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Momo Inc. (MOMO) Q2 2020 Earnings Call Transcript

Momo Inc. (NASDAQ: MOMO) Q2 2020 earnings call dated Sep. 03, 2020

Corporate Participants:

Cathy Peng — Director, Investor Relations

Yan Tang — Chairman and Chief Executive Officer

Jonathan Xiaosong Zhang — Chief Financial Officer

Yu Wang — Founder & Chief Executive Officer of Tantan

Analysts:

Thomas Chong — Jefferies Hong Kong Limited — Analyst

Tian X. Hou — TH Capital — Analyst

Lei Zhang — Bank of America — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Second Quarter 2020 Momo Inc.’s Earnings Conference Call. [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.

Cathy Peng — Director, Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us today for Momo’s second quarter 2020 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 all — they will discuss the Company’s business operations and highlights as well as the financial 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 U.S. Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement 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.

Yan Tang — Chairman and Chief Executive Officer

[Foreign Speech] Thank you for joining our conference call today. Q2 was a busy quarter for us. Although the economic impact from the pandemic still lingers, we have seen user engagements improving at a steady pace on Momo and Tantan. With things gradually coming back to normal on the traffic side starting from Q2, our teams have stepped up the efforts to drive toward our strategic goals.

[Foreign Speech] Now, let me quickly walk you through the key operating and financial results for the quarter. We are also going to give you an update on the Company’s priorities for the year and how we are going to approach them in the coming few quarters. Firstly, a brief overview of the financial performance. For the second quarter of 2020, total revenue was RMB3.87 billion, down 7% year-on-year, but up 8% quarter-over-quarter. Adjusted operating income for the quarter was RMB1.04 billion, representing a 27% profit margin. Excluding Tantan’s loss, adjusted operating income for the core Momo was RMB1.1 billion or a 33% profit margin. On Tantan’s side, I’m glad to see that our testing with the live broadcasting service started gaining traction in the second quarter. Although the membership service was struck hard by the COVID and the associated weak dating activities, total revenues at Tantan still grew 82% year-over-year and 35% sequentially to RMB117 million for the second quarter, driven by rapidly ramping up live broadcasting revenue. As topline improved, Tantan’s adjusted net loss also narrowed down to RMB70.79 million

[Foreign Speech] Now a deeper dive into other aspects of the quarter. First, on operating metrics. As the COVID impact began to tail out in the second quarter and the lockdown measures substantially relaxed within China, the social sentiment also recovered gradually. The number of grew MAU grew 3.5 million during the quarter to 111.5 million in June. Total time spent also saw substantial improvement from the previous quarter. As the MAUs of the platform recovered, the number of paying users on Momo also saw 300,000 net addition from the first quarter to 8.9 million in the second quarter of 2020.

[Foreign Speech] Now turning to Tantan. Tantan experienced rapid user growth during the two weeks following the Chinese New Year holiday. However, the growth momentum was disrupted by the continual spreading of the coronavirus and the waning dating sentiment as a result of that. Unlike Momo, where a variety of alternative social entertainment experiences is available, Tantan was almost purely about converting online matches to offline dating activities before Q2. Therefore, compared to Momo, Tantan was struck harder by the COVID and the recovery also happened later than it did on the Momo core. By early May, the lockdown in most parts of China have been lifted, and therefore, we were able to see a recovering trend in the number of active users on Tantan. We are very optimistic about the user growth outlook on Tantan post-COVID as the team continues to improve its user acquisition efforts and in which the product experienced on the platform. These are also the two most important priorities for Tantan team in the coming few quarters.

[Foreign Speech] Tantan’s paying users for the second quarter totaled 3.9 million or 300,000 decrease from the previous quarter. On top of the decrease in DAU, COVID also hurt the users’ motivation to pay for the subscription services leading toward a decrease in the paying ratio, which is also taking more time to recover than the overall DAU. Such an effect has caused the paying user recovery to temporarily lag behind the resumption of DAU growth in Q2. In Q3, the paying users have already gone back to the growth track. Wang Yu will have more details for you a bit later.

