Momo Inc. (MOMO) is trading lower in early trading after initially being sharply higher after reporting Q1 results this morning. It's not really clear what caused the weakness as the numbers appear to be quite good. Let's take a closer look at the Q1 results.
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 Q1 results, MOMO reported non-GAAP EPS of US$0.44, which was much better than market expectations and well above the $0.06 earned in the prior year period. Revenue jumped 421% YoY to $265.2 mln, well above prior guidance of $238-243 mln. For Q2, MOMO is guiding to revenue of $283-288 mln, which is better than market expectations.
Live video service, which was launched in 3Q15, continued its momentum and generated revenue of $212.6 mln in Q1, up sharply from $15.6 mln in the prior year period. The rapid growth in live video revenue was mainly because of the increase in paying users of live video service. Paying users of live video reached 4.1 mln.
Value-added service revenue mainly includes membership subscription revenue and virtual gift revenue. The total value-added service revenue came in at $22.9 mln, a 54% YoY increase. Mobile marketing revenue rose 45% YoY to $17.9 mln, driven by an increase in effective cost per mille (eCPM) of its in-feed advertising service. Mobile game revenue rose 56% YoY to $11.6 mln, mainly due to the contribution of a self-developed game.
In sum, this was a strong quarter for MOMO. After an EPS miss in Q3, MOMO has responded with nice upside quarters in Q4 and Q1. 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. The growth of this segment has been surprising to investors.