Momo Inc. (MOMO) is trading sharply lower (-17%) in early trading after reporting Q2 results this morning despite reporting a nice beat and guiding Q3 revenue above expectations.
In terms of quick background, it operates Momo, one of China's largest mobile-based social networking platforms (similar to Tinder in the US). Momo users can build relationships through private and group communication tools, content creation and sharing functions, recreational activities such as gaming, as well as offline social activities. Momo offers a personal and lively way for users to discover people nearby, and facilitates the connecting and content sharing with others. Momo features various location and interest-based features, including Nearby functions, live broadcast and others.
Its Momo app can be downloaded and used free of charge. MOMO generates revenue from the various services it offers on the Momo platform. Its core business is its dating app and it has been growing very quickly. However, MOMO has been expanding in other areas, such as live video, mobile games and music.
Currently, its largest driver of revenue by far is its Momo Live Video Service, which launched in September 2015. This segment generates revenue when users purchase and send in-show virtual gifts to broadcasters. Initially, the service adopted an online live concert format whereby MOMO invited certain talented performers to put on live music shows in a professional studio environment. Such shows were broadcasted live on a daily basis and at pre-announced times.
Until April 2016, MOMO offered the service to just a limited number of talented performers pre-selected carefully by Momo. In April 2016, the company opened up the service to all users of the Momo platform so that each one of them can become a broadcaster if they wish. Revenue has been ramping primarily due to the increase in the number of broadcasters and paying users. Paying users for its live video service increased from 0.2 million in 2015 to 5.6 million in 2016.
MOMO also has a Mobile Marketing Services unit, which provides advertising services to enable customers to develop ad campaigns and post ads on the Momo platform. MOMO also provides customers with analytical tools to help them to track and improve the effectiveness of their marketing campaigns. In terms of mobile gaming, MOMO's app offers games primarily developed by third-party developers. Games on its platform are designed with a variety of themes, cultural characteristics and features to appeal to different segments of the game player community.
Turning to the Q2 results, non-GAAP income per ADS was $0.35, nearly triple the $0.12 reported in the same period last year and above market expectations. Revenue increased 215% year over year to $312.2 mln, which was well above prior guidance of $283-288 mln. Monthly Active Users (MAU) were 91.3 mln in June 2017, compared to 74.8 mln in June 2016. In terms of guidance, MOMO sees Q3 revenue of $337-342 mln, which is much better than market expectations.
Live video service continued its momentum and generated revenue of $259.4 mln in Q2. The rapid growth in live video revenue was driven by the increase in the quarterly paying users, which was 4.1 mln in Q2. User base growth continued to accelerate, driven by the expansion of MOMO's video content ecosystem. The usage of short video service has reached new milestones and revenue from live video service has hit new record highs. More importantly, with the newly launched 8 series, MOMO says it has moved on to make new explorations and innovations in the social and entertainment territories.
Despite the good numbers, the stock is sharply lower this morning. We are not seeing an obvious reason for the decline as the results and guidance were better than expected. In fact, after an EPS miss in Q3, MOMO has responded with nice upside quarters in Q4, Q1 and Q2. However, the same thing happened in May when the stock sold off despite a nice Q1 beat. The stock did eventually recover but it was odd to see that reaction.
From a broader perspective, MOMO is showing very impressive growth right now. However, you always need to be careful with Chinese social media stocks. Today's trading action is a good example of the volatility you can expect. MOMO made its IPO debut in December 2014, pricing at $13.50. It traded mostly sideways until about August 2016, when it started ramping higher as its Live Video Service started to really take off. Unfortunately, the stock has a history of being volatile around earnings.