Hello Group Inc. (MOMO) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Fourth Quarter and Full Year 2018 Momo Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [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.

Thank you, operator. Hello everyone and thank you for joining us today for Momo's fourth quarter and fiscal 2018 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, President and Chief Operating Officer; Mr. Wang Yu, Founder and Chief Executive Officer of Tantan; and Mr. Jonathan Zhang, Chief Financial Officer. They will discuss the company's business operations and highlights, as well as 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. Further 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 statements 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.

Good morning and good evening everyone. Thank you for joining our conference call today. Q4 was a solid quarter, closing out a fruitful year of 2018. Now my team and I will take you through the details. Firstly, a brief overview of the financial performance. For the fourth quarter 2018, total revenue reached RMB3.84 billion, up 50% year-on-year. Adjusted operating income for the quarter was RMB1.03 billion, up 30% from the same period last year. For fiscal 2018, total revenue came in RMB13.4 billion, up 51% year-over-year. Adjusted operating income reached RMB3.9 billion, up 42% year-on-year. Excluding Tantan’s financial impact, our adjusted operating income for the year would have been RMB4.2 billion or a 32% adjusted operating margin, compared to 31% last year. During the year 2018, we have made significant investment in strengthening the content ecosystem and expanding the talent pool to better support our research and development efforts. These investments have laid a solid foundation for us to drive further product innovation as well as revenue growth in the year 2019. Even with these significant investments that we've made, I'm pleased to see that on a ex-Tantan basis, we were still able to deliver an improvement in bottom line margins as compared to the prior year. Now a deeper dive into the quarter. Firstly, our community continued to grow. The core Momo app had 113.3 million monthly actives for the fourth quarter, up 14% year-on-year and representing a 2.8 million net addition from the previous quarter. Last year, we mentioned that we had a major cleanup of the spending activities starting from September. The campaign had a peak of its impact well into September and October. Since then, we’ve seen a gradual rebound in different engagement metrics. Per user time spent reached an all-time high since the beginning of 2017, largely driven by the rapid growth of the audio and video based live interactive experiences that have flourished on the platform during the past two years. Total paying users for the core Momo platform reached 9.1 million in Q4 2018, representing a 16% year-over-year growth or a 200K net addition from last quarter. Paying user for Tantan continued to increase rapidly reaching 3.9 million in the fourth quarter, a quarterly net addition of 300,000. As we closed out year 2018 and start going into the '19, I’d like to share some of my thoughts on how to better serve our users and pursue growth opportunities in the coming year. Although China’s mobile Internet user growth has been substantially slowing down, we still see plenty of growth opportunities in the open social space. More importantly, unlike some of the trends that come into fashion quickly and out of it just as fast, discovering new relationships is a basic human demand that is always going to be there. Although Momo and Tantan, collectively, we are already the dominant player in this space, our rough estimation is that a combined MAU of Momo and Tantan is less than one half of the total addressable market that we're aiming at. How fast we can grow and penetrate deeper into that addressable market depends on how fast we can innovate in order to help more users effectively discover new friends and build meaningful interactions. If we think about the key challenges that have been holding us back from going faster, here are the major ones: A, the limited ways that we connect people; and B, the limited form of interactions that we offer. For example, for many of our users, especially those in lower tier cities text-based communication can be a high barrier form of interaction and we found that audio and video based interactions and entertainment content can effectively lower that communication barrier. In addition, physical proximity has long been the major connecting dimension that we offer. In some cases, it can be very natural bonding element, but in many other cases, it is not. We believe by considering other factors, for example, user’s behavioral data and measurements indicating the likelihood of interaction. We can help the users make much more relevant discoveries and improve their quality of interaction on the platform. During the past two years, we have made