Q2 2021 CooTek (Cayman) Inc Earnings Call
Good day and welcome to the <unk> second quarter 2021 unaudited financial results conference call.
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Please note. This event is being recorded I would now.
I would like to turn the conference over to ICA Investor Relations. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining US today, our earnings release was distributed earlier today and is available on our IR website at IR <unk> com and on PR newswire.
On the call today from <unk> are Mr. Karl Zhang Chairman, and Chief Technology Officer, and Mr. Robert Cherry Chief Financial Officer, Mr. Zhang will review business operations and company highlights followed by Mr. <unk>, who will discuss.
So some guidance there.
We'll both be available to answer your questions during the Q&A session that follows.
Before we begin I would like to kindly remind you that this conference contains forward looking statements they've seen the meaning of section 21 dash.
The Security Exchange Act of 1934 as amended.
These forward looking statements are made under the safe Harbor provisions of the U S. Private Security Litigation Reform Act of 1995. These forward looking statements can be identified by terminology such as well.
<unk> anticipates future intends plans believes and.
After my confidence and similar thing.
<unk> may also make written or oral forward looking statements in its report filed with.
Or furnished to the U S that do you see in its annual report to shareholders in press releases and other return much euro and oral statements made by its officers directors or employees to third parties.
Any statements that are not historical facts, including statements about Kodak sleeves and expectations are pharma looking statement that he is wow factor risks and uncertainties that could cause actual results to differ materially from those in the forward looking.
St. Louis.
Such factors and risks include but are not limited to the following <unk> mission and strategies future business development financial condition and results of operations.
It's growth of the mobile internet industry, and mobile advertising industry, the expected growth of mobile advertising expectations regarding demand for and market acceptance.
Sometimes after concrete products and services.
As shown in the mobile application and advertising industry and Ravel, the relevant government policies and regulation is relating to the industry.
Further information regarding these and other risks.
Certainties and factor is included in the company following the U S. S E C.
All information provided on this call is current as of the date of todays call and <unk> does not undertake any obligation to update such information except as required under law. It is now my pleasure to pass the call to Mr. Carl.
Chair, Chairman and Chief Technology Officer of Kodak <unk>. Please go ahead.
Thank you everyone for joining our second quarter.
Today's call.
Well, we have reported our second quarter results.
The result, with net revenues of USD 80.
$85.0 million, which was a bit higher than our previous guidance.
As mentioned in our first quarter earnings call, we have been implementing our strategic roadmap driven by our online literature and mobile games business, both in domestic and overseas market.
We are pleased to return to profitability, while keeping a positive quarter over quarter revenue growth in the second quarter of 2021.
In line with our balanced approach between growth and profitability.
As a general comment.
Despite recent uncertainty in the domestic mobile advertising market related to the St Joseph religion, and industry softness in education mobility in the property sector.
We remain confident in driving the long term value by further enhancing the innovative content and the features of our product portfolio on a global basis.
Yeah.
With the continuous optimization of our content platform. We are dedicated to the two Wheeler development focus on online literature, and the mobile game segments.
Importantly, we believe that we are in good position for deliberately into nexus that sustainable growth given the gross margin for the two segments have been consistently improving since the first quarter upside if anyway.
Yes.
Firstly, let me elaborate on development of our online literature business.
For whom do novel, our free online literature product in Chinese market.
Encouraged by the continued enhancement of our content ecosystem.
The user retention rate continued to be improving and we can concentrated providing qualified user experience and a diversified content to our users.
The overall user base.
Has been more active and engaged at which contributed to the enhancing daily Apple with year over year growth.
42% and a quarter over quarter growth of 50% in the second quarter oftentimes at Honeywell.
As of June <unk> 91, the number of authors of bundled it with your platform further increased to more than 4200 <unk>.
The original contract book further increased to more than 5400 with quarter over quarter growth of 17% and the tiny percentage respectively.
With rich and the diversified companies don't do literature platform has cooperated with leading companies such as <unk> malaria soy.
<unk>, Inc.
