Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by.

Welcome to the fourth quarter 2019 earnings Conference call, What's your Joel Joel Inc.

At this time, all participants listen only mode. After managements remarks, there will be a question about especially in today's conference call. This brings us.

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To your host site you can you. Please go ahead.

Thank you very much welcome everyone to the third quarter 2019 earnings conference call to do Inc.

The Companys financial and operational results will be well release the by news why success study it today and have been made available online.

You can also beauty earnings press release by boosting the Iraq section about website at <unk> Dot two hotels Dot net participants on today's call will include Oh, CEO , Mr. 10, and co cfos missed the jingle, one and Mr. <unk>.

Before we continue please note that today's discussion will contain forward looking statements made on the safe Harbor provisions the U.S. Private Securities Litigation Reform Act up nice 95.

Forward looking statements evoke inherent risks and uncertainties.

As such the company's results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. Securities and Exchange Commission.

The company does not assume any obligation to update any forward looking statements, except as required under applicable law.

Please note that you do those earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as its nongaap financial measures.

If you do that was press release contains a reconciliation of the unaudited non-GAAP measures to the almost at the Gulf measures.

I was talking already out there was commentary on the business.

I would like to first with you the business what a third quarter and then provide some outlook for the last remaining quartile to you and sort of beyond.

For the review pod I will go through the key highlights in gross constant use economics.

Touching on reduced development in a bit more vito.

Despite the less than hospitable operating environment, which has persisted for much of the yes, we have pushed on with determination as bonus agility.

Oh. The are you has reached a 42 million, which has doubled from the level a year ago well end. The U.S. also showed a simpler leap.

Well irrational competition Odeon. He is an a week advertising market of course with some impact growth trajectory.

Neither has dented our core capabilities.

We have taken advantage of the slow market not coming to initiate organizationally improvement anybody know people wouldn't technology. We have also made meaningful progress on product suite expansion.

The most notable of wishes me do like which commenced in may and as quickly got that more than 3 million. The are you.

To further strengthen our competitive advantage, we continue to food content ecosystem both <unk>.

And the Qt.

During the third quarter, we expended and deepened Corporation would come from the juices, most notably Ivy to what's known as Tony Good.

Which is currently the alone just a single online digital platform in China.

Oh use this will be able to enjoy both quality content coming from <unk> as long as the personalized and enhanced reading experience facilitated buyout.

Platform.

On the Qt P. side, we have further made efforts to upgrade outcomes integration by establishing permanent connection to the public I'd verification system of the police Department.

Which allows our platforms automatically squeeze on to the individual tons.

The reason has been a termination of more than 10000 comes and provide the accounts since July and the significant reduction of negative feedback uses.

Additionally, there have been targeted initiatives aiming at the strengthening content offerings for specific categories, such as games Sensient public squares Health Entertainment news et cetera.

Through our collaboration with prominent media groups in the entertainment space, we're signing up celebrities as confident contributions.

Our users will continue to enjoy the progress in outcomes and offerings in terms of both richness and quality.

Comes in the improvement is a key ingredient for better use of retention and monetization.

Both while short and long term retention rates in the current quarter at least temps and that's a in relative terms in comparison to the first half of this year.

System with the trend of rising time spend in the quarter.

ARPU trends have been muddied by the temporary suspension of me do levels, but if we look at QVC on a stand alone basis.

Clearly being sequential improvements.

Diversification of revenue streams is also progressing nicely.

With revenues generated some games and nice treating both more than doubled quarter on quarter.

We don't have tend to 20% well use as accessing games and around 3% of use as active on live streaming on a daily basis.

The significance of diversification is not just in homes monetization potential.

But also an expansion any Richmond oval.

Ecosystem.

Actually becoming more relevant an indispensable for more people over time.

And this is putting the synergy lever improve long term retention rates and grow use a tone spend.

Being able to structurally increased retention both at the long and the shortened gives us confidence that we are pushing into right direction.

We also stepping up the monetization efficiency of our proprietary advertising platform by transitioning into I know CPC system, which is supported by strong AI and data capabilities as well as close partnerships with our customers silicone mutual trust and consistent delivery of value added services.

In comparison to the traditional CPC system. It has the benefit of further de risking advertising customers budgeting process by offering more precise.