[Foreign Speech] Now that we are entering into the post-COVID mode, the teams are able to focus fully on the strategic priorities for the long term. Now, let me take you through the updates on several important projects that will stay on management’s agenda for the coming few months. [Foreign Speech] First and foremost, improve the product and operations on Momo and Tantan in order to better serve the users’ social demand. One of the critical steps we need to take on that front is to enrich the product experiences on Tantan. We have always believed that in order to drive better user engagement and improved long-term retention, Tantan needs to supplement the core swipe and match experience with virtual features and services as alternatives. Late last year, Tantan introduced the Flash Chat experience, which was the first step toward that goal.

It was proven in Q1 that Flash Chat played a positive role in driving user engagements as well as monetization. Of that success, we significantly accelerated the pace of product innovations on Tantan in the second quarter. On April 7, we fully rolled out the Nearby Posts feature on Tantan, which is an important move in improving the community experience for Tantan users. It also extends the runway of exploring other product innovations down the path. In mid-April, we started accelerating the pace in testing another important service, the live broadcasting service on Tantan. Up until now, we’ve been four months into the pilot phase. The results obviously have exceeded our original expectations. It proves our earlier belief that live streaming cannot only be a powerful revenue driver but also complement the core dating experience in a very positive way. Although at this point we’re still at the testing mode, and the team is focused on improving the product and content experience instead of driving monetization, it is already becoming clear that Tantan, as the second growth engine for the Company, is beginning to gain traction.

[Foreign Speech] Besides the Nearby Posts and the live broadcasting service, Tantan is also making impressive progresses on multiple other fronts. Wang Yu will have more details for you again later.

[Foreign Speech] Now a quick update on the core Momo. In the second quarter, we made several optimizations to the basic social experiences on the platform. For example, we upgraded the onboarding experience for the new users and resurrected users, making it easier for them to build meaningful connections. We also adjusted our recommendation engine to push dormant relationships to some of our old users in order to reactivate the conversations. These efforts aimed at enhancing the user experience and improving the retention when the users came aboard on Momo from the long period of social distancing. As a result, in June, we saw a meaningful improvement in the retention ratio for the new users and resurrected users.

[Foreign Speech] Lastly, I’d like to spend a few minutes discussing an important endeavor that we have been undertaking lately. As many of you know, since the beginning of the year, the economic impact from the COVID-19 has been pressuring the live broadcasting revenues and Momo core. A considerable number of our high paying users are private business owners whose financial conditions have been negatively [Phonetic] affected by the pandemic. We believe that the macro factors may continue to be a headwind for the top spending.

During the past couple of years, especially in the back half of 2019, Momo core’s live broadcasting business had become more reliant on the top of the pyramid users as well as the top of the pyramid broadcasters. In view of the current macro conditions, we believe it is safer to reduce the revenue concentration on the top and move the spending more toward the middle layers within the pyramid. As a matter of fact, early last year, we already made some efforts to stimulate the middle cohort spending, which generated some positive outcome. However, more fundamental product and operational changes are needed in order to reduce the dependence on the top in a more meaningful way, and at the same time, improve the long tail content ecosystem. The adjustments will cover a wide range of areas within the live broadcasting ecosystem, including traffic direction strategies, product design, and content operations, as well as the way we manage the competition events and the agencies.

Our President and COO, Wang Li, will discuss the adjustment plan in more detail later. As the plan involves the changes on multiple product and operational fronts, short-term wise, it may create some pressure on Momo core’s live broadcasting revenue and gross margin, especially in Q3. We believe that pressure should be quite natural as the strong growth from Tantan and the solid performance for Momo live will keep the revenue relatively stable during the transition period and we expect the live broadcasting revenue on the core to see gradual improvement in Q4. More importantly, I’m also a firm believer that when we walk out of this transition period, we’re going to see a revenue structure that is more resilient in the current environment as well as vibrant and long tail-driven content ecosystem that supports long-term growth for 2021 and beyond.

[Foreign Speech] Lastly, I’m pleased to announce that today our Board approved a $300 million share repurchase plan. This program will allow the Company to capitalize on attractive share prices to enhance shareholder value. Similar to the dividend payments that we’ve announced in the past, this share buyback plan demonstrate our long-term commitment to maximizing shareholder value as well as management’s confidence in the future of the business.

Thank you for trusting Momo team, and here is Xiaosong to review the business update. Xiaosong, please.

Jonathan Xiaosong Zhang — Chief Financial Officer

[Foreign Speech] Thanks. Now, let me take you through the progresses we’ve made across our key business lines.

