Momo Inc. (MOMO) Q1 2019 Earnings Call Transcript

Momo Inc. (NASDAQ: MOMO)Q1 2019 Earnings CallMay 28, 2019, 8:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to First Quarter 2019 Momo Incorporation Earnings Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions) Please note this conference is being recorded today.

I'll now hand the conference over to your first speaker Ms. Cathy Peng. Thank you. Please go ahead, ma'am.

Cathy Peng -- Director of Investor Relations

Thank you, operator. Hello everyone and thank you for joining us today for Momo's First Quarter 2019 Earnings Conference Call. The company's results were released earlier today and are available on the company's IR website.

On the call today from Momo are: Mr. Tang Yan, Co-Founder, Chairman and Chief Executive Officer; Mr. Wang Li, President and Chief Operating Officer; Mr. Wang Yu, Founder and Chief Executive Officer of Tantan; and Mr. Jonathan Zhang, Chief Financial Officer. They will discuss the company's business operations and highlights, as well as the financials and guidance. They will all be available to answer your questions during the Q&A session that follows.

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 the events that involve known or unknown 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 US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law.

I will now pass the call over to Mr. Tang, I will translate for him. Mr. Tang, please.

Yan Tang -- Co-Founder, Chairman and Chief Executive Officer

(Foreign Language) Good morning and good evening everyone. Thank you for joining our conference call today. Q1 was a solid quarter and a good start to the year 2019. Now my team and I will take you through the details.

(Foreign Language) Firstly an overview of the financial performance. For the first quarter 2019, total revenue reached RMB3.72 billion, up 35% year-on-year, driven by the rapid growth of Momo's virtual gifting service, as well as content subscription business. The revenue mix of the company continued to diversify. I'm happy to see that VAS revenue for the first quarter of 2019 already represented more than one-third of the revenue contribution from live broadcasting service.

With the VAS business getting increasingly sizable and the initiatives that we took in live broadcasting service to drive the middle cohort spending, our revenue structure is becoming healthier and more defensive to macro uncertainty. Wang Yu and he's going to elaborate a little bit more in his remarks.

Adjusted operating income for the quarter was RMB1.01 billion, excluding Tantan's financial impact. Our adjusted operating income for the quarter would have been RMB1.09 billion, representing a 32% adjusted operating margin.

(Foreign Language) Now turning to the progresses that we've made on the user growth and product front. Firstly, our community continue to grow, the core Momo app had 114.4 million monthly actives for the first quarter, up 11% year-on-year, and representing a 1.1 million net addition from the previous quarter. The slowdown in quarterly net add in Q1 was mainly due to the negative impact from Chinese New Year, which Momo platform experienced it almost every year.

(Foreign Language) Total paying users for the core Momo platform was RMB9.0 million in Q1 2019, up 12% year-on-year. The number of paying users on Momo was slightly down by 0.5% from the previous quarter, due to the seasonality around Chinese New Year and to a lesser extent negative macro impact on our life streaming business. The one month self inspection that we are currently undertaking may have a temporary average effect on the number of paying users of VAS business, particularly on the number of membership subscribers. However, we do expect the paying user account of Momo platform to bottom out and start to rebound once we complete a self inspection procedures.

(Foreign Language) Now briefly on Tantan's community growth, I will leave more detailed discussion to Wang Yu later in his remarks. In the first quarter 2019 Tantan reached an important milestone with its total paying users hitting 5 million for the quarter, representing a RMB1.1 million net addition from Q4 last year. Tantan's MAU growth significantly accelerated in Q1, which was the primary reason for the big jump in the paying user account. The paying conversion ratio also saw a meaningful improvement, driven by the continuous optimization of it's premium features.

The impressive growth in its user base and paying user account has validated the effectiveness of our strategy to use value added services to enhance user experience and thus drive better retention and faster user growth. Obviously the growing revenue from that also significantly improves the ROI of the user acquisition efforts, allowing us to continue to invest in a big way to expand the user base.

I am happy to see that such virtuous cycle is clearly forming on Tantan. Although Tantan recently had some regulatory issue that we need to work hard to address according to government directive, and will have some negative impact on user and business growth in the near-term. We believe that a self inspection process is going to be helpful in making sure that the Tantan community develops in a healthy environment. I'm confident that after these temporary challenges got passed, Tantan continue to grow larger and stronger to be the problem of choice for dating in China. We still have high conviction that Tantan will become a significant growth driver of the company in the coming few years.