tremendous progresses in enriching the social features to broaden the form of interactions as well as diversifying the ways of connecting people. Three years ago, when people came to Momo, what they could do was pretty much limited to checking out Nearby People and IM-based chatting. Nowadays people are connecting and interacting over a variety of different use cases including nearby functions, live shows, short video, social games, karaoke and other form of audio and video experiences. More specifically in the year 2018, one of our biggest achievements on the product side, is that after several quarters of trial and error, we finally figured out the right formula for building live audio and video interactive experiences beyond the live broadcasting showrooms. That's essentially pushing the application of live streaming technology beyond the talent show business to better serve Momo users' unique social demand. In Q1 2018 we introduced audio chat room. Later in the year we added karaoke and other sort of interactive tools into the chat room. Throughout the year, we've seen the retention ratio of the chat room gradually improving. And now it is already one of the major social use cases on our platform. In terms of DAU penetration, it's now at the same level as the interest group. Because users on average spend much longer timing audio chatting than in text-based chatting, in terms of total time spent, audio chat room is actually more than twice as big as the interest group, and half as big as the live streaming service. In addition, Quick Chat and Parties, which were two earlier social experiences we launched in late 2017, after several rounds of group iteration, also reached a stable growth base in Q3 both in terms of usage and in terms of revenue. In 2018, we also took the first step toward diversifying the connected dimensions. We started to test other recommendation strategies in the algorithm to supplement physical proximity. Our experiments in Nearby People and Nearby Posts showed positive results in driving interactions and response rate to greetings. What we are doing here are still pretty early days and we have a long way to go. In the year 2019, it remains an important task of ours to tweak the algorithm with a goal of helping people make more relevant discoveries and build more meaningful interactions. Overall, the team has made impressive progress this year in expanding the form of interaction based our audio/video technology and in pushing the ways we connect people beyond physical proximity. With these changes happening, we have the chance to serve the users that we were not able to serve well in the past. During the coming two quarters, one of our key strategies is to leverage new use cases and go after the huge amount of dormant users, pull them back through effective channels and see if we can better retain them. In addition, the booming growth of audio and video interactions also leaves bigger room for us to build richer monetization features and drive business growth beyond live streaming shows. Throughout the year 2018, we have seen an acceleration in the growth of the VAS line. We are seeing a great deal of potential here and we'll continue to pursue these opportunities in 2019. Other than the changes that we drove to the core Momo application, in 2018, we also completed the acquisition of Tantan. The acquisition has strengthened our leadership and dominance in China's open social space. Tantan's growth in 2018 was undoubtedly impressive. However, we believe that it has bigger potential to be unleashed both in terms of user growth and in terms of revenues. Our goal is to make Tantan a new engine for the company in the coming two to three years. Lastly, I would like to finish my speech today by announcing that our Board has declared a cash dividend in the amount of US$0.62 per ADS, which will amount to a total cash payment of approximately US$128.3 million or 25% of our adjusted net income in 2018. The dividend payment demonstrates our commitment to delivering shareholder value. Such commitment is backed by our consistent record of earnings growth and strong operating cash flow. One thing worth pointing out here is that Momo is still a fast growing company and we do see many opportunities to further grow our platform and business. However, we have and we'll continue to be disciplined and selective in pursuing investment opportunities. If there are opportunities that can strengthen our position in a way that Tantan has, we will strive to capture them. And if we continue to generate excess cash flow compared to our meaningful operation and investment and if deemed by our Board of Directors to be in the best interest of our company, we may continue to share our prosperity with the shareholders in the form of future dividends. Thank you for trusting the Momo team. We look forward to creating and sharing more value to the investors in 2019. With that, I'm handing over to Wang Li for our business review. Wang Li, please?