[Foreign Speech] Firstly, on live broadcasting. Total revenue from live broadcasting business for the second quarter 2020 was RMB2.6 billion renminbi, down 16% from the same period last year, but up 12% from the previous quarter. The sequential increase was largely driven by the rapid growth from Tantan live streaming service, and to a lesser degree, the gradual improvement in Momo core’s live broadcasting business. As many of you know, Tantan has been accelerating the testing of this live broadcasting service since mid-April. The testing results have been very encouraging. Wang Yu will share more details in his remarks later, so I will be mainly focused on the core Momo.

[Foreign Speech] Momo core’s live broadcasting revenues totaled RMB2.41 billion for the second quarter, down 22% from the same period last year, but up 4% from last quarter. During the second quarter, as the traffic gradually recovered, we held a couple of events trying to test the water for the consumer sentiment, especially that among the top spenders. Although we did see some incremental revenue contribution from those events, we could clearly see that the overall spending sentiment from the top remained weak. According to our survey as well as anecdotal conversation from some of our high-paying users, a significant portion of them own business in manufacturing and commerce industries in coastal regions such as Zhejiang and Fujian. It may take some time for these business to fully turnaround due to the situation of the pandemic globalize.

[Foreign Speech] While it is hard to predict how the overall macro climate may develop in the coming few quarters, as the platform operator, we did take considerable efforts during the past couple of months to study what are some of the changes that we can effect within our own content ecosystem so that the live broadcasting business can continue to grow healthily in the new external environment.

Now, let me share some of the findings from our studies. First of all, like Tang Yan said, over the past couple of years, our live broadcasting business has become heavier on the top, both in terms of revenue contribution and in terms of traffic on both supply side and demand side. Such a situation was due to a number of different reasons, including the evolution of our traffic allocation system, the way we set KPIs in the agency incentive program, as well as certain interactive features and operational efforts that we rolled out to boost top spending. As a result, middle and entry-level performance are getting insufficient traffic support, which further cost the content quality in long tail shows to defend. Having a vibrant long tail content ecosystem has been a key competitive advantage of Momo as a social platform. We need this advantage to be strengthened, not weakened, especially in a challenging macro environment.

[Foreign Speech] After identifying these issues, we have put together a plan to address them. Key things under the plan include: Adjusting the traffic allocation strategy to redirect the users from large channels to smaller ones; investing in new features and operational events to beef up the content experience in the long tail shows; and adjusting the KPI system for agencies as well as reinventing the competition events with a purpose to focus less on revenue and more on content and supporting new talent. The plan also involves adjustments to certain interactive features and related operational policies that can be a strong stimulator for top spending, but long-term wise may not be beneficial for the content ecosystem.

[Foreign Speech] The adjustment plan could put some temporary pressure on both revenue and gross margin for Momo core’s live broadcasting business. However, the robust growth of the VAS business and the strong momentum from Tantan, presents a good opportunity for us to carry out the structural reforms, because these business lines will keep the overall revenue of the Company stable during the transition period.

[Foreign Speech] By now, we already have been five weeks into the program. The content ecosystem is now beginning to see some initial signs for improvement. Revenue, after experiencing strong volatilities in early August, also has stabilized. These facts give us the optimism that the worst of the impact should have been absorbed and that live broadcasting revenue for the core should see gradual improvement as the content ecosystem continues to improve.

[Foreign Speech] Now turning to VAS. Revenues from value-added service reached RMB1.2 billion, up 27% year-over-year. Again, I’ll be focusing on Momo’s VAS business and leave content part to Wang Yu a bit later. Revenue from VAS on an ex-Tantan basis reached RMB879 million for the second quarter of 2020, up 32% year-on-year. On a sequential basis, VAS revenues on the core grew 10%, driven by the recovery of traffic, as well as the growth momentum from some of the key paying experiences within that.

[Foreign Speech] During the second quarter, the audio and video social entertainment experiences continued to generate robust growth for VAS. The continuous momentum from the category was driven by innovative product and operational ideas from the team. For example, we introduced a few new mini games into the chat room experience such as Karaoke Show and Friends Trade. We also revamped the game plays in the real world experience, which successfully put this relatively order experience back on to the growth track.

