Hello Group courts investors with big bottom-line gains

The dating app has moved past its pandemic legacy and earlier regulatory woes with strong gains in its third-quarter profit and margins

Key Takeaways:

• Hello Group’s profit rose 21% in the third quarter, as its profit margin increased 3.7 percentage points to 22.4%
• Revenue and monthly paying users continued to decline for its Momo and Tantan dating apps, but it reported strong gains for its newer apps

By Edith Terry

Investors greeted the latest results from dating app operator Hello Group Inc. (MOMO.US) with the kind of reaction you might see with the arrival of a cute new girl next store. The stock got a brief flare of interest from investors, followed by a yawn on the realization that perhaps not too much had changed. The shares rose 16% after the Dec. 8 announcement, only to give back most of the gains the next day, showing investors want more than just a single pretty report.

Known as the “Tinder of China,” Hello Group’s biggest problem these past few years has been its Tantan app that it bought in February 2018, meant to be a profitable little sister to its main Momo app. But Hello hasn’t quite known what to do with Tantan, which has been the focus of a major overhaul over the last two years.

What’s more, Hello’s newer livestreaming businesses have run into problems with regulators, who also cracked down on both Tantan and Momo in 2019 for failing to eliminate pornographic material from their platforms. Since then, Hello Group’s management has been more cautious. Then, there was the three-year pandemic hiatus, when hooking-up became difficult to impossible.

As those memories have receded, Hello Group has managed to crank up both its profit and profit margin, even as the company now faces new headwinds from China’s slowing economy. It’s getting at least some relief from outside China with new standalone apps that may contribute as much as 10% of its revenue by the end of this year.

We should also note that dating apps have come into recent favor among Chinese authorities, partly to spur marriage at a time when fertility rates are dropping sharply. Momo, Tantan and Soul, a dating app backed by Tencent (0700.HK), are China’s three most popular dating apps, with a combined 150 million monthly active users in 2022.

Those apps have evolved from simply matching users based on physical traits like appearance to using people’s interests, hobbies and personalities to bring them together. If they began as pure dating apps, the line between dating and social app has become much blurrier.

With a market cap of $1.37 billion and a price-to-earnings (P/E) ratio of less than 6, Hello Group looks seriously undervalued right now. Larger U.S. peer Match Group (MTCH.US) trades at a far higher 18, while Bumble (BMBL.US) is even higher with a forward P/E of 40. Perhaps Hello Group, having lived through China’s longer cycle of pandemic restrictions, may simply be taking longer to come back. Of 16 analysts polled by Yahoo Finance, 15 called it a “buy” or “strong buy,” while only one rated it a “hold.”

Falling revenue

While the analysts are generally upbeat, the more mixed sentiment among general investors comes with good reason.

The company’s top line revenue has been disappointing, peaking at 17 billion yuan ($2.4 billion) in 2019 before falling to 12.7 billion yuan last year. The declines continued in the third quarter, with revenue for the period down 5.9% year-on-year to 3 billion yuan, mostly due to a 14% decline for Tantan to 295 million yuan. The company forecast fourth quarter revenue of 2.9 billion yuan to 3 billion yuan, down again from the 3.2 billion yuan a year earlier.

COO Zhang Sichuan attributed Tantan’s slumping revenue to both a reduction in channel investments and anti-spam initiatives, which reduced the service’s user base. Revenue from the Momo app, considered Hello Group’s cash cow, also fell 5% to 2.7 billion yuan. The company’s overall revenue from live video services fell by 7.6% to 1.5 billion yuan, and value-added services – mainly from virtual gifts and membership subscriptions – fell by 4.6% to 1.5 billion yuan.

In 2017, live video helped transform Hello Group – then known as Momo Inc. – into a powerhouse that once attracted investors like the Harvard Management Co, which oversees Harvard’s $50 billion endowment fund. While live video continues to account for nearly half of Hello Group’s revenue, China’s slowing economy has led to lower spending among livestreaming users and a decline in return on investment in that area, according to the company.

Most of Hello Group’s live broadcasting revenue for the quarter came from Momo, which contributed 1.41 billion yuan. Tantan’s total was far smaller at 120 million yuan, also down, due to a “pivot away” from live broadcasting for the service. Chairman Tang Yan said the company will continue to downsize its live video and refocus on dating aspects of its apps.

Monthly paying users for both apps also fell in the third quarter, from 8.4 million in the third quarter of 2022 for Momo to 7.8 million in the latest quarter; and from 2 million to 1.4 million over the same period for Tantan. Monthly active users on the Tantan app also dropped sharply to 15.7 million in the latest quarter from 20.9 million in September 2022.

So with so many falling figures, what’s to cheer about? Profits. Net income for the third quarter rose 21% to 546.4 million yuan, helped by a 3.7 percentage point rise in profit margin to 22.4% year-on-year. After finally turning profitable this year, Tantan also continued in the black with a 23 million yuan profit in the latest quarter.

“In terms of monetization, being a 12-year-old app has both advantages and disadvantage,” said CFO Peng Hui on the company’s earnings call. She elaborated that advantages included brand loyalty to the Momo app, which has become a “go-to place, if you want to be around people, discover some new friends and have fun and meaningful interactions with people you do not already know.”

But the company is also eyeing new businesses. COO Zhang said revenue declines from Momo and Tantan were partially offset by 295 million yuan in revenue from the company’s newer standalone Duidui, Hertz and Soulchill apps, which was up 45% year over year. Soulchill is a voice chatting app launched in October 2019, targeting overseas markets in the Middle East, Turkey, Southeast Asia and South America. In all of 2022, the standalone apps generated 337.6 million yuan in revenue, according to the company’s latest annual report.

CFO Peng said that the three newer apps were on track to bring in 1.1 billion yuan to 1.2 billion yuan for all of this year, and 100 million yuan in net income. But she admitted the growth could slow in 2024 as the newer apps gain bigger scale.

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