Cathy Peng - VP, IR Jonathan Zhang - CFO

Thank you, Operator. Hello everyone, and thank you for joining us today for Momo's second quarter 2016 earnings conference call.

The company's results were released earlier today and are available on the company's IR website. Joining me today is our Chief Financial Officer, Mr.

Jonathan Zhang. Mr.

Zhang will discuss Momo's business operations followed by financial review. Due to the pending going private transaction, we will not be hosting a Q&A session following the end of the call.

If you have any additional questions, please contact us at [email protected] or (8610) 5731-0538. 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 events that involve known or unknown risks, conditions, 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.

With that, I would like to pass the call over to Mr. Zhang, who will now go over the business and financial highlights for the quarter.

Mr. Zhang, please.

Thank you, Cathy. Good morning, and good evening, everyone.

Thank you for joining our conference call today. In the absence of our CEO, Mr.

Tang Yan, I will walk you through an operational update, followed by a financial review for the quarter. Second quarter 2016 was a very good quarter for us, both from a financial point of view and from business point of view.

Total revenues for the quarter reached $99 million, up 222% year-over-year; and non-GAAP net income reached $23.2 million, up 290% year-over-year. The strong financial results came hand in hand with the progresses on operational front-end.

Total MAUs on Momo platform, increased from $72.3 million as of March to $74.8 million as of June. To clarify, the total MAUs we are disclosing here, it doesn't include the active users on Hani, the standalone live video application we launched in late March.

Overall, we are happy with the performance of Hani in terms of our user growth. However, right now, Hani is still at early stage of development.

Once it reaches a more mature stage, we'll consider to disclosing more operating data about it. In the second quarter, we wrote out a few upgrades to enhance the overall user experience and to provide a more enjoyable social experience to our users.

Just to name a few here, in order to cater to some of our users' demand for more video communication tools, in early May, we introduced video checking function on a one-to-one communication environment. In early April, we made live video on a separate tab next to the default nearby tab, and started it to connect broadcasters in a large scale.

Deeper into Q2, we also added more interesting features such as customized filters and lenses, as well as more virtual gifts and associated special effects. As a result of this efforts, in the second quarter, we saw a significant increase in the number of both broadcasters, as well as viewers.

On the technological end, we started it to remove some of the roadblocks that has been hammering user experiences. For example, we worked hard and will continue to work hard to reduce the latency in loading and making the streaming experience smoother.

We are also beefing up our content monitoring capabilities in order to support the rapid growth in the number of peak concurrent broadcasting channels. It is an extremely crucial part of our efforts to make sure that live video business grows in a healthy environment without problematic behaviors getting in the way and jeopardizing the social ecosystem around it.

What makes us more excited about is the live video opens up many doors for us other than simply being a monetization powerhouse. Enabled by technological transitions, live video service is fundamentally changing the way people interact, socialize, and have fun via Internet.

Although we are already seeing new used cases emerging onto our platform, we believe we are only at the beginning of the Golden Age, where live video converges with the social activities. We are feeling excited about many opportunities ahead of us and are running a field pioneering projects to foray deeper into the space.

Very soon, we will be launching our [indiscernible] interactive video service called in Chinese Shíkè or Moments in English, which is an innovative experiment to expose more Momo users to live video experience and build more social activities around it. We are hoping that through this product initiatives, we can help more and more Momo users and potential Momo users realize that video as compared to test and voice messages provides a much more compelling social experience to them.

Now move to the monetization. In Q2, revenue from live video business continued its strong momentum, reaching $57.9 million compared with $15.6 million in Q1 2016.

Paying users for the second quarter of 2016 reached $1.3 million compared to $0.4 million a quarter ago. ARPU for the quarter was RMB301, slightly up from RMB284 for the previous quarter.

In the second quarter, live video service covered around over 13% of our active users, with our stepped-up efforts on the product, content, and operational trends. We are confident that we will continue to board more users to the live video experience, and because mobile Internet users have much greater tendency to pay for services, we believe that there are plenty of opportunities for us to further drive paying ratio and ARPU over the longer-term horizon.

Revenues for mobile marketing were $16.6 million, up 146% year-over-year. For our in-feed performance-based marketing service, which made up a big majority of our overall mobile marketing revenues, the year-over-year growth came primarily from the substantial increase in effective CPMs, with a very limited additional ad inventories, we released on the supply end.