(Foreign Language) Now back to the core Momo platform. In the year 2017 and 2018, we spend a lot of our resources on testing and introducing new social experiences, and we've made a number of the important progresses last year. Today Momo users are connecting and interacting based on location, interest and a variety of recreational activities; including live talent shows, short videos, social games, as well as other video and audio -- audio based interactive experiences; such as live chats and mobile karaoke experience.

Going into 2019, there is another area that we will focus on and that is to enhance the basic social experience, so that Momo users can more effectively discover new relationships and build meaningful interaction. These efforts will range from more fundamental changes; such as making or matching algorithm better to improving the basic social infrastructures; such as the instant messenger, news feeds, push notifications et cetera, and also the smaller details; such as taking more care of the user on-boarding experience. For example in Q1, one of our key efforts was to make the low frequency users more active. Our approach is to analyze your usage behaviors and try to bring them back more frequently to push notifications showing them the social activities that they are likely to be interested in based on our big data analysis.

In addition, we also made a few upgrades to the algorithm of the nearby recommendation engine. The goal is to optimize for more two-way interactions and to drive decentralization, so that average Momo users can improve their chances of building meaningful interactions as well. As a result of these efforts, although the -- I mean you only grew slightly quarter-over-quarter, due to seasonal factors many important engagement metrics; such as total time spent, number of interactions and number of two-way relationships won grew much faster than the overall MAU growth.

Optimizing the basic social experience and improving the efficiency for users to discover relationship and build meaningful interaction, while continue to be one of the key areas of focus for Mono product team this year.

(Foreign Language) Next I would like to give an update on the recent regulatory issues that we announced earlier this quarter. Since May 11th, Mono has been conducting a through self inspection and implementing certain internal measures to strengthen our constant review and monitoring system. The measures that we have been taking included suspending the users ability to post new feeds for one month starting May 11th, and some other actions to beef up our content monitoring system. These measures taken by Momo have had some degree of impact on our user engagement, which we currently expect to be quite manageable and transitory.

The impact from the above mentioned regulatory issues of Momo and Tantan's user engagement can be directly or indirectly translated into revenue line, which have been fully reflected in our Q2 revenue guidance. Despite of these short-term negative impacts that we've seen, we feel that is -- that it is necessary for us to go through the process to make sure that our whole ecosystem and communities develop in a healthy environment. Again we expect the negative impact to the users and revenues to be temporary. We as the management of Momo and Tantan are confident that we will be able to continue to deliver growth and create value for our shareholders.

(Foreign Language) With that I'm handing over to Li Wang for a business review. Li Wang, please.

Wang Li -- President and Chief Operating Officer

(Foreign Language) Thanks, as this is the review of the first quarter 2019 business results. Before we get into the details, I would like to reiterate the priorities that we currently have on the business front.

For the coming few quarters, we will be focusing on the following key things: number one; drive steady and healthy growth from live broadcasting business through product innovations and operational efforts; number two, cultivate a paying potential from the middle cohort and the long-term users to reach our vast experience; number three, drive monetization growth of Tantan through optimization of existing premium features, and the introduction of new paying experiences. Wang Yu will elaborate on the third one later in his remarks.

So next, I'm going to take you through what we've done and the future plans regarding the first two priorities.

(Foreign Language) Firstly, our live broadcasting business, total revenue from live broadcasting business for the quarter was RMB2.69 billion, an increase of 14% from the same period last year. During our last earnings call, we shared the mixed revenue performance among different cohorts of paying users during the CNY holiday. During the seven day holidays period, the tipping revenue from the top 100 live broadcasting paying users only showed a slight uptick, as compared with the same period 2018, while the middle and the long tail cohorts contributed nearly all of the year-over-year growth. It also took longer, as compared with last year for the top users to recover from the CNY weakness. That made us believe that the macro headwinds still had some lingering impact on the top level spending in Q1.

Therefore we had decided not to push too hard in the Q1 competition event. For example, we remain fairly disciplined in terms of stimulating the top spending in the March tournament. This kind of operational strategy has led to lower payout ratio, which was reflected in the improvement in the company's Q1 gross margin, as compared with the previous quarter.

Instead, in Q1 we focus on the product and operational efforts in driving better paying experience for the middle cohort users. In January, we rolled-out an interactive virtual gift called Penguin, which has proven to be very effective in driving the middle and long tail spending. Moreover the embedded game element also lower the barrier for some of the entry and middle level broadcasters to interact with their audience. Therefore we've prepared a series of these mini games to allow the broadcasters and the users to have fun and socialize together.

