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China-based social media, dating, and live-streaming company Hello Group (MOMO -2%) left something to be desired in its Q2 report today. MOMO may have exceeded EPS estimates on decent revenue upside. However, the midpoint of its Q3 sales outlook fell short of analyst expectations. Economic issues in China have been prevalent for several quarters, which has created sales pressure among many Chinese companies requiring healthy discretionary spending, including MOMO. However, outside of economic strife, some of the weaknesses from the quarter were MOMO's own doing.

• MOMO operates three primary businesses: Momo, its core social media app; Tantan, its dating app; and new endeavors, which include several standalone apps. While these standalone apps generated positive yr/yr growth in Q2, Momo and Tantan struggled, delivering a 13% and 27% drop in revenue, respectively, culminating in a 14% decrease in consolidated revenue to RMB 2.69 bln.
• Spending softness amid a deflated economy was one underlying cause, a headwind restricting revenue growth for numerous quarters. The other problems arose from MOMO's operational adjustments, which it has been implementing since the end of 2023 to maintain a healthy ecosystem.
• MOMO set a few primary goals to improve its Momo app, including enhancing the female user experience by adjusting advertising materials and proactively reducing large-scale competition events on the live-streaming side. These actions resulted in short-term turbulence.
  • Shifting its advertising materials around did not produce meaningful paying user gains as the metric fell by 9% yr/yr to 7.2 mln and only ticked 0.1 mln higher sequentially.
  • Meanwhile, live streaming revenue plummeted by 50% yr/yr as large-scale competition events tend to generate sizeable revenue gains. To address this problem, MOMO enacted a moderate uptick in incentives for non-events operations.
• Tantan's goals were to improve the core dating experience while improving profitability. Over the past two years, cost reduction strategies have pushed Tantan to profitability. However, a continued reduction in channel investments as a part of the cost-reduction measures continued pressuring Tantan's user base, leading to monthly active users (MAUs) decreasing by 6% sequentially to 12.9 mln.
• Looking ahead, MOMO expects near-term pressures to persist, projecting Q3 revs of RMB 2.58-2.68 bln, translating to a 14% drop yr/yr at the midpoint, similar to the decline in Q2. As far as 2025 is concerned, management noted it was still too early to tell, citing macroeconomic and regulatory headwinds as the deciding factors over how next year plays out.

Taking further steps to improve the long-term growth of its core apps resulted in another relatively soft quarter. Investors may have been willing to forgive this if not for the fact that the initiatives MOMO is undergoing are hurting results for longer than expected, as illuminated by bearish Q3 guidance. Unless MOMO's actions result in meaningful benefits soon, investors could become increasingly impatient, triggering a more substantial correction.