Article / 20 May 2015 at 4:53 GMT

Once-seedy Momo cleans up with stronger net profit

China Watcher / Shanghai
China
  • Momo was known as a hook-up app, with its default ‘Nearby’ function
  • The company shows a net profit but will have reinvest to grow its user base
  • The collaborations with Alibaba and Tencent-backed 58.com look promising

By Neil Flynn

Social networking firm Momo posted strong results, including a profit for the first time in its history, which saw the share price rally 26.91% to $16.27 on Tuesday. The firm is also seeing continued growth in its user base, and we will continue to see new features and new monetisation strategies in the year ahead. 

Strong headline results but volatility lies ahead

Total revenues of $26.3m beat the company’s guidance of between $24m and $26m, and non-GAAP diluted EPADS of $0.05 beat analyst consensus of -$0.01. These are impressive results for the firm, however it should be noted that this was aided by the seasonally slow first quarter, which sees notably lower operating expenses.  

Momo Revenues
Source: Momo Investor Relations  

The user base continues to see strong growth, and reached 78.1m in the first quarter of 2015 from 69.3m in the fourth quarter. In addition, paying members increased by 200,000 sequentially to 3.1m, although the percentage of monthly active users that are subscribers has fallen from 4.2% to 4.0%. This is likely due to the release of the new Momo 6.0 platform, and as users become familiar with the features, and see how subscription can improve the user experience, we should see this figure grow in the coming quarters.

Momo Users
Source: Momo Investor Relations  

The company has provided revenue guidance of between $31m and $33m for the second quarter, which would represent between 17.8% and 25.4% sequential growth, and between 267.3% and 291% annual growth. This would actually represent a notable slowdown in revenue growth, and management was keen to state that despite the first ever profit for the firm, expenses were low because of the late timing of the Chinese New Year and the timing of the firm’s marketing campaigns.

Management said that this would cause earnings volatility in the coming quarters, but I am expecting to see that Momo will return to a net loss during the year. CEO Yan Tang stated that the firm’s key strategy is to increase the user base and user stickiness, and investors should focus on these metrics throughout the rest of the year.

Release of Momo 6.0 is broadening the platform

I have previously discussed how Momo is used as a complement to Tencent’s dominant WeChat platform instead of a direct rival. WeChat is used to connect with existing friends, whereas Momo is used to find new friends, through common interests and location.

The release of Momo 6.0 is a clear statement of intent that the firm is moving away from its seedy history. Previously, Momo was known as a hook-up app, where the default start page on the app was the location based ‘Nearby’ function, where users can search for nearby users based on specific parameters, typically gender, age, and time since the user was last logged on to Momo.

With the release of Momo 6.0, a feature called ‘Message Board’ is the new default page, where you can see posts of users who share similar interests and have similar backgrounds to yourself. This can be thought of as similar to Facebook’s default landing page, where the notifications that you see are of users who are most compatible to you.

Momo has been so keen to shed its seedy reputation that the Nearby function has become a secondary page under the Discover function, which is exactly the same as WeChat’s placement of its ‘Look Around’ feature, although it is very rarely used.  

Momo Nearby
 













































The Nearby function is no longer the default landing page for Momo users. Photo: Momo

Momo 6.0 has also introduced location based and interest based chat rooms, which allow users to meet new friends through common interests. Group chats is an important feature for Momo, and the first quarter saw the number of groups on the platform rise to 5.5m. Throughout 2015, investors should see that the firm is expanding this ecosystem to allow for more content to be shared, as well as live performance shows.

The introduction of Momo 6.0 has seen a notable growth in social interaction on the platform. Previously, social interaction was governed by appearance and gender, whereas social interaction on Momo 6.0 focuses more on common interests.

Momo Groups
Source: Momo Investor Relations - Create your own charts with SaxoTrader. Click here to learn more 

The app has an impressive gaming platform, with 6.2m active gamers, and the firm launched eight new titles during the quarter, including its first in-house game in February, which reached second place on the iOS downloads list.

As with WeChat, gaming is an important business for Momo because with a large and active user base, the firm needs to offers more ways to keep users on the platform. Gaming is an effective way of doing this, because users can play with each other, and post their achievements on the Message Board.

The firm is also seeing strong performance in its gifting function, which allows users to make purchases through the app, and also make ‘wish lists’, which other users can view and purchase for other users. Whilst this has strong monetisation potential, particularly given the collaboration with Alibaba, I have previously voiced concerns that this will enhance the seedy reputation of the app, with male users having to purchase items from a female user’s wish list in order to initiate a conversation.

Partnerships with 58.com and Alibaba show promise in O2O business

Mobile marketing revenues mainly came from collaborations with Alibaba and the Tencent backed 58.com. Momo users have easy access to 58.com’s online marketplaces through the Discover function, and Alibaba places targeted advertisements of their marketplace merchants on the Nearby People function.

Due to the late timing of the Chinese New Year, ecommerce activity was notably lower than in previous years, but throughout the rest of 2015, investors should see marketing revenues grow. Momo is looking to work with Alibaba to improve its data and app format capabilities, whilst combining social networking and small business.

This will likely take the form of popular users forming small independent stores that can be found on Taobao. Momo will also look to further its collaboration with 58.com, which is similar to Craigslist. Given a user’s interests and location, Momo and 58.com will improve user targeting by focusing on products and services that users will likely have an interest in.

Throughout the rest of the year, we should also see Momo find more partners for its O2O business. Management is targeting O2O expansion, and investors should see the number of services increases throughout 2015. CEO Yan Tang stated that the firm is looking into food delivery, car-pooling and even an Airbnb-style accommodation sharing service. 