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. Firstly, on live streaming, total revenue from live broadcasting business for the quarter was RMB2.96 billion, an increase of 36% from the same period last year. I’ve pointed out on the November earnings call, the macro headwind and overall consumption weakness have caused us to have a soft October and November. In December, we held a year-end competition event. In the face of the macro uncertainty, we have refrained from utilizing the extreme stimulating measures as we did in 2017. Instead, we focused on the efforts -- we focused the efforts on designing the competition structure, as well as innovating the key features to enhance the overall tournament experience. The enthusiasm we saw from the users in December tournament exceeded our expectations giving us a 7% quarter-over-quarter growth in live broadcasting revenue for Q4, despite a high revenue base in Q3 and a softness in October and November. As we put the year-end tournament behind, we can now shift the focus towards driving much longer -- longer-term structural changes to our system. Last quarter, Tang Yan mentioned that we would like to better cultivate or paying potential of the middle cohort paying users by introducing more interactive tools into the showroom. In January, we rolled out an interactive gift card Penguin Hitting. When a user sends a traditional gift, it is simply a virtual gift with certain special screen effect. An interactive gift such as the Penguin Hitting comes with a game that allows the users to have fun and compete with other users in the same live channel. That way, the users can enjoy themselves even with a limited amount of spending. Data shows that the game very effectively drove the paying activities of the middle cohort of paying users by enhancing their paying experience. For example, during the 7-days Chinese New Year holiday, the tipping revenue from the couple hundred paying users only showed a slight uptick. However, the total revenue during the CNY holiday showed a healthy double-digit year-on-year growth. Nearly, all of the growth came from the middle and bottom layer of paying users. That is just one of the examples of how we can innovate to offer better entertaining experience to our users. As a matter of fact, the team is now working on a series of products and operational adjustments to drive new demand and better paying conversion in view of the new macro environment. As we speak now, some of these trends are already taking through the execution stage. We believe that with these measures gradually taking effect, we will be able to drive steady and healthy growth for live broadcasting business in the year 2019. Now, our non-live broadcasting line items. Revenue from value-added service or VAS continued to ramp up fast and reached RMB722.4 million in the fourth quarter, a 272% growth on a year-over-year basis. Wang Yu will talk about Tantan’s business later, so I'll be focusing on the VAS business for the core Momo part. Excluding Tantan, Momo's VAS revenue was RMB499.4 million, a 157% year-over-year increase. For the past four quarters in a row, VAS has been accelerating its Y-o-Y growth rate driven by the virtual gifting service outside of the live broadcasting channel. When we first launched the virtual gifting service in early 2017, we started with the largest and also most established use case to Nearby People. Many users send virtual gift to increase the response rate to their greetings. Later on, we expanded the paying use case into interest groups. Since the beginning of 2018, we began to push harder on the virtual gifting business by introducing new gift features and organizing more operational events around the service. At the same time, we also started to test virtual gifting service in some of the new live interactive experiences based on audio and video streaming technology. Now both Werewolf, Quick Chat and Parties are all pretty sizable revenue contributors. All of these led to be outperformance in the virtual gifting business in year 2018. Going into the year 2019, we still expect the growth of VAS business to continue to outpace our business -- outpace other business lines. As compared with live broadcasting business, VAS bears a much lower ARPPU and therefore should be more defensive against the macro headwind. At the same time, the flourishing live interactive experiences based on audio and video technology provides ample room for us to build paid services, that add-value to the users. One thing worth pointing out here is that although live broadcasting currently represents the big majority of our total revenues, less than 30% of our total DAU actually consumes live streaming content, the rest 70% plus are engaging with other social experiences that have nothing to do with the live talent shows. We believe these users also have strong inclination to pay for value added services, as long as we give them a good reason to do so. In 2019, we’d like to see ourselves move a bit faster in experimenting on paying use cases for virtual gifting across the different non-talent show experiences that we offer on the platform. Now briefly on mobile marketing business. Mobile marketing revenue was RMB122.1 million, a 15% year-over-year decrease. The decline was caused by the challenging macro environment, as well as the regulatory changes in some of our big ad sectors. Our current expectation is that the macro environment will continue to be tough for mobile marketing business in the year 2019. Therefore, instead of aggressively pursuing growth opportunities here, our strategy is to increase the operating efficiency of the mobile marketing team. We plan to apply the same strategy to the downsized game business in the year 2019. That’s the review of the key business lines. Now let me hand over to Mr. Wang Yu to review Tantan’s product and business development. Mr. Wang, please.