A few days ago, we tested another interactive gift called Gold Miners (ph). The initial data that we are seeing has been encouraging. Penguin and Gold Miners are similar interactive gifts in that they facilitate simple interactions between the user and the machine putting these simple mini games in the showroom and setting them upon a competition structure among the fellow viewers can make a stand-alone game a unique social experience on Momo.

We believe that we can make the experience much better and more revenue generated, if different users can play concurrently together and the interaction can go beyond user versus machine to user versus user. We're working on it and hopefully we'll have something more fun for the user soon.

(Foreign Language) Although for the first quarter 2019, the strategic focus was more on the middle cohort. We still believe that over the longer run there are plenty of opportunities to grow the top user spending as well. Therefore in the second quarter, we're going to step up the efforts to drive more tough user spending. This would involve organizing some of the offline and online promotional events targeting hardcore paying users, as well as revamping the paying user ranking system to better stimulate spending. We firmly believe that live broadcasting as a new form of entertainment and interaction still have ample room to penetrate deeper into the wealthier classes in China. Our team is going to continue to pursue these opportunities in the future.

(Foreign Language) Now turning to VAT. Revenue from value added services or VAT continue to ramp up fast and reached RMB903.8 million in the first quarter 2019, a 285% growth on a year-over-year basis. Wang Yu will talk about Tantan's business later, so I will be focusing on the VAT business for the core Momo part.

Excluding Tantan, Momo's VAT revenue was RMB608.5, a 159% year-over-year increase. Despite the seasonality in user activities on Momo around Chinese New Year, VAT revenue at Tantan still grew very strongly by 22% from Q4 last year. Q1 was also the fifth consecutive quarter, where Momo's VAT revenue accelerated its Y-o-Y growth rate. Driven by the strong performance of virtual gifting service outside of the live broadcasting channels.

In Q1, the growth of the virtual gifting business came in pretty much across the board from all key revenue contributors. Although, we lower the overall payout ratio pretty meaningfully for the quick chat and party experience in early Q1, I'm glad to see that the revenues from quick chat and party's continue to ramp up at a solid pace growing 24% sequentially. The growth was on the back of Momo's -- Momo users strong social mentality and the team's solid innovation and execution capability.

In Q1, we took the idea from a popular Korean TV dating reality show and apply it to VAT, creating a new group dating party experience called The Heart Signal. The experience was an immediate success enacted as a meaningful driver to both user engagements and virtual gifting revenue.

In addition, virtual gifting revenues from traditional and social use cases including, greetings one-to-one IM chatting and interest groups also ncreased significantly growing by 30% from an already sizable base in Q4 last year. The growth was mainly driven by a number of interactive gifts that we launched during Q1 that enhance the chatting experience especially in the interest groups. Were Wolf showed good level of growth from Q4 last year, due to the ongoing optimizations and the gamification.

(Foreign Language) We believe that there is still a great deal of potential in the VAS business, because this was an area that have been under monetized prior to the year 2017. Today around 70% of our DAU and more than 80% of our total consent were on non-financial related use cases. These non-financial related users also have strong inclination to pay for services.

However, prior to the year 2017, they really had not been anything for them to pay for other than the RMB10 or RMB30 per month membership subscription services. Although during the year 2017 and 2018 we have made a lot of progresses in diversifying the paying experience for VAS, we believe we still ave a long way to go.

For example, the chatroom experience, which is the biggest in terms of consumer penetration among interest group, quick chat and party's, as well as Were Wolf is coming under -- is still currently under monetize. We will keep testing different paid services that truly enhances the social experience for the users. As we do so Momo's VAS revenue will continue to grow as well.

(Foreign Language) As Tang Yan mentioned, our efforts to drive the middle cohort spending in live broadcasting and the rapid growth of that has enabled us to have a healthier revenue growth pattern. If you look at the paying users across live streaming and VAS on Momo in Q1. The middle cohorts grew significantly faster year-on-year than the top 500 paying users. In March 2018, the top 500 contributed more than 30% of the year-over-year growth. In March 2019, that number has dropped to low teens. Substantially lowering our risk exposure to the macro uncertainty.

(Foreign Language) Now briefly on other business lines, mobile marketing revenue was RMB80.7 million, a 32% year-on-year decrease, similar to what happened in Q4 last year, the decline was mainly caused by the challenging macro environment and the regulatory changes in some of our big ad sectors. Mobile gaming revenue was RMB39.0 million for the quarter, and 8% year-over-year decline. As said in our March earnings call, this year our strategy for these two business lines would be to optimize on internal operating efficiency rather than actively pursuing the growth opportunities.

