Q4 2019 Earnings Call
Ladies and gentlemen, this is the conference operator to these conference calls her to begin for about a five minutes until such time. Your line. It was still gonna made on musicals, he's going to get a sudden. Thank you for your patience. Once again, so they scotts run scores used to be good for about five minutes and until such time your line, but still remain on musicals.
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Hello, Ladies and gentlemen, thank you for Sunday by for the fourth year quarter 2019 earnings conference call for true with all child incorporated honestly I'm. All participants are in the listen only mode I started the management's remarks.
Your question answer session.
These conference calls being recorded all bundled surgical or what's your host using Jones. Please go ahead eason.
Thank you very much.
Welcome everyone to fourth quarter will tend to <unk> earnings conference call I'm trying to.
The Companys financial and operational results were released today and how being made available online.
Also viewed earnings release by visiting the IR section of our website at <unk> Jude hotel done that.
Participants on today's call will include all the CEO Mr. Eric.
And our sample is to show.
Before continue please note that.
At this discussion will continue forward looking statements made under the Safe Harbor provisions you asked private Securities Litigation Reform Act 1995.
Forward looking statements involve inherent risks and uncertainties as such the company's resolves maybe materially different from the views expressed today.
Further information regarding these and other risks and uncertainties is included in the company's prospectors are the public filings as filed Reis U.S. Securities and Exchange Commission.
The company does not assume an obligation to update at any forward looking statements, except as recalled bye.
People, there's no doubt <unk> earnings press release, and this conference call into discussions.
All the GAAP financial measures as well as on all the non-GAAP financial measures should hotels press release contains a reconciliation of the or the non-GAAP measures to the audited GAAP measures.
I will start by reading out Erics commentary on business.
I'd like to start with a performance review for last quarter up to 19 before discussing the longer term initiatives and investments we have been calling to taking for beauty and prospering franchise for future.
We also touched on the impact of Cobiz nitin before providing an out of the fog business.
Last year was a year of challenge for everyone in industry oversupply in the market coupled with moderating calling me put a significant downward pressure on pricing environment.
Well irrational competitions held up cost lives.
I think on top was also a tightened up regulate treating belmond, which called for adjustments for business. Both in every internet content categories.
These factors combined I mean, a challenge <unk> tests for oil and resulted in a by bifurcation as a result of the differing unblind strings on tend to be to pay offs.
It was again to such a challenging backdrop that we managed to double our average do you use for the whole often to 19 year on year and drive a similar level gross in total revenues materially outperforming the wife market.
In the fourth quarter revenues grew by.
5% young year, despite market headwinds and the negative impact on me do suspension, which mostly hard assert cultural tend to not talking about loved it into the first half of the <unk> fourth quarter.
The gradual recovery from the suspension was possibly by choice as we had taken.
Lower as an opportunity to revamp product design and upgrade content.
Well recalibrating the long term strategy.
Driving the growth with not just extend to you as gross you are the base, but also crucially and he has to monetization engine as rehab observed better added conversion metrics, which cost structure in nature.
The sequential improvement in approved was also reflective of the enhanced a monetization deficiency.
Most of our advertising performance based which are better positioned as a sub sector than the traditional browser based old impression based segments.
From an advert buyer's perspective.
Advantage to match ability or budget a wide in performed performance Fas has become even more pronounced especially thing with market.
And I believe.
The budget allocations shift towards performance as well be a long term trend.
During the fourth quarter.
New business law, and such as laser games and live streaming will also showing promising early results.
He was a base extended to reached levels that gives us confidence that our revenue diversification initiatives will add meaningful upside to our monetization potential over time.
Well, we have taken most stringent approach towards financial <unk> lending and management.
Oh folkers on investing into the business remains asset intensive as ever.
We have made meaningful progress on three fronts, the algorithms that drive feed recommendation Oh CPC system.
And proprietary content ecosystem.
For me.
To drive the continuous upgrade at reason, we have established a first class pro pouch seemed machine learning platform, which is crucial in facilitating the positive trend and all I presume that will lead to better meet recommendation based Michigan analyses and understanding what to do some preferences.
I'll now foam would allow the processing of huge extended date approved with much quicker 10 around while also reducing unit processing costs through cooperation with leading service providers such as Ali cloud.
This demonstrates our long term commitment to r. and D. afterwards in better algorithms and better content distribution and recommendation mechanism.
In order to feed into the possible large quantities.
The book data real time.
We have salty through all you the behavior date her across all product lines, who them together and have the organized in a much more intelligent.
This more precise characterization of each behavior scenario totaling incidence.
