Momo's (MOMO) Q2 Earnings Beat Estimates, Revenues Rise Y/Y

Momo Inc. (NASDAQ:MOMO) reported second-quarter 2019 non-GAAP earnings per American Depositary Share (ADS) of 82 cents, which beat the Zacks Consensus Estimate by a dime. However, the figure declined 39.3% from the year-ago quarter.

Revenues of $604.9 million surpassed the consensus mark of $581 million.

In domestic currency, the company reported loss of RMB5.6 per ADS. Revenues increased 32% year over year to RMB4,152.6 million attributable to growth in Momo's virtual gifting service.

Net revenues from Momo segment increased 23.9% on a year-over-year basis to RMB 3119.8 million ($563.1 million) primarily due to revenue growth in live-video service and value-added service segments.

Net revenues from Tantan in the reported quarter increased 818.7% on a year-over-year basis to RMB284.8 million ($41.5million).

On Apr 29, popular dating app, Tantan was removed from app stores in China on the orders of government authorities.

Momo announced a one-month comprehensive self-inspection on the Tantan platform for the period May 11-Jun 11 as part of compliance and content screening efforts. The company also suspended the feature, which enabled users to post social news feed during the said period to strengthen its content review system.

Per management, paying users for virtual gifting business and the live streaming business were negatively impacted by the self-inspection in the reported quarter.

In addition, in early May, Apple (NASDAQ:AAPL) also suspended the in-app purchase services for the iOS version of Tantan. Most subscribers in China have auto-renewed subscription on a monthly basis.

Segment Details

Live-video service revenues were RMB3,099.9 million ($451.5 million), up 18% year over year, driven by an increase in the number of quarterly paying users and higher average revenues per paying user per quarter.

Value-added service revenues mainly include membership subscription revenues and virtual gift revenues. Revenues surged 169% year over year to RMB948.4 million ($138.1 million). Growth of the virtual gift business on the Momo application and consolidation of Tantan’s membership subscription revenues for the whole quarter drove growth.

The company tested interactive tools, including a new gift card, Gold Miners, in the reported quarter. Momo expects to enhance user experience and revenue growth via gifts cards like Penguin and Gold Miners. The focus is primarily on increasing user interaction through live game competitions.

Mobile marketing revenues declined 46% year over year to RMB76.2 million ($11.1 million). This decline was due to lower demand from advertising and marketing customers on Momo platform due to suspension of a few user posting functions.

Mobile games revenues declined 33% year over year to RMB23.2 million ($3.4 million), primarily due to decrease in the number of quarterly paying users. However, per management, mini games from products like The Parking Lot and The Farm gained popularity in the reported quarter, attributed to continuous upgrades and optimizations.

User Details

Monthly active users (MAU) on Momo application were 113.5 million in June 2019 compared with 108 million in the year-ago quarter.

Total paying users of live-video and value-added services, without double counting the overlap and including 3.2 million paying users of Tantan Limited, were 11.8 million in second-quarter 2019 compared with 11.6 million in the year-ago quarter, which included 3.1 million paying users of Tantan Limited.

However, total paying users for the Momo platform was 8.6 million, down by 400,000 from the previous quarter due to the significant decrease in the number of membership subscribers on Momo.

Decline in growth rate of the number of paying users on TanTan segment can be attributed to the suspension of the payment service on iOS in the reported quarter.

Operating Details

Non-GAAP cost and expenses increased 29.7% year over year to RMB2866.7 million ($417.6 million). This was due to higher personnel related expenses, increase in revenue sharing with live video broadcasters and higher amortization expenses.

Further, increase in marketing and promotional expenses to enhance brand awareness and attract users and rise in infrastructural spending increased overall expenses.

Non-GAAP research and development (R&D) expenses increased 76.5% year over year to RMB204.8 million ($29.8 million).

Non-GAAP sales & marketing (S&M) expenses increased 62.6% year over year to RMB502.3 million ($73.2 million).

Additionally, non-GAAP general & administrative expenses increased 51.9% year over year to RMB119.4 million ($17.4 million).

On a non-GAAP basis, the company’s operating income came in at RMB1,447.9 million ($210.9 million), up 39% from the year-ago quarter. The non-GAAP operating margin expanded 180 basis points (bps) from the year-ago quarter to 34.9% driven by revenues generated from value-added services on Momo platform.

On a non-GAAP basis, operating income of Momo segment came in at RMB1,488.5 million (US$216.8 million), up 18.2% from the year-ago quarter. Non-GAAP operating margin contracted 410 bps from the year-ago quarter to 35.8%

However, on a non-GAAP basis, the reported operating loss of TanTan segment was RMB47.9 million (US$7.0 million), down 7% from the year-ago quarter. The non-GAAP operating margin expanded 50 bps from the year-ago quarter to -1.2%.

Balance Sheet & Cash Flow Details

Momo exited the quarter with cash, cash equivalents, term deposits and short-term investments of RMB12,489.8 million ($1.82 billion) compared with RMB12,015.9 million ($1.79 billion) in the prior quarter.

Cash flow from operations was RMB1,422 million ($207.1 million) compared with RMB1,175.9 million ($175.2 million) in the prior quarter.

Guidance

For third-quarter 2019, revenues are anticipated between RMB4.25 billion and RMB4.35 billion, indicating an increase of 17-19% year over year.

Zacks Rank & Stocks to Consider

Currently, Momo carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader sector are Anixter International (NYSE:AXE) , LogMeIn (NASDAQ:LOGM) and Perficient (NASDAQ:PRFT) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Anixter, LogMeIn and Perficient is currently pegged at 8%, 5% and 10.8%, respectively.

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