(Foreign Language) That's the review of the key business lines. At a very high level, Q1 was a fruitful quarter, we're making remarkable progresses in growing our communities and business and also laying solid foundation to build future growth drivers. I'm looking forward to sharing more with investors in the coming few quarters.

Now let me hand over to Mr. Wang Yu to review Tantan's product and business development. Mr. Wang, please.

Wang Yu -- Founder and Chief Executive Officer of Tantan

Thanks. So let me briefly review Tantan's operational and business development in the last quarter and our next step plans. First on user growth, in Q1 2019 the growth of the Tantan community accelerated significantly. Total paying users reached 5 million for the quarter, a net addition of 1.1 million from three months ago, compared to a quarterly net add of 0.3 million in the fourth quarter last year.

Impressive paying user growth in Q1 was on the back of the strong user expansion particularly in February and March. The user acceleration in Q1 was due to a combination of seasonal factor, as well as our initiatives on the product and marketing side. Let me share some more details: number one, Q1 has historically been a strong quarter for user growth on Tantan, especially during the period after Chinese New Year's holiday. We believe that this has something to do with the uniqueness of Chinese culture and family tradition, as well as the fact that Tantan has increasingly recognized by young Chinese singles as a platform of choice for dating.

Number two, with ARPPU and paying per merchant continuing to improve, which stepped up our efforts with the paid marketing channels for user acquisition. And number three, in Q1 we initiated an effort called real photo verification and made remarkable progress with it, such initiative has substantially improved the social experience for Tantan users. We believe that these concerted efforts have boosted the user growth in Q1. Other than the acceleration in user growth, which we believe is the primary reason for the big jump in the number of paying users, paying conversion, also meaningfully improved in the first quarter, due to the optimizations we made to the premium features.

Next turning to monetization. Total revenue for the quarter was RMB295 million, up 32% sequentially, driven by those paying user growth and the increase in ARPPU are piqued (ph), which was in turn due to the greater adoption of the See Who Likes Me feature. In Q1, we rolled out an optimization of the See feature, which has improved the paying conversion ratio by 2 percentage points.

As Wang Li mentioned in his remarks just now, we're in the key priorities based on the new series to drive monetization growth through optimization of existing premium features and the introduction of new subscription and non-subscription features. I'm glad that in Q1, we delivered well on that front. As we move deeper into the year, while we will continue to optimize existing premium features to drive adoption and revenue growth. We are also going to step up the efforts on testing and introducing new monetization features.

We now have a clear roadmap to move beyond the subscription model into a la carte sales. In a way, this is not the simple as a monetization tool for Tantan, but also an effort to drive the user experience and engagements. As the Tantan community continues to expand, we do realize that we have an increasing number of users who have strong willingness to pay more for better social experience without currently underserved on that fronts. We believe that having a good a la carte paying experience is important for providing better use of consumer experience to those users.

If we can figure out the right a la carte paying experience, our peak (ph) will be removed and the monetization of more potential of the Tantan community can be fully unleashed. As compared with a few months ago, we now have better idea in how to make that happen. Our plan on that front will gradually unfold after the regulatory issues are resolved and different operational data is back on a growth track.

Now an update on the products front. As mentioned in earlier in Q1, we kicked off an important project called Real Photo Verification. One of the key success factors of Tantan is that we take the user screening process extremely seriously. Among all our peers that we know of, we believe Tantan applies the most stringent standard in reviewing and approving the registration applications. That has given us a high quality user base with genuine intention to make romantic connections. We believe that can we can do better on that front by encouraging users to verify the authenticity of their profile pictures.

By mid-April 60% of our DAU had already passed a Real Photo Verification. We intend to keep pushing forward on that initiative in order to build a healthy social environment in Tantan. Lastly, let me give you an update on an issue that we recently had on the regulation side. As the company announced earlier this quarter Tantan has been removed from the application stores in China on the erection of certain government authority. Pending authorial self inspection and certain other corrective measures we need to make to our content review system. We have been conducting a comprehensive self inspection by thoroughly reviewing the content offered on the platform. In terms, since we receive the notice we have also substantially strengthened the content review system to ensure that content service offerings are compliant with the respective regulations. Before the application is fully restored at the app stores, our ability to attract new users will be adversely affected. We expect the number of active users to debase materially during the suspension period.

