Hello Group Inc. (filing registrant: Momo Inc.) — 2018 Form 20-F
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2018, not a standalone fourth-quarter report. The filing identifies the registrant as Momo Inc.; the supplied company metadata says Hello Group Inc. Results are prepared under U.S. GAAP and reported in RMB, with U.S. dollar amounts provided for convenience. Momo operates social and entertainment platforms in China and completed its acquisition of dating app Tantan in May 2018.
Key financial metrics
Amounts below are RMB unless stated otherwise; financial statement amounts are in millions except per-share data.
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | 13,408.4 | 8,886.4 |
| Operating income | 3,266.3 | 2,434.3 |
| Net income | 2,788.5 | 2,144.5 |
| Net income attributable to Momo Inc. | 2,815.8 | 2,148.1 |
| Basic / diluted earnings per ordinary share | RMB 6.92 / RMB 6.59 | RMB 5.44 / RMB 5.17 |
| Net cash from operating activities | 3,327.7 | 2,886.1 |
| Cash and cash equivalents at year-end | 2,468.0 | 4,462.2 |
| Term deposits at year-end | 8,824.6 | 2,432.0 |
| Total assets / total liabilities | 18,965.5 / 7,942.7 | 8,471.2 / 1,719.1 |
- Revenue increased approximately 50.9% year over year; net income increased approximately 30.0%.
- Operating margin was approximately 24.4%, down from 27.4%; net margin was approximately 20.8%, down from 24.1%. Cost of revenues rose to 53.6% of revenue from 49.2%.
- Revenue mix: live video 10,709.5 (79.9%); value-added services 1,883.2 (14.0%); mobile marketing 500.3 (3.7%); mobile games 130.4 (1.0%); other services 185.1 (1.4%).
- Cash flow: operating activities provided 3,327.7; investing activities used 10,034.0; financing activities provided 4,688.0. Investing outflow principally reflected term-deposit and short-term-investment purchases and the Tantan acquisition. Cash plus term deposits totaled 11,292.6 at year-end.
- Debt: the company issued $725 million of 1.25% convertible senior notes due 2025. Their year-end carrying value was RMB 4,877.1; holders may require repurchase in 2023 or following specified fundamental changes. A separate $300 million bank loan used for the Tantan acquisition was repaid in July 2018.
- Liquidity: current assets were RMB 12,633.2 versus current liabilities of RMB 2,696.3. Management said cash and expected operating cash flows should meet working-capital and capital-expenditure needs for the next 12 months.
Material changes versus the prior comparable period
- Momo MAUs reached 113.3 million in December 2018, up from 99.1 million a year earlier. Momo live-video and value-added-service paying users reached 17.7 million, versus 13.7 million in 2017; Tantan reported 4.1 million paying users for June–December 2018.
- Live-video revenue grew approximately 44.1%, but its share of total revenue fell from 83.6% to 79.9%. Value-added-service revenue rose 170.6%, partly reflecting Tantan membership revenue consolidated from June.
- Mobile marketing revenue declined 2.7% and mobile games revenue declined 46.0%. Management attributed the latter mainly to fewer paying users and described a shift toward self-developed games.
- Research and development expense increased 119.7% to RMB 760.6 million; sales and marketing rose 23.5% to RMB 1,812.3 million; general and administrative expense rose to RMB 640.0 million. Share-based compensation was RMB 580.8 million.
- The Tantan acquisition added RMB 417.998 million of revenue and RMB 519.206 million of net loss after acquisition. It contributed to goodwill of RMB 4,284.7 million and intangible assets of RMB 1,037.0 million at year-end. The company recorded no goodwill impairment in 2018.
- Cash and cash equivalents fell, while term deposits increased substantially; investing cash outflow was much higher than in 2017. The company changed its reporting currency from U.S. dollars to RMB effective in the fourth quarter of 2018 and recast prior-period figures for comparison.
Outlook, commentary, risks, contingencies and unusual items
- Outlook: No quantified revenue or earnings guidance is provided. Management expects continued investment in research and development, marketing, facilities and technology infrastructure, and says costs may rise as the business expands. It stated that liquidity should be sufficient for the next 12 months.
- Revenue concentration: Live video remained nearly 80% of revenue. The filing highlights dependence on user engagement, paying users, broadcasters and talent agencies, and the possibility that revenue-sharing terms or competition could pressure profitability.
- Tantan: Integration, user retention, monetization, marketing costs and the acquired business’s historical losses are identified risks. Tantan’s 2018 operating results were included for only part of the year.
- China regulatory and structure risks: Much of the business operates through contractual VIE arrangements rather than direct ownership. The filing warns of uncertainty around enforceability, foreign-investment restrictions, content rules, privacy requirements and required licenses. Momo had not obtained an internet publishing license for online games, though it reported cooperation agreements with license holders and approvals for its 12 games; 11 had completed the required filing as of March 31, 2019.
- Legal matters: The company paid RMB 4.0 million in October 2018 following a final-instance judgment concerning a discontinued game; the plaintiff subsequently sought retrial. Four patent-infringement complaints filed in February 2019 sought approximately RMB 4 million in total; hearings had not occurred by the report date. The company said it did not believe pending proceedings would materially affect its business or financial condition.
- Capital returns and dilution: A special dividend of $0.62 per ADS, approximately $128 million in aggregate, was declared in March 2019 and scheduled for payment in April. The filing says there is no committed plan for regular future dividends. The 2025 convertible notes and share-based awards could dilute shareholders.
- Other items: Other operating income included government subsidies of RMB 224.0 million in 2018. A television program generated RMB 169.6 million of advertising revenue sharing, while related production costs were RMB 429.2 million. Management and the auditor reported effective internal controls, but the assessment excluded Tantan, which represented 31.1% of consolidated assets and 3.1% of revenue. The financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Review whether live-video user engagement and revenue growth can be sustained, and how broadcaster and agency revenue sharing affects margins.
- Assess Tantan’s post-acquisition user growth, monetization, losses, integration progress and the assumptions supporting its substantial goodwill valuation.
- Reconcile the cash-flow statement’s large investment outflow with year-end cash, term deposits, acquisition payments and remaining deferred consideration; confirm the availability and location of cash given PRC transfer restrictions.
- Review the convertible notes’ repayment and conversion terms, potential dilution, and the company’s capacity to meet obligations.
- Track outstanding licensing and game-filing requirements, content and privacy regulation, and any developments affecting the VIE structure or the Foreign Investment Law.
- Follow the pending retrial and patent claims, and verify the scope of internal-control testing after Tantan was excluded from the 2018 assessment.