[Foreign Speech] Now within the bucket of new experiences, Heard [Phonetic], a standalone audio dating application and matchmaker, a video dating experience within a core Momo continued to progress well in the second quarter. The retention ratios for both products improved steadily, which is the foundation of user growth and also the most important target for these early stage endeavors. At the same time, the team is also actively exploring different monetization opportunities within these new innovations. We believe the revenue contribution from the new bucket will continue to improve and become a meaningful driver next year.

[Foreign Speech] Now, briefly on our other business lines. Mobile marketing revenue was RMB37.96 million, down from RMB76.21 million the same period last year. The decrease was a reflection of both macro headwinds and our strategy to underweight the line in terms of resource allocation this year. Jointly operated game business continued to trend down in Q2, and will likely fluctuate around the current level for the coming few quarters.

[Foreign Speech] That’s the business review of the core Momo. Now let me hand over to Mr. Wang Yu for the Tantan’s product and business development. Mr. Wang, please.

Yu Wang — Founder & Chief Executive Officer of Tantan

Thanks. So let me briefly review Tantan’s operational and business relevance in the past quarter and our next step plans.

First, on user trends and related metrics. Tantan’s domestic DAU showed robust growth momentum after Chinese New Year. In mid-February, the growth trend was disrupted by the escalation of the COVID-19 outbreak, and DAU started declining rapidly. By early May, the epidemic within China got largely under control and the social distancing measures were largely relaxed. After the May holiday, we were able to see dating sentiments and user engagements gradually coming back. By the end of June, Tantan’s domestic DAU has rebounded by around 10% from the bottom seen in early April.

Now briefly on user trends outside China. Since the beginning of 2020, we’ve been pulling back the resources from developing countries, such as Indonesia and India, and beefing up the efforts in developed regions instead. As I mentioned before, our overseas strategies primarily geared towards revenue and profit. Although developing countries can provide a large user base, the ARPU we can get under the subscription model from those regions is too low to scale the profit in a meaningful way. While in the developed markets where the ARPU is much higher, we see greater opportunities to obtain better ROI off a much smaller user base.

As a result of the strategic shift, the overseas DAU trended down in the first half of 2020, but revenues from our overseas markets continued to grow at a healthy pace, despite the headwinds from the COVID-19 pandemic.

Within our overseas development plan, we still see huge growth opportunities in the developing countries. However, based on our understanding of user behavior and psychology, we believe that as compared with the subscription model, pay per use value-added services should make much better sense in terms of ROI in developing markets. Our strategy here is to go back into these markets once we establish a solid non-subscription revenue model in China.

Now turning to paying users. Paying users for the second quarter on Tantan totaled RMB3.9 million, down from RMB4.2 million last quarter. As Xiaosong mentioned earlier, COVID not only hurt the DAU, but also adversely affected the propensity to pay from active users. As a result, during the social distancing period, the paying ratio saw a meaningful decrease, and the recovery of it also lagged recovery of the overall DAU, causing a temporary lag between the resumption of paying user growth and the rebound in DAU. As we entered into Q3, the lagging effect began to tail out, and the paying user count has been catching up. As a matter of fact, as of August 31, the number of paying users has bounced back to 4.1 million with a continuous upward trend.

Now briefly on revenues. Total revenues for the second quarter reached RMB517.2 million, up 82% year-on-year and 35% quarter-on-quarter, driven by the strong momentum from the live broadcasting business, which significantly lifted ARPPU. The subscription business showed a downward trend in the second quarter, largely due to the COVID impacts. To a lesser extent, introduction of live streaming business also had some negative impact on the subscription business, which was within our expectations. Based on the testing results, the cannibalistic effect is about 10% to 15% of the subscription revenue, which is quite manageable. With the continuous recovery of DAU, we expect Tantan’s loss business to resume growth in Q3.

Now let me give you an update on the progresses that we’ve made on a number of other strategic fronts during Q2. First of all, enriching the product experiences. In the second quarter, we’ve significantly accelerated the efforts in building features and services beyond the core swiping experience. The goal is to improve the long-term retention of Hong Kong, which is a critical factor in the user growth equation.

In April, we fully launched Nearby Posts feature. It allows Tantan users to discover new relationships and build interactions over content, rather than purely based on the profile information on the swiping system. As the related operational effort, we introduced the hashtag section within the post, so that the users would have interesting and meaningful topics to talk about, which further helps Tantan’s users more effectively connect with each other.

