Q2 2019 Earnings Call

At this time all participants are in a listen only mode.

After lunch, which remarks, there will be a question and answer session.

Today's conference call is being recorded double nonsurgical overture. So cheap you. Please go ahead Sir.

Inc.

The company's financial and operational results, but really the buy newswire services earlier today and have been made available online.

You can also view the earnings press release by visiting the IR section of our website at <unk> Dot Dot net.

Participants on today's call will include our co founder and CEO Ms. every time and co cfos. They single one of them. It does show tool.

Before we continue please note that todays 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 Navy motivity different from the views expressed today.

So I think its nation regarding these and other risks and uncertainties is included in the company's prospectus and other public filings filed with the U.S. Securities and Exchange Commission.

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

Please note that you know Delek earnings press release, and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.

She Doesnt help press release contains a reconciliation to non-GAAP measures to the unaudited GAAP measures.

Now, let me start by reading out there was some commentary on the business side.

[noise] I would like to review the business and I was structured with you first and then provide some outlook for the rest of the year in the second quarter, we have focused on three things.

The first disclosed.

The overall business continues to enjoy strong momentum with quarterly average combined the are you reaching 38.7 million.

When combined and they you reaching 119.3 million.

More than tripled from a year ago.

In addition, just getting up existing X., we have leveraged our platform capabilities to develop new products in May we started they do like.

Which is a mobile application that allows users to read all of my literature for free.

Any loyalty points evaluation in design helps us to attract a user base that is different from that helped me too.

And is that for what valuable addition to our family of apps.

The second is compliance as we all know compliance requirements for Internet continent have tightened up considerably this year.

We have one of the best track records in compliance and motorcycle in news feed players in the space.

As we have put in significant effort from the very beginning in building a constant compliance team and capabilities.

Last month, we expanded out compliance personnel by adding a team based in pending which will strengthen our constant review and monitoring.

We have recently been granted to Internet news license, which is the first afford non state owned company is now 2017, and the first and only one in Shanghai, representing an official recognition of our effort in content quality and compliance.

As long as our leading market position.

The third is the optimization of internal teams to support future growth.

Shifting to building the service oriented architecture, Modularizing common functionality and loading facilities is progressing well.

It's a significant step towards our long term positioning as a multi product platform in this quarter. We started a rotation the program FFO team leaders.

Which offer them opportunities to be 40 volt operationally in various parts of the business.

So this gives out key management style, a more comprehensive operational experience with business, which would in home efficiency and internal collaboration.

We believe such organizational changes will pay off over time, and the spend and our long term competitive advantage, especially as our business continues to scale up.

Let me also talk about competition in the market.

With the Sidoti <unk> by focusing on regions outside of tier one and two cities in China.

On the pioneering the loyalty program. It has differentiated itself from competitors and captured a large underserved market.

The relative lack of technology infrastructure and services of course in low tier cities. The digits. These full behind the tier one and tier two cities.

By contributing to the narrowing of the distill Guy. She hotel is playing a posse rove is social development, which we believe is both a good quarter in itself.

And a great structural fee to pay into.

We have built a deep understanding of the people we serve.

Which has underpinned our leadership position in the market.

[noise] media, who started in the competitive online. This is a market where stroman dominant players what existed on having the free Threed model.

Me too expanded the addressable market by offering a solution to hundreds of millions of online live to see lovers, who had been previously excluded by the traditional paid only business model.

Mid who has maintained a leading position in the free to read market since inception.

And already has the richest homes and ecosystem by a clear margin in comparison to the REIT peers.

We have also built an internal edited team to work with right. This directly to introduce original and differentiated content, which has grown exponentially in page views.

Albeit from a very low base the value of our efforts in the housing content offerings will not be visible in the immediate quarter or quarters.

But will over time lead to better user retention and engagement, which is key to our user base expansion.

The mid July we have temporarily suspended comes an update on the commercial activities.

As we sort through our existing library to adjust to the regulators compliance requirements.

This also puts a temporary or breaking out the U.S., we are not able to acquire a new users who led to the channels during the period.

This phase the cars by 30 in Q4, but at least on both of them as you.

Our objective of reaching 10 million plus do you with me too and then we do like combined by year end.