In addition in early May, Apple also suspended the app in app purchase service for iOS version of Tantan. As most of the subscribers have an auto renewed subscription on a monthly basis. The suspension of the payment service on iOS is going to have a pretty meaningful impact on a net number of paying users, and the revenues for the second quarter of 2019.

As we currently do not have full clarity on when Tantan's download service can be restored, while making Q2's investments, we tend to lean on the conservative side by assuming that the suspension of download service and the in-app purchase on iOS, will last throughout the second quarter. Negative impact to revenue based on such assumptions have been fully reflected in the company's guidance. We are fully cooperating with government authorities and proactively taking self inspected measures according to the directives from the regulators in order to restore the download service as soon as possible.

The challenges that we now have are temporary. Currently, we are still seeing very strong user demand for our service internal (inaudible) equity and the teams execution capabilities have improved by the strong growth we achieved in Q1. We have the high conviction that Tantan will have a healthier ecosystem and resume rapid growth after the short-term challenges behind us.

With that I'm passing the call to Mr. Jonathan Zhang for financial review. Jon, please.

Jonathan Xiaosong Zhang -- Chief Financial Officer

Thanks, Wang Yu. Hello everyone, thank you for joining our conference call today. Now let me briefly take you through the financial review. Total revenue for the first quarter 2019 was RMB3.72 billion, up 35% year-on-year and exceeding the high end of our revenue guidance. Non-GAAP net income attributable to Momo was RMB910.3 million, compared to RMB903.8 million for the same period 2018.

Now let me talk about our paying user metrics. Total number of paying users across the core Momo platform was 9 million for the first quarter of 2019, compared to 8.1 million from the same period last year, and 1.9 million -- 9.1 million a quarter ago.

As of March 31st, Tantan had 5 million subscribers, up from 3.9 million a quarter ago or a 1.1 million quarterly net addition. As Tang Yan and Wang Yu mentioned in their remarks, we do expect the self inspected measures that Momo and Tantan are currently undertaking could negatively affect the number of paying users of Momo and Tantan.

This number, so get back to the growth track after the temporary challenges gets behind us. In the interest of time, I'm not going to reveal the revenue lines in detail, which has been covered comprehensively by Wang Li.

Now on the cost and expenses items, our non-GAAP cost of revenue for the first quarter 2019 was RMB1.85 billion, compared to RMB1.33 billion for the same period last year. Non-GAAP cost of the revenue as a percentage of total revenue was 49.7%, an increase of 1.6% from Q1 2018, a decrease of 4.3% from the previous quarter.

On a year-over-year basis, the lower non-GAAP gross margin in Q1 2019 was mainly caused by the higher payout ratio for our live streaming business and the fast ramping virtual gifting business under VAS, partially offset by a positive contribution from Tantan revenue, which bears a higher gross margin than the core Momo business.

On a sequential basis, non-GAAP gross margin improved by 4.3% from 46% in Q4 2018 to 50.3% in Q1 2019. The quarter-over-quarter improvement in gross margin was primarily attributable to lower payout ratio from live streaming business, as well as certain VAS services. And to a lesser extent, the fact that the Phanta City impact is completely behind us in Q1 2019. The lower payout ratio for live streaming and virtual gifting businesses from VAS demonstrate that Momo management team not only care about topline growth, but also focus on the quality of their revenue growth. The fact that we were able to lower the payout ratio and still drove impressive revenue growth reflects Momo's strong competitive position and the team's solid execution capabilities. Especially given that we operate in a market where many players are trying to compete with the higher payouts.

Non-GAAP R&D expenses for the first quarter was RMB207.4 million, compared to RMB94 million for the same period last year, representing 5.6% and 3.4% of total revenue respectively. The year-over-year increase reflected our strategy to step up our investment in R&D area throughout 2018, mainly to expand R&D talent pool in order to support our various product innovation initiatives, as well as the consolidation of Tantan.

We entered the quarter with 2,053 total employees of which 457 are from Tantan. The R&D personnel as a percentage of total employees for the group was 54 -- 54%, compared to 46% Q1 last year. Overall, we feel that in terms of size of the engineering talent pool, we are in adequate position now to support our product innovations going forward.

Non-GAAP sales and marketing expenses for the first quarter was RMB567.5 million or 15.2% of total revenue, compared to RMB260.8 million or 9.4% of total revenue for the same period last year. On a year-over-year basis, the increase in sales and marketing expense as a percentage of total revenue was mainly due to the consolidation of Tantan, while the core Momo non-GAAP sales marketing expenses as a percentage of revenue remained relatively stable.