Since we initiated the transition into and oversee PC system a year ago.
We have quickly cover 90% customer spending I'll toppled with first degree CPC realized station, which optimize the cost action for customers.
We have also covered 30 person customer spending we second degree overseas piece, the realization which for the takes.
Responsibility, all often optimization user behaviors.
Most of <unk> I.
She user quality metrics, such as retention rates Ping ratios.
Time spend a et cetera.
They extend to rich customers are willing to out okay budget toward I'll always CPC offerings, especially towards the second degree realize vision demonstrates how much they recognize the value the productivity of Oh CPC system.
On this measure we are among the leaders of the industry and we have achieved such for position within a shorter period of time in comparison to computers.
As we have discussed before the ongoing structural trend advertising botched thought just shifting to words performance based ads will see us as clear beneficiaries and further strengthen our competitive position in market.
In terms of content investment for me.
We continue to extend the scope of our strategic collaboration with a major called dried owners after initiating a deep strategic relationship with I read or in the third quarter of tend to 19.
The size of reserve grew by approximately 30% during the fourth quarter of.
19, with a smaller categories driving most of the gross which suggests diversification of the kind of titles. We can offer a two hour Lloyd readers.
Since we started building whole proprietary content ecosystem by working with Bob and incoming orders directly.
We have proven our original this is right.
The power of algorithm in discovering talent and guiding high quality content production.
About 20% of all most popular books on now developed in house to which we own copyright.
The significance of there's a shipment to float.
A full outdate her assisted literature development process, it's very effective and efficient.
Secondly, given our use a demo graphics, it's hardly representative of the overall population they'll for all date her can give us a better understanding of the entire online market.
We are doing a good position to explore the downstream potenza sure of.
He was a copyright our top drives which opens up to a significant long term upside in terms of monetization.
Let me finish by providing you with some of the book business.
The outbreak of Covidien 19 or across the globe has put pressure on the overall advertising market in the near term as advertising budget in general couldn't be constrained.
Although performance has given the magic bullets here or valley effectiveness could fail relative better longer term impact on the Chinese technology called me and the appetite industry remains to be saying.
It will depend on how quickly the situation is brought him on the control both here in China and around the world, which will closely monitor.
We'll continue to improve the monetization efficiency for our advertising Apple.
Driven by continued investment in people and R&D infrastructure.
This is a gradual process, which invoked lots of hoggard patients and resources.
But we believe this is at the very hard of this trends and to do or better tilt the business we are building.
As it is walking complaints and induces virtuous cycle driving the economic.
Economics of the business model.
We also like to keep expanding into new categories of added birds. So that we can better leverage our increased knowledge and understanding of how we use this profires as a result of.
Enhanced how resumed.
But keep an eye on potential new business opportunities as well, whether they'd be new products new features to existing products on new monetization avenues as we try to stay nimble and not too.
Last but not list will mintel balance between growth and profitability as we move forward.
Focus on long term investment into beauty Oh, it into building out our overall technology capabilities at all that are.
And in all aspects, which is called our fundamental identity.
Thank you very much that concludes Eric's remarks, and our staff over shelf. We are now read his own remark.
Thank you you said an outlook and thanks to everyone for attending our earnings conference today.
So first of all let me go through financial highlights of the fourth quarter 2019 with you.
<unk> revenues grew by 25% year on year during the quarter to reach RMB 1.1 billion 660 minutes, which is also an 18% sequential improvement from the sort of quarter often the 19.
The growth has been driven by enhanced my tightening efficiency and the user base expansion with D.A. you, averaging over 45 million during the quarter, representing a 48% increase year on year.
Or ARPU, which is defined as revenue per day you per day was RMB 39 cents in Q4 hundred 19 compared to RMB 36 cents in Q3 to 19 and RMB 47 cents in Q4 hundred 18.
The year on year decline reflects the general weakness of the advertising markets. This year as well as the recovery of me do.
Taking a gradual past, especially in the first half a quarter. The sequential improvement was mostly attributable to improvement in anti they see efficiency as well asked me to increasingly contributing more revenues.
We have made more strategic budget allocations, which the upside shall come user and revenue growth and instead.
Yes on investing into R&D and building, a higher quality and more diversified content ecosystem to maximize our long term potential.
Now moving two line items of the piano. Please note. The following discussions of cost and expenses will focus on non-GAAP measures, which exclude stock based compensation.
Our gross margin was around 70% in Q4 to 19, a sequential improvement of five percentage points from Q3 to 19.
Reflecting the improved monetization, it's a decrease from the level, one year ago, which stood at 85%.