In mid-April, we started fast tracking another important project, the testing of live streaming service on Tantan. Up until now, the live broadcasting service has already covered millions of DAUs on the platform. The data that we have seen so far has proven two important things that provide guiding value on our future paths and developments. Number one, it handled property. Live broadcasting and potentially other peripheral experiences can be complementary to the core dating experience, especially for users who find it less effective to connect and interact based on the swipe and match mechanism. And number two, Tantan has a great deal of growth potential buying in live broadcasting, as well as in other forms of paper use value-added services.

Looking into the rest of the year, our primary focus for live broadcasting service is to improve the product experience. A lot of what we do will revolve around improving the recommendation engine, beefing up the content experience and testing ways to better integrate live streaming service into the application, so that we can serve more Tantan users in needs. We would also like to carefully manage the pace of revenue growth to avoid any unexpected adverse impact on the dating ecosystem. As we push the boundaries on the product side, we also believe that what defines Tantan is our core mission, which is to help young people discover new relationships and build interactions for romantic purpose.

The core swipe and match experience continues to play the most important role in accomplishing that mission. Therefore, while diversifying into other product experiences, we also dedicate significant resource in making the core dating experience better.

Currently, we have several key projects in the testing phase, such as revamping the profile page with an enhanced personal description and content, as well as furthering the real person verification system from photo verification to ID card verification. All of these product efforts aim at delivering a better dating experience to Tantan users in a more secure environment. This is still the single most important value that we would like to deliver to our users. This is also the single most important goal we need to accomplish in order to keep expanding our user base. Everything else will be secondary to that mission.

Under that same principle, on the monetization side, we are also working hard to develop new VAS features based on the core dating experience. Some of these are new features and some of these involve repackaging and repricing the existing features. The lab results have come back quite positive, so we are very optimistic about the growth opportunities for VAS in the second half and beyond.

Those are the key things that I’d like to cover for today. Now let me pass the call over to Mr. Jonathan Zhang for financial review. Jon, please.

Jonathan Xiaosong Zhang — Chief Financial Officer

Thanks. And thank you for joining our conference call today, let me briefly take you through the financial review. Total revenue for the second quarter 2020 was RMB3.87 billion, down 7% year-on-year, up 8% quarter-over-quarter. Non-GAAP net income attributable to Momo was RMB669.8 million, compared to RMB1.24 billion from the same period 2019 or a 46% decrease year-over-year.

During the second quarter, the Company repatriated RMB2.2 billion from the WFOE, legal entity in China, and incurred RMB220 million in income tax expenses. Excluding this special item, non-GAAP net income for the quarter would have been RMB889.8 million.

Let me jump directly into the review of costs and expenses items, as revenue on line items covered comprehensively by Wang Li and Wang Yu. Our non-GAAP cost of revenue for the second quarter of 2020 was RMB2.01 billion, compared to RMB2.04 billion for the same period last year. Non-GAAP cost of revenue as a percentage of total revenue was 52%, increased from 49% in Q2 2019.

Non-GAAP gross profit margin for Q2 2020 was down by 3 percentage points year-on-year. The decrease was attributed to the following four factors: Number one, higher payout ratio from live broadcasting business on Momo due to higher revenue contribution from agencies represented broadcasters. Number two, higher payout ratios from VAS business due to the strong momentum coming from the audio and video social entertainment business, a bigger part of which involve third-party professional hosts. Number three, lower gross margin from Tantan as its live broadcasting business is becoming sizable during the quarter. And lastly, certain fixed nature cost items, such as headcount and depreciation of fixed assets related impacted the gross margin negatively as total revenue declined, and those items represented a higher percentage of total revenue.

Non-GAAP R&D expenses for the second quarter was RMB226.6 million compared to RMB204.8 million for the same quarter last year, representing 5.9% and 4.9% of total revenue respectively. The increase in R&D expenses was mainly due to the headcount increase. We ended the quarter with 2,362 total employees, of which 712 are from Tantan. R&D personnel as a percentage of total employees for the group was 60% compared to 54% during the Q2 last year.