Books et cetera, which offers new opportunity for the subsequent external licensee and the rapid intellectual property content to creation of this novel.
So are the external licensing of ebooks.
The literature platform has collaborated with traditional online literature channels, such as mobile Baidu, I reader and sushi novel to maximize.
The revenue of each platform with Arthur positive content.
Total net neutral platform also made a strategic cooperation with leading social media channels, such as D&O books and it sounds the only thing to actively promote the original companies.
With the exploration of the of this new cost from those original content successfully achieved first place on the Tencent, Colombia comps rising popular.
Popularity list of novels in June.
Yes.
At the same time bundled literature platform is aimed to produce that.
Gravity of IC content for audio book and film.
So variable business practice, including content co development with other parties audio product output and audio copyright treaty.
We have reached the strategic cooperation with major audio book producers.
With such a backward developments in the IP operation the revenues from the IPO business a phone to a novel recorded.
194% quarter over quarter growth.
In addition, we have been expanding and upgrading the fitbit model of our overseas online literature.
<unk>.
With the concept of LNG expansion and the improving user retention rate, we have strengthen the economic model.
Oh, hi level in the U S market has been constantly improving.
At the same time, we have observed more encouraging performance during our expansion to the South East Asia market, such as Philippines and Malaysia.
We are optimistic about the growth potential of the product in the overseas market.
Secondly, while our mobile games business, we have continued to expand and optimize our mobile game portfolio and the pipeline both in the domestic and overseas markets through internal development and external investments and the partnership.
With all kinds of the spirit and the growth guidance.
We have continued to attain its ratio of upgrades and the incubation.
For forming a matrix of independence.
Independence, they develop the mobile game with light box at the same features.
These things are popular among the amount the game consuming people with a fast paced lifestyle.
We have formed a mobile game metrics for the global market.
Releasing dozens of games to date with more than 10 million users.
When asked why if this would rise on the strong performer most off catwalk beauty, our globally pulp racing copper breaking a catch up game to form a competitive product pipeline.
At the same time since the first quarter accounted Honeywell.
We have strengthened our investment income.
Studios.
At enriching and expanding our product portfolio, which can provide additional upside for the segments business performance.
Through our invested studios, we launched more than four new casual games in the second quarter plenty of anyway.
In addition, we will also continue to aggregate upstream and downstream. We saw this in the industry to provide developers with wingstop distribution and the fall product services.
We started to cooperate with three studios to provide them publishing and operations, which enhanced.
Our involvement in it.
And the entire operation.
Yeah.
We have dedicated to further increase the scale of the third party game publishing business.
As a special note for the second half of the antibody one we expect a strong mobile game pipeline with more than 15 games in the domestic market and more than kind of the game in the overseas market and that the smooth combination of our internal development and external cloud.
<unk>.
Going forward, we will maintain our strategic focus on building a user oriented content the ecosystem on a global basis targeting at the sustainable growth and overall profile.
Profit profits.
Profitability.
With that I will hand, the call to Robert our CFO, who will walk you through our financial results for the quarter. Thank you.
Okay.
Thanks, Carl Hello, everyone.
Thanks, again for joining us Tonight.
As focusing on operating our business model, we have been optimizing the balance between our marketing and monetization strategies, which resulted in the achievement of group level profitability in the <unk>.
Second quarter of 2021.
We will further expand the scale of all of our product portfolio improve our user experience and user stickiness and enhance our monetization capabilities.
We are confident in delivering a robust and stable long term growth.
I'm going to brief our second quarter of 2021.
Net revenues were $85.0 million U S dollars, a decrease of 34% from $130.0 million U S dollars. During the same period last year, an increase of 2% from $87.0 million in U S dollars during the last quarter.
The decrease compared with the same quarter of 2020 was primary due to a decrease in mobile advertising revenue with the continuous restructuring of our portfolio of products.
Net revenues are mainly generated from three categories of our content rich apps.
Our games accounted for approximately 50.
5% on a literature accounted for approximately 37% and a scenario based content apps accounted for approximately 7% of total net revenues.
