Q2 2020 Qutoutiao Inc Earnings Call
[music].
The trends are in a listen only mode. After management's remarks, there will be a question and answer session. Today's conference call is being recorded I will now turn the call over to your host side. She news. Please go ahead <unk>.
Thank you very much.
Welcome everyone to the second quarter Twentytwenty <unk> cool.
The company's financial and operational results, we released design newswire services earlier today and I'd be made available online.
The beauty earnings press release by visiting the IR section of our website at <unk> Dot She's hotel GAAP net profit.
Participants on today's call will include a CEO at a time and our CFO Mr. Shelton.
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 as nice 95.
Forward looking statements.
Involving inherent risks and uncertainties as such the Companys 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 that she does her earnings press release and this homepage.
Conference call include discussions of auto to GAAP financial measures as well as unaudited non-GAAP financial measures.
Fuel sales press release contains a reconciliation of the on notice that non-GAAP measures to the unaudited GAAP measures.
I will start by getting out of his commentary on the business.
[noise] so far this year strategically we are maintaining a good balance between growth and profitability in other words sustainability and the healthy growth have been playing a very important role in our thinking.
Let's cover 19 put a damper on the general economy. The first time, we have taken a relatively cautious approach to managing the overall business.
Despite the generally weak market and the slow recovery for the first half of this year of business expanded at mid teens rate in comparison to a year ago in terms of sales. This is the result of all our hard work and unwavering investments.
It's a demonstration of the value we create the advertising customers as well as our loyal users who have been the biggest of support for us to in challenging times like this.
Our operational efficiency has improved tremendously as we are trapped overhead costs well under control as the business expands demand.
He managed to operate on a smaller sales and marketing budget, while maintaining a larger user base, which has very positively impacted our profitability at the same time, we invested more into areas, we deem to be strategically important Atlanta, mainly.
Mainly technology algorithms and content.
We have been selective are you.
Not as playing straightforward as just adding headcount everywhere. He said, we try to gain a better picture of what we need to drive better growth for the business along with it and.
And prioritize strengthening different segments about capabilities accordingly.
To achieve our long term objectives, we will continue to focus on content and technology.
Since we started to directly sign up license for me to levels, we have been increasingly seeing this strategy paying off.
Our share of the most popular novels keeps increasing and the most recently reached 50%.
That has been an important part of our clinical strategy as we integrate vertically we will be able to extract much more value from the semi piece.
Most recently only two novels pools are formed a strategic cooperation with question.
In short video series, which will leverage meet it was constant unconventionals user traffic.
This will raise the profile of new two novels original content and create a much stronger basis for the longer term harvesting of derivative IP value.
Coupled with continued improvement in our recommendation engine, we see enhanced monetization efficiency, which has allowed us to drive down the user engagement costs, while increasing ARPU.
We feel encouraged by the strategic progress, we have been making especially with respect to content and technology and we expect them to be the key pillars supporting our future development.
Our financial performance is also trending in the right direction, which gives us further confidence that we are taking the right steps.
On July 16, 2020, China Central television reports.
In its annual consumer rights show that certain advertisements placed by third party advertising agencies.
Hello, exaggerated the health benefits of certain foods and dive products and promoted activities that may in both online gambling.
The response to the issues raised by the report the company has probably taken appropriate measures such as immediate suspension of all employees involved in these advertisements, including the person in charge of operations.
Operations.
Stricter management of quarter Party upsizing agents.
In announcement of content management capabilities in identifying with leading or inappropriate advertisements and.
And the launch of an easy to use and easy to find complaint channel on the home screen of Sidoti.
As.
So that users can follow their complaints with us about adding advertisements placed on our behalf.
That should Odell App was temporarily removed from several major Android based App store in China. After the CCTV report, but was reinstated on July 31st 2020.
It is our commitment to bring real value to users and it is against our ethos of less than 100% compliant content should appear.
The RV industry itself comes with some inherent risks heavy player has to manage and which we are also fully aware of.
I've always closely follow the rules and regulations of the industry and the country.
We aim to build the best content ecosystem for every stakeholder on our platform.
We would like to use this incident as a chance for us to further sales on a constant ecosystem on our advertising platform, which is part of our cost structure to establish a solid foundation for driving long term growth.
Strengthening our competitive advantages.
We have also taken the time to reflect on the current state of the industry from both a seller and a buyer's perspective.
And recalibrate our growth strategy going.
Going forward.
We will deemphasize growth through spending marketing dollars and drive growth predominately through engaging content.
Recommendations and excellence user experience overall.