The O2O marketing platform Dao Diantong (到店通) is showing very strong growth, and the firm worked with major brands such as Nike and GM during the quarter to promote products to Momo’s user base. Management reported that the marketing customers doubled sequentially, and investors should expect to see further progress throughout the year to expand this service. It is very similar to WeChat’s recent monetisation of its huge user base by placing advertisements in the Moments page, which is the equivalent of the Facebook and Twitter default landing pages.

Final thoughts

I have been bullish on Momo’s potential since its IPO in December, and the company has been making good progress in shaking off its seedy hook-up app reputation to become a evermore popular social networking app.

While the net profit is good to see, investors shouldn’t expect this to continue in the coming quarters, as the firm will invest further in its platform in order to grow its user base. The collaborations with Alibaba and the Tencent backed 58.com look promising, and will help to grow monetization, as will the good progress that the firm is making in its gaming business. For the rest of the year, investors should focus on how the firm’s user base is growing.

Neil Flynn is a portfolio manager at Alcuin Asset Management
. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.
3y
moat888 moat888
I happend to be up this evening in California and noticed your very nice write-up. Your charts showing relavent metrics are excellent. You mentioned you don't think they will remain profitable during some quarters this year? Did management indicate that to you? Couple other questions: Mobile marketing revenues was up big during Q1, was that unexpected? How do you see this line item for Q2-Q4 this year? (mostly from Alibaba and 58.com right?) Thanks again for the excellent write-up Neil !
3y
Neil_Flynn Neil_Flynn
My pleasure. I actually thought that i was too late for you to read it today. In the conference call, they mentioned that expenses were seasonally low. This is because at Chinese New Year, people go back to their hometowns, so in the big cities like Shanghai and Beijing, there aren't many people around, so there's no point in promoting their service. Their marketing expenses will increase in the coming quarters, and management stated that they are focusing on expanding their user base, so i expect that whilst the net profit was nice to see, the firm will likely post a small loss in the coming quarters. Plus their in house game development looks strong, but will require further investment.

Mobile marketing was mainly driven by the new collaborations with Alibaba and 58.com. Alibaba advertises its merchants to Momo users, and 58.com gets a lot of traffic from Momo. I think that this will only increase throughout the year, as management collaborates further with these two.
3y
moat888 moat888
(1 of 2)
Now that they have shown a profit they better keep it up or the stock is going to get whacked. I actually think it would have been better if they didn't show a profit because now people will price the stock using p/e rather than p/s. At this early stage they should simply grow rather than worry about profits. Just don't lose too much money each quarter and maintaining the $450m cash on the balance sheet. They should be very clear in their earnings release and conference call to say their intention is to roughly break even for 2015 and 2016.

I have no idea what management is thinking so I am just rambling here.

But it's possible Alibaba and 58.com will keep those marketing dollars coming and drive MOMO's growth this year.

Q1 Sub revenue growth was actually disappointing. Game was good and Alibaba/58.com save the day.

(con't)
3y
moat888 moat888
(2 of 2)

You made a comment before about they should not require a subscription for users to block unwanted messages, I agree with you. They should focus on what's best for users and focus on growing MAU and worry about collecting fees later on, first growth to catchup to WeChat. It's all about critical mass. They need north of 500m MAU to achieve critical mass.

MOMO is a very interesting social app to watch.

p.s. there are 7 billion people on earth and I feel I am the only retail investor reading your write-ups here since I am the only one commenting here. Almost like you are my personal analyst on the ground in China.

pps. FYI, Here is how I found you. Immediately after an earnings release (such as BABA's) I go to Google, set time frame to last 7 days and search for images of "BABA GMV". Then your (timely) charts show up and I get to your articles. So, your (timely) charts with relevant metrics can get you eyeballs. You got mine that way.
3y
Neil_Flynn Neil_Flynn
I agree, because a firm like Momo should focus on building its user base and platform. The performance of Momo's share price over the past two days has been ridiculous, and it will come crashing back to earth if/when they post a net loss in the second quarter. Gaming looks promising for Momo, particularly from their in-house development team, so we should see further revenue growth from that unit over the coming quarters.

Users shouldn't have to pay for unwanted messages, but Momo doesn't have the financial backing that WeChat has, and also the subscription fee is around 100 RMB a year (off the top of my head), and with the added features from subscription, it's more than reasonable, and hence why subscriptions are growing.

Haha, i genuinely appreciate you commenting on my research. In a weird way, despite being in China, it helps me to understand what Western investors want to know about regarding Chinese firms. The perils of becoming too Sinicised!
3y
moat888 moat888
Your write-ups are top quality Neil. I like it when you show relivant Q/Q metrics (e.g. charts of paying member conversion rate & number of groups).

Western readers appreciate when you write about your observations of the competitive landscape on the ground as you see it, and about management's background if you have been following the company for a while.

I assume you have read "One Up On Wall Street". Write as if you are presenting the story to Peter Lynch.

Your Momo write-ups are excellent because you give the readers a good feel of the App and the competitive landscape (i.e. how Momo & WeChat are different, the App's Tinder-like history and how its evolving)

Would appreciate it if you can contact me when you are in Palo Alto, I would love to take you out to lunch or dinner. I can speak elementary Chinese but unfortunately I cannot read or write. I am amazed and fascinated by the rapid rise of the Chinese Internet entrepreneurs, it's truly the golden age for them.
3y
Neil_Flynn Neil_Flynn
Thanks a lot. China is such a fascinating country, but it is very difficult to understand because the companies and technologies are almost completely domestically focused.

Absolutely, the next time i'm in California, i'll let you know. Likewise, if you are ever in Shanghai, contact me
3y
LION KING LION KING
This comment has been redacted

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