Thanks. So let me briefly review Tantan's operational and business developments in the year 2018 and our plans for 2019. First, an overview of the key metrics for the quarter. In Q4, the Tantan community continued to grow rapidly. Total paying users reached 3.9 million in the fourth quarter, or a quarterly net addition of 300,000, largely driven by the overall user base growth. Total revenue was RMB223 million for the quarter, up 36% sequentially, driven by both paying user growth and the rapid increase in ARPPU, which was in turn due to the greater adoption of the See Who Likes Me feature. Now, let me briefly review the achievements made in the year. First of all, user growth was a number one priority for Tantan in 2018. I'm glad that we delivered very well on that front. The users grew significantly faster in 2018 compared to 2017. The accelerated growth was driven by both an increase in retention and an acceleration in growth of new users. The increase in retention came from the launch in paid users, growth optimizations and algorithm improvements. While the acceleration in growth in new users came from proactive talent strategies and an increase in organic growth as we become more widespread. I'm especially happy that we were able to make the value added service as the big driving factor in the growth formula and aligned improvements of user experience will increase the commercial value of our platforms. Next on monetization. 2018 was the first year of Tantan’s monetization. I'm glad that we delivered beyond target on that front. In January 2018, we launched the VIP subscription service. Because of the high quality of Tantan’s user base as well as the rightsizing strategy of our business, we were able to quickly grow the paying subscribers to 3.1 million by end of June. After success of the VIP service, we launched two additional paid features in July 2018, the See Who Likes Me stream and Super Exposure. The See Who Likes Me feature significantly improved the paying conversion as well as ARPPU giving a boost to revenue growth in the second half of the year. In 2018, we established our AI team working to improve the algorithms so we can better distribute value in the network. On the operational front, in Q4, we also started to build a data tracking system to make our user acquisition efforts more effective and ROI driven. We believe there’s further room for improvement in area of marketing efficiency. That will continue to be an area of focus for us in the coming few quarters. As we look out to the year 2019, user growth remains on top of our priority list. With that said, monetization and revenue growth will be taking an increasing bigger role as we continue to grow. In order to achieve the goals we’ve set for ourselves in the year, two things are crucially important to the team. Firstly, we need to continue to improve the user experiences we offer. We believe that Tantan already offers the class dating user experience among dating open services in China, but we believe that there is still a big room for improvement and our product engineering AI teams were relentlessly keep pursuing and optimize our product offering. We believe that providing a killer product is the best way to take over and dominate not only the Chinese market but other markets as well. The other thing that we need to get right is the continuous optimization of existing premium features and allow for new monetization features. In area of optimizing existing features, our experience is that sometimes small ideas can make big differences. Throughout last year our monetization teams were able to continuously output optimizations that seemed small but were able to significantly boost commercial rates and revenue. Our ability to massively A/B test for best solutions plays a very important part of this success. And we will continue to build on our data and testing platforms this year. Regarding new monetization features, we'll be testing a number of different models, both subscription-based and non-subscription-based. The latter is important for us to significantly increase ARPPU and fully unleash the monetization potential of Tantan. Overall, the year 2018 was a milestone year both for our team and for our users. We look forward to creating more value for users and the investors in the New Year. With that, I'm handing over to Mr. Jonathan Zhang for financial review. Jon Zhang please.