We remain motivated by and committed to our long term vision of bringing rich and diversified online content millions of users across the country.
We started the business in the first place as we saw the lack of tailored online products and services for people in low tier cities, which account for the vast majority of Chinas population and.
And they've got to remains launch still as of today and we will inevitably be served as our society moves forward.
And our organization drugs disposal income growth.
As the first into the company to dedicate effort and resources to tackle. This problem, we are well positioned to serve the great purpose.
And create significant value although uses going alone.
Thank you very much that concludes erik's remarks, and I will now turn call over to our CFO salute.
[noise]. Thank you sachi and again, thank you everyone for joining todays call.
Let me first go through the financial highlights of the second quarter from 20 before touching on financial objectives for the remainder of this year.
Other revenues for the second quarter was RMB $1.441 billion, which represents an increase of 4% year on year and some moderate sequential growth as well this.
This has been driven by user base expansion. This hour do you has increased by 11% year on year, but partially offset by the weaker ARPU, which saw a 6% decline, reflecting the difficult lighting market and to generate a weaker economy in the second quarter we.
We have been working hard to improve our operating efficiency and have seen greater results. So far this year, our operational loss ratio has narrowed to just under 10% in the second quarter of 2020, which is a record low and the significant improvement both year on year and sequentially.
Continuing a very positive trend we have delivered in recent quarters.
This has been achieved with much more targeted and efficient marketing spending in terms of both acquiring new users and the user loyalty program.
This testified to the strength of our combination of coke abilities in content and technology, which we have invested into comp.
Consistently.
Now, let's look at the costs and expenses in marketing house.
Yes, otherwise stated please note that I will be referring to non-GAAP measures, which means the share based compensation is excluded.
Cost of revenues were RMB 397 million in the second quarter, an increase of 10.4%.
From a year ago, primarily attributable to increases in compounds related costs.
I think the company's long term vision to build a platform delivering high quality online content to our users.
Gross profit was RMB 1 billion for the Formula in second quarter, an increase of 1.7% from a year ago gross margin was 72.4% comp.
Compared to 74% in the second quarter up from 19, the decrease of gross margin year over year was mainly driven by the growth of content related costs.
R&D expenses were RMB 195 minutes in the second quarter, an increase of 6.1% from a year ago.
Sales and marketing expenses were RMB 922 million, a decrease of 29.6% year over year.
Sales and marketing expenses as a percentage of net revenues were 64% in the second quarter of 2020 compared to 94.5% a year ago continuing to hit a record low.
User engagement expenses were RMB 457 minutes in the second quarter, a slight increase of 1.7% year over year, and a decrease of 9.9% quarter over quarter user.
User engagement Francis for D.A.O. per day were RMB 12 cents in the second quarter, our company and compared to RMB 13 cents in the second quarter of 2019.
The decrease of user engagement expenses year over year was primarily due to the company's ongoing efforts in optimizing user engagement expenses for loyalty program as well as enhanced personalize reading experience facilitated by our AI platform and our enriched content library.
You saw acquisition expenses were RMB 436 million in the second quarter, a decrease of 44.7% year over year and to 13.2% quarter over quarter.
User acquisition expenses consist of the cost of gross referrals and serve Hardy marketing.
The decrease mainly reflected the company's efforts in optimizing its traffic acquisition strategy and to a lesser extent the weak advertising market environment in the first half of this year.
General expenses were RMB $92 million in the second quarter.
Non-GAAP loss from operations was RMB 148.6 million in the second quarter of 2020 compared to RMB $506 million a year ago non-GAAP operating loss margin was 9.8% compared to 36.5% in the second quarter, a year ago and improvement of over 26%.
Non-GAAP net loss was RMB $173.3 million compared to net loss of RMB 496.3 million in the second quarter of 2019, and a non-GAAP net loss margin was 12% compared to 35.8% in the second quarter off to 19.
Now onto the outlook for Q3 and second half opportunity there.
The CCTV report, which I referred to earlier caused the truetouch applications will be taken up app stores for a short period of time he earlier Q3 occur.
The company has observed negative impacts on the business operation and financial performance due to this in this quarter and is still evaluating the extend of such impacts.
Sure. They are highly appreciates the importance of strict compliance with all applicable laws and regulations and the beliefs. The measures taken by the company are critical to protect the interest of its users and investors in the long term.
For the third quarter of 2028. The company currently expects net revenues to be between RMB 1.130 billion to RMB $1.150 billion.