Non-GAAP sales and marketing expenses for the second quarter was RMB590.7 million or 15.3% of total revenue, compared to RMB502.3 million or 12.1% of total revenue for the same period last year. The year-over-year increase in sales marketing expenses was mainly due to the higher marketing spending for Tantan, as well as marketing spending for Momo on new product initiatives. On a sequential basis, the sales and marketing expenses decreased by 8%. Because of the marketing spending in connection with a Momo’s yearend live broadcasting dialog event, which happened in early January this year.

Non-GAAP G&A expenses was RMB91.9 million for the second quarter 2020, compared to RMB119.4 million for the same quarter last year, representing 2.4% and 2.9% of total net revenue, respectively. Non-GAAP operating income was RMB1.04 billion, a decrease of 28% from Q2 2019, representing 26.8% non-GAAP operating margin for the quarter, down 8 percentage points from the same period last year.

Now briefly on income taxes. The Company repatriated RMB2.2 billion from our WFOE in China to our offshore entity in Q2 in order to replenish our U.S. dollar funding. In accordance with the respective taxation laws of China, the Company paid 10% or RMB220 million withholding tax to Chinese tax authorities. This payment was recorded as income tax expenses for the Company during the second quarter 2020. Excluding the withholding tax payments, our non-GAAP effective tax rate would have been around 21% in Q2 2020.

Now turning to the balance sheet and cash flow items. As of June 30, 2020, Momo’s cash, cash equivalents, short-term deposits and long-term deposits totaled RMB15.38 billion, compared to RMB15.23 billion as of December 31, 2019. In Q2, the Company paid approximately an equivalent of RMB1.1 billion special cash dividends to Momo’s shareholders. Net cash provided by operating activities in the second quarter was RMB87.3 million.

Lastly on the business outlook, we estimated our third quarter revenue to come in the range from RMB3.7 billion to RMB3.8 billion, representing a decrease of 16.9% to 14.6% year-on-year, and a decrease of 4.3% to 1.8% quarter-over-quarter. Please be remindful that this forecast represents the Company’s current and preliminary view on the market and operational conditions, which are subject to change.

That concluded our prepared portion of today’s discussion. With that, let me turn the call back to Cathy for Q&A. Cathy?

Cathy Peng — Director, Investor Relations

Yeah, just a quick reminder before we take the questions. For those who can speak Chinese, please ask your question in Chinese first, followed by English translation by yourself. And also please limit the number of questions to maximum two, so that everybody gets an opportunity to ask questions. Operator, ready for Q&A, please.

Questions and Answers:

Operator

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

Thomas Chong — Jefferies Hong Kong Limited — Analyst

[Foreign Speech] That’s my first question. And my second question is about the second half outlook on Tantan, especially along the key metrics, such as paying users and revenue. On top of that, if there’s any separate color for live streaming and fast line would be appreciated. Thank you.

Cathy Peng — Director, Investor Relations

Let me take couple of minutes to translate the first question. I think Thomas wanted to understand the — how exactly the overall adjustment plan is going to impact the revenue in the second half of the year. And also would appreciate management to provide some quantitative guidance regarding this specific impact from the adjustments. And also what’s management’s view about the longer-term revenue trends from a Momo core’s live broadcasting business as well as the overall topline at the Company level.

Yan Tang — Chairman and Chief Executive Officer

[Foreign Speech] Let me translate the first part. As we mentioned in the prepared remarks, the adjustment plan that we are currently implementing is touching many different areas on the product side and on the operational side. Some of the measures when initially implemented are going to have some negative impacts on some of the top users and some of the top broadcasters as well.

In addition, we are also making adjustments to the KPI system of the agencies, as well as restructuring the way we build the competition events. And the principle here is to gear these systems more toward content improvements rather than purely focused on meeting revenue targets.

So as you can see the adjustments on those fronts are going to put some short-term pressure on revenues. And there’s this third direction that we are moving toward, which involves holding a series of promotional events in order to revive the long tail content ecosystem. For these events, the Company is going to put in respective investments, which is going to have some negative impact on gross margins.

[Foreign Speech] In terms of quantifying the short-term financial impact, among the different measures that we are deploying, the ones with relatively bigger short-term impacts are already in the system. We sort of put them in early August timeframe. And the bulk of the impacts should be seen during the first several weeks after implementation, which is to say that most likely the worst of the impact is already behind us.