Thank you. Hello, everyone. Thank you for joining our conference call today. Before getting into the financials, starting from this quarter, we changed our reporting currency from the US dollar to renminbi to reduce the impact of foreign exchange changes on the company's reported results. Our operation is mainly conducted in China, and all of our revenue is generated locally. Based on the significant fluctuations in currency exchange rates during the past recent periods, we believe financial results presented in RMB better reflect the fundamental performance of our businesses. The press release issued earlier today contains US dollar translated from RMB amounts using spot rate on December 31, [2008] just for reference purposes. In the interest of time, let me go direct into costs and expenses as revenue line items have been covered pretty comprehensively by Mr. Tang Yan and Wang Li. Our non-GAAP cost of revenue was RMB2.08 billion compared to RMB1.32 billion for the same period last year. Non-GAAP cost of revenue as a percentage of total revenue was 54%, an increase of 2% from Q4 2017. The higher cost base for Q4 2018 was mainly caused by costs incurred in connection with Phanta City TV variety show and higher payouts from our live streaming business and fast ramping virtual gifting business under VAS. On a sequential basis, non-GAAP costs decreased around -- as a percentage -- non-GAAP costs as a percentage of revenue decreased around 1 percentage point from 55% to 54% in Q4. The improvement was mainly due to lag from -- a lag dragged from Phanta City Show and positive contribution from Tantan revenue partially offset by higher payout ratios from our live streaming business and fast ramping virtual gifting business under VAS. Non-GAAP R&D expenses for the fourth quarter was RMB193.9 million, compared to RMB107 million for the same quarter last year, representing 5% and 4% of total revenue, respectively. The year-over-year increase reflected our step-up efforts in expanding the engineering talent pool to support our various product initiatives and the consolidation of Tantan as well. On a sequential basis, non-GAAP R&D expenses as a percentage of revenue remained relatively stable. We ended the quarter with 2,147 total employees, of which 432 are from Tantan. The R&D personnel as a percentage of total employees for the Group was 55%. Overall, we feel that in terms of the size of our engineering talent pool. We are in much better position now as compared to a year ago. Looking deeper into 2019, our efforts will be shifted to mainly focusing on optimizing the structure of it and to improve the talent pool quality. Therefore, we do expect the pace of our overall headcount growth to meaningfully reduce in 2019, comparing to 2018. Non-GAAP sales and marketing expenses for the fourth quarter was RMB557.3 million or 14.5% of total revenue compared to RMB353.8 million and RMB502.8 million or 13.8% of total revenue for the same period last year and third quarter 2018, respectively. On a year-over-year and sequential basis, the increase in the sales and marketing expenses as a percentage of revenue was mainly due to the consolidation of Tantan, while the core Momo business continued to gain operating leverage on the sales and marketing side. Our Non-GAAP G&A expenses was RMB133 million in the fourth quarter of 2018, RMB39.3 million higher than the RMB93.8 million in the third quarter of 2018. The sequential increase was mainly because that we recorded RMB30.3 million one-off write-down of a prepayment related to Phanta City project which we currently expect we would not be able to benefit in the future period. Non-GAAP operating income was RMB1.03 billion, up 30% year-on-year from RMB790.6 million, representing approximately 27% non-GAAP operating margin for the quarter. Now, turning to the balance sheet and cash flow items. As of December 31, 2018, Momo's cash, cash equivalents and term deposits totaled RMB11.3 billion compared to RMB6.9 billion as of December 31, 2017. Net cash provided from operating activities during the first quarter 2018 was RMB1.16 billion compared to RMB790.8 million for the same quarter last year. Lastly, turning to the first quarter 2019 revenue guidance. We’ve estimated our first quarter revenue to come in the range from RMB3.55 billion to RMB3.65 billion, representing an increase of 28% to 32% year-on-year or a decrease of 8% to 5% quarter-over-quarter. Such estimates is based on assumptions under VAS -- VAS business will increase on a sequential basis and live broadcasting and advertising businesses are going to decrease quarter-over-quarter due to the seasonality around Chinese New Year. Please be mindful that this forecast represents the company's current and preliminary view based on the market conditions and operational status, which are subject to changes. That concludes our prepared portion of our today's discussion. With that, let me turn the call back to Cathy for Q&A. Thank you, Cathy.