This outlook reflects treehouse current and the preliminary view, including preliminary assessment on the potential impact from the CCTV report, which is subject to uncertainty.
In terms of the bottom line, we expect our operating loss to be narrow significant can play on a year over year basis, and flat quarter to quarter basis in the third quarter and we remain committed to further improve our operational efficiency as we have achieved consistently over the past several quarters and.
We expect this trend to continue in the fourth quarter of 2020 and beyond.
This concludes todays prepared remarks.
Again, thank you all very much and we are now open for questions.
Operator. Please proceed.
Thank you we will now begin the question and answer session. If you wish to ask a question. Please press star one on your telephone keypad and wait for your name to be announced if you wish to cancel their request. Please press the pound or Heskey. Once again. Please press star one if you wish to ask a question. The first question comes from.
The line of Bill Me Dang of Keybanc capital. Please ask your question.
Thank you management.
For taking that question I am asking the question so on behalf of hence choline. So I have two questions. My first question is about the third quarter guidance. So the third quarter guidance is much lower than the consensus because of the CCTV report issue, but even when we add back the two.
Next run rates due to the temporary removal of Ji hotel apps on Android App stores third quarter.
Third quarter guided revenue is still well below consensus.
So could you elaborate on the causes for that but that's our pool gets in.
Impacted because we cling autos Noncompliant ads and then my second question is.
Although the third quarter revenue is guided down quite a bit from the second quarter operating loss is expected to be flat sequentially. So where are we caught in the most extensive thank you.
Thank you enjoy these are very important questions. So regarding your first question on our Q3 guidance I think as we have said in the prepared remarks.
Prepared remarks, both us and our advertising partners are quite cautious post the CCTV report and we took extra ordinary measures to make sure that our continent AD hoc compliant.
I would say that way, one above and beyond what the loss loss under operations as well as industrial practice would normally required in China and the second reason and I'd be more important reason is as we have said repeatedly in previous earnings call is that we want to take a more balanced approach between profitability and growth.
So this means three things first is that because we took on we'll continue to take a modest putting approach to our investment in Europe, especially on the marketing side and the way it would require a good ROI for every marketing dollar spent.
So we are likely to see a more subdued growth trend in terms of both revenue increase and user base expansion in the near term rather than a net breaking speed we have experienced back in 2018, our second.
Second we want to make sure that we get to a breakeven on some profitability by by the end of this year.
And this is a key priority for us and we will continue to see top line growth going into Q4 and beyond but the more important target for US right now is to get a positive bottom line and.
And last but not least we want to further shift to the user base mix towards users.
Structure to our platform by content.
[noise] Newsfeeds short videos or novels, and et cetera, we want our royalty program to two to stimulate and encourage our users to stay engaged with us by the way don't want them to be our platform purely for the project points. So as we have said before we believe content and recommendation algorithms are the key pillars for our future growth.
And our user base build our lease would it be a good foundation, Florida on 10% growth. So regarding your second question on ARPU and.
Breakeven I think are out we still target to be breakeven in Q4 on a non-GAAP operating basis.
We are already very close to breakeven in June and are not.
Despite the recent setbacks, we expect the operating loss in Q3 to be in line with Q2 and.
To improve significantly compared to the same period, one year ago. So given the recent trend the recovery of our revenues as well as the usual seasonality, which means that Q4, usually it will be the best return for advertising of the year. We are very confident that it will continue to improve our operating efficiency in the west.
The year end to get to breakeven in Q4, and if you look at you know that the major line items I think first that we will continue to invest in continental NRG, which.
Which we believe is vital to our long term success and we'll keep a similar level of investment in in absolute dollar terms for content and technology.
Total sales and marketing expense was at like 64% of our revenue in Q2 and over 30% improvement year on year and we believe this trend will continue and we'll adapt may see further operating leverage from this end for the coming quarters.
And.
Especially our savings from user engagement expenses with by the hour events and the better content as we have explained in the.
Prepared remarks, so our user engagement expense at 12 cents per user per day, and only about half the level from the peak two years ago, and we plan to keep that figure as a similar level or even lower.
For the coming quarter and in terms of T_a_c, how we have been very conservative so far this year and.
We will probably will continue this approach as well so.
If you look our bottom line non-GAAP operating loss margin for Q2 was less than 10%.
As we have said in our Q1 earnings call. We see at least 10 percentage point improvement in Q2 compared to Q1 and the extra implement was over 15%. So in all we are still very confident to get non-GAAP breakeven by Q4 and around.
Along the way we will also have a better use of mix with more users attracted to our platform by our hour by hour content. Thank you.