Do you use of the company's portfolio of products were $28.0 million a decrease of 2% from $32.0 million in June 2020.
EMEA yourself, the company's portfolio of products were $70 million, a decrease of 15% from $88.0 million in June 2020.
Do you use of the company's online literature products, where at this point 7 million a decrease of 17% from $9.0 million in June 2020.
Use of the company's online literature products were $19.0 million decreased from $32.0 million in June 2020, the average daily reading time of the key product from doing all those users was approximately 153 minutes in June 2021, which continue to grow.
Steadily compared with 148 minutes in March 2021.
Our gross profit margin was 89, 4% compared with 95, 5% in the same period last year and 89, 1% last quarter.
Cost and expenses were about 81.7 million.
Kris of 13% sequentially and decrease of <unk> <unk>.
34% from the same period last year.
Sales and marketing expenses were $867.0 million U S dollars.
Kris a 44% from the same period last year and a decrease of 15% from last quarter.
As a percentage of total revenues sales and marketing expenses accounted for seven 2% compared with 84% Europe at the same period last year and 87% last quarter.
The sequential and year over year decrease in the sales and marketing expenses as a percentage of total net revenues was primarily due to the continuous transition of the strategy in relation to the acquisition of new users and the retention of existing users, which resulted in a reduction of the user acquisition cost.
Costs.
R&D expenses increased by 20% year over year and increased by 7% sequentially.
Primarily due to an increase in salary and payroll expenses associated with technology R&D staff and was partially offset by decline in share based compensation expenses.
As a percentage of total net revenues.
R&D expenses accounted for 12% compared with 6% during the same period last year and 11% last quarter.
G&A expenses increased by 18% year over year, and a decrease of 12% sequentially.
The Socratic sequential decrease was mainly due to a decrease in share based compensation and third party outsourcing fee and was partially offset by a rise in professional service fee.
The year over year increases were mainly due to an increase in salary and payroll expenses associated with G&A staff professional service fee and third party outsourcing fee and was partially offset by decline in share based compensation.
As a percentage of total revenues G&A expenses accounted for 6% compared with 3% during the same period last year and 7% during last quarter.
Net income was 0.3 million U S dollars.
Paired with net income of $4.0 million U S dollars. During the same period last year and a net loss of $16.0 million U S dollars last quarter.
Adjusted net income was $2.0 million in U S dollars compared with adjusted net income of $9.0 million U S dollars in the same period last year and adjusted net loss of $1$2.0 million U S dollars last quarter.
The achievements of profitability compared with the adjusted net loss last quarter was mainly due to the decrease in the sales and marketing expenses as a percentage of total revenues driven by the continuous transition of the strategy in relation to the acquisition of new users and the retention of existing users.
As of June 32021, we had cash cash equivalents and restricted cash of about 39.
U S dollars compared with $57.0 million U S dollars as of March 31, 2021.
As of June 32021, restricted cash or $6.0 million U S dollars, mainly consisting of.
The amount of $4.0 million in U S dollars held in the company's bank account as guaranteed deposits or loan facility provided by the bank.
As of March 31, 2021 long term restricted cash was $26.0 million U S dollars held in the company's bank accounts, which were frozen by local authority in connection with an ongoing investigation relates to an alleged illegal act of certain customers as of June 32000.
One the relevant bank accounts have been frozen.
On may the 18th plenty plenty, we announced a share repurchase program. The 2020, a program, where we are authorized to repurchase the company's class a ordinary shares in the form of <unk> with an average value of up to 20 million U S dollars during a 12.
Periods, starting from May the 18th 2020.
We expect it to fund repurchases under this grant.
Existing cash balance as.
As of June 32021, we had used an aggregate of six <unk>.
<unk> zero million U S dollars to repurchase one 4 million <unk> under the <unk> program and recorded as Treasury stock.
Plenty plenty of program was terminated on May 17, 2021.
Operator, we are now ready to take questions.
Thank you if you would like to ask a question. Please take note by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Once again press the star followed by the one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
We can now take.