Yes, actually just a quick reminder. First, we appreciate if the analyst limits the number of questions to two each person so that we can take more people in. And number two is that for the Chinese speakers, please ask the question in Chinese first, followed by the English translation by yourself. Operator, we are ready. Please take the first person in.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Thomas Chong from Credit Suisse. You may ask your question.

Thanks management for taking my question and congratulations on the strong set of results. I have two questions. My first question is about any update on the macro impact to the live broadcasting business. How should we think about the 2019 revenue outlook, as well as the monetization strategy? And my second question is about our thoughts on overseas expansion? Thank you.

Firstly, I'm going to talk about our view on the macro impact. Our current view is that macro is probably still going to stand out as a risk factor to the pace of revenue growth this year. However, right now we are seeing some favorable policy getting rolled out at a macro level. So we'll see how it goes as we move deeper into the year. As a company, we tend to focus on the things that we have control on and these are the product and operational levers that we have in hand. By pulling these levers in a right way, we still see a lot of growth opportunities here. For example, the operational efforts that we put into the year-end gala event had a clear impacting driving the tipping consumption from the top users immediately. And also immediately after that competition event, we also quickly rolled out the interactive gifts to stimulate the middle cohort. And we were able to see almost immediate positive impact in that cohort in January and also during the Chinese New Year period. If you look at the Q4 revenues on the ex-Phanta basis, the revenue in Q4 grew 10% on a sequential basis. And if you look at our Q1 guidance, although, we are making relative prudent assumptions on the performance from the top users, our guidance is still indicating a year-on-year growth -- a pretty satisfactory year-over-year growth rate. For the whole year 2019 there are several directional stuff that I can -- I’d like to share with you guys here. Number one, for our live broadcasting business the team needs to focus on cultivating new demand through product and operational efforts. At the same time we are also looking to do a better job in converting the platform traffic into live streaming paying activities. For example, we now see a clear mismatch on the platform where on the one hand we have a lot of users having difficulty in finding effective interaction. On the other hand we also have tons of small long-term broadcasters or entry level broadcasters who cannot find enough traffic support. So when they go live, they essentially have no audience in their channel. That is a problem that can be better addressed by making our traffic dispatching system better. And then the other opportunity that we see is that in some local areas in China, we feel that there are still a lot of wealthy people who have the potential to become our high paying users, that have actually never touched Momo’s live broadcasting service before. So these are examples the opportunities that we have this year and we will continue to pursue. Our other planned initiative will include several things that I can talk about here. Number one is the continuing introduction of new product features into the live show; and number two is the revamp of the broadcasters’ ranking system to provide better motivation; and number three is the adjustment to the platform algorithm to support better live streaming conversion. And lastly, we do have some offline promotional events to drive new paying users into live broadcasting. These strategies will get rolled into the system step-by-step in the coming few quarters. And the second focus of ours on monetization side is that VAS and Tantan as mentioned before, these two business lines tend to be more resilient in a macro headwind. And as compared with live broadcasting business these two currently do not monetize as deep. So we actually see a lot of growth potential in driving the paying activities from the middle toward longer-tail paying users. But to unlock the values in these cohorts of users, we need richer monetization features and more diversified paying use cases for VAS service. For example, recently we took the idea from some of the Japanese and Korean TV dating reality shows and we applied these ideas into building new gamifications in the VAS service and created a new party experience -- moderated party experience to replace the old one. Right now we are seeing very positive data in terms of user engagements and also paying activities. So far into Q1 despite the negative impact from Chinese New Year, our own VAS business and Tantan are all showing very strong growth momentum on a sequential basis. So throughout the year 2019 that's going to be an area that we will be pushing very hard on, which is to experiment on more of these new VAS experiences. Right now we are seeing plenty of monetization potential for our Quick Chat and Party experience, the chat room experience and also Tantan. We believe that the revenue contribution from VAS and Tantan as a percentage of total, is going to see pretty significant increase in the coming couple of years. For Momo, we have been looking at the overseas expansion. We have been keeping an eye on over overseas expansion opportunities are making regular assessments from time-to-time. And in doing so, we generally have to guiding principles. One is that there has to be a proven business model. And the second one is that, it has to be something that fits into the forte of our team. Right now, on Momo side, we do not have any definitive plan, but Tantan may have a more specific opportunity that we would like to pursue. I'll pass on to Wang Yu to elaborate a little bit.

Okay. So regarding Tantan's overseas strategy. So while China is still our focus, we do in facdt already have a pretty sizable overseas user base. We do see the overseas market, especially in Eastern market as a big growth opportunity for Tantan down the road. We believe Tantan has a significant competitive advantage in our operational fit for Eastern cultures.

Okay. Operator?

Alright. Your next question comes from the line of Jialong Shi from Nomura. You may ask your question.

Thanks very much for taking my call. And I have two questions here. First, I will first ask my question in Chinese and translate it into English. [Foreign Language] I have two questions here. My first question is a follow up question on live broadcasting. And management mentioned on the -- during the prepared remarks, Momo actually has a few new features to be added into the live broadcasting service, which are similar to the Penguin Hitting feature added last quarter. So I just wondered if management can provide more details on those upcoming new features? And my second question is about Tantan. We understand Tantan's revenue in 2018 was mainly driven by premium membership. So I just wonder how we should assess the monetization level for this premium membership model? And management mentioned during the prepared remarks, Tantan is currently testing few new monetization models. And I just wonder if management can provide more colors on those upcoming monetization models. And also when those models are likely to be rolled out? Thank you.

The growth of the VAS business has largely been driven by the virtual gifting service in the past few years, which mainly involved users sending each other virtual gifts in a non-live webcasting use cases enhance the overall social experience. In terms of DAU penetration, the order of ranking among different standalone use cases on the platform goes like this: the biggest one is Nearby People and then it's live broadcasting and then the chat room experience and interest group. Quick Chat and Parties, Werewolf, these are relatively smaller use cases in terms of DAU penetration. Quantitatively live broadcasting represents a bit less than 30% of total DAU and the rest of the social experiences represent 70% collectively. That's why we actually think that the non-live broadcasting use cases provide a long runway to ramp up your virtual gifting service. Virtual gifting is a model that has been proven by multiple consumer experiences like Nearby People interest group, Werewolf, Quick Chat and Parties. Right now based on the existing use cases VAS is still ramping up -- the VAS revenue is still ramping up very fast. And this year we do have the plan to start testing monetization features in the chat room experience. And chat room experience I said before is a relatively bigger use case in terms of total time spent. It’s already half as big as the live broadcasting service. And which, live audio interactions and the karaoke feature within the chat room experience also provides pretty rich channels to build diversified paying use cases. So we do believe that it has the potential to become a pretty meaningful driver for VAS down the road. However, because we really haven't monetized the chat room experience in any big way in the past this year, we may need to allow the team some time for trial and error. And Tantan?