[music].
Your next question comes from the line of Viki way of Citi. Please ask your question.
Thank you management for taking my questions Sonia.
But even further.
For the second half so may I ask what is the company strategy to maintain user growth and reduce cost to achieve profitability. So would you. Please elaborate about the user growth strategy and while you apply all the ties that profitability and my second question is what does management.
Thank God that second half advertising market sentiment and what do you think how long that CCTV impact will last thank you.
Thank you Vicki.
So for your first question regarding our user growth I think as we have expressed before that.
We do want to make sure that.
We will continue has to have a you know.
Long term sustainable growth and we want to take an approach in our balance between profitability and growth, but obviously, we want to be in a profitable at the dealer level of over 100 million rather than the current 40 plus million, but however, we do want to make sure that we are on the right path for long term growth.
Sales and also want to prove the value of our users and our business model and we seem to achieve profitability. This year is the right twice in a given the uncertainty in the market.
And but that said, we're still planned for healthy user base expansion and revenue growth for the coming years.
The other thing to note is that this is a result of a more disciplined spending instead of simply cutting the budget, which means that we are getting the results. We want with good ROI for each marketing dollars, we are spending and if the market recovery continues and if the ROI is right, which we believe it will then we will.
Not hesitate to invest for the future.
Another thing that we have already said that we want to want to have a better user mix we want.
You know users that are attracted to our platform by content newsfeed short videos or novels and et cetera.
We want our loyalty program to encourage our users to to stay to engage with us, but we don't want them to be.
Platform purely for the right points so.
So our wait wait to want to make sure that along the way using our path towards profitability, we will get a better user base mix and.
And this will be a good foundation for our long term growth regarding your.
Regarding your second question on the overall markets I think that we have seen the market start to pick up in the second half Q2, and the country. This trend continued in Q3, so it's still not back to the levels, we have seen before the pandemic, but the overall trend in the market looks pretty.
Promising.
As we have said in the prepared remarks, the city, we would of course cost the children application to be taken off app stores for about two weeks we.
We have observed negative impacts our business operations and financial performance due to this in Q3, and we are still evaluating the extent of such impacts, but as we have said that we have already seen a trend of recovery and we think the growth and recovery will continue in Q4 and Q.
Okay.
Your next question comes from the line of Thomas Chong of Jefferies. Please ask your question.
Hi management. Thank you for taking my question.
On behalf of Palmer.
My first question about the corn on corn.
Hi, Paul.
This will conclude the.
It would be helpful.
Inside.
Thank you.
No.
In content costs and no one here on the revenue sharing 10.
Okay.
And my second question is on.
On board seeking margin also.
Oh, yes.
Yes.
Okay.
He is impact on the margin.
You can imagine.
Couple of a couple in profit.
Well.
Uh huh.
But there will be margin. Thanks.
Thank you. So regarding your first question in terms of content cost trend yet we have you know.
Made a significant investment in content side, especially for me too for the last few quarters or for the last two years and in terms of our revenue sharing I think as we have explained before.
Because there are a large part of freelancers and other content.
Contributors to our newest news feed in this.
I think the content sharing for the news feed side of the business will continue to be high low less than 10% under me do side, we usually share about 20% of our revenue with our content providers.
But you know as we start to grow this business and as we make more investments and sign more contracts with different content providers, there will be different contractual arrangement here and there. So there might be some no fluctuation, especially on the need to sign in terms of content hot from quarter to quarter, but I think overall the trend will continue to.
These statements are so the content cost as a percentage of revenue I think probably will.
No free trade from quarter to quarter, but.
I remain at a similar level over the longer term so in terms of GP margin.
Let's go to the same same question because the men.
Impact factor affecting our.
Effecting our GP margin over the last few quarters RV content cost and so if we are increasing our content cost a bit from quarter to quarter, there might be some fluctuation two hour.
GP margin, but I think overall I think we'll continue to see a GP margin are around 70% or so some quarters over 70%. Thank you.
Thank you.
Once again, if you wish to ask a question you May press star one on your telephone keypad.
Again, it is Taiwan, if you wish to ask a question.
And there are no further questions now I'd like to turn the call back over to Tyson.
Thank you over a much for joining us for today's call and if you have any further questions. Please don't hesitate to contact us at Investor Relations Department. Thank you and have a good day.
Thank you ladies and gentlemen. This concludes today's conference call. You May now disconnect. Your line. Thank you.
[music].
[music].
[music].
