Q1 2020 Qutoutiao Inc Earnings Call
[music].
Remarks, there will be a question and answer session.
This conference call is being recorded and knowledge to turn call over to your host that she'll do please go ahead <unk>.
Thank you very much locum, everyone through the first quarter of Twentytwenty earnings Conference call should Hotel Inc.
The.
The financial and operational results were released by Newswire services earlier today and have been made available online.
You can also beauty earnings press release by visiting the IR section of our website at <unk> Dot Dot dot net.
Participants on today's call will include our CEO Mr., Eric 10, and our CFO Mr. shallow true.
Before we continue please note that today's discussion will contain forward looking statements made under the safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.
Forward looking statements involve 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 todays earnings press release, and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.
Today's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.
I will start by reading out Erics commentary on a business first.
I will review key business development since we last talked back in March that will providing an outlook for the foreseeable future.
In the end I will share with you my thinking on the long term objectives and strategy.
Koby 19 continues to impact the wind the economy and the real economy in two ways on one hand, the reopening of the offline businesses has been very gradual uncontrolled.
Along with that the equally gradual recovery of marketing activities.
On the other hand, the partly we induced by the cautiously paced recovery the outlook for business activities and the demand environment, we maintain for a variety of sectors and industries.
As a result, we expect the current more conservative purchasing practice by advertising customers to continue.
Until more material brightening of the general economic prospects.
However, we execute is strongly in the first quarter of Twentytwenty against a strong industry wide headwinds by growing our revenues, 26% year on year to reach the north of 1.4 billion RMB well within our previously guided range. The growth has been supported by continued user base expansion with the are you increasing 20.
2% year on year to reach almost 46 million.
With our data user time has been flat the inherent improvement in ARPU year on year is a strong testament to our commitment and ongoing effort in the housing in the core capabilities of our platform, especially given the unprecedented challenges facing our economy and industry in the reason Pos in Stark contrast to the market.
Additions a year ago.
Being a young franchise growth has naturally be an important part of our identity and strategy.
We have taken a balanced approach to growing our business appreciating. The fact that growth is not an end in itself.
As much as we would like to grow and have become multiple times larger as a platform given the market potentials, we are facing.
We have always emphasized unit economics, when it comes the budgeting and spending which is a function of the lifetime value of each new user and the acquisition cost associated with recruiting each new user.
We have been patient in executing our growth strategies, while navigating market vagaries in the past couple of years.
Aiming at profitable and sustainable growth.
We're pleased to see significant operating margin improvement in the past quarter.
As our quarterly net loss had strong too a little more than half of the level a year ago, while we achieved a healthy topline growth.
Investing into business has been a recurring topic, you know discussions but has never been more relevant.
Since we established our proprietary machine learning platform, we have been able to accelerate R&D on algorithms, which are fundamental to improving both user experience and monetization.
Being able to process and test the large quantities of data has meant a steepening of the learning curve for talk specific algorithms, which lead to a much better tailored push of high quality content as well as assets.
This enables an overall upgrade about the user experience because if both the actual content and the adverse can be interesting and relevant for the user and the interchange between the two is seamless and well timed the whole experience can feel very smooth and enjoyable as opposed to feeling intruded go interrupted.
This makes a material difference in today's world class competition in the use of attention and time spent his fears.
Machine learning capabilities also underpin the development of our CPC system, which relies on the ability to estimate and managed performance metrics alone the AD conversion value chain.
In a no CPC system, where the customer bids for results further downstream taken on less at performance risk.
Core capability of the system is to translate that into variables further upstream and leveraged intelligence gathered from large quantities of data to more precisely allocate at inventories to where they can deliver maximum ultimate utility.
For the system to do a good job.
He needs to be capable of analyzing and understanding each and every piece.
Of AD inventory as well as intermediary links and steps leading to the fulfillment towards the end customer request.
Essentially the old CTC sits in place the role of a super agent bidding on behalf of advertising customers delivering optimal and the results at lower and more stable cost [noise].