Our non-GAAP G&A expenses was RMB92.9 million for the first quarter 2019, compared to RMB71.1 million for the same quarter last year, representing 2.5% and 2.6% of total revenue respectively. The GAAP G&A expenses was RMB602.6 for the quarter, compared to RMB109.5 million for the first quarter last year. The big jump in the GAAP G&A expenses was mainly due to a special share-based compensation item. The company recognized a share-based compensation of RMB593.1 million in the first quarter 2019, compared to 90 -- RMB78.7 million in the same period last year. As discussed in our 2018 20-F. In August 2018 Tantan Limited granted 3,578,205 shares options to its founders with a full year vesting period, representing approximately 12% of Tantan's shares on a fully diluted basis. The vesting can be accelerated based on achievement of certain performance conditions. According to relevant US GAAP literature, a share-based compensation expense of RMB466.9 million was amortized during the first quarter 2019, based on the progress of achievements of the performance conditions as of March 31st, 2019.

We currently expect that the remaining RMB273 million would be fully amortized into the second quarter of 2019. The amortization of the share-based compensation expense in connection with this option rewards will have no further impact from Q3 2019 onwards. Non-GAAP operating income was RMB1.01 billion, representing 27.3% non-GAAP operating margin for the quarter. Excluding Tantan consolidation impact, core Momo adjusted operating income for the first quarter of 2019 would have been RMB1.09 billion or 31.9% adjusted operating margin.

Now turning to the balance sheet and cash flow items. As of March 31st 2019, Momo's cash, cash equivalent, term deposits and short-term investments totaled RMB12 billion, compared to RMB11.3 billion as of December 31st, 2018. Net cash provided by operating activities in the first quarter was RMB1.2 billion, compared to RMB825.5 million for the same quarter last year.

Lastly, for the second quarter 2019 revenue guidance. We estimated our second quarter revenue come in the range from RMB4 billion to RMB4.1 billion, representing an increase of 27%, up to 30% year-on-year, and an increase of 7% to 10% quarter-over-quarter. Such estimate is based on the assumption that our live streaming and Momo's core VAS businesses will continue to increase on a sequential basis, while the mobile marketing business and Tantan's revenue will decrease quarter-over-quarter, due to the self inspections that we are currently undertaking.

Mobile gaming will continue to be downsized, due to the shift of the company's strategic focus. Please be mindful that the forecast represents the company's current and the preliminary view on the market and operational conditions, which are subject to changes. That concluded our prepared portion of today's discussion.

With that let me turn the call back to Cathy to start Q&A. Cathy?

Cathy Peng -- Director of Investor Relations

Operator. Before we began just a quick reminder to the analyst waiting in the queue. For those who can speak Chinese, please ask the questions in Chinese first followed by English translation by yourself. And also please limit the number of questions to a maximum of two, so that more people can get the opportunity to ask questions.

Operator we are ready for questions.

Questions and Answers:

Operator

We will now begin a question-and-answer session. (Operator Instructions) Our first question comes from line of Jialong from Nomura. Please ask your question.

Jialong Shi -- Nomura -- Analyst

Hi, thanks management for taking my question. I will first ask my questions in Chinese, and then I will translate it.

(Foreign Language) Thanks for taking my question. I have two questions both related to regulation. Just wonder if management can provide any update on Tantan app following your recent communication with regulators. And can management give more colors about the potential impact from the suspension on Momo's news feed service and the Tantan's app downloads. And what are the impacts you have monitored on your business from these suspensions. And also just wonder whether this suspension may have any impacts on your expenses and a profit this year.

And secondly, just wonder, if the tightening regulations -- regulatory environment may have an impact on your product and operation plans? Thank you.

Yan Tang -- Co-Founder, Chairman and Chief Executive Officer

(Foreign Language) I'll be focused on Momo's situation, and I'll pass the call to Wang Yu to talk about Tantan later. Momo has been undertaking a comprehensive self inspection and direction from certain government authority. At the same time we have been strengthening our content reviewing team and beefing up our content monitoring capabilities to eradicate any non-compliant content from the platform. And so far we have been very proactively driving the self inspection process as according to the requirements from the regulators and we are moving forward in a very solid manner. And at the same time, we have also been maintaining very smooth communication with the regulators.