Hello, Ladies and gentlemen, thank you for standing by for the second quarter 2020 earnings Conference call Fortuitous appeal incorporated at this time all participants are in a listen only mode. After management's remarks, there will be a question and answer session. Today's conference call is being record.
I will now turn the call over to your host side. She Lewis. Please go ahead <unk>.
Thank you very much.
Welcome everyone to the second quarter Twentytwenty studies called is cool.
The company's financial and operational results were released divide newswire services earlier today.
<unk>.
Oh, the beauty earnings press release by visiting the <unk> section of our website at <unk> Dot <unk> Dot net.
Today's call will include our CEO and our CFO mr. shouting true.
Well, we'll continue piece, though 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 95.
Forward looking statements.
Involve inherent risks and uncertainties as such the Companys results may be materially different from the views expressed today.
Let me make sure 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 since you took up earnings press release and this.
Conference call include discussions of auto to GAAP financial measures, that's but that's I don't know what the non-GAAP financial measures.
She'll help press release contains a reconciliation of the note that non-GAAP measures to the unaudited GAAP measures.
I will start by getting out of his commentary on the business.
So far this year strategically we are maintaining a good balance between growth and profitability in other words sustainability and healthy growth have been playing a very important role in our thinking.
Let's cover 19 put a damper on the general economy to football we have taken.
We have taken the right to be cautious approach to managing the overall business.
Despite the generally weak market and the slow recovery for the first half of this year our business expanded at mid teens rate in comparison to a year ago in terms of sales. This is the result of all our hard work and unwavering indefinitely.
Illustration of the value, we create thought I thought in customers.
The users who have been the biggest to support across two in challenging times like this.
Hello operational efficiency has improved tremendously.
We have tripped over call rather than control as the business expands.
Managed to operate on a smaller sales and marketing budget, while maintaining a laundry user base, which has very positively impacted our profitability.
Things on we invested more into areas, we deem to be strategically important long term.
Mainly technology, coupled with an uncommon.
We have been selected.
Not as playing straightforward as just adding headcount anyway.
We try to getting a better picture of what we need to drive better growth for the business along with it.
Prioritized strengthening different second to develop capabilities accordingly.
To achieve our long term objectives, we will continue to focus on content and technology sales.
Since we started the directly you sign up Rice's somebody do doubles, we got that increasingly seeing this strategy paying wall.
Show up the most popular novels keeps increasing and the most recently at least 50%.
That has.
Has been an important part about come to a strategy. That's basically vertically we will be able to extract much more value from the say my piece.
Most recently I mean, the multiples pools and formed a strategic cooperation with question Im sure.
In short video series, which will leverage made it was constant quite shows you the traffic.
This will make the copal up need with novels original content and to create a much stronger basis for the longer term harvesting of the limited I P value.
Coupled with continued improvement in our recommendation engine, we see in the house the monetization efficiency, which has allowed us to drive down the user engagement cost while increasing ARPU.
We feel encouraged by the strategic progress, we have been making especially with respect to confident depend technology, how do we expect them to be the key pillars supporting our future development.
Our financial performance is also trending in the right direction, which gives us further confidence that we are taking the right steps.
On July the 16 2020, China Central television in its annual consumer rights show that so at Tysons placed by third party I thought.
Hello, exaggerated the health benefits of certain food and diverse products and promoted activities that you booked online gambling.
In response to the issues raised by the report the company has probably taken appropriate measures such as immediate it's a function of all employees.
These advertisements, including the person in charge off.
[noise] operations.
Victor management Gulfport that taught the pardon agents.
You know when the content management capabilities in identifying with leading inappropriate advertisements and the law.
And the launch of an easy to use an easy to find complaint channel on the homes, we have two dotel.
As.
So that you just go farther complaints with us about adding advertisements placed bono.
But you don't go up was temporarily removed from several major Android App store in China up.
Capstone in China up at the CCTV report.
What was reinstated on July 31st 2020.
It is our commitment to bring real value to users and it is against that equals about less than 1% compliant content should appear.
The IP industry itself comes with some inherent risks every player has to manage and which we always want to be aware of.
We have always closely photos and videos and the regulations up industry and the country.
Aim to build a better content ecosystem for at least a codell no platform.
We would like to use this incident as a challenge for us too.
There was a public company ecosystem.
The platform, which is part of our cost structure to establish a solid foundation for driving long term growth and stress.
Strengthening our competitive advantages.
We have also taken the time to reflect on the current state of the industry from both a seller and a buyer's perspective that'd be.
That'd be kinda plays out the strategy going.
Going forward.