In the guidance that we give, we are modeling in a more than 10% sequential decline in the live broadcasting revenue on the core. Since the middle of August, we have started seeing some initial signs for improvement in the content ecosystem, and the revenue has also been showing some initial signs for recovery from the trough that we saw in early August timeframe. And these give us the confidence that as we move into Q4, the live broadcasting revenue on the core should see stabilization with a gradual uptick.

[Foreign Speech] With regards to the margins and also the profitability trend, the subsidies that we are putting into the promotional events for content are probably going to last for some time, until we feel that we reach a satisfactory level with the overall adjustment plan. This part is going to press the gross margin down by 2 percentage points to 3 percentage points. But if you look at the net income of the Company in absolute dollar amount, I think Q3 is going to be the bottom. As we move into Q4, the net income of the Company is going to see improvement as the overall topline continues to improve.

[Foreign Speech] If we try to think about the overall revenues at the Company level over a medium toward longer-term horizon, here are some thoughts. Tantan is the second growth engine of the company, is clearly gaining traction now. And the VAS business on the core has also been growing at a pretty solid pace. And because of the strength coming from these two parts, we can see that even during Q3, where the worst of the short-term impact from the structural reform is going to fall into the overall revenue at the Company level is still able to maintain a pretty stable sort of state with only a slight downtick from the prior quarter.

So moving into next year, at this point, we’re still seeing pretty good growth opportunities around VAS and especially around Tantan.

And for the live broadcasting revenue on the core, as we move out of the transition period, the revenue is also going to start improving. So, we do expect the overall topline of the Company to perform much better next year versus the year 2020.

Cathy Peng — Director, Investor Relations

I think the second question was for Mr. Wang Yu.

Yu Wang — Founder & Chief Executive Officer of Tantan

Okay. So paying users has already resumed growth. And like I said, up until end of August, it has gone back to RMB4.1 million with a continuous upward trend. But there’s one thing that I’d like to call out here. We’re currently testing a differentiated pricing strategy for the membership business to maximize the revenue. But according to the testing results, this could slow down the growth of the number of subscribers in Q3, due to the higher average pricing of the bundled packaging.

For the live broadcasting business, our focus for now is on user experience. This would include improving content and recommendation engine, as well as better integrating live broadcasting into the overall app. Revenue is not top priority this year. Run rate wise, ideally we would like to keep within RMB5 million grossing per day during Q4. Now that the traffic is coming back, I want the rest of the year to be more about new VAS features than live broadcasting revenue.

As for VAS, membership business has resumed growth in Q3. For the rest of the year, we’re looking at several drivers for the VAS line. So overall, DAU growth, that’s number one. Number two, we will be launching a new SVIP package towards the end of Q3, the one I just mentioned, which is supposed to be a driver of the membership business according to lab results.

Number three, currently we also have a few other new VAS features that we’re testing, which could come out either this year or next. Some of them are subscription-based and some might be other part features. Value-added services based on the core dating experience is crucial to experience of Tantan. So VAS will continue to be an extremely important piece in our revenue mix. Thank you.

Thomas Chong — Jefferies Hong Kong Limited — Analyst

Thank you.

Cathy Peng — Director, Investor Relations

Operator, ready for next.

Operator

Your next question comes from the line of Tian Hou of TH Capital. Please ask your question.

Tian X. Hou — TH Capital — Analyst

[Foreign Speech] So, as of the ecosystem had adjustments, operation wise, there can be a lot of trial and error process. So what are some kind of metrics that management use to measure the outcome or effectiveness of the ecosystem at adjustments? That’s the first question.

The second question, as last June in Tantan starting to take off, so in the future, what’s the revenue mixture is going to look like? So how the live broadcasting and subscription going to be in terms of their proportion in the revenue composition? Thank you.

Yan Tang — Chairman and Chief Executive Officer

[Foreign Speech] The adjustment measures that we are currently implementing are going into several key areas. In the area of reducing the concentration, here we will be looking at the revenue contribution from the super top of the pyramid users as well as some of the super top of the pyramid performers. And we will, of course, also be looking at the number of paying users of the live broadcasting business on core.

In terms of content improvement, here, we’ll be looking at the number of DAUs in the live broadcasting channels and their respective viewing time, and also the number of active broadcasters on daily basis and their respective broadcasting time. For some of the deeper level product adjustments, we’re going to be looking at different gauging factors at different stages. I think this is an area where we can probably further the discussion after the call when we have more time.

