan gave Hello the title as China’s undisputed leader in online dating, Hello was slow to integrate the unit into its broader business portfolio. The company only recently managed to align the Tantan business under its own top-level leadership after a massive shakeup that saw it boot out Tantan’s original founding team last year.

Accordingly, Hello’s turnaround is heavily focused on Tantan, which has become a drag after accumulating mounting losses over the years. For the three months through June, Tantan’s net loss nearly tripled to 119 million yuan, which came even after the company reined in its marketing expenses. In that process, Tantan’s revenues tumbled 36% to 331 million yuan, making up only 10.6% of Hello’s total revenue for the quarter.

Tantan’s other metrics also declined, with monthly active users edging down by 3% year-on-year to 24.8 million. Its base of 2.2 million paying users was down by 200,000 compared to this year’s first quarter, according to statistics provided by the company’s management on the investor call.

The management laid out a two-pronged strategy to tackle Tantan’s troubles: one focused on streamlining the business by reducing and controlling marketing costs; the other emphasizing the rollout of new functions to persuade users to stay with the platform.

The strategy’s cost-cutting prong will see it “start from channels and methods with the lowest ROI and retention.” Meanwhile, a big new attraction for the second prong is the rollout of a function called “FlashChat,” which matches strangers in one-on-one style online chatroom settings. The company hopes such functions will improve user “stickiness” by offering them options to remain anonymous.  

With the dual strategies, Hello’s management predicted Tantan’s losses will gradually narrow in the coming months. The company expects Tantan’s third quarter net loss to narrow to 50 million before the unit eventually breaks even by 2023. As it cuts its marketing expenses, management also expects Tantan’s monthly active user numbers to continue shrinking, with a goal of maintaining the pool at 80% of the current level at the end of this year.

The success of a Tantan turnaround could depend strongly on external factors out of the company’s control, most notably how China’s Covid situation trends. Any potential new restrictive measures to control future outbreaks would almost certainly dampen user appetite to go on the app for offline dating. After all, there’s no real chance to “meet up” when people are confined to their homes.

We should also point out that Hello’s retrenchment is an across-the-board effort, not only applying to Tantan. The company will also seek to “optimize the key line items” for its core Momo money-spinner, including marketing, personnel and infrastructure costs in the second half of this year and into 2023. Money saved by trimming costs will be used to ramp up investment in newer initiatives, including overseas expansion and launch of new apps.

At the end of the day, Hello’s future growth will count not only on cutting fat at its existing business, but also on its new initiatives as China’s traditional online dating market faces saturation amid increasing competition. But trials of new businesses, such as overseas expansion and new apps, have yet to bear significant fruit, at least based on the company’s relative silence in terms of providing sales figures or user data for such initiatives.