We will be episodic, both who's spending marketing dollars and drive growth predominantly through engaging content.
Recommendations and an excellent use experts.
We remain motivated by and committed to a long position that bring rich and diversified online content millions of users across the country.
We started the business in the first place as we sort of lack of pay that online products and services for people in the low tier cities, which.
Which accounted for the vast majority of Chinas population.
And they've gotten remains launch still as of today and it will inevitably be served as our society moves forward.
And other times they can drive is the income growth.
At the first thing that company to a dedicated effort and resources to tackle. This problem, we are well positioned to set the great purpose.
And if we have significant value although uses going alone.
Thank you very much that concludes our two mark and I will now turn call over to our CFO.
[noise] [noise] Central African Touchy and again, thank you everyone for joining todays call.
Let me first go through the financial highlights of the second quarter up and running before touching all financial objectives for the remainder of this year.
Other revenues for the second quarter was RMB 1.441 billion, which represents an increase of 4% year on year and some moderate sequential growth as well this.
This has been driven by user base expansion, So where do you has increased by 11% year on year, albeit partially offset by the weaker ARPU, which saw a 6% decline the second the difficult I can market and to generate a weaker economy in the second quarter we.
We have been working hard to improve our operating efficiency and have seen greater results. So far this year, our operational loss ratio has narrowed to just under 10% in the second quarter up and running which is a record low and the significant improvement both year on year and sequentially.
Continuing a very positive trend we have delivered in recent quarters.
This has been achieved with much more targeted and efficient marketing spending comes from both acquiring new users on the user loyalty program.
This testified to the strength of our combination of coke facilities in content and technology, which we have invested into.
Instantly no.
Now, let's look at the costs and expenses in marketing house.
Otherwise they did please note that I will be referring to non-GAAP measures, which means the share based compensation is excluded.
Cost of revenues were RMB 397 million in the second quarter, an increase of 10.4%.
From a year ago, primarily attributable to increases in compound with a good call.
I think the company's long term vision to build a platform delivering high quality online content to our users.
Gross profit was RMB 1 billion for the 4 million in the second quarter, an increase of 1.7% from a year ago gross margin was 72.4%.
Compared to 74% in the second quarter up from 19, the decrease of gross margin year over year was mainly driven by the growth of compounds with the costs.
R&D expenses were RMB 195 minutes in the second quarter, an increase of 6.1% from a year ago.
Sales and marketing expenses were RMB 922 million.
Decrease of 29.6% year over year sales.
Sales and marketing expenses as a percentage of net revenues were 64% in the second quarter of 2020 compared to 94.5% a year ago continuing to hit a record low.
Users' engagement expenses were RMB 457 million in the second quarter, a slight increase of 1.7% year over year, and a decrease of 9.9% quarter over quarter user.
User engagement census per Diego per day were RMB 12 cents in the second quarter up and running and compared to RMB 13 cents in the second quarter of 2019.
The decrease of user engagement expenses year over year was primary due to the company's ongoing efforts.
Customizing user engagement fantasy sports loyalty program as well as enhance the personalized reading experience facilitated by our AI platform and our enriched content library.
Use of acquisition expenses were RMB 436 million in the second quarter, a decrease of 44.7% year over year and certain gone 2% quarter over quarter.
You said acquisition expenses consist of the cost of gross referrals on third party marketing.
The decrease mainly reflected the company's efforts in optimizing its traffic acquisition strategy and to a lesser extent the.
We have a tightening market environment in the first half of this year.
General expenses were RMB 92 million in the second quarter.
Non-GAAP loss from operations was RMB 148.6 million in the second quarter of 2020.
Pair to RMB 506 million a year ago.
Non-GAAP operating loss margin was 9.8% compared to 36.5% in the second quarter, a year ago I improvement over 26%.
Non-GAAP net loss was RMB 173.3 million compared to net loss of RMB 496.3 million in the second quarter up 19, and a non-GAAP net loss margin was 12% compared to 35.8% in the second quarter up from 19.
Now onto the outlooks for Q3 and second half a penny today.
The CCTV report, which I referred to earlier caused the treatment applications will be taken off at stores for a short period of time, you earlier Q3, but.
The company has observed that the impact on the business operations and financial performance due to this in this quarter and it's still evaluating the extent of such impacts.
She knows how high they appreciate the importance of strict compliance with all applicable laws and regulations and the beliefs. The measures taken by the company are critical to protect the interest of its users and investors in the long term.
For the third quarter up 2028, the company currently expects net revenues to be between RMB 1.130 billion to RMB 1.150 billion.
