Hello Group's Tantan Welcomes First-Ever Profits

Key Takeaways:

• Hello Group’s Tantan unit reported its first-ever profit in the first quarter, though the app’s revenue has shrunk by nearly half over the last two years
• The company said its SoulChill app targeting users in the Middle East and Southeast Asia has begun making “significant revenue” just two years after its launch  

By Doug Young

Hello, profits!

That’s the biggest message in the latest quarterly report from Hello Group Inc. MOMO, operator of China’s leading dating app often referred to as the “Tinder of China.” In fact, Momo is quite profitable overall. Instead, our witty opening really refers to Tantan, the smaller of its two main apps, which the company purchased for $760 million in 2018.

At the time, media jokingly referred to the purchase as a “match made in heaven,” bringing together the company’s original, more mature Momo app with an up-and-comer that was supposed to become its new growth engine. But things didn’t quite work out that way, and Hello Group announced a major overhaul for Tantan two years ago, including the departure of Tantan’s founder.

While Tantan’s profit was the star of Hello Group’s latest quarterly report, the announcement also contained a few other noteworthy news nuggets. Those include a continuing narrowing of the company’s revenue contraction that dates back to 2020, with the possibility that revenue could finally return to a growth track later this year.

Hello Group also gave some details on its young overseas foray targeting lovebirds in developing markets in the Middle East and Southeast Asia. It said that initiative, called SoulChill, has already begun producing meaningful revenues, and founder and CEO Tang Yan called it the company’s “most promising app among our new endeavors.”

We’ll return to those sidebars later in this review. But Tantan’s move into the black was clearly the company’s biggest news, removing a drag that had become an albatross around Hello Group’s neck for the last two years.

As Tantan crossed the profit finish line, the analyst community has become increasingly bullish on the company. Fifteen of 16 analysts polled by Yahoo Finance rated the company a “buy” or “strong buy” in June, up sharply from 8 out of 17 who gave it such ratings in May.

Despite that growing bullishness, Hello Group’s stock is still quite lowly valued, trading at a forward price-to-earnings ratio (P/E) of just 6.6. By comparison, U.S. giant Match Group MTCH trades at a forward P/E of 20, while the smaller Bumble BMBL trades at an inflated 74, as analysts expect it to earn a profit this year after slipping into the red in 2022.

The big “Hello discount” probably owes at least partly to weak consumer sentiment in China, as people rein in their spending over worries about the nation’s sputtering economy. The first quarter was also hurt by a huge wave of Covid infections in January after China ended its “zero Covid” policy, dampening demand for dating services. But with that period now in the past and people resuming their older habits, it does seem like the company should be well positioned for a rebound.

Investors greeted the latest report mostly with indifference. Hello Group’s American depositary shares (ADSs) actually fell 1.7% the day of the announcement last Tuesday, though they bounced back over the next three days and were 2.6% ahead of pre-announcement levels when markets closed at the end of last week. The stock is now down 3.6% year-to-date.

Tantan In The Black

At the highest level, Hello Group’s top line revenue fell 10.5% year-on-year to 2.82 billion yuan ($395 million) in the first quarter, continuing a trend of contracting revenue dating back to the first quarter of 2020. Revenue for its core Momo app accounted for the big majority of the total at 2.5 billion yuan, also down about 10% year-on-year.

Tantan revenue fell by a similar 11% year-on-year to a more modest 309 million yuan. To put that in perspective, Tantan’s revenue was nearly twice the current level, totaling 568 million yuan in the first quarter of 2021, showing just how much that unit has shrunk since the overhaul began.

Top management emphasized on the earnings call that the company was abandoning its earlier “growth at any cost” approach to pursuing profitable growth, echoing a similar mantra that has emerged among overseas-listed Chinese tech companies lately. As part of that, the company said it would no longer announce the larger monthly active user (MAU) figure going forward, which looks big but includes mostly free users. Instead, it said, it would focus on paid users.

Tantan’s improving bottom line saw it swing to a profit on both an operating and net basis in the first quarter. Its 4.5 million yuan quarterly net profit marked a huge improvement from the 162.4 million yuan loss in the year-ago period. Largely as a result of that improvement, the company reported its overall net profit rose 35% year-on-year in the first quarter to 390 million yuan.

Hello Group forecast it would record revenue of 3 billion yuan to 3.1 billion yuan in the second quarter, which would represent a roughly 2% decline at the midpoint. That improvement from the first-quarter’s 10.5% decline and an even larger 12.6% decline in last year’s fourth quarter seems to show the company could finally return to revenue growth in the second half of this year.

We’ll close with Hello’s global initiative, which is coming from the Tantan division’s SoulChill app. As we noted above, Tang said the app has “contributed significant revenue and profit to our group in just two years,” though he declined to be more specific. The app first launched in the Middle East in 2021 and more recently has been experimenting in Southeast Asian markets, including Indonesia.

That development path is similar to some other Chinese internet companies, though many have encountered difficulties from local competition and a tendency to try to copy their Chinese business models to those markets. In the most recent case of such difficulties, JD.com earlier this year shuttered most of its Southeast Asian e-commerce operations after failing to gain traction.

“SoulChill has been experiencing rapid growth in terms of user’s revenue and profit,” Tang said on the earnings call. “And despite encountering some unexpected events in the first quarter, such as the Turkish earthquake and the Egyptian currency devaluation, SoulChill has actually shown good resilience and continued growth.”