Hi to becoming the biggest online listen just platform at home market in 2020 remains unchanged.

We remain confident about achieving the objectives, given the better than expected doctors and they do light.

The strong growth momentum as needed we enjoyed in Q2 and the tremendous market opportunities lying ahead.

Turning to the second half of 2019 outlook.

We will continue to grow our user base, which in hotels and the participant in that it was losing position was normal operations resumed by mid October .

Yeah. When do you target remains unchanged at 50 to 60 million via you for the group, which is about double the level at the end of last year.

The overall digital.

Advertising market is experiencing weakness this year due to the supply demand imbalance and the weak macro conditions.

Despite a much tougher operationally environment, we're delivering one of the fastest growth rate in the industry.

We continue to diversify our monetization avenues by growing contributions from casual games and live streaming which have been increasing their share of group revenue.

Looking longer term as we are far from realizing that monetization potential.

I'll focus undoubtedly continues to be optimizing the efficiency of our AD platform, which will drive structurally higher ARPU.

[noise]. This concludes Abbotts remarks, I will now read the prepared remarks 17 goals.

Despite the weakness in the AD market leased directly impacts us through pricing a unit economics remain healthy.

Average use acquisition cost was RMB 6.93, our user engagement expenses for the whole group was RMB 0.13, a deal you good day.

What I'll ARPU was RMB 0.39.

We continue to invest across the different products based on what we think makes strategic sense.

We have invested heavily in they do on the concept from just before the suspension.

As a result that has a phone, but the coverage of the high quality books available in the market than any freedom peer does.

We have also built a very capable in house at as a team, which works with devices directly to generate the original and differentiated company.

We have been pleasing performance data, which clearly showed that these original books have been well received by the readers.

We have significant potential to further drive, though monetization by improving the efficiency of a proprietary advertising platform, which we both last year.

As the business grows.

With diversified, though advertising inventories through the investment in technology and accumulation of data, we will be able to bring home the bidding system targeting algorithms to close the gap between us and established a phase.

In the meantime, with deepening our existing customer relationships actually those better understanding of customers and deliver better results.

As well as expanding into more industries to better match the EPA in diversifying at inventories that are being added onto our platform.

We're also making good progress on growing revenues from casual games and live streaming.

This concludes the analyst remarks, now I will move on to show those comments.

Our revenue has recovered from the seasonal low of Q1, two reached RMB 1.4 billion in Q2, which is close to three times higher versus the same period last year. This rapid growth is being driven predominately by the are you both and has been achieved against the backdrop of a weak overall advertising market, especially from a pricing perspective.

The recovery since Q2 has progressed and more.

Slowly than what one would expect on the normal market conditions, but we're not seeing any worsening trend.

ARPU, which we define as net revenues for the year you today was RMB easier 0.39 in Q2 2019 compared to RMB 0.33 in Q1 2019.

And on and be 0.42 in Q2 2018.

The year on year decline has been driven by the Boston both of you put up such as meat, which have lower ARPU was in comparison to two dotel.

And also the general weakness of the advertising market in China.

Sequentially, we see meaningful ARPU growth across all products, which is a combination of favorable seasonality impact.

And structural improvements of monetization as products growth.

Turning to costs and expenses I will focus on non-GAAP measures, which exclude stock based compensation.

For Q2, 2019, our gross margin was 74.0%, which declined 1.2% quarter on quarter or 9.1%.

Yes, mostly due to our investment in infrastructure.

To better accommodate more bandwidth data intensive content, such as video lifesaving and game.

However sequentially, our operating margin has improved by 18.7% as they attempt though expenses under control why monetization improved.

Our user engagement expenses as a percentage of revenue have improved both sequentially and year over year.

As we have continued to bring down the absolute amounts we paid each active use every day, which will be stable and within the range of RMB 2.15.

<unk> 0.20 for this year.

Oh AD load is at a healthy level and given the potential for AD inventory increase coming from a product scaling up such as they do and subsequently the higher efficiency of a central platform.

Manifested through higher click through rates and cost per click the confidence about the growth opportunities that lie ahead.

R&D expenses were 13.3% of revenue compared to 12.4% in Q1, 2019, and a 7.9% in Q2 2018, as we continue to invest in talent and a cool technological capabilities, which underpin our long term competitiveness.