This outlook reflects treehouse current and the preliminary view, including preliminary assessment on the potential impact from the CCTV report, which is subject to uncertainty.
In terms of the bottom line, we expect our operating loss to be narrow significant currently on a year over year basis, and flat quarter to quarter basis in this quarter and we remain committed to further improve our operational efficiency as we have achieved consistently over the past several quarters and.
We expect this trend to continue in the fourth quarter of tiny trendy and beyond.
This concludes todays prepared remarks.
Again, thank you all very much and we are now open for questions.
Operator. Please proceed.
Thank you we will now begin the question and answer session. If you wish to ask a question. Please press star one on your telephone keypad and wait for your name to be announced if you wish to cancel their request. Please press the pound or hash key once again. Please press star one if you wish to ask a question. The first question comes from.
The line of Dolby Dang of Keybanc capital. Please ask your question.
Thank you management.
Oh for taking that question I am asking the questions on behalf of hence trouble. So I had two questions. My first question is about the third quarter guidance. So the SEC what the guidance is much lower than the consensus because of the TB report issue, but you thought.
Well when we add back the two weeks run rates due to the temporary removal of a trickle down from Android App stores.
The quarter guided revenue is still well below consensus.
So could you elaborate on the core.
Causes for that but that's our pool gets.
Impacted because we cling altos Noncompliant ads and then my second question is although this hotel revenue is guided down quite a bit from the second quarter operating loss is expected to be flat sequentially. So where are we talking the most expensive. Thank you.
Hi, Thank you enjoy these are very important questions. So regarding your first question on our Q3 guidance I think I would have said in the prepared.
Prepared remarks, both us and our advertising partners are quite cautious oppose the CCTV report and we took extra hardware measures to make sure that our continent at offline.
I would say that we went above and beyond what the law laws and regulations as well as industrial practice would've normally required in China and the second reason I'd be more important reason is as we have said repeatedly in previous earnings call is that we want to take a more balanced approach between profitability and growth.
So this means three things the first is that because we took on we'll continue to take a multicity prudent approach to our investment in the east.
Specially on the marketing side and the way it would require a good ROI every marketing dollar spent.
So we are likely to see a more subdued growth trend in terms of both revenue increased on user base expansion in the near term rather than the net breaking speed and we have experienced back in 2018, our second.
Second we want to make sure that we get to breakeven on some profitability by it might end up this year.
This is a t. proudly plots and we will continue to see top line growth going into Q4 and beyond but the more important target boss right now is to get a positive bottom line and.
And last but not least no we want to further shift to the user base mix to our users.
Trying to get to our platform by content.
Newsfeeds shot videos or novels, and et cetera, we want our royalty program to two to stimulate and encourage our users to stay engaged with us by the way don't want them to be our platform purely for the larger point so as.
So as we have said before we believe content under compression algorithms are the key pillars for our future growth and the use of a build out of these would it be a good foundation of our long term sustained growth.
Regarding your second question ARPU and.
Breakeven I think we feel.
We still target to be breakeven in Q4 non-GAAP operating basis.
We are already very close to breakeven in June and.
Despite the recent setbacks, we expect the operating loss in Q3 to be in line with Q2 and.
To improve significantly compared to the same period, one year ago. So given the recent trend the recovery of our revenue as well as the usual seasonality, which means that Q4, usually it will be the best speed as lot of the timing of the year. We are very confident that it will continue to improve our operating efficiency in the rest.
For the year and to get to breakeven in Q4, and if you look at that as a major line items I think first that we will continue to invest in content and technology, which.
Which we believe is vital to our long term success and we'll keep a similar level of investment in in absolute dollar terms.
Antenna technology.
Total sales and marketing expense was that like 64% of our revenue in Q2 over 30% improvement year on year and we believe this trend will continue and we will definitely see further operating leverage from this and for the coming quarters.
And.
Especially our savings from user engagement expenses with by the algorithms and the better content as we have explained in the prepared remarks. So our user engagement expense, a 12 cents per user per day and only about half the level from the peak two years ago, and we plan to keep that figure as a similar level or even lower.
For the coming quarter and in terms of PC away, we have been very conservative so far this year and.
We will probably will continue this approach as well so.
If you look our bottom line non-GAAP operating loss margin for Q2 was less than 10%.
As we have said in our Q1 earnings call, we see at least.
Percentage point improvement in Q2, compared to Q1 and the extra implement with over 50%. So in all we are still very confident to get non-GAAP breakeven by Q4 and up along the way we will.
