MOMO.US
Hello Group's revenue declines accelerate

The company sometimes called the ‘Tinder of China’ said its revenue fell 9% in the first quarter, and predicted the rate of decline would accelerate

Key Takeaways:

  • Hello Group’s three years of revenue declines continued in the first quarter and are accelerating as the company faces both internal and external headwinds
  • The dating-app operator said it could soon receive a policy boost, in an apparent reference to China’s recent efforts to raise its tumbling birthrates

  

By Doug Young

Has the flame finally gone out in the “Tinder of China”?

Investors may be starting to feel that way, after Hello Group Inc. (MOMO.US) reported its latest quarterly results that showed nearly all of its key metrics continued to drop in this year’s first quarter, led by accelerating revenue declines for one of China’s oldest dating apps.

Investors dumped the stock to the tune of a 14% decline on Tuesday after the company’s latest results announcement, sending it to a one-and-a-half year low. The shares rebounded somewhat the next day, reflecting the love-hate relationship investors have with this company, which is still a cash cow due to its status as the leader in China’s huge dating market.

Notably, Hello Group’s stock has been left behind in the recent rally for U.S.-listed Chinese shares that has lifted the iShares MSCI China ETF (MCHI.US) more than 20% from a low in late January, as investors become bullish on the group after more than two years of neglect.

Woes at the company, whose revenue has been in continuous decline since 2019, owe at least partly to factors beyond its control. Three years of tough pandemic restrictions dampened the mood for dating among the many young users of the company’s apps, including its industry-leading Momo. Since the pandemic’s end, weak consumer sentiment has continued to dampen demand as China’s economy slows sharply after a three-decade boom.

Last, but certainly not least, growing numbers of Chinese are simply not interested in dating or marriage these days – a reality that shows up in the country’s plunging birth rates.

With so many macro factors working against it, it’s not too surprising that Hello Group is having difficulty finding and keeping an audience. Added to that are company-specific factors, most notably Hello Group’s disastrous purchase of its other major app, Tantan, back in 2018. Once billed as a key future growth driver, Tantan quickly became just the opposite and has been sinking fast ever since. Hello Group was also tripped up by regulatory issues in 2019 when its popular livestreaming service came under government scrutiny for containing pornography.

The company has tried to escape the turbulence in its home China market by expanding abroad. Its global expansion, most notably to Turkey and the Middle East, has been one of the few positive notes in its most recent reports. Most of that has come from Hello Group’s new apps, with names like Duidui, Hertz and Soulchill.

Revenue from those new apps, which are mostly focused on overseas markets, grew 51% in the first quarter to 344 million yuan ($47.5 million), accounting for 13% of the company’s total revenue for the period, it said on its first-quarter earnings call. That increase contrasted sharply with the Hello Group’s overall revenue, which contracted 9.2% year-on-year to 2.56 billion yuan from 2.82 billion yuan a year earlier.

The latest revenue decline rate marked an acceleration from the last two quarters, when the figure dipped by around 6%. Making matters worse, the company forecast its revenue would fall about 14% in the second quarter, representing a further acceleration of the decline rate.

Investor turnoff

Despite all the gloom, Hello Group continues to be quite profitable, partly due to its market-leading position and also its strict cost controls. The company’s costs and expenses fell 12% year-on-year in the first quarter, outpacing its revenue decline rate. As a result, its operating income rose 5.5% during the quarter to 460 million yuan.

The company’s bottom line wasn’t so pretty, with its net income plunging to just 5.2 million yuan in the latest quarter from 390 million yuan a year earlier. But most of that was due to a one-time tax expense in the latest quarter, company officials explained on the earnings call. Excluding that, the company’s non-GAAP net income, which typically excludes stock-based employee compensation, would have risen 8% to 508.5 million yuan.

That combination of relatively high profits and sinking investor confidence has been quite toxic for Hello Group’s valuation, with the stock currently trading at a price-to-earnings (P/E) ratio of just 4.9. That’s less than half the 13 for Match Group (MTCH.US), owner of Tinder, and shows just how out of love investors have fallen with Hello Group.

Despite all the gloom, there were still a few slightly encouraging signs in Hello Group’s latest report. We’ve already mentioned the global expansion, which is rapidly becoming an important new engine to this otherwise growth-challenged company.

Another intriguing boost could be coming on the policy front, as China worries about its plunging birthrates and aging population. The nation has begun rolling out a wide range of incentives for people to get married and have more children, and Hello Group hinted that such measures could ultimately benefit the company.

“We’re seeing some positive policy changes at the top,” said CFO Peng Hui on the call, without elaborating. “However, how effectively and quickly those policy changes will get filtered down into the consumer behavior in general, and more specifically into user spending on our platform, that, at this point, it’s – I think it’s still too early to tell. We’ll see as the year progresses.”

Like many other tech companies, Hello Group is also experimenting with artificial intelligence to draw users to its apps. As an example, officials said on the call that the company is experimenting with AI that can “suggest ice-breaking topics to users by analyzing the image and text information on the potential (dating) candidate’s profile page.”

There wasn’t any talk of AI-generated virtual soulmates, though perhaps that’s somewhere down the road.

Analysts don’t see any fast turnaround for Hello Group’s sinking revenue, forecasting the figure will drop 11% this year before finally returning to a growth track in 2025. They have actually become more bullish on the company’s depressed stock lately, with 15 out of 16 surveyed by Yahoo Finance in May rating it a “buy” or “strong buy,” up from just 8 who gave it similarly strong ratings of 14 surveyed in April. Perhaps that shows that sentiment may be turning back in favor of this wallflower company as it struggles to find some love from investors.

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