So the impact of me do revenue loss locking into the first half of Q4 hundred 19, as well as increased investment in content.
Trust structure, an active revenue mix impact.
We are spending almost three times as much on content versus a year ago, partly because abuse or based doubling partly because of the deeper collaboration.
Collaborative relationships, we established with top content producers.
The online literature site.
Which involve some front end loaded expenditures temporary ray in facing cost ratio somewhat.
Overtime with weak ganging competitive advantage as a result of this will far outweigh the cost.
And the we have discussed during our last earnings call. We believe the gross margin up our been this will gradually recovering Q4 hundred 19 and be out after the slump in Q3 last year.
Our R&D expenses have increased by 106% year on year outpacing revenue growth, resulting R&D expenses as a percentage of revenue increasing from 9% in Q4 hundred 18% to 40% in Q4 hundred 19. This reflects our commitment to driving the been this drove strong coal technological capabilities.
With healthy revenue growth since then and good cost control of all our sales and marketing expenses as a percentage of revenue came down to 82% off in Q4 hundred 90, which represented a significant improvement of more than 20 percentage points, both year on year and sequentially our.
Our general and administrative expenses was 3% up the revenue in line with history.
[noise] therefore, despite the materially increasing investment in key focus area like R&D and content or margins have trended well with non-GAAP operating loss ratio at 28% infield wasn't 19 significantly improved from the 59% for the quarter before.
As of December 31st to 19, the company has cash cash equivalents restricted cash and short term investment of RMB 1.650 billion over 237 million in us dollars.
No I would like to talk a bit more about other month initial object kept this year, which is to breakeven on non non-GAAP quarterly basis in the second half.
Of this year.
It has three levers to pull.
First we expect might hydration efficiency to further improve at our ongoing R&D efforts on the investments bear fruit.
Upgraded algorithms and all CPC offerings, which as Eric mentioned, our some of the key step ups, we achieved which will enable us to increase the sophistication and the value add of our service to our advertising customers aided by deeper understanding of our users and the availability of richer advertising.
Formats slow our various different product offerings.
Second we continue to explore new monetization channels, such as live streaming which is more than just incremental revenue generation from existing traffic.
From a user's perspective that get this is additional functionality ups application, which makes the application more useful and engaging leading to better user retention over time, we draw support from our current data from a commercialization perspective. This step is also crucial in nurturing the paint habit of our U.S.
There's because.
Previously our users pace, nothing upfront floral product and services, but the with live streaming which naturally generates mentally donations. The users will overtime become comfortable with idea of spending money there I'd say our path.
We should open at all cost to push harder for monetization strategies outside of the advertising such as E Commerce and the membership for me too.
Third on the back off by the monetization efficiency, we expect the trend of improving margins to continuing 2020 benefiting from economies of scale as we optimize our cost structure.
And the management team here is committed to use our capital wisely with a disciplined approach.
Looking ahead, we expect a rocky Twentytwenty as public 19 has introduced a lot of uncertainty into the economic outlook and put a lot of pressures on the.
Advertising industry in China.
We remain focused on our key strategic objectives as we continue to see relative strengthening demand for fulfillment based that we are also actively looking at further expanding the range of sectors. Our advertising customers are going to increase exposure to currently under presented areas such as insurance second tier E Commerce.
Platform and also heavy gains if we keep our eyes on our long term vision and do a good job with what we can control, namely keep improving the monetization efficiency of our pretzel explore new revenue opportunities on synergies and BT, putting up a costs, we will whether it's Tom and emerge from it as an even stronger.
And then this.
We see the business continues to grow for the first quarter of Pegphtwenty.
We now expect net revenues for the first quarter to be between RMB, one in 400 million to RMB, one bit in 420 million.
The midpoint of which represents an increase of 26% year over year.
This has already taken into account the impact of club at 19 in Q1, so far.
Assuming no material further deterioration with a pandemic situation, especially domestically.
Rich condensate seems to be the most likely outcome.
We show waits until later in the year for full year outlook, given the Freud nature of the current situation and we'll update you accordingly, but law, we remain confident that our financial goal of even on a non-GAAP quarterly basis in the second hop off this year can be achieved as we take advantage.
Of the inherent operational leverage in the business.
That concludes our prepared remarks today now we open for questions. Operator. Please proceed.
Ladies and gentlemen, who will now begin the question and answer session. So I'll ask the question. Please press star one from a telephone and wait for a name to be announce and to cancel your request you May press. The father Heskey Oh. Please note.
But there will be a shortfall discussions I be equal later than we thank you for your patience. Your first question comes from the line of.