(Foreign Language) On the user side, for the core Momo app, our self inspection mainly involves the suspension of user posting for a month. Other than that, during the one month inspection period certain other product modules are also going to see some negative impact. But the magnitude of the impact from other corrective measures is going to be much, much smaller, as compared to the impact from the user posting. And based on our observation and based on the data that we've seen from the past two weeks after the inspection started, we do expect that user engagement mainly represented by total time spent, number of interactions and number of relationships formed to see pretty meaningful decrease during the inspection period.

DAU is also going to see some level of decrease, but to a much less degree than total time spent. And of course the decrease in user engagement and DAU is also going to cause the paying users of the platform especially the VAS paying users to decrease during the inspection period. However we do expect these engagement metrics to gradually start to resume growth after inspection period is over.

With regards to the impact on MAU, we are going to be reporting Q2 MAU based on the data that we see in the month of June, and we do have plan to step up our channel marketing efforts after the inspection is over to make up for the losses in user engagement and users. And hopefully through these efforts we can build a larger user base based on which we can continue to drive user engagement growth for Q3.

(Foreign Language) For the impact on the revenue side, the suspension of posting is obviously going to cause us to lose one month's advertising revenue. But advertising -- because most of our advertising inventory reside in the new seat, but advertising represents somewhere around 3% to -- 2% to 3% of total revenue. So any sort of ad revenue loss that we're talking about here is really just around one-third of that very, very small piece within the total revenue base. And also the decrease in user engagement is obviously going to be directly and indirectly translated into the decrease in VAS revenue, and VAS paying users. But VAS has been showing very strong growth momentum in the past few quarters, and we do expect such momentum to make up for the losses to a very large extent.

Currently, we still expect VAS revenue to see sequential growth in Q2 from Q1s level. Now it looks like that live streaming is either not affected or the impact should be very, very small and indirect, and all of the impacts that we're talking about here have been fully reflected in our Q2 revenue guidance already.

(Foreign Language) On the expensive side, obviously we are going to increase our spending in strengthening the content reviewing system both in terms of personnel investment and in terms of technological upgrades. But given the size of our P&L, the negative impact to margins from such sort of spending should not be very significant. On the channel marketing side, we do have plan to increase our spending through the channels to make up for the losses in user and user engagement. And in particular we're looking to step up the user call back effort, but again given the size of our P&L, the drag to margins from such sort of spending should be quite limited.

(Foreign Language) Now here's is Wang Yu to talk about impact on Tantan.

Wang Li -- President and Chief Operating Officer

Okay, let me first provide a little bit more on progresses remained so far. We have an open dialog window with the government authority and have been maintaining a smooth communication. Since the downward suspension happened, we have thoroughly reviewed content on the platform, and also substantially strengthened our content monitoring system as according to two government directors.

For example, during the past month we've doubled our content review personnel, strengthen the training program and significantly increased our investment on tax funds to beef up the content review and monitoring capabilities. We have also been reporting these progresses to the government authority on a regular basis to make sure that we're doing things the right way. We're confident that we'll be able to resume rapid growth in a healthier environment after our download service (technical difficulty).

Regarding the impact on users and paying subscribers. As we said in the prepared remarks, the cost -- the downward suspension did have a negative impact on new users. We do expect active users to take a pretty meaningful hit before Tantan gets back on the app stores. And due to the suspension of payment on iOS, we expect paying users to decrease more than active users. However as said these challenges are temporary. The fact that we hit 5 million paying users demonstrated the strong user demand for the service we provide, and the solid execution capability.

On the revenue side by making a conservative assumption, which is that the downward suspension and the iOS payment suspension last throughout the quarter. We expect Tantan's total revenue to decrease from low to mid teen percentage points in Q2, compared to Q1.

Regarding expenses and bottom line, during this whole -- during the download suspension period, we've done substantially scaled back our marketing efforts and thus a significant saving on the marketing expenses. However, we do plan to increase the marketing spending after the regulatory issue gets passed. So that we can get back to the -- on the growth track as soon as possible. So the cadence of our marketing spending will shift from our original plan depending on when the download service can get -- can be restored. And because their revenue may take some time to recover it's likely that the net loss for Q3 will widen from the Q2s level.

Regarding the impact on new featured objects and other strategic goals, we will refer the new featured launches and some of the revenue optimizations till assets tunnel -- funnel is restored on app stores. So there is going to be some delay on that front. But we're committed to our strategic plan and moving forward in a methodical way, contemporary challenges may cause some short-term disruption, but won't change our long-term strategy.

Cathy Peng -- Director of Investor Relations

Yes, I think both of the questions have been answered. Operator, can we take the next one in?