We have driven deeper coverage of customer spending with second degree CPC realization, which is now at 50% plus in comparison to 30% earlier this year.
We believe a head start in this field will enhance our competitive advantage of the long term and we are confident about the long term prospects our performance based assets overall and see tremendous room for us to growth.
On the me do side, we continue to strengthen our lead on content offerings. We are now collaborating with more than 80% of online digital content providers in the entire industry.
Our unique advantage of proprietary content development supported our real time user feedback and a powerful data analytics is already producing positive results.
And now we have almost a 30% of the most popular titles being in House productions. Despite the fact that enhanced production started last a year ago.
Given the reach of our platform our diverse user base and ability to match the write books with the right volumes, great Rice's increasingly initiate conversations with us and our team to explore areas of development and the collaboration not possible for them previously.
Our vision is to create a healthy and providing content ecosystem that will bring huge value to both leaders and orders.
And our platform will play a vital role in supporting the expansion of the willing population.
Which currently is estimated to be close to 500 million and growing steadily.
Now in terms of the outlook there are still plenty of uncertainties in the AD market, which present a challenge that everyone.
By sticking to what we believe will create value and strengthen our core over the long term.
And when the market normalizes, we will emerge much stronger we expect to see both revenue and user base expansion in the second half of this year.
We'll continue to improve our operating efficiency by holding the higher bar for capital allocation, especially with regard to user engagement and acquisition.
We aim to achieve quarterly breakeven in the second half of this year and the progress we have seen and achieving year to date has given us more conviction.
Our long term vision is to build a platform delivering quality online content to millions of pounds whos across the country.
Bringing entertainment enjoy knowledge and information to everyone.
We see huge growth potential, especially in the low tier cities in China, where the vast majority of population is located and where historically there has been a significant lack of online products and services tailored to local needs.
There was a strong and growing appetite for online entertainment and activities I'm satisfied.
Despite a wealth of internet offerings, because such offerings has mostly been created to look after consumer preferences and the lifestyles of to develop the regions of China.
We are among the first to see this supply demand gap and subsequently set out to make it our mission to bridge the gap by really investing time and effort to understand this user group and respond to their requirements.
We believe this is an extremely fulfilling endeavor and we will be recognized for the long term value, we bring to our users over time.
The Kobin 19 pandemic has caused significant disruptions to talk to our society and lifestyles. Among many things it reminds us of the value to society technology could create.
Closing between growth and profitability, we will continue to invest into building out technological capabilities at all levels.
Accelerating the upgrade of our platform building, a rich and high quality content reserve.
Along with first class a our distribution capabilities to become an indispensable part of hundreds of millions of People's Daily lives.
Thank you very much but that's concludes Eric's remarks, and we'll now turn core to our CFO shallow.
[noise]. Thank you, Eric Kentucky and again, thank you everyone for joining today's call. Let me first go through the financial highlights of the first quarter of Cincinnati before discussing up in more detail, our financial strategy and providing outlook for the rest of the year.
Our net revenues grew 26 cents year on year during the quarter and the reached RMB 1.410 billion. The exact figure off which is slightly above the midpoint of our our guided ranch, but gross can be broken down to a 22% user base expansion in terms of D.A., you, which grew from 38 million to 46 minute and the 4% in.
Movement in monetization in terms of ARPU, which increased from RMB 33 cents to RMB 34 cents.
Given the extra ordinary environment. We're in this year, what we have achieved so far has not come easily.
As Eric has already expand the increasing ARPU. During these trying times are testament to the investment that we have made in advancing our technological capabilities.
This has given us a actioning delivering better results to our customers at a time, where everyone is taking a more cautious approach towards marketing and actively looking for more measurable advertising channels.
The results from the last few quarters give us the confidence in the effectiveness of our all CPC system and we are also confident that we will continue to see better Mike my position efficiencies in the coming quarters, especially one advertising marketing China recovered from the pandemic.