And pay the traffic allocations taken into account customers overall return requirements.

This allows customers to increase spending with even better results and allows us to accelerate the evolution about attack.

We keep optimizing the process.

Cool competitive advantage and deepening client relationships over time.

With better retention, a stronger monetization engine and ARPU, improving we shall see better ROI driving our business going forward.

No only do I see no for the most part of the third quarter commercialization and come to an upgrade have been suspended for me do novels.

However, we do like driven by superior use economics, even that this 30 stage of development.

Quickly grown to become a strategically important pillar of me do franchise.

The differentiated design, which incorporates the loyalty program. In addition to the standard offer me do novels is in fighting many with zero experience with only literature to give it to try and consequently developed a passion for reading.

Oh data support is observation.

At the overlap between me do novels immediate light is negligible despite them both being of a reasonable size already as we speak.

Given the highly complementary nature of the to EPS in relation to each other.

We were at the most of them equally going forward as together they allow us to more effectively target both existing weeding population.

Potentially in population achieving full coverage of the entire market from a product perspective.

The board of significance office development is that it will lead to an acceleration in the enough structural shift.

Of the industry from a paid only model to ultimately a freemium model. That's the visibility of the rights offerings will quicken the popularization up to feed wheat concept.

And the weakening of the potentially huge demand from the addressable market still largely on the dress.

Despite going through a tough period recently, we do received around the financing that by CMC capital partners.

Which is a recognition of the solid fundamentals of the business I mean, its long term growth potential.

And we are grateful for CMC support and trust.

Our target is to become the largest only literature platform in China in the next quarter with two with more than 10 million de are you.

From which point on with we will increasingly game Brent value in the mines of both content providers and read is.

Feeding a virtuous cycle of ever expanding content library user base and my monetization potential.

We will further strengthen our leadership position in the industry.

Finally in terms of the outlook for the future.

We firmly believe that the lower tier cities remain the most attractive space today with a match the structural potential.

Growth in monetization.

One of the goal that has come to my attention recently, which I would like to share is that June a double 11 shopping festival.

[noise] G M P's generates about your hotel uses on ecommerce platforms increase more than 10 fold in comparison to last year.

We are the privilege to jump upsetting a huge historically on the sub population and we certainly intend to more than keep up with that.

Well I don't really use is expected of us.

Oh priority is not simply growth, but rather long term profitable growth.

We intend to respond to market fluctuations with reason.

And gain comfort in remaining focused on doing the right things that will ultimately matter.

That means a balanced approach to growth and kept allocation with an emphasis on sustainability.

Thank you very much.

That concludes Eric's remarks, I went out readout Cfos Commons.

We generated 1.4 billion RMB revenues in the third quarter 2019, which is an increase of 44% in comparison to the same period last year.

Quickly revenues are up slightly not fully reflecting the underlying improvement in a business and the overall market as we experienced.

Mainly due to the loss of revenues for me do novels.

The result of the three month suspension between mid July and mid October .

The suspension has now been foodie lifted, but we're not in a rush to ramp up growth yet as we have been taking opportunities we find out product design.

Recalibrate our longer term strategy, we expect some time before me it was revenues fully normalized.

Our ARPU, which is defined as revenue, but the are you but date was.

36, RMB sense in Q3, 2019, compared to 39 RMB sense in Q2, 2019, and 51 RMB sense in Q3 2018.

You don't get decline has been driven by the general weakness of the advertising market. This year.

As long as the loss of revenues due to meet a novel suspension.

Sequentially. However, we have seen growth on a like for like basis.

Consistent with seasonal tailwinds and structural improvement in our ability to monetize.

Turning to costs I will focus on non-GAAP measures, we set food stock based compensation.

For Q3, 2019 gross margin was 65% compared to 84% in Q3 2018.

The decrease was due to three factors.

Firstly that was the loss of revenue somebody do novels, which was not commensurate with the amount of savings on the continent Costa side.

Secondly, there was a negative mix impacts and the growth of the Lovaza integrated and customized marketing solution services.

Thirdly, we have increased investment income from the 90 infrastructure to support the increasing richness of outcomes and as demonstrated by the button share videos games and live streaming and other uses consumption mix.