Operator

Sure. Our next question comes from Daniel Chen from J.P. Morgan. Please ask your question.

Daniel Chen -- J.P. Morgan -- Analyst

(Foreign Language) I will translate myself. So my question is on the live streaming segment, so we are doing some of the new value or creative methods lately such as some offline events, and also a new well ranking system et cetera. So how are these measures working recently? Thank you.

Yan Tang -- Co-Founder, Chairman and Chief Executive Officer

(Foreign Language) We believe that we still have a lot of growth opportunities for live broadcasting service this year for -- through product innovations, as well as operational efforts. Currently, we have several priorities that the live broadcasting team's has been working on. Number one, is that we are going to stimulate middle cohort spending through the introduction of the interactive gifts and mini games. And the interactive gifts that we've introduced so far has been very effective in driving user engagement, as well as monetization growth. But the experiences that we've introduced so far are -- it's fair to say that they are quite preliminary in terms of the underlying technology and also the form of interaction that we can offer to the users. So we do see opportunities for improvement and optimization. So, we've prepared a series of upgraded experiences to be launched later, or believe that these new experiences that we're going to be introducing are going to be more fun and thus making bigger contribution to drive the interactions and also the monetization growth.

(Foreign Language) And the second priority is that similar to what we did to the broadcasters ranking system in Q1, starting from next month, we are going to start making changes to the paying user ranking system, specifically targeting the high paying users. And in that new system we are going to putting in the demotional factor or in order to better stimulate the top spending -- the spending from the top users.

(Foreign Language) And the third priority is that starting from the second quarter, we have started to introduce online and offline promotional events targeting the hardcore paying users. For example, on May 18th, we held our first offline music tour in Shanghai. In that event we let some of our highest paying users invite their local friends to join us in the party and together they could experience what they could resonate with, what makes live streaming such a unique and gratifying entertaining experience for them.

We so far that -- our first offline music tour has been pretty well received. So we do have plan to roll-out more of these promotional events, in order expand the pool of high paying users on the platform. We believe that by pulling these product and operational levers this year we're still looking at -- we will be looking at a very steady and healthy growth from live broadcasting business growth from the middle and long tail and from the high paying users.

Cathy Peng -- Director of Investor Relations

Operator, given the time, we -- let's take the last question from the other one and then we are ready to close.

Operator

Sure. Our last question comes from the line of Tianxiao Hou from T.H. Capital. Please ask your question.

Tianxiao Hou -- T.H. Capital -- Analyst

(Foreign Language) We have witness, the good performance of Tantan in Indian market. So it is the trend for many international, as well as Chinese companies to go to the market where they are not currently in. So in overseas expansion strategy, what's company's thoughts on that? Are you planning to go abroad. And how are you going to go abroad, if you plan so. Is that going to burn a lot of cash or some other ways, that's my question. Thank you.

Jonathan Xiaosong Zhang -- Chief Financial Officer

Hi. So we have been taking initiatives in some of the Asian markets for some time and things have been progressing quite well. The progresses we've made so far in overseas markets prove our early belief that some products can resonate well with different Asian cultures. We do see a lot of growth opportunities in overseas markets especially in Asia. As the Chinese social company Tantan does have a very unique advantage in seizing these opportunities. But at this point the bigger focus is still on China, because we're still early in penetrating the domestic market and the opportunities are huge here. In terms of the spending, just to answer that. Our thoughts is basically that we will manage the ROI of our spending into marketing. So that's whatever we spend overseas we will maintain the same or better ROI than we do domestically in China. Thank you.

Tianxiao Hou -- T.H. Capital -- Analyst

Okay. Thank you.

Cathy Peng -- Director of Investor Relations

Operator? We are ready to close, why don't I just close our end that's all for this quarter's earnings conference call. Thank you for joining us. We look forward to speaking with guys next quarter. Operator back to you.

Operator

Thank you. That does conclude our conference for today. Thank you for participating, you may all disconnect.

Duration: 83 minutes

Call participants:

Cathy Peng -- Director of Investor Relations

Yan Tang -- Co-Founder, Chairman and Chief Executive Officer

Wang Li -- President and Chief Operating Officer

Wang Yu -- Founder and Chief Executive Officer of Tantan

Jonathan Xiaosong Zhang -- Chief Financial Officer

Jialong Shi -- Nomura -- Analyst

Daniel Chen -- J.P. Morgan -- Analyst

Tianxiao Hou -- T.H. Capital -- Analyst

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