Moving onto expenses. Please note our focus on non-GAAP measures, which excludes stock based compensation.
Our gross margins stood at 68% in comparison to 75% in the same period last year.
The change is the result of a number of sectors most rate driven by our investment in content and tax infrastructure as well as revenue mix change from a revenue mix cost structure perspective, our gross margin in Q1 20 is much more comparable to Q4, 19, which was only 2% higher at 70% although.
As seen in allocating often this will usually mean, a noticeable sequential decline in revenue and margin going from Q4, two Q1, the following year all else being equal therefore, the underlying trend is in fact, rather positive.
Our user engagement expenses on a per deal per day basis decreased to RMB 12 cents, which is nearing the lowest level on record our user acquisition expenses per new installed users was RMB 4.6, which is a 26% decline year on year and a 17% decline.
The quarter on quarter.
I'd say, reflecting our budgeting discipline and partly reflecting the week advertising marketing environment.
Our total sales and marketing expenses in absolute terms are down 18% year on year, Despite think finishing our user base and topline as a percentage of revenue sales and marketing expenses was 75 cents, which represented a 48 percentage points improvement versus the same period a year ago.
R&D expenses as a percentage of revenues stood at 15% versus 12% in the same period last year.
Through terms it increased by 54% the second our commitment to ongoing investment into talent and the coal technology capabilities.
Gen. Eight cents this were 4% of revenue in line with history.
Overall, our non-GAAP net loss was RMB 308 million with non-GAAP net loss ratio at an 8%.
This represents a significant improvement from Q1 hundred 19, when net loss in absolute terms was 59% larger and the net loss ratio was double comfort level.
As of March than 20, we had cash cash equivalents restricted cash and short term investments of RMB 1.2 billion or you SD 163 million.
So we mounted to the always said our financial objective this year would be to breakeven on a non-GAAP quarterly basis by the end up per year that remains unchanged and well on track, we will achieve it by leveraging topline growth and margin improvement we're focused on three areas to drive margin expansion.
The first is better monetization, which will be the part out of better business economics, and the new incremental revenue streams.
With enhanced machine learning capability as Eric mentioned earlier, we will be able to further fine tune and the AD conversion and the user retention process to meet our race threshold requirement for economics. Meanwhile, we will keep exploring alternative ways to monetize a significant user traffic our platform has attracted games and live streaming.
Some of the successful initiatives led play, which we believe will produce long term benefits for us as USIS growth increasingly comfortable with spending money on our platform as opposed to the traditional way of earning reward in addition to getting everything for free.
Paid membership Ami do is another step in that direction and make make semi do product offerings small and inclusive.
Despite a weak market impact by covered 19, we managed to grow not only total revenue, but also ARPU in Q1.
The second is improving algorithm to drive better content recommendation, while optimizing the loyalty points reward system.
Ultimately users spend time on our platform for quality and interesting content the more they enjoy our content and unless they would pay attention to the Roger points arent and the more there is the potential to reduced large points being handed out.
Algorithm plays an important role in identifying that excess loyalty points and subsequently cutting down costs without affecting overall user experience.
Our user user engagement expenses per day per day since peaking in mid 2018 at more than half as of Q1 minute hunting.
The third is smart user acquisition strategy, we don't look at user acquisition in isolation, rather we consider the effect and the impact of it in conjunction waste our overall user base growth on quality.
We have overtime reduce customer acquisition costs considerable reg, while growing our user base and maintaining its stability.
Looking ahead as the economy recovers from a pandemic and potentially the end market picks up user acquisition budget could increase but as a percentage of revenue were expected to be formally below the levels. We have experienced in 2019.
Last but not at least in terms of the outlook. We expect Q2 2020 net revenues to be between RMB 1.41 billion and RMB 1.43 blend, which would represent a 2% to 3% increase year on year with net loss margin to see at least 10 percentage points improvement sequentially.
Our stance on sales and marketing spending has been conservative so far this year given the uncertainties in the market. However, we will continue to invest in content and technology as evidenced in our Q1 results. We believe these errors are vital to our success over the long run.