Our user engagement expenses on a per the are you, but they bases have almost half from 25 RMB since a year ago, No 14 RMB sense.

We intend to keep it at close to this level for the near future given the material reduction achieved in a relatively short period of time.

Quote what has made this possible you've seen homes the value proposition about products as long as the result of an ongoing investment into account and technology and people.

As a percentage revenues user engagement expenses were 38%, which was 11 percentage points Nova in comparison to last year.

Despite the temporary really suppressed revenue base, we enjoyed during the quarter.

Our U.S acquisition expenses were.

6.58, RMB pre installation, which was 5% lower quarter on quarter as we benefited from the generally weaker advertising prices in the market.

That's me too light has grown rapidly during the period, which required investment to support to use acquisition overall spending in absolute amount in this area has stayed flat sequentially.

Other sales and marketing expenses with talks and revenues, which was higher year on year due to the temporary reduce the revenue base as well as out increase the spending in brand advertising.

We believe that given our current scale and leading position in the industry.

Then campaign is a sense for additional marketing strategy has increased awareness of our name shooting coach natural inflows.

Users.

Essentially word of mouth effect, which can accelerate some natural traffic.

R&D expenses was 16% in revenues in the quarter, which was generally in line with Q2, 2019 and higher than the 7% same period last year.

Again to certain extent effect to the bio suppressed revenues. In addition to increased capital allocation to technology and talent.

DNA expenses with folks in revenues in the quarter generally in line with history.

Overall non-GAAP net loss was 833 million RMB.

Representing a net loss ratio of 59%, which was increased from a year ago.

Honestly, reflecting the impact from the suspension of me do novels.

And investment required by the phones growing me do light and to a lesser extent how investment.

The infrastructure.

This quarter, we have also completed the issuance of new shares to the paper also known as pumping win.

As you into the agreements we entered into before IPO.

Details of this transaction can be found in our most recent food at three fold mainly for the purpose of this transaction.

Our balance sheet remains strong with 2.1 billion RMB cash as of September Thirtyth.

And we remain confident that we are well supported continued to grow and invest for the future.

As Eric has already discussed we would like to take a more balanced approach between growth and profitability going forward.

Our most mature biggest business like Q T T has already.

Either a healthy uptick in operating motion in the second half of 29 team.

This strong performance so far in the fourth quarter.

We now expect this business lines breakeven in 2020 on a stand alone basis.

No for the full quota we are seeing best unit economics, as a result, especially user retention as long as best pool in the queue T T side, which we believe will be sustained.

Throughout the fourth quarter and beyond.

Together with better economics, we expect her mouth has been type company in Q4 also recovered to level better than what we achieved in a second quarter of this year.

For Q4 revenue guidance based on all of you have to market and the operating conditions, which are subject to change we expect net revenues to be in the range of.

1.6 to 1.62 billion RMB.

This has taken into account the resumption of normal operations and we do novels, the latter half of the quota.

That concludes our prepared remarks today and they'll be open for questions. Operator. Please proceed.

Suddenly sir.

Ladies and gents, we will now begin the question answer session. If you wish to ask your question. Please press star followed by one.

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No no no. It's the highway did you go through and Telco will Cook.

Let me translate myself.

Thank you management's for taking my question I have two questions. The first one is a we see Cogs in Threeq you had a surge of over 200%. So be sure explanation is Q2 do you have a newly integrated uncut lot like marketing solution services.

Introduce this new business and the reason for integration. The second one is how do you look at a competition of free reading markets all competitors like achievable and they had a quite good momentum as need to adjust to have a new round of financing when you guys to maintain your marketing a use acquisition Uh huh.

Hi level. Thank you.

I think you're doing this in shallow.

Regarding our first question comes up gross margin I think it's a combination of several factors, especially if you look at the year over year numbers. The number one factor is obviously the loss of revenue from me do.

This this loss of revenue has skewed our margins across lie in Q3. Other second reason is the content cost on them you do side as you know there are certain upfront payments for working with content providers like I reader, a we make our investment decisions based on the normal course of our business and the suspension off me.

Do you know came as a surprise to us, but we choose to not interrupted a normal operational carbon this given the lack of time for preparation notice so.

We continue the content expenditures in Q3.