The first question from Steve Server from Argus Research.
Hi, everybody and congratulations on returning to profitability is great to see.
Just a quick question I noticed that the.
Percentage of revenue in the second quarter was geared a little bit more towards the gaming section compared to online literature compared to last quarter.
Just wanted to get your updated thoughts in terms of the long term revenue breakdown between the two groups.
Or whether you see a lot of fluctuation over time.
Just on the rollout of new games and the continued expansion of the author.
Accounts for the online literature program. Thank you.
Okay.
Okay, Let me talk about the that the game.
Relief plan, then I will hand over to Robert to answer.
Revenue.
And so our mission is to empower everyone to enjoy relevant content similar to our strategy. At this moment is to focus on entertainment content to build up our content ecosystem.
So we.
We released our first in house developed game in the first quarter of 2019 and from then on we have released.
Self games in Chinese market and in overseas market in the past seven quarters. So we are happy to see such big growth in our game business in that short period and the success of our game business embedded in our strategy execution and data driven system.
Magic growth capabilities.
So we have formed.
Mobile game metrics for global market, releasing dozens of games to date with more than 10 million users. So at the same time since the first quarter of 2021, we have strengthened our investment in excel or studios are aiming at enriching and expanding our product portfolio.
Which can provide additional upsides for the segments business performance so through our invested.
Studios that we have launched in more than four new casual games in the second quarter of 2021.
So as of today, our focus is on global mobile casual game sector.
We choose to focus on casual games practice, because so first we believe casualty sector has bigger growth potential globally. The casual game half brother user base and this sector is expanding and growing faster than others globally.
And second this sector has relatively higher short term, our eyes, which benefits our cash flow. So we maintained our strong focus on game types with higher how I and the longer product cycle. So for example, cat catwalk beauty, a catch up game design and the release.
In the global market.
Rich remember when the U S and other 70.
Either a 50.
<unk> 57 countries and the rigid appstore and Google play games.
So it contributed.
Mainly 3 million gross profit in the first three months since it was released.
And its overall ally exceeded 200 plus 200%.
Three we can fully utilize our systematic and scalable growth capability to publish successful games of this sector. So this ensures the scale of our gaming business. We will also continue to aggregate upstream and downstream resources in the industry to.
Provides developers with what stopped distributions and for processing services.
And for the second half of this year, we expect a strong mobile game pipeline.
Focusing on casual games sector with more than 15 games in the domestic market and more than 20 games in the overseas market and that the smooth combination of all of our internal development and external corporation. Thank you.
Yeah, Okay. So regarding the question about the.
Growth and profitability.
Yes, it is actually encouraging that we achieved.
The overall profitability, while keeping a positive quarter over quarter revenue growth in the second quarter of 2021, we believe that we are moving towards the optimization of resources to achieve this balance between growth and profitability.
And expand the overall profitability for the second half with plenty of 'twenty, one and further net margin improvements for the coming quarters and our execution of this strategic path. So.
So firstly, we have been actively expanding and upgrading the mobile games.
<unk> portfolio with strong OE performance.
So with our internal development and external investment and cooperation. So we are positioning effectively over the entire games development.
Being in operations chain, we have more than 30 games launched in the second half of 'twenty or 'twenty, one which demonstrates our in house pipeline to contribute.
More sustainable growth.
Secondly, we have been strengthening our strategic focus on the content and user management, while on a literature products aiming at improving efficiently both the user stickiness and the product monetization driven by our intensified after and content results we are.
It is on consolidating the existing monetization capabilities would be revenue from advertising and diversifying that revenue stream with revenue from IC operations.
Including IP licensing IP contribution through audio audio book short drama and view and also social media distribution with pay to read model.
And thirdly, while we have been improving the efficiency of our user acquisition and user management, our cost and expense structure continues to be optimized. We expect further efficiency achievements for the sales and marketing R&D and G&A expenses as a percentage of revenue for the coming quarter.
Which will result in the continuous margin improvement.