Around the way we will also have a better use of mix with more users attracted to our platform by off by our content. Thank you.
[music].
Our next question comes from the line of Viki way of Citi. Please ask your question.
Thank you management for taking my questions. So you show about a breakeven profit for the second half. So may I ask what is the company strategy to maintain so gross and reduce cost to achieve profitability. So would you. Please elaborate about the use of growth strategy.
And while you apart all the ties that possibility and my second question is what does management think that second half advertising makinson and what.
And what do you think how long that CCTV impact last thank you.
Thank you Rick.
So first.
First question regarding our use of growth I think as we have expressed before that.
We do want to make sure that.
We will continue had to have a long term sustainable growth and we want to.
Take up approach.
Balance between profitability and growth.
I wonder if they want to be in a profitable at the dealer level up over 100 million rather than the current 40 plus million, but however, we do want to make sure that we are on the right possible for long term growth and also want to prove the value of our users and our business model and we think to achieve profitability. This year is the right twice.
Given the uncertainty in the market and but that said, we still plan for healthy user base expansion and revenue growth for the coming years.
The other thing to note is that this is the result of a more disciplined spending instead of simply cutting the budget, which means that we are getting the results we want with good ROI for each marketing dollars west Brandy.
And if the market recovery continues and if the ROI is right, which we believe it will.
We will not hesitate to invest for the future. The other thing that we have already said that we want to want to have a better user mix we want.
Users that are attracted to our platform by content newsfeed short videos on almost any such huh.
We want our ROI around two to two to encourage our users to to stay true to engage with us by the way don't want them to be.
Platform purely for the right points so.
Oh wait wait to up to make sure that along the way you know path towards profitability, we will get a better user base mix and.
And this will be of what foundation for our long term gross regards.
Regarding your second question on the overall markets I think that we have seen the market start to pick up in the second half of Q2 and this trend continued in Q3, so it's still not back to the levels, we have seen before the pandemic, but the overall trend in the market looks probably.
Promising.
As we have said in the prepared remarks. This is if you will of course cost the children application to be taken up app stores for about two weeks we.
We have observed that could impact our business operations and financial performance due to this in Q3 and that we're still evaluating the extent of such impact, but as we have said we have already seeing a trend of recovery and we think that the growth and recovery will continue in Q4. Thank you.
Okay.
Your next question comes from the line of Thomas Chong of Jefferies. Please ask your question.
Hi management, Thank you Paul.
Well on behalf of promise.
My first question.
Hello.
Amit.
Hi.
Okay.
This will conclude the call.
Okay.
Awesome.
Oh, no increase in content costs and Oh here on the revenue sharing 10 O. Smith.
Okay.
And my final question is on.
On the margin also Oh.
Yes.
And also the impact on the margin.
Yes.
A couple of a couple of.
Welcome.
Well.
Me too.
That will be.
Model. Thanks.
Yes.
Thank you. So regarding your first question in terms of content cost trend, yes, we have.
Eight significant investment on the content side, especially for me to opt in for the last few quarters on for the last two years and in terms of our revenue sharing I think as we have explained before.
Because there are a lot of policy now of freelancers and other content.
Sure. There's two hour news news feed business I see.
I think the content sharing for the news feed side of the business will continue to be quite low less than 10% on the Mi do side, we age ratio about 20% of our revenue with our content providers.
But you know as we start to grow this business and as we make more investments on sign more contracts with different content providers, there will be different contractual arrangement here and there. So there might be some no fluctuation, especially on the need to sign comes up content hot from quarter to quarter, but I think overall the trend will continue to.
They will also come down cost as a percentage of revenue I think probably will.
No fluctuate from quarter to quarter, but.
A room at a similar level over the longer term so in terms of GP margin.
Let's go to the same same question because.
The man.
Impact factor.
Affecting our GP margin over the last few quarters RV.
Content costs and so if we are increasing our content cost a bit from quarter to quarter, there might be some fluctuation to our GP margin, but I think overall I think we'll continue to see a GP margin on wrong, 70% or some some quarters over 70%. Thank you.
Thank you.
Once again, if you wish to ask a question you May press star one on your telephone keypad.
Again, it is star one if you wish to ask a question.
As there are no further questions now I'd like to turn the call back over to Tyson.
Thank you all very much for joining us for today's call. If you have any further questions. Please don't hesitate to contact us at Investor Relations Department. Thank you all and have a good day.
Thank you ladies and gentlemen. This concludes today's conference call. You May now disconnect. Your line. Thank you.