Certainly the is additional costs associated with content compliance.

This is something that we had putting a lot of efforts so far this yet but.

But I think this part of cost should be stable going for the fourth reason is that that's you mentioned there was a small amount off our revenue in Q3 have a lower gross margin. This is.

And this that way startup provides to our third party partners for advertising platform services. A this is still a small part I know we don't think this will be a big part of our revenue going forward.

Fits reason is the change up user preference, especially in the content format side are now more videos are.

Being viewed everyday power users the majority over 50% off our advertising are delivered through video, which means that it requires a mall infrastructure build up such as servers on bandwidth and also different AI computing resources. So I think the.

The decrease in gross margin. This quarter is a combination of several factors as I just threat and the biggest the problem is that the loss of revenue from me doing Q3. So we believe the our gross margin will be back to over 70% in Q4 and beyond.

The impact on me do sustaining a smaller in Q4 compared to Q3.

Also if you look going forward I think there will be more leveraged content cost as a percentage of revenue will decrease as metals revenue increase.

Infrastructure related to cost should be stable and content compliance cost should be stable as well. So all I think for the next year, where we'll see our gross margin over 75%.

So your second question regarding the competition of me do I think.

Despite the suspension in Q3, we continue to be the number one player in a free online literature market with a comfortable margin based on third party data we have seen.

Our goal to become the number one player in the entire online interest from market has not changed especially with the launch helping me too light well able to keep our combined the user traffic to be stable for the entire Q3. So our the combined steer you open we'd want to me to light I still 8 million.

That's up now.

The other thing that with the additional royalty a feature Amit like the new App attracts a.

Somewhat different user base compared to the original me do at and also with this Roger program, we are able to increase.

The ARPU of me do in Q4 so.

You combine.

The two apps now contribute to a close to 3 million RMB per day in terms of revenue for the first week of December until we see continued clear path towards profitability for especially on the me too light tied with the higher our pool next year.

Also oh, they use or overlap between me do enemy do like she is very small at around 2%.

He was able to attract users mutu online literature because of its loyalty feature. So we believe both apps has a long term strategic value for us and we believe it will help us to capture a bigger share off the market.

Thank you.

Thank you very much.

Thank you Sir.

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Hi.

Oh, Thank you Alicia.

Regarding our first question.

Yes, I think I mean, it it took some time on for let me do apt to.

Got back into a full steam after the end up the suspension.

As I already said.

Right now the revenue run rate at 2.5 million to 3 million RMB per day. So I would say that for December we had we have had me do.

Bat about in the early part of Q4, yes, we did have some impact from the.

Previous suspension, and which suppress that revenue from me too.

But overall I think we have seen very strong performance, especially in the second half of Q4.

On the Qt side, where we can we see continued growth with new features including short video live streaming leisure games all contributing.

Today, I think 70% of our users already played some video games on the TV app without making any big promotions and game publishing and live streaming is already starting to provide new monetization channels plus.

In Q4 of the contribution from these channels are still in the low single digit in terms of tonnage up total revenue, but they are ramping up very quickly.

Well, you know better monetization comes better ROI I think all over the longer term this will allow us to invest.

<unk> more official gross.

So and combine weight, we continue to be very healthy growth in Q4 hundred 19.

However, as discussed in the prepared remarks of all we will make a more balanced approach between growth and profitability. We now see a clean much clear path towards profitability in 2028, especially on the T. side, we believe with just a disciplined expense control TTR standalone basis will be able to achieve breakeven.

Quarterly basis in a second half a penny and if we're doing well for the entire company as well so.

Starting from this quarter, we are taking a more stringent approach in terms of use our position is now.

Our new investment for use our position needs to meet the six month payback periods threshold, which means that we are power.

[noise] team to get our initial investment back within six months Oh. This is a much stringent requirement compared to previous quarters. So.

Unless we see real compelling new opportunities will stick to the current class and to put more focus on sustainability and the long term profit bulk growth in Q4 and to be out.

To your question regarding.

Let's see especially second half next year, yes, obviously given the.

Loss of revenue in Q3 for me do I think on a like for like basis next year second half would probably we'll see a accelerated growth and also if weight do things right, we'll be able to reinvest the profit back into the business I'm going to second half a penny 20, but along I think a wheel well took up.