Sure.
Thank you very much.
We can now take the next question from Vivian Zhang from Diamond equity research.
Good evening.
Good evening. This is <unk> from Diamondback with Europe I have two questions.
Adding to the company from two novel has been bought from Bon ton.
Media channels so.
So can you provide more colors on how you are checking with it from a wechat lethal or take talk how you turn them into revenue does the company completed developing type content to attract users on the platform.
My second question is regarding coffee rod monetization.
Can you share with us what Albert the company have might monetize copyrights.
Now I'd like to call your Robin's Jean Thank you.
Okay. Thank you I will address these two questions.
So for the first question, we have initiated our exclusive content distribution through social media channels with a pay to read model since the first quarter of 'twenty or 'twenty. One. So currently with more than 404200 sign office and more than 5400 original.
Contract books on the phone do literature platform as of June 21, we are in a very good position to further explore diversified content monetization options.
The social media channels actually provides a novel way to reach our target readers and demonstrates <unk> success in developing a new business model and amplifying the revenue growth.
It has become a popular to distribute on a literature through social media channels and it is different than distributing through literature apps. The algorithms for user recommendations, it's more precise in our social media ecology.
<unk> immersive emerged a clearance off reading Standalone books drives better commercialization as users are more likely to pay for something they already are interested in.
So the social media channels, mainly targets the novel leaders, who are our customers to reach out and do not use traditional reading apps. This is a quite difficult.
Difficult segments of readers to reach through regular novel apps.
So in the wechat ecosystem for new novel distributors compounds.
In times, such as city live fantasy and romance.
We test matrix of public house.
So I'm Gonna novel has attained good user feedback on wechat in terms of addressing these users reading needs for short term reading consumption.
We currently operate the social media distribution through internal team and external agents.
Our main App is still concentrated on the free to read content. We are actively developing this complementary social media channel to position us on the peso reads content distribution.
Yeah.
So for the second question about the copyrights monetization.
We have had very strong focus on the IP and copyrights operation with our enriching content resource for Funko novel.
As measured through the external licensing of E books mobile level has collaborated with traditional all our literature channels to maximize the revenue of these platforms.
And at the same time Photonovel has aimed to produce these IP contests for audio books and fuels.
So through these various business practices, including content co development with other parties Portola has reached the strategic cooperation with major audio books are producers and also feed producers.
In terms of the fuel.
And television the former levels top rated all our novel in June called 3000 years old off pretty fast has been successfully recommended to the few med TV companies for fuel production as of now there are two pieces of content, which has been submitted to the local government.
Approvals in a few minutes back it will be completed this year.
So through all of these innovative initiatives in transforming the online novels into various forms.
Of entertainment.
The level has discovered a variety of ways to monetize the copyright so these tactics.
Now different forms of IP to form a synergy to significantly increase the value of the original IP.
Thank you.
Thanks.
I have one more question regarding mobile games, we see the Chinese governments Justine Palisson yoga prediction that further limits the amount of time on the 18th.
Unlike game.
So how do we if that does affect Europe mobile game business like what what percentage of the company's Rob and it comes from teenagers in China. Thanks.
Yes, so we have obviously closely monitoring the local regulation changes as of now we are not in a position to.
Materialize on these specific impacts our on our games portfolio given we are concentrated on the theme.
In apps advertising model of the mobile games commercialization Y O D. A.
Carbon regulation is more focused on the in App purchase model off the mobile games. So we haven't yet had a very precise statistics about the percentage of the users which are under 18 are the minus Ah.
Within our games portfolio, but obviously, we are monitoring closely this policy evolution and we'll definitely.
Make appropriate solutions in order to mitigate the negative impact on the potential revenue.
Our revenue of our over overall game portfolio and in addition, as we have been always emphasizing we are expanding vigorously in the overseas market, which tend to be.
<unk> have higher growth potential in terms of the.
Mobile games portfolio and mobile games pipeline. So we remain confident on the further development of mobile games portfolio and pipeline on a global basis and not only in the Chinese domestic market. Thank you.
