- 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.
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.
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.
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.
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.
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
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