Okay. So generally, we believe that our potential for dating in China is as high, if not higher than the West. But we probably need to use some -- besides subscription based models use some non-subscription based models to fully unleash the -- our potential. With that said, so far into Q1, we have been outperforming our own expectations on user growth by quite a lot. As an indication, we expect that the quarterly add-on in paying users to increase very significantly from 300,000 net add that we saw in Q4 and even surpass that of the net add of Q3. We are testing a number of different new premium features, some of them are subscription based and others are not. When we feel that we're ready, we'll do an official launch. But we will take our time in testing the features to make sure we do the things right.

Okay, operator. Operator, we're ready for next.

Your next question comes from the line of Daniel Chen from JPMorgan. You may ask your question.

[Foreign Language] I will translate it myself. So my question is for Jonathan. So how should we look at Momo's margin profile in 2019? So -- and any place that we can -- we are going to see the operating leverage for the whole company? Thank you.

Thank you. Actually as a public company, we don't provide specific margin guidance for the coming year. But, however, based on the -- what Tang Yan just discussed, we feel confident that our revenue will continue to grow from live streaming, faster pace of revenue ramp from our VAS business and also Tantan business. So definitely we are going to be very carefully to manage our cost structure. As we communicated in the past, we feel that the current level of revenue sharing is adequate to the agencies and broadcasters. We do not have a plan to significantly increase the payout ratio. That’s probably we are going to continue on in 2019. And then, there are other factors that are in the cost component. Since the virtual gifting business under VAS ramps up quickly, it could provide additional drag on the gross margin side. And also Tantan’s business will -- as the revenue ramps is going to positively impact the gross margin. So we're going to carefully manage that. In 2019, with no Phanta impact, which is a positive factor, so do see there is a potential. We hope that our gross margin will improve based on the 2018 level. And based on the current macro condition, as I said during the earnings call -- during the prepared remarks we are going to be very disciplined in terms of headcount control, mainly focusing on optimizing the talent pool quality. And the only incremental area would be the selling and marketing expense to support Tantan's user growth. On the core Momo side, we're going to continue on the discipline side to generate operating leverage. So overall for 2019, on the operating margin side, we definitely hope that we can achieve similar level of profitability compared to 2019 on a consolidated basis.

Operator, maybe we can take the last question. And come back to me for closing in the interest of time.

Your next question comes from the line of Tian Hou from TH Capital. You may ask your questions.

[Foreign Language] Okay. So I am going to translate it, okay. So Momo has been proven, has a deep understanding of China's social connection markets and proven by the successful acquisition, integration, monetization of time Tantan and its own Momo app. So if we can -- if we Match Group in US as a company and we see Match Group has many apps, each app targeting one particularly social connection desire and particular group. So I wonder what's the future strategy for Momo? You want to do the [APP] internally or externally. You want to have just existing 2 apps or you’ll more apps. So what's the future strategy? That's my question. Thank you.

Well, first of all, thank you for your compliment on Momo's management team and specific open social space. My view towards your strategic question in that specific space is that in the open social territory, it's hard to find one type fit all kind of solution to satisfy all the specific vertical demand in some specific demographic or form of interaction or in some specific markets. So we probably need multiple solutions to keep penetrating deeper into the market. As a matter of fact, since last year, we’ve actually already stepped up our efforts in self-developing new products to satisfy new demand and new demographics. And we've actually launched a few projects and new applications last year. But -- and we will continue to try to go in deeper on that front this year. We also have some plans for standalone application developments down the road. However, because that is a new area for the company, so we probably also need to allow some trial and error time for the team. And lastly, other than self-development of new products, we also do not want to rule out the possibility of getting into new areas through M&A or partnering with other people in some new projects. That was also an area that we've already got into in the year 2018, that's still one of the -- one of our strategies in the coming year as well. So that's the answer to your question.

Operator, I think that will conclude our call today. We are ready to close. Maybe you can take it over for the closing remarks?

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