We also plan to increase our marketing budget if the current market recovery. We have witnessed in late May and June can be sustained throughout the year.
But given better operating efficiency, we will continue to see improved margins in coming quarters.
Looking at our operational and financial performance year to date and the considering the various possibilities for the remainder of the year, we're confident about achieving quarterly breakeven during the second half, while maintaining a reasonable pace of revenue and user base expansion across this assumes that there will be no.
Further disruption from the pandemic.
At least in the domestic market.
So that concludes today's prepared remarks again. Thank you all very much and operator were now open for questions. Please proceed.
Thank you ladies and gentlemen, we will now begin the question and answer session. If you wish you asked the question now Please press star one on your Tenelotto and white sand aim to be announced.
If you wish account say every class. Please press the pound all hash key once again, ladies and gentlemen, if you wish you asked the question now please press star one.
Your first question comes from the line.
Vicki way from Citi. Please go ahead.
Insulin management. Thanks for taking my question I have no question.
Well cost management elaborate more on the impact that second quarter revenue guidance.
We see that the first quarter was relatively resilient it by cobot lighting impact and seasonally spot corridor and Fiveish underlay engines from other Internet company waste business activity, we still.
The second quarter should see decent quarter over quarter goal.
And what does that does that affect QD ability to capture that advertising dollars that is different from other company.
Is that related to suspension of user acquisition and engagement spend in the first quarter.
Both management page provides some great style of major act character is contribution.
And I have another questions about cost of revenue and it seems like corn and cost for meeting, we'll continue to capture a larger or.
Is that first quarter gross margins, a new long and we perceive further pressure from here.
Thank you.
Thank you everything so to your first question regarding on the non advertising revenue trend. So far this year I think we did have a very strong.
Performance before the Chinese new year, and before the pandemic and it looks like for US March and have pro war the bottom as most of our customers who are quite conservative at the time, but we have seen the markets start to pick up in late May ending June so far no. It's still not back to the level, we have seen before the pandemic, but the trend for the last three or four.
Two weeks looks quite promising and so in terms of quick dance, we have seen in a strong demands from our ecommerce partners for the June 18th events recently, App downloads, which is a top pathway for us in last go for on Q1. This year is relatively weak as airlines are still taking a more cautious approach towards.
Bucking and user base expansion so far this year.
Branding is another area that remains weak however, given our lack of exposure in this area in previous years would have made some quick throws in Q1 this year with new advertising customers that China mobile Yum, China on Evergrande to name a few so.
This will be an area, where we can further enhance our monetization, but overall weakness in branding means this will not contribute.
Significantly in terms of rumbling twentytwenty for us so, but as we have said before our strengths implement space that will help us to cash flow difficult times as our customers are increasingly looking for direct and a more measurable results. So.
Oh, you know I think the weakness in the from March two two may.
Probably explains the led the guidance for Q2, but we do see our that our result is quite resilient in Q1. If you have already said and also we think that these things will getting better starting from now as we have seen the trend for the last few weeks and also in terms of you know marketing and the investment.
So we are with who have been quite cautious in terms of investments.
Formatting, so far this year and as I said in our prepared remarks on top of revenue growth will see at least a 10% page 10 percentage point improvement in non-GAAP operating margins in Q2 sequentially compared to Q1, which is already a big improvement compared to previous quarters. So overall I think.
We are you know right are on track.
Towards what we have no set.
What do we targeted at the beginning of the year, which is relatively gradual growth of user base on revenue, but to hit breakeven in the second half of this year.
Second question regarding gross margin a cost of revenues I think as we have explained in the pre prepared remarks.
There is several reasons for that so to give you a little bit more detail I think there's several things first is obviously is an investment for content way a make up big investment for.
Online electrical content for me do starting from Q3 last year and we also are starting our own proprietary content platform, which is also something we started in the second half of last year.
Other things that for bandwidth and servers.