Okay, Thanks, Joe but for additional details again, congratulations on the quarter.
Thank you.
We can now take the next question from Ken <unk> from financial.
Financial partners.
Okay.
You May go ahead, Sir your line is now open.
Okay.
Good evening. Thank you for taking my question. So my question is describing to south inaugurating margin as we know you started implementing a violent approach to improve the up what you should know our efficiencies since last quarter mobile.
Wanted to know if the improvement of the south and marketing margin still on track, reaching below 70%. This year when its all or target around 60% to 70%. Thank you.
Okay. Thank you I'll address this question as well so with our continuous optimization of the efficiency in relation to the acquisition of new users and the management of existing users. So we have seen a constant reduction after sales and marketing expenses as a percentage.
Our revenue since the third quarter of 2020.
The percentage in the second quarter of 'twenty or 'twenty, one as mentioned was 72% down from 87% in the first quarter of 2021.
<unk> matched our expectation so.
So we believe that our current Spanish strategy will result in a robust improvement of the net market.
Normalized basis.
Sales and marketing expenses as a percentage of revenue is still targeted at 50% to 70% and with the continuous efficiency improvements in relation to the R&D and G&A expenses, we are confident in achieving our double digit net market.
Okay. Thank you.
Thank you very much.
Yeah.
Okay.
We can now take the next question from Jimmy Quinn from Sunquest Security Company.
Yeah.
Thanks for taking my question congratulations on the strong I think most of my question.
So I have one more question about <unk>.
Our strategy for expanding overseas market.
Additional information can tell us.
That approach.
Okay I'll take that Patrick Thank you.
Yes, we are actually expanding the Chinese domestic market and the overseas market at the same time, so as mentioned in our first quarter earnings call. We have been implementing our strategic roadmap driven by our online literature and mobile games business both in the <unk>.
<unk> in overseas market.
Were pleased to return to profitability, while keeping a positive.
Over quarter revenue growth in the second quarter.
It was in line with our balanced approach between the growth and profitability.
So with the continuous optimization of our content platform. We are dedicated to these well to well development focus on online literature and the mobile game.
Segment in both Chinese domestic market and overseas market. So.
Both have big potential and we saw very strong synergy between all the literature and mobile games and the synergy between Chinese domestic market and overseas market.
Example, the foundation of our online literature products for the overseas market.
From the data driven growth platform to the AI based recommendation system and a data driven a content creation platform, which assisted assist assist.
Others to write better performed book.
Are the same.
And the same happened to our 10 visits.
So, though we see a strong synergy between.
Global market between the overseas market and Chinese domestic market and recently, we noticed some with notice for some.
Extreme skin cancer.
Regulations related to the internet sector in Chinese domestic market, such as the strength of data privacy protection and the regulating advertising experience.
And and and there are some uncertainties in the domestic mobile advertising market related to the.
Two of the regulation and industry softness in the education mobility and property sectors.
But we remain confident and positive. So we are investing more on our overseas business to mitigate the risk for example, with recruit and boom coupled new game Studios.
Studios indifferent too rigid, including Taipei to expand our game pipeline for overseas market.
Addition, we have been expanding and upgrading the business model of our overseas online literature products.
With the content and AR inventory expansion at a stable user retention rate would have also strength the economic model.
Our level in the U S market has been consistent consistently improving.
At the same time, we also.
We have observed some encouraging performance.
During our expansion into southeast Asia markets, including for example, through the pain and Malaysia.
So we are optimistic about the growth potential of the product in the global market. So we believe that our tool will develop strategy mitigates the short term risk and ensure our long term growth.
Yes.
Okay great.
Congratulations.
It appears there are no further questions at this time I would like to now turn the call back over to <unk> for any additional or closing remarks.
Thank you operator in closing on behalf.
Half of the entire management team of <unk>, we would like to thank you again for joining this conference call Tonight.
You have further questions in the future please feel free to contact us at <unk>.
At <unk> dot com or cool tech.
I see a Asia dot com. Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
[music].