Other sales and marketing expenses amounted to 5.2% of revenue compared to 3.0% of revenue last quarter.

On a full point folks and the revenue in Q2 2018.

The increase was driven by an increase in spending on brand advertising, which we believe would be more value creating from here onwards, given that we have reached a meaningful scale.

DNA expenses were stable at 3.6% of revenue in line with history.

Overall, our non-GAAP net loss was RMB $496 million, representing a loss ratio of 35.8%, which has increased from a year ago largely due to our increased investment in <unk>.

Infrastructure and higher use acquisition costs on a per new installation basis.

Looking ahead in terms of guidance given that meet who has been suspended for new content update and commissioning activities since July 15.

And it will remain suspended for the rest of Q3, we will have very little revenue contribution from the two this quarter.

We do expect the business to resume regular operation by October 15, So the impact on Q4 should be small and as discussed earlier during the call.

Human traffic as well as revenue run rate target for me do remains unchanged.

Given the strong growth momentum for me do you have.

Witnessed in Q2, and the better than expected start a little light so far.

For Q3 based on the view of the market and the operating conditions, which are subject to change we expect net revenues to be at a similar level as we have achieved in the second quarter.

This has taken into account for the short term impact of lost revenues from me too.

Finally in terms of balance sheet, we are in a strong position with RMB 2.3 billion cash and we are confident this will support us.

As we take the business the next level.

This concludes our prepared remarks today now we open for questions.

Hopefully the please proceed.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session.

If you wish to ask a question. Please press star one and your telephone keypad retraining TV.

If you wish to cancel your request please press the pound or hash key.

Ladies and gentlemen, once again its star one if you wish to ask a question.

The first question. We have is from the line of cheating view from you B S. You may now ask your question.

Thank you management for taking my question.

Wanting to wait it out.

Not even when he saw the Kindle goes the USA or.

So my husband's on among them and just how E auctions I should hold off on me boil down to up that to go you know what she told <unk>.

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No. They are the ones you know how you weigh a little gushing hook on gotten got no. Let me do that there are some people that you hope you know, it's just you know yet either.

Yes.

Could you talk about like how she shops.

Number one it says the phone and go been voted she has always shown that you'd have some units are looking to immediate willing to commit a wouldn't here no.

Oh, well I, usually like light tight soybean <unk>, we notice that a D.U.S. stagnant into Q can you elaborate more on our user acquisition strategy on both a cheat hotel and me too and they are the idea you chance.

Due to advertising and content upgrade substantial media, you and monetization will be under pressure in Threeq you counted on stand that you already launched a light version to offset some pressures can you elaborate more on current progress on how you deal with them. We do have issue I'll stop here. Thank you.

Thank you [laughter] Hello, So regarding your first question.

They are your girlfriend I think wait wait you discussed this a little bit during our last earnings call. We have some pressure in our late Q1 early Q2 income about user growth due to you know irrational competition in the market and also the overall weakness in end market, but we have been seeing some recovery income south.

User growth starting from the second half of the second quarter, especially in June .

And I will say that our user growth has since reaccelerated and that trend has been carried over to Q3.

In terms of our Q TTM may do on a stand alone basis on both fronts. We took out side I think we have seen some very healthy trends so far this quarter.

Thank you our panel on base has increased.

Oh averaged about 10% to 15% as compared to Q2 other calibrated I'll, let me do side I think as we said during our prepared remarks, we have a very strong second quarter and.

The early results in the beginning of Q3 is also very good that the uptick there you for May do has reached over 8 million at the beginning of Q3. However, we did have this.

Suspension for me too.

Starting from July 15th so.

This will be turning bought in Q3, plus a freshman we're locked from dry dockings to into October protein folding impact mainly falls into three.

So to your second question regarding the media situation, we do have some.

Additional effort.

First of all that we continue to expand our content library, we continue to be the number one player in the three online literature market.

And with a comfortable margin based on our third party data and also with the launch of me to like we were able to keep our combined user traffic stable for Q3.

Compared to Q2.

Although the monetization has been stopped so the impact on revenue side. It will be much bigger assuming that we have no growth for me too in Q3, a steel has at least 8 million you and im assuming.