Obviously, more and more account and delivered in the form of video afterall throw all our different apps for users, which means that we need more bandwidth and diverse and also way we want to use algorithms two to four content recommendation, which means we also need more diverse.
As we have set content and then technology, our two things at the with the leap.
That is very important for future success, and we'll continue to make investment in this area. The other thing.
You know the result is encountered review team, which make sure that sometime.
Appliance of our platform. So all in all I think we have a relatively stable cost of revenues. If you look at previous quarter numbers. The cost of content for Q1 is actually up smaller compared to Q4 and Q3. So I think the margin is really depends on how fast and can't grow our.
Revenue and I don't think thats at the level, we have here in Q1 will be the new norm.
Thank you.
Thank you.
Thank you next question comes from the line as has Chow from Keybanc. Please go ahead.
Thank you and asking on behalf of 10 and so.
Well I just want to know what's the mentioned will give you on the competition online literature, although recent implications on China led you to restructuring and the what's the Companys guidance about me too.
Q2 and beyond in Q.
Thank you.
So our for me do I think our we have seen as stable user base and monetization in Q1, and a Q2 so far.
As we took a more balanced approach for the entire company bits and growth and profitability. This applies to me too as well as the year end target for me do you still to get over 10 million in terms of D.A., you and the stable ARPU in line with the rest of the company.
So are we have made no significant investment content, especially with our proprietary content and we plan to keeping investing in this area as we believe that only a healthy content ecosystem can retain the users over the long term and our proprietary platform enables us to further interact with our users and to use real time user.
Data for quality analysis and to give real time feedback to the offers.
The quality of content as a REIT match of authors content and reader are the key to long term success for any content based business. So the proprietary program was launched.
Less than nine months adult and as we said.
Already six off the top 20 in almost all me to our own.
Our competition wise, we see our guidance and baidu, making and not getting to this marketing strike and making several investment announcement and also there is the written amendment, which operating a channel literature. So you're definitely seeing more players, making plans into the free literature market, but I think this for the prove the value of.
Sector, and we will come more players to make lifts our robust unhealthy industry. As we have said before we believe the threed literature market is much bigger compared to the traditional pay to remodel. So there will always be competition from incumbent as well as new new Commerce. However, our has start and experiencing user acquisition monetization and Uh huh.
The company ecosystem.
Makes us uniquely position in this market and we will continue to be whilst the leading players in this market. Thank you.
Okay.
Thank you. Our next question comes from the line that Thomas Chong Sam's Jefferies. Please go ahead.
Yes.
Hi, Ben management for taking my question.
I would put back to the.
Hi, inside I, just want to get a sense about informing our Q2 guidance or what you saw a month on month on month April May and June.
I will talk about a year on year wall.
Or decline.
In each month, so that we can better form the expectation for the second half.
And my second question is about the competitive landscape in advertising.
Should we think about impact small such form video.
Oh, how to medium channels.
In getting the budget appetite appetizers. Thank you.
Thank you Thomas so to your first question, yes, we have seen.
Nope or Greg will pick up in front of revenue for US last few quarters. So to give you a sense I think fee.
The revenue so we get from the second half of May is about 15% higher compared to the first half of May.
So you probably look essence asked me that speed up the pickup so in terms of your second question regarding different content formats getting ad budgets and.
As it.
You, sometimes I think if you look at our offerings.
Only acuity side, the we start at the news feed ads, but eventually evolve into as you know content aggregator. So we have all kinds of different count on format and acuity.
Video included we also have games live streaming so which help us to further extend our user base and also to increase our ARPU even during the difficult times. After we have witnessed weakness in Q1 that during the pandemic. So I think.
While we wait we are rating.
Trying to not to offer our users whatever account and they watch in whatever form that is suitable to deliver and also if you look at our offerings. We also have two new short video apps ways our combined.
The off across all five minutes in the last month.
You may so I think we are making you know different experiments await weekend different.
Innovations in different front to make sure that we have the right offerings, while users in whatever format. They want.