Other than the quantitative measures, some of the more qualitative gauging factors are also extremely important for us to make sure that we are on the right track and move toward the right direction with the adjustment plan. And these factors include, whether it’s fun to stay in the live broadcasting channels, whether the daily PK events and other form of competition events are intensive and compelling to watch, the overall experience of the consumers, how do they feel, and the overall experience of the broadcasters and agencies, how do they feel, whether they can build up a reasonably good level of revenue and profits, all of these are important things that we’re going to be looking at.

The other thing that I’d like to point out here is that the changes to the content ecosystem is not going to happen overnight. It requires the commitment and patience from the management also the focus on long-termism and the changes will happen over a progressive basis. We’re hoping that we could use six months period of time to drive gradual changes to these above mentioned quantitative and qualitative measures around the content ecosystem. And the second question.

Jonathan Xiaosong Zhang — Chief Financial Officer

Yeah. So, total ARPU wise, I think Tantan will be similar to Momo, and it could even be higher than Momo over time, given the rising consumption power of the new generation. But in terms of revenue mix, I think it will be different, because Tantan users are much more focused on the coordinating experience. So, I believe that ultimately, the VAS will very likely be a higher percentage of the total revenue than live broadcasting. Thank you.

Tian X. Hou — TH Capital — Analyst

Thank you. Quite clear.

Cathy Peng — Director, Investor Relations

Operator — sorry, Tian. Operator, given time, we’re ready to take one last question and then please come back to me for closing. Thank you.

Operator

Your last question comes from the line of Lei Zhang of Bank of America. Please ask your question.

Lei Zhang — Bank of America — Analyst

[Foreign Speech] Thanks management for taking my question. Two quick questions. One on the competition of dating area, can you give us some update on the competitive landscape here? And secondly, on the bottom line of Tantan, any change of our guidance in terms of breakeven in May next year? Thank you.

Jonathan Xiaosong Zhang — Chief Financial Officer

So in terms of competitors, we’ve never been too focused on competition. And we don’t really feel any strong or direct competition that we should be worried about. I think that in terms of connecting young singles that could potentially have romantic connections to meet offline, we are by far the market leader currently. So that’s for question number one.

And in terms of question number two, in Q3, we’re going to spend a bit more to grow the user base, because usually the summer holiday time presents a good opportunity for marketing. Therefore, net income could be pretty flattish versus Q2.

Moving to Q4, revenue will continue to grow meaningfully from both VAS and live streaming. So, even if we continue to spend heavily on marketing, we’re still likely to see the breakeven point by the end of the year, but that’s not most happening for us. The strong topline growth should continue into next year, which means that 2021 will most likely be a profit making year for Tantan, unless which is the huge investment opportunities that we have to pursue at the expense of profitability, which we are not seeing at this point. Thank you.

Yan Tang — Chairman and Chief Executive Officer

[Foreign Speech] Okay. So, just quickly several points to the first question regarding the competition. I think any sort of competition within the open social space will ultimately boil down to one question, and that the single most important question is, who can build the right product to help the users better discover new relationships and build meaningful interactions. On that front, Momo’s team has over nine years of experience and Tantan has also around six years of experience. And during that multiple years time, we’ve seen user behavioral changes and we’ve gone through multiple rounds of direct and indirect competitions. Some of the competitions came from more focused players in the open social space, and some of the competitions came from ubiquitous application trying to much bigger ubiquitous application, trying to expand into our territory.

But I’m happy to see that after all these years, that all these changes, Momo is still — today Momo is still the dominant player in the respective territory that we are in. That speaks to the capabilities of Momo’s team and also Tantan’s team in the open social space. We are very confident that this is the area where we will continue to be leading down the path.

And the other thing is that, the Company has built up a comprehensive system and also has a professional team to follow and analyze the competitive landscape on a regular basis. And this is to make sure that the Company always — that we always remain vigilant about what’s coming up around the corner. And also this is also to make sure that the Company stays at a leading position in the territory that we are in. So, I think this is an area where investors do not need to be too concerned about.

Cathy Peng — Director, Investor Relations

That concludes the conference call today. Thanks for joining the conference call. We’ll see you next quarter. Operator, we’re ready to close.

Operator

[Operator Closing Remarks]

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