Hello Group takes ‘Cyrano approach’ in bid to rekindle China’s dating interest

The leading dating app has launched an AI-backed function that advises people on what to say to prospective dates, as it tries to return to revenue growth after five years of declines

Key Takeaways:

• Hello Group’s revenue fell 2.6% in the second quarter, extending a stream of declines dating back to 2020, as it also reported a surprise quarterly loss
• The leading dating app has found recent success with its overseas business, whose contribution grew to 17% of revenue in the second quarter from less than 10% a year earlier

By Doug Young

Could a dating approach used by the fictional Cyrano de Bergerac finally halt the revenue slide that has plagued dating app operator Hello Group Inc. (MOMO.US) for the last five years? It was hard to tell in the company’s latest financial report released this week, which showed the its revenue continued to fall in the second quarter, extending a long string of declines dating back to 2020.

But officials said they were encouraged by some early results for a recently added AI-backed approach in the company’s core Momo app, similar to the type of date coaching provided by Cyrano de Bergerac in the famous nineteenth century French play. The approach, rolled out in the second quarter, uses an “AI greeting feature” to help male users generate personalized greetings for their potential dates when using the app.

“Using our use of AI to enhance icebreaking chat experience, we have also been testing an AI chat assistant feature, which provides content suggestion for male users during the ongoing conversations,” COO Zhang Sichuan explained on the company’s earnings call. “This feature drives an increase in number of multi-round conversation and offers in-depth chat, thereby improving retention and playing a positive (role) in stabilizing Momo’s user base.”

The approach sounds intriguing and like a good use of AI for tongue-tied Chinese young men, many of whom may have little dating experience due to China’s traditional focus on a person’s studies over dating during their formative years. But for now, at least, the new function has yet to halt Hello Group’s sliding revenue, even as many other consumer-facing companies in China that recorded similar declines have seen their revenue stabilize in recent quarters.

Hello Group’s revenue fell just 1.5% in the first quarter, one of its best performances in quite a while, signaling it could finally return to revenue growth. But the company’s latest results show its revenue continued to decline in the second quarter, falling 2.6% year-on-year to 2.62 billion yuan ($368 million) from 2.69 billion yuan a year earlier.

The declines look likely to continue into the current third quarter, with Hello Group forecasting revenue of 2.59 billion yuan to 2.69 billion yuan for the period, representing a 3.2% decline at the low end of that range and a 0.6% increase at the high end. Adding to the disappointment, officials said growth for the company’s overseas business, a rare bright spot, was expected to slow in the third quarter.

And in one final disappointment, the company also reported its first net loss in more than three years during the latest quarter, though the surprise development appears related to one-time items that we’ll describe shortly.

Hello Group’s stock fell 7.3% in the three trading days after the release of its latest report, wiping out most of the stock’s gains this year. The stock is still up 17% over the last 52 weeks, though even that is still well behind the nearly 60% gain for the iShares MSCI China ETF amid a strong rally for U.S.-listed China stocks during that time.

Former investor darling

Formerly known as Momo, the name of its core app, Hello Group was once an investor darling, often referred to as the “Tinder of China” for its early reputation as a hook-up app. It has broadened its base since then to include more mainstream dating functions, reflected by the newly added AI-backed dating assistance functions.

After years of strong growth, the company was tripped up by its acquisition of another hook-up app, Tantan, back in 2018, and has been working over the last five years to fix that mess. At the same time, its core Momo app took a big hit during the pandemic, when social activities like dating slowed as people often chose to stay home to avoid becoming infected with Covid.

As the pandemic faded, the company has faced the new challenge of a slowing Chinese economy, which is making people more cautious with their spending on things like virtual gifts that are Momo’s main revenue source. The company blamed “soft consumer sentiment” for an 11% year-on-year decline for the Momo app’s value-added services in the second quarter, which fell to 1.85 billion yuan, accounting for about 70% of total revenue.

Paid users for the Momo app fell about 15% sequentially to 3.5 million in the second quarter, while the figure for the much smaller Tantan fell about 10% to 740,000 over that period.

One of Hello Group’s few bright spots lately has been its international business, whose revenue rose 73% year-on-year in the second quarter to 442 million yuan. That brought the international unit’s revenue contribution to 17% of the total, up sharply from 9.5% a year earlier, with the company citing the Middle East as a particularly strong region. But officials cautioned that the growth rate is likely to slow to the mid-60% range in the third quarter, as the company becomes more conservative on the expansion.

Hello Group’s costs and expenses fell by 2.1% year-on-year during the quarter, roughly in line with its revenue contraction. But it unexpectedly slipped into the red with a net loss of 139 million yuan for the quarter, marking its first quarterly loss since 2021. That development was mostly due to a one-time tax expense related to dividends that the company paid out in 2024 and the first half of this year.

Analysts and investors remain mixed on Hello Group, as they wait for the company’s core China business to turn a corner. Six of the eight analysts polled by Yahoo Finance still rate the company a “buy,” though one rates it a “hold” and one calls it an “underperform.” The company’s stock also trades at a relatively low price-to-earnings (P/E) ratio of 11, which is well behind the 19 for global peers Match Group (MTCH.US) and Bumble (BMBL.US).

It seems no one is too excited about Hello Group at the moment due to all the headwinds it’s facing at home and also the competition it’s likely to face overseas as that business gains traction. The latest AI functions look potentially intriguing, and could perhaps revive some interest in the company’s business. But other dating apps are probably doing similar things, and nothing the company can do will change the reality of softening consumer demand at home due to China’s sluggish economy.

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