We'll take a a balanced approach.

So the health also been this other long term sustainability first and then there will not sort of come with the girls.

Regarding your second question other other competition with other players in the.

Online letters from market I think.

We have this thing, though I mean do want to me to lights, one two punch, a we'll able to cover a lot a user base, especially in the lower tier cities.

In terms of Accountants Library asked we have discussed in our prepared remarks, we have signed.

Basically every big major account on providers other that channel literature in the market, especially our cooperation with I reader is very comprehensive. So we do have the most comprehensive content library in the market that's up now.

Our second advantage as our data and algorithm so from our experience as a news feed provider I will able to.

Match, our users interest with most.

A precise content.

Certain things that the slowest program, we have on them into lifestyle, which allows us to attract a different user base, especially users new to the online literature.

Content and I think with these three factors combined will be able to continue to lead in this market. Thank you.

Thank you.

Thank you once again, ladies and gentlemen, just to remind you get a star followed by the number one to asking question.

On the phone lines.

So I want to ask a question.

The next one coming from the lying off.

Please go ahead.

Good evening. Thank you for taking my questions. So I'm just quick question regarding a fourth quarter Aro because can management give.

Give more color on.

The key assumption.

On the user metrics.

Like the.

I know you da you and then.

On both the duty tea and let me do and also how was the ARPU trend.

On the sequential basis and.

And then and then perhaps the our our view on the on the cost side or <unk> well be D.

The operating loss for the fourth quarter. Thank you.

Sure I think for the fourth quarter as I said, we will plan, we plan to take a balanced approach so.

This will this means we will pay for a long term sustainable growth and I said, we'll take a more stringent approaching comes up your stock position on so I think for Q4, but probably see a slower I use or.

User base increased compared to previous code of course incomes of our pool on on the Qt Deeside upward trend is already quite strong, especially for Q3 and so far in Q4, I mean do side. The with the are you know back to normal operations.

Cool for me do is obviously it will be better compared to Q3. So overall I think we'll see a slight increase in terms of traffic.

There are pool and allow we'll see a sequential increase.

Increasing terms of revenue from Q2 in Q3 and the it in terms of no on bottom line I think a waste.

More disciplined approach in terms of investment we will see better.

<unk> margins in Q4 as well.

Well now I think we wish we believe that the Q4 loss will be smaller compared to Q2.

In terms both off in the absolute dollar amount and also in terms of margins. Thank you.

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He has.

The next.

Question time line off Thomas Chango. Please go ahead.

Hi, Good evening, Thanks management for taking my questions.

So asked about the odds on long term.

For a company in particular, how should we think about revenue up you over the long.

And also how should we think about the baby.

Mrs in the long from US we have any upbeat.

About our.

Head office, if any time, you and I was on when you got be doll.

See that up on Sunday Wendy.

ER beds and that's all.

Hi.

Hey lighting.

Total defense and level.

You got Paipai purchases will need to be a nice rollout.

Oh.

Yes, well you got some other.

Asia Pacific.

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So in terms of ARPU I think.

This year, we have since unless the hospital operating environment.

Especially our you know I'm under the macro headwinds. So if you look how our pool this year and compared to last year.

I believe that's on the second I'll hop last year, our ARPU was over 45 cents. A so we must specific 50 cents in Q3 and put in some sense in Q4 Infantry 18. So I think it's possible that we can't get our ARPU back to that level somewhere down the road, but I think it will take some time I know it will also depends on the.

Oh law.

Economic landscape in China as well.

In terms of total our user base.

I think wait wait wait we we still believe that lower tier cities remained the most attractive space they with unmatched structural.

So for growth and monetization. However, as I said, we want to take a more balanced approach regarding growth and profitability Hunt down the road. So I think we still have a high.

Station for the long term.

And I Mayo target, but I think we'd now we'll probably be pace, our gross on together ways no profitability. Thank you.

Thank you.

Thank you.

As a no further questions now I'd like to turn the conference call back to the company.

[noise]. Thank you very much for joining todays call I'm pleased don't hesitate to reach out to our Investor relations team for any further questions that concludes today's cool. Thank you.

Thank you.

Okay. Thank you all from your participation.

Okay.