30 to 35 cents income per ARPU that means we are losing 2 million RMB income from revenue per day for the for the entirety of Q3.

However, we do have a better than expected start of middle light go farther you. The traffic growth is has been very strong.

So we were able to keep the combined user traffic of need while middle light at a stable stable level compared to Q2 and also with additional royalty program program Ami do like the new App attack somewhat different user base compared to the original video App and the way that vertical well, we are able to increase our pools as well as.

The early results have skills so.

We are confident that both that well do well wants me to resume some operations and our year end target of combined you have 10 to 50 million for me to have not changed.

On the monetization side I think we do essential has yet to be fully realized.

Given the low AD load in the first half of this year and also the new opportunity from me to light.

So wait blade combined the two apps will contribute.

Potentially two to three RMB two to 3 million RMB per day in terms of revenue in Q4.

Thank you.

Thank you.

The next question we have is from the line of Alicia.

Can you could you may now ask your question.

Hi.

Good evening good morning management. Thanks for taking my question I have couple of questions number one is just to follow up on the need to question.

I wanted to understand.

How sure are you read that.

The regulators have Weve got we are seeing really.

Good luck and resumed.

Hi, perhaps and then if we look forward in palm solve a when we can we assume the monetization.

How do you think the me too.

When you grow into a pencil I say percentage of total revenue contribution from me do you believe that that could reach and then second question is regarding the cost to expenses.

We did see some you know have like.

Cost control or the benefit you might use the engagement coming down, but user acquisition and content procurement cost it seems to be.

We really haven't made that they are.

So can you help us understand Oh, what will be the expense trends for the second half income self lessee to content and user acquisition in you.

So any color on the direction that would be helpful. Thank you.

Thank you Alicia.

I think regarding our first question, we are quite confident that with our media will assume normal operations by on October 15th.

We also obviously the England news license recently so this is the first license issue there. It seems early planning something and the first and only issues in Shanghai. So.

Which means that I think that our effort from the very beginning during our content combined payment capabilities have been well recognized by the regulators and I think based on our understanding.

Communications with regulators, we are quite confident that the impact of me too in Q4 will be limited.

Regarding your second question in terms of revenue contribution at that that.

Previously that our way to see a very healthy traffic growth of me do in Q2 and early Q3 and also would have a very strong start up need like so by this quarter. So I think in Q4, we do have very high expectations from me do and with the current trends. We see that's me do can contribute up to 20% of Apollo revenue in Q4.

In terms of your third question regarding on carbon Frank I think.

That several things first is for content cost I mean, given the nature of our business. We believe we will be able to control the content up at 6% to 7% level estimate up revenue on the security side and I was on expense Alamito type respectively.

At the head contributor.

But not comment a large share of users mindshare compared to other compound format. While the tail is lunch, but for both new speed and align literature. We are confident we'll keep our content costs as a comfort level in the near future.

As for user acquisition, we had stayed at that six to seven RMB safestop for installation level for several quarters and we don't see any big changes for the rest of the year.

In terms of engagement hub I think this quarter, we were able to further reduce our average using in club to RMB 13 cents for the year.

But on that basis compared to 17 cents in Q1 and over 20 cents in the second half last year.

The reduction is a result of our improved.

Our results for which we have focused our engagement by our users at a more perfect susceptible to cash accumulation and also effect that we intentionally cut back some of the cost in low sealants and in the face of irrational competition in Q1 Q2.

For Q3, and Q4, we expect our average engagement how could you you too.

Increased a little bit due to seasonality and better monetization on the appetite, but still low compared to the same period last year and to be around 15 cents for the you on a blended basis.

Thank you.

Okay. Thank you.

Your next question. We have is from the line of Charles from Keybanc Keybanc capital markets. Your line is now open.

Thanks for taking my question. So after a couple of questions first so.

Can you.

Give us some color around your view on the full Q.

Revenue outlook and then.

Remember last quarter, we have.

However annual guidance for.

For six to 7 billion and I, just wonder if that guidance still maintain and then secondarily it seems like the.

Engagement ratio, which is a D U two and May you and then also the converging front.

His door user to meet you.

If you look at the two matrix it both came down quite a bit in the same quarter. So just wonder what drove the train and then and how should we think about the trend.