GE GE Gigi from the Dziedzic, Yes, your line is up and using.
Sure voluntary Oh.
Oh, So James will go away. So you can call namal going.
Do you go and can you just.
Yes.
Jamie lets go to take on deposit yes.
Most of that.
Yes.
Hi, This will lead you to how youre starting to think about Nicole good.
Yes.
So they go.
Yes.
Well look on the Anita.
But nonetheless Darling all year equivalent in July.
Let me just like myself.
Thank you management for taking my question I have two questions. What's your plan well clearly where the up me due in 2001. He has the already encountered some but both Meg well, we still see great upside for this.
Secondly, R&D expense had a surge of over two folds in 2019, well that supplies in to that point. Thank you.
Okay. Thank you interesting so as we have said.
Prepared remarks in our focus this year will be on.
To find a phase for long term sustainable growth for the entire company that includes me too.
Hi, where we do see out you know a great upside in this business, especially over the long term, but given this year's uncertainty in the market, we want to be smart with investment on with the our capital at hand, so together with the entire company, we'll be focusing more on achieving long term goals and the key focus area for me to this.
There will be on the content side and also on the user experience side at least for the first half and.
And we believe the content on the user experience will be the key differentiator down the road.
But.
Regardless, we see a great potential for me do and.
It has achieved a greater operating result, especially in the second half of Q4, and we see this trend to continue and we don't see any reasons.
For two to two slowdown, but that said we will take up.
Yes, a disciplined approach towards investment, especially under these uncertain times so.
For especially for Q1 and the first half of the this year. We at the company don't have any specific the EU goals for our products, but we do expect some growth in terms of both the are you and revenue for our product line.
By the way I set that way, we don't have any though.
Aggressive plans in terms of pushing do you use a while the overall market is under pressure. So to your second question regarding R&D expenditures, yes, we have made having match funding R&D in 20, Ninee and this investment will continue but as most of our investment are in talents.
And.
Pop you engineers that we have the crude hitting 2019th we don't see and the big increase from that part being 2020, and I think we have already view that top tier team here at Sidoti and we are.
Happy to see their progress so far.
And we don't have any friends to no.
Further increase the size of Timo for increased our R&D expenditures this year. Thank you.
Thank you.
Your next question comes from the line of Alicia Yap from Citigroup. Your line is little bit Lisa.
Oh, Hi management. Thank you for taking my question.
Sure.
Half of this year.
Two questions.
Please oh.
First quarter, given this call revenue guidance for whatever can management elaborate more on the big driver behind the growth.
Rich advertising Sachin he's going to see more recently freshen well wishes.
Thank you Patrick Micronet virus outbreak also can management.
Mike.
About the current effort at the current advertise and mix.
Great and my second question.
Regarding the margins.
In light of current around or something.
She doesnt have spent more aggressively on user acquisition instrument.
What would be the implications of margin for first quarter.
Hi, Thank you.
Thank you. So regarding your first question the revenue growth for Q1 under the current 19 impact I think you know as you can see in the market everybody's taking on more cautious approach to our marketing spending and the law AD budget and there are these uncertain times that include us.
And we expect a law advertising market to remain weak.
For the near future. However, as we have sat in the prepared remarks. We're also writing on the trends where customers are allocating more and more budget performance based that because this type of advertising offer superior instant on highway measurable results and increasingly our customers are using performance based that as their sales channel rather than marketing channels.
Which means they will have a bigger budget if they want to continue to increase their business. So as long as we can offer superior all rice for our customers investment. The natural result would be increase budget on she took out so we have in healthy trends in terms of revenue growth and a better monetization efficiency.
Starting from the later half of coupons on the 19 and this trend continue in Q1 before the growing a virus outbreak and the as you can see the midpoint of our guidance represents a 26% year over year revenue growth, which is slightly faster than a growth rate we achieved in Q4 19.
Which means we are we have seen a trend of re accelerated revenue growth. Despite the impact from the krona virus. So should the situation do not deteriorate further at least in China. We see good chance that we can keep this rate of revenue growth for the rest of the year.
If not factor and.
In terms of sectors I think overall, we see.
The impact is across the board I realize being cautious.
Two different extent, but so far as I said, we are still.
Trying to.
Keep up with what we can control, which means that increasing the monetization efficiency.
And while customers and also expand into new categories, finding channel new channels for monetization like live streaming on video games.
That's our approach to our this outbreak.
For your second question regarding margins on the T.J.C.
For Q1.