As we continue to optimize our marketing products, and improve ROIs for our marketing customers, we see plenty of opportunities to drive further expansion in eCPMs. In addition, as compared with some of our established industry peers in the mobile marketing industry, our ad load is relatively on the lower end due to our careful control to protect user experience.

Due to these factors, we believe mobile marketing should continue to be a powerful revenue driver in the mid-to-long-term. Membership subscription revenue for the quarter were $15.6 million, up from $14.8 million a year ago.

Paying members totaled $3.2 million as of June 30, 2016. The year-over-year growth in membership subscription revenue was driven by the growth in our pool, which was in turn driven by the growth in the number of SVIPs, our premium membership packages subscribers as a percentage of total paying members.

Mobile games revenues were $7.4 million in the second quarter of 2016, slightly down from $7.7 million for the same period last year. The year-over-year decrease was a result from management's decision to adjust our strategy in terms of how we're steering our gaming business in the coming quarters.

Mobile gaming remains as our strategically important area that we have to win out over a longer period of time. We believe there is a tremendous potential for us as an open social platform to foster a strong game portfolio.

Going into the future, we will scale back on the number of titles we jointly operate with other content partners and shift our efforts to quality games, both self-developed ones and jointly-operated ones, with a focus on cultivating on the core attributes of our platform. Now turning to the cost and expenses.

For the second quarter of 2016, our cost and expenses on a non-GAAP basis totaled $77.3 million compared to $27.2 million for the same period last year. The year-over-year increase in cost and expenses was primarily due to the continuing expansion of our business, especially the booming live video business.

We booked revenues from virtual gifts sent to the broadcasters on a gross basis and record the revenues shared to them as a cost of revenues. Same as last quarter, the revenue shared with our broadcasters made the largest cost driver as revenues from the live video business continued to ramp up rapidly.

Although our live video business is currently profitable, its margin may fluctuate and revenue continued to expand. Key factors that may impact the margin trend include, but not limited to, changes in shares with the broadcasters, size and timing of our marketing campaigns, et cetera.

We were focusing on optimizing the cost structure of our new business to balance the top-line growth and the bottom-line result. The second largest cost driver was marketing cost.

Due to the second -- during the second quarter, we stepped-up our branding efforts around the live video service, as well as expanding our direct marketing channels. As our top-line keeps expanding in the second half, we will continue our brand efforts centered around live video and our investment in user growth.

Further down the list, personnel related spending also contributed to the year-over-year growth in cost and expenses. By the end of June 2016, our total number of employees was 805, representing only a 16% year-over-year increase.

As compared with our rapid business expansion, we believe, we have been very disciplined in controlling our headcount increase. Our assets and operation-like business model is one of our key competitive advantages and it will stick to that model going deeper into the year.

Non-GAAP net income attributes both to Momo, Inc. was $23.2 million in the second quarter of 2016 compared to $6 million in the same period last year.

Non-GAAP net margin for the quarter was 24% compared to 19% a year ago. While I'm glad to see that our revenue growth came with a significant operating leverage, I would like to remind investors that we are still at the early stage of development and seeing many opportunities ahead to drive future growth.

Therefore, we will continue to balance our margin expansion with the investment in branding, user growth, and future business growth opportunities. Quickly on the key balance sheet and cash flow items.

As of June 30, 2016, Momo's cash, cash equivalents, and time deposits totaled $503.5 million compared to $469.5 million as of December 31, 2015. Over 75% of our cash are deposited offshore in the form of U.S.

dollars. As such, we do not expect volatilities in the foreign exchange rate will have material negative impact on the value of our cash assets.

In the second quarter of 2016, we generated an operating cash flow of $42.6 million compared to $9.3 million for the same period last year. Capital expenditures and cash used in investing activities were around $1.7 million for the quarter.

In summary, we are progressing well in the second quarter. Our performances reflected our strategic focus on driving user growth through product innovations, as well as digging deeper into monetization opportunities.

We feel excited about the journey we are on and look forward to discussing with you more on our achievements in the future. With that, I'd like to conclude our conference call today.

Once again, thank you very much. Operator, please.