To get a stabilized going forward. Thank you.

Thanks sitting over that time.

So regarding the revenue outlook and the guidance I think if you look at our our Q3 numbers.

As weight it Brent that we have almost.

Lower little to zero revenue conversion from me do this quarter so.

Our guidance for this quarter is that a way play away are expecting Q3 revenues to be on a similar level of flattish compared to Q2 quarter to quarter basis that means she though doubt app alone will contribute.

Revenues on a similar level as to go down we do combine in Q2. So for Q4 I think wants me to resume normal operations and I'll also add that expense in a previous question that we believe me do can contribute as much as two for 20% of our total revenue.

We are we do think that Q4 will be a strong quarter, what interest incomes up revenue growth and regarding the overall annual guidance I think so far average trend is growing at way expected that with.

Have discussed with the market before.

But there is a lot of revenue in Q3 from me too. So I think the main difference will be that park otherwise, we think we have strong confidence in achieving our other no annual goal, especially on the truck side. We are still very confident that we can achieve our goal of.

Year end the are you up 50 to 60 minutes.

In terms of your third question regarding our engagement ratio I think we have touched upon that a little bit vigorously as well.

We have some pressure in the first quarter and the first half of second quarter due to irrational competition and the overall, we kicked off the.

And market.

However, we did make.

Several effort in terms of optimizing our user engagement costs also increased the quality of our content and we have seen some very promising early results starting from the second half of Q2 its batteries starting from June and the ISI friends, we have seen a 10% to 15% user traffic growth.

In Q3, so far compared to Q2, two and we believe this trend will continue and also in terms of me do despite the suspension. We have a very strong start off me do light. So combine topic of media when we do write us stay flattish compared to me do in Q2, and I think we have we can.

You know start restart of the growth of me do once the normal operations resumed so overall I think we are we are still very confident in terms of achieving our year end goal of 50 to 60 million data users and.

The.

The pressure will have earlier this year.

Well, we don't think its a long term thing thank you.

That's true.

We have the next question from the line of John Malone from T.H. Capital. Your line is now open.

Yeah.

Well I need so I think when you Miss you when you use a woman who are new to me, which I'm really I wouldn't assume that Nielsen leaseback ash well show a woman so you'd be.

Just can you then immediately Atlanta, LMA Mad dog I wasn't able to liquidate the adult English automobile shut them up I. Appreciate you go then team [laughter] gather linking that usually when you go to Ben you know woman under what Goschel lighting, the quantum gokul, yes, not much is she shopped lame duck senior and when the blood culture, Oh hung in the top two legs, yeah. She's got an idea how you're gonna go to them you will not see a home either getting hard to beat out George let me get to choose shutting <unk>. Okay. No findings yonhap. So two question. What you said regarding the retention rate I said earlier, we did see some treasury we have this year.

We continue to optimize how are you thinking for web while facing irrational competition in the market at the same time and Mark and I. Both are they look like what books you why are we seeing Apollo okay, but Q2 would have ended the quarter a high or not.

Quarter on via you exceeded 40 minutes and the strong momentum continued in Q3 so.

And also as I said earlier, we see every day, you're going to see the assets increase overtime Central Bank Q3, compared to the second quarter.

Regarding the use over they didn't talk as I explained earlier that wait wait wait okay. No that continue to increase our comes on board as they continue to optimize our operations and have to offer more social features lidocaine live streaming and they pick up also all kinds of new compound features on the security side to increase user engagement engagement and activity and so far we have seen some very strong early results and as I said that our year end target of 50 to 60 million.

Yeah, you have nothing changed so far we are quite confident in comes up user traffic growth on the user retention.

In terms of your second question regarding the on the Advertiser.

So far this year.

E Commerce has been quite strong.

I continue to be the largest segment.

Of our advertiser.

Otherwise I think Smokeable segment I'm all at the same as previous caller and we think that this trend will continue for the rest of the year. Thank you.

Thank you.

Thanks.

Thank you.

As there are no further questions I don't know like behind that confidence back to the company for closing remarks.

[noise].

[laughter].

Again, if there are no further questions I'd like to turn the call over to the company for closing remarks.

Thank you everyone that concludes today's conference call.

Thank you.

Thank you.

[noise].