We have set that we want to take a disciplined approach towards cost and expenses and also we want to be smart with the capital we have at hand, especially in 2020 and.
For for this quarter, we see continued improvement in terms of net non-GAAP net loss margin compared to Q4, I think for both in terms off.
Absolute dollar amounts all as percentage of revenue.
And which means that we probably will be enough.
Control all different cost and expense line, especially on the shutdown acquisition side, given the weakness of the end market. So far and we do want to keep a stringent ROI requirements for new user acquisitions.
So which means that we will see better efficiency better returns of our investment, but probably a smaller budget at least for kilowatt on to the near future. Thank you.
Thank you.
Once again to other question you May press Star one from a telephone keypad Istar. Once asked the question. Your next question comes from the line of Thomas Chong from Jefferies. Your line is often Thomas.
Thank you management for taking the passion.
Hey, I'm asking the question on behalf of Thomas Chong.
First of all I'll add to assets.
Can management share.
The color on the EMEA, you and you try again.
Management that we don't have the TV content for that.
Could you share more on the tank and secondly, we will act you asked about the competitive landscape in the on my reading May do.
We have to China literature.
Thank you.
Thank you so regarding our first question on the.
Do you and I know you trend.
Uh huh.
I think Thats you fancy would have seen very on.
Nice growth trend in Q4 in terms of both.
Thank you and also for the entire year off today 19, despite the regulatory impact on me do in the mid off the year.
Hi were at that that our focus this year will be on long term sustainable growth for the company and given the current the pandemic situation, we want to be clever with our capital and the be disciplined with cost and expenses. So for Q1 I think our way ahead, we will continue our stringent requirements.
For our marketing dollars.
Which we started the from Q4 last year and we will continue to do so this year. This means we will see we'll see better returns for our investment in acquiring new users, but likely a smaller use our position budgets for the year on both in absolute dollar terms on as percentage of revenue and for Q1 waste, we think that that they use will.
We're likely to remain at a similar level as Q4 last year and right now we don't have any specific targets for the whole year well.
However, given the year on year revenue growth would have achieved so far in Q1.
I think we should be able to ramp up RTC a bit in coming quarters.
If the macro situation.
Can step lies in China, but that before this is due a fluid situation and the way we will monitor this cross linked.
In terms of competition they need to side.
We see no significant change.
In the industrial landscape.
In Q4.
Some new commerce.
Like by by that and also we have seen that by do make several investment in this area, but we view this as opposed to sign.
For the entire free literature market at this demonstrates people's conviction in the market and the business model.
We are in terms of our competitive advantage I think we still come on the most comprehensive content library in the three leading market and the we have good relationship with most of the major content providers and the we have made a conscious effort in promoting our in house productions, starting from the second half loss.
Yes.
Now as we have set in your prepared remarks, 20% of our most read books are already in cost productions. Our user profile is most similar to the general population distribution in China, and we have more users in the third and fourth tier cities. So we are we believe that we have a better understanding of the user preference of the larger underlying.
Market, which gives us actually in determining what kind of content to promote old recommends to our users and we also offer real time feedback to our riders.
So we view this as a very promising market and we are starting to view some of the competitive ads that we believe will be key down the road. Thank you.
Thank you.
Your next question comes from the line of Ajay dollars Th capital. Your line is now up Ajay.
Yes.
My question.
Paul let us all the way deal on commencement amendment share holder about.
I will reduce certainly.
Yeah.
Okay sure.
So.
Videos on short videos are two key focus area for us not only for this year, but also we have already but not up effort and investment in 2019. So videos published on Sidoti All the news feed App increased 188% in Q4 hundred 19 compared to the same quarter a year ago and.
Now our Standalone short video apps reached a combined have you have 4 million in Q4 last year and average PB was.
320 million in Q4 with total time spend increased tenfold year on year.
So today still our small business compared to the users we have.
Sure look our omni do about we see very promising signs and we will continue to invest in this area in 2020 and also the other the other aspect.
We have discussed.
Is that.
We see no increase user engagement and effectiveness.
As a result of us offering more different content or format and also.
The short video is a very good format for advertising and the we have seen strong contribution to our revenue growth from short video apps a in Q4 hundred 19, and this quarter already and we believe this will continue in 2020.
<unk>.
Once again to ask the question you May press star one from its on the phone keypad.
Okay.
Oh no.
No further questions now I'd like to turn the call back over to the company for closing remarks.
Okay. Thanks. This concludes our conference call today. Thank you for joining US we assume next quarter. Thanks Bye.
Thank you. This concludes this conference call you may now disconnect. Your lines. Thank you. Thank you for participating.
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