Thank you.
Thank you.
Hi, Thank you once again, ladies and gentlemen, if you wish you asked the question now please press star one on it.
Okay.
Our next question comes from the line that Miranda Dropout Bank of America. Please go ahead.
Thank you operator, and good evening management and stuff I assess question in Saudi Oh, Gee Pcs system, and so can you imagine update about like let's see on improvement to advertisers Oh I.
She then by this old CPC system, and then Hollysys Oh Cpcs system into the for example, the up I can't all ARPU.
Tyson.
And if I may so for the ask so I mean that they are a lot of advertising companies in China, they're all in maintained.
He acts advertising system I like I told towel and like we bought back to an exact John So I'm wondering how do management you Youre Cpcs just 10, when you benchmark that with <unk>.
The other competing on advertising.
Yes.
And then my second question is out the user expenses, so our imagination about how I try to keep the quite you into many users. So how should we think the Oprah user base I close for the second half a year.
How should we think about the user engagement and acquisition costs.
Thank you.
Our thinking right now so to your first question regarding all CPC I think.
Wait wait started right to the earlier compared to our.
Yes, I think we said during our last quarterly earnings that's over 90% of our advertising are delivered a strong CPC. This quarter, we set at over our close to half hour on ads are now in second degree or CPC, which means we can offer more detailed measurable results are fully the performance of our eyes.
That means that our you our customers can measure the in all the retention the eventual a performance of the our users they acquired from our platform. So in terms of comparison with others as I already expense that we are while the leading players to to get into this field I think.
We are definitely among the first tier players in terms of the the.
The percentage of 50 seat delivered and also in terms of the technology. So we have so far our export. So we do believe that per performance ads in the form of all CPC or think TX <unk> is the right reduction for the future off the advertising market, especially online.
In terms of your second question regarding user growth.
I mean.
As we have set wave we want you know.
Take a more balanced approach between profitability and.
User base expansion, although I think are we will continue to invest for the long term success of the business in in terms of content and technology, which we believe is vital to the long term success and.
So it probably will probably will keep us a similar level of investment in absolute RMB terms.
But as revenues grow in the second half, we will see a better gross margin and R&D as a percentage of revenue. We're also decrease in terms of your question regarding sales and marketing expenses, especially on our user engagement science and end user traffic acquisition.
On the user engagement side I think as we have said by the algorithm and better content will will will help us too.
Further reduce user engagement expense last quarter is at 12 cents per user per day only about half the level from the peak two years ago and with peak, we plan to keeps a per user per day figure at a similar level or even lower for the coming quarters. So as a percentage of revenue. It will also decrease as you know we were getting out out of the.
And then make from numbers in Q1, we would certainly see a higher ARPU in the second half.
In terms of P.C., we probably will increase case in coming quarters in absolute terms.
We have been very conservative so far this year, especially since February.
As the markets start to recover and as we have more confidence in improving our operating efficiency from every aspect of our business. We are I'm confident that we can achieve our targeted for both revenue and user growth as well as well as breakeven in the second half so.
I think.
The traffic position as a percentage of revenue were also decreased despite the increase in absolute terms. So overall I think as I said, we believe that.
On top of Q1, non-GAAP non-GAAP operating loss watching at 27%, we will see at least another 10 percentage points improvement in Q2, if not more and.
We are very constant to get to non-GAAP breakeven by Q4, this year and maybe even in Q3, if the market recovery continues and if we choose to.
Mark with the more disciplined investment approach. Thank you.
Thank you children.
Thank you once again, ladies and gentlemen, a star one other question.
Yeah.
Okay.
Right, Yes, there are no further questions I like to turn the call back to the company for closing remarks.
[noise] [noise]. Thank you very much for joining us for today's call or that concludes the corporate today. If you have any further questions. Please don't hesitate to contact.
The better relations team and security.
He will come out and be able to meet the speak with you next time.
Yeah.
Thank you. This concludes today's conference call you May